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The Henry Hazlitt Series: The Broken Window

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This week’s essay is the first of a roughly monthly exploration of the seminal work of the economic writer Henry Hazlitt, Economics in One Lesson.  This work draws heavily upon the insights of the great French economist Frederic Bastiat.  His key insight was to look at that which is not seen.  So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy.  Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the economy as a whole.  Hazlitt then applies this lesson to a variety of topics.  Each installment will pay homage to this most clear economic thinker and writer by applying each of his applications to our world today.

The Broken Window Fallacy

This week we cover a most basic, and still with us fallacy, known as The Broken Window Fallacy.  This is the idea that if say a window is broken out then the glazier gets business in order to repair the window.  The ignorant conclusion is that this is good for the economy, because we can see the additional business that the glazier receives.  What is unseen are the other items, say a suit, that the window owner could have purchased with the money that went to the glazier.  So, the glazier wins, but at the expense of the tailor.  In terms of total wealth the window owner could have had both an intact window and a suit, but now only has an intact window.  That is clear and logical enough.  Let’s see however, that many in today’s world still adhere to this hoary notion.

A Zombie Idea

This is an idea, like so many others, that has a zombie like existence-it simply will not die.  In researching this piece I was genuinely surprised how many so-called professional economists still buy into this idea, in one form or another.  Perhaps the most notable modern proponent of this idea is Nobel Prize winner Paul Krugman.  In 2011 Krugman advanced the idea of forcing firms to upgrade or better yet outright replace their physical plant in the name of ozone protection (not the place for a conversation about environmentalist overreach).  He claimed this would bring an increase in jobs and prosperity.  Of course, he failed to mention the unseen; those jobs and wealth that could have been produced with the resources now devoted to replacing the newly destroyed physical plant.  That is, the economy could have had the existing physical plant and additional goods and services, but under Krugman’s policy the economy only gets the newly built plant.

Krugman justifies this by claiming that the US was at the time (and in his mind always is) in a “liquidity trap”.  This is a Keynesian notion best explained with a quote from Keynes (The General Theory of Employment, Interest, and Money, MacMillan & Co. Ltd. (1964), p. 207.)

There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.

This notion is erroneous if for no other reason than that people obviously would not hoard forever because that would mean they cease to exchange goods and services.  The Krugman answer to this is to inflate the currency even more, as well as “break some windows” to “stimulate” the economy.  However, it is this inflation that causes an erosion of the savings that are necessary to accumulate capital (tools) that allow for the production of more and better goods and services.  Savings is not the enemy, it is the foundation of material civilization.  An accessible refutation of the “liquidity trap” can be found here

The main point here is that the idea of destroying perfectly good physical plant to “create” jobs and prosperity is ludicrous on its face.  Think about your own life, would you blow up your lawn mower just to provide jobs for Lawnboy, or would you rather spend that money on something else and have that and your lawn mower?  I thought so.

Other modern iterations of this idea can be seen in the response to the pandemic.  Joe Biden’s Secretary of Housing and Urban Development claimed in 2022 that the economy was “stronger than before the pandemic”.  Even though the shutdown polices amounted to a massive breaking of windows.  You may think that these were necessary public health steps (I don’t) but to claim they helped the economy is nonsense.

The other modern iteration that comes to mind is in the wake of the racial unrest after the murder of George Floyd.  There were “economists” that claimed all the riots and destruction would help the economy.  A report on Fox Business claimed:

While there’s “no situation where this is a good thing,” the U.S. economy may actually see a boost due to the rebuilding that will occur following the riots, Dutta said.  “This is sort of your classic hurricane-style shock where you have a delay in activity and then things pick up and then there’s a rebuilding process that actually boosts GDP,” Dutta said. “The destruction in wealth doesn’t necessarily impact GDP, but the rebuilding does.”

The reference to hurricane destruction is notable because that is the other time this zombie idea pops up.  Again, ask yourself, if you owned a business would you feel more or less well off if your business was burned down in a riot, or destroyed in a hurricane?  Don’t plead that the insurance companies will cover it, because in the end it is the premiums we pay that enable insurance coverage.  Those premiums will go up.  None of these modern iterations pass the logical smell test.  Logical that is if you are not a house economist seeking government favors, these are the class we know as house prophets. There is no reason that a prudent response to God’s gifts need entail an embrace of economic and logical lunacy.

Praise Be to God

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