The Fixed Window Fallacy

Ozempic is not bad for business

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In a quaint little town, nestled amidst the meadows, there stood a humble shop owned by the diligent shopkeeper, Armen A. The shop had a long-broken window, a relic of a stormy night years ago, which Armen had grown accustomed to. The jagged emptiness stood as a testament to nature's whims, while also letting in the chilly breeze that reminded Armen of the changing seasons.

One fine spring morning, under a sky brushed with soft hues of dawn, Armen decided that the time had come to mend the old window. The townsfolk, who had long gotten used to the sight of the broken pane, found the decision quite intriguing. As the glazier, Harold, set to work with his skilled hands, a small crowd gathered around, their faces reflecting the gentle warmth of the morning sun, mingled with curious expressions.

As Harold secured the last pane in place, the crowd couldn't help but share their musings with Armen. “Ah, the days of the brisk breeze sweeping through your shop are over, Armen,” remarked Old Man Maynard with a nostalgic sigh. “And what of the extra firewood you bought from the Friedmans to keep the place warm? The Friedmans depended on that extra coin. Surely, business will be hurt by your selfish actions.”

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By now, students of economics will hopefully recognize that the above is a reversal of a story in Frédéric Bastiat’s essay “What is Seen and What is Not Seen.” In Bastiat, people argue the broken window is actually a good thing, since it is supposed to spur economic activity. Bastiat points out the flaws in this argument, which he calls the broken window fallacy.

The flip side of Bastiat—which is equally flawed reasoning—is that fixing the window will harm the economy: “the fixed window fallacy,” trademark pending.

I was reminded of Bastiat upon reading Matt Levine’s newsletter “Ozempic Is Bad for Business” ($). Is it?

For those who do not know, Ozempic is known generically as semaglutide, which has been called “the future of weight loss.” (I’m not that kind of doctor, so don’t listen to me.) For our purposes, we can think of Ozempic as an appetite suppressant.

Levine puts forward the argument that because weight loss drugs and food are sometimes owned by the same companies, there may be an incentive to withhold the drug from the market since it harms the food business. Ozempic is a substitute for Cheetos; lowering the price of Ozempic will reduce demand for Cheetos. This is a standard argument in the common ownership literature, unrelated to weight loss drugs of any type. What’s interesting here is that Levine applies it across traditional market definitions, not just between Cheetos and other salty snacks.

Putting interesting common ownership issues aside, is it true that Ozempic is bad for business? Levine links to multiple articles that point to the downsides of decreased demand for food. For example, Bloomberg’s Michael Tobin writes:

“The growing popularity of the drugs could hurt demand for companies including PepsiCo Inc., the maker of Pepsi soda and Lay’s potato chips, McDonald’s Corp., and Altria Group Inc., the cigarette maker, according to Barclays strategists led by Jigar Patel in a note on Tuesday.”

Is this a harm to business? Surely, three companies (PepsiCo, McDonald’s, and Altria) do not equal “business.” There are literally millions of businesses in the U.S., and we would never want to conclude business as a category is hurt by what happens to three companies.

This is the same as the idea that fixing the window reduces the demand for wood to burn, harming the sellers of wood, and therefore fixing the window is bad for business. But what about everyone else? The wood seller is a particular business. That is the seen. Bastiat teaches us to think about the economy overall. We need to look at the unseen.

I’m sure Levine wasn’t falling for the fixed window fallacy, but, especially given the title, I’m worried some readers would fall into thinking that by suppressing people’s appetites, the drug harms business.

We always need to ask, what happens next? What else happens with the introduction of a new drug? If the $1,000 per month spent on Ozempic was taken out of people’s food budget, we can imagine no real, overall effect on the economy. Instead of the employees and shareholders of Cheetos’s owner, PepsiCo, receiving the $1,000, the employees and shareholders of Ozempic’s owner, Novo Nordisk, would receive the $1,000. (For simplicity, ignore that Novo Nordisk is a Danish company.) That $1,000 going toward Novo Nordisk employees will likely be spent on similar things, and the ripple effects through the economy will be largely unchanged.

But it is not a simple substitution of drugs for food. Customers switch to Ozempic from Cheetos because Ozempic is the lower-cost way to achieve the customer’s goals. For example, Ozempic and Cheetos may both eliminate hunger, but Ozempic also does that without the other side effects of eating too much. Now, with the new drug, the consumer can become/stay healthy. There is more value-added, as far as consumers are concerned.

Thinking in terms of real resources instead of dollars, the inputs that were being used to produce Cheetos (workers’ time, corn meal, and whatever that orange powder is) are freed up for other producers to use. On the flip side, resources used for Ozempic are bid away from others. It is a complex system of interlaced markets, which prices help coordinate.

There are lots of ways for this substitution to play out. Maybe it is a net spending suppressant, and people truly want to spend less, as Levine suggests. Again, then what happens? Do people place that saved money under a mattress? Or will it be invested in productive activity, as is the norm in a functioning economy? In this case, the saving effect is reinforced because people will be healthier and value the future more.

What is the net effect on business? What happens to GDP or gross value added? It is safe to say that the innovation of the drug allows people to do more with less, just like innovation in general.

As a general rule, if you want to know whether something will “help the economy,” you should ask, will this change make it less costly to produce value for people? Our ability to produce stuff is what holds us back. Our demands can never be fully suppressed. Scarcity is the constraint, not desires.

Technological advancement and supply are core drivers of GDP and economic growth, outweighing the role of demand (with possible exceptions in the depths of a recession). As technology improves, it boosts industries' productivity, leading to increased output. Therefore, focusing on technological development and efficient supply mechanisms is crucial for sustained economic growth.

A few days ago, I joked with some friends that saying Ozempic hurts business is like saying lab-grown kidneys would hurt business. After all, people would need to spend less money on dialysis, which is a huge expense! Funny enough, Arpit Gupta just tweeted about a new drug that seems to help kidney patients, thereby harming dialysis companies.

Because kidney treatment does not sound like “demand suppressants,” no readers will think this technological advancement will harm business. But it has the same effect as Ozempic. Both medical improvements allow consumers to achieve their goals more easily than they could before.

Oh. And that drug that helps kidney patients? Ozempic.

So let us cheer on technological advancements without any guilt about what happens “to business.” Markets adjust. Resources get reallocated. In the end, we can make more stuff with less. Technological progress go brrr!