Hazlitt once pointed out that the good ideas in economics have to be relearned every generation, and indeed it seems that a disaster cannot pass without common economic fallacies rearing their ugly heads. The broken-window fallacy seems to reappear every time terrorism or a natural disaster causes mayhem and destruction. Do we have to compound the misery by ignoring one of the most basic lessons economics has to teach us? FULL ARTICLE
Source link: http://blog.mises.org/8350/broken-glass-everywhere/
Broken Glass Everywhere
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«As a fan of innovation and progress, I am somewhat sympathetic to the idea that disasters increase productivity by hastening the switch to more efficient technologies. If the productivity increase from implementing these new technologies were so great, however, private firms would implement them on their own initiative without government prodding.»
Exactly. And this deserves to be stressed. A good entrepreneur will constantly look for new ways to structure production in general, and for new capital in particular. If the profits he expects by replacing his current capital justify it, then the entrepreneur will do it and make his firms more competitive, which, as a result, will eventually push other firms to try reforms. Careful, planned replacement of capital is the way to go, in order to minimize the impact of such restructuring in society. Disasters is completely terrible for customers and employees, plus it will mean that the new capital will take much longer to build as resources are bid up by other industries that need to be rebuilt as well. For a good while, you might very well end up with worse capital after a disaster, not better.
“In spite of all of this, I am prepared to believe that the long-run consequences of a disaster can be beneficial if they lead to privatization of previously government-owned property as well as institutional reforms more amenable to free markets.”
What a statement to make, historical evidence suggests the opposite: more government intervention.
The reality is that NO disaster of any kind can be beneficial either in the short run or long run.
It is this kind of compromise that has led many to believe government intervention is the solution rather than the problem. It must not be forgotten that in the realm of economics when governments intervene the net benefit is always negative. There are of course many who for whatever reason whether lack of mental thinking capabilities or short term self interest, tend to bring in government to solve natural disasters.
Governments of course have been shown to be the primary cause of manmade disasters.
Couldnt agree more.
But since Hazlitt came up, can anyone at Mises.org explain why the classic one lesson book ( which I was anxious to recommend to a very confused but sincerely well-meaning anarcho-communist of my acquaintance, in an attempt to enlighten him recently*), is one of the few items NOT offered as a Pdf download?
just asking…..
* PS I was most embarrassed, having previously sung the praises of Mises.org to this guy because his views on IP in all its forms echo yours completely (and I blew him away on this point, he having hitherto been of the firm impression that IP protectionism is a fundamental component of ‘capitalism’ ….see what I mean on other posts about what ‘capitalism’ means to different people?). And having thus declared that Mises walks the talk by making a policy of offering online free what is offered for sale in hardcopy, the ONE online book above all others I wanted to recommend to him to get the economic point as clearly as possible, is the very one that is inexplicably not there!
David Ch, that questions was already made a few times. I don’t remember the details, but it comes down to Mises.org not having copyright over Economics in One Lesson. They actually buy the rights of some of these books in order to make them available for free, but they haven’t been able to do so for this particular one. I believe you can easily find it on the internet though.
An online version of Henry Hazlitt’s “Economics in One Lesson” can be found on the Foundation for Economic Education (FEE) site…
(http://www.fee.org/library/books/economics.asp).
For Blacksheep,
Natural disasters are still wasteful because they destroy the unused economic benefit remaining in previous investments. That is they force replacement. Private industry does not adopt new technology because it is more efficient. It must also make economic sense.
Here is another way to look at it. A consumer does not replace their 1 year old gas guzzler just because gas has doubled in price. There is a capital cost to consider as well. Forced replacement of 1the gas guzzler, because a collision destroyed it, gives the consumer a more efficient vehicle but not more economical transportation. They have lost the capital that was in their gas guzzler.
OK, let me take a stab at devil’s advocate and present a new viewpoint in support of the broken glass fallacy.
It boils down to, whatever doesn’t kill us makes us stronger. Lets use the Crusoe metaphor. Two Crusoes on an island each have a field of fruit trees and herd of pigs to live off of forever. A Hurricane destroys 90% of Crusoe A but 0% of Crusoe B. Crusoe B becomes fat dumb and happy while Crusoe A ecks out a living by learning to fish, grow different crops etc. He is also inclined to create a store of food. The next hurricane 10 years later destroys 95% of both Crusoes supplies and Crusoe A survives while Crusoe B dies.
So the first hurricane was beneficial to Crusoe A. Yes Crusoe B could have used his free time to learn all the difficult chores that Crusoe A learned but as we often see in general people and our own lives, if we aren’t prodded to do something, we don’t do it.
OK, so I understand the fallacy is in the wealth transfer aspect and the misunderstanding that that somehow “creates” wealth. I believe that those trying to counter the fallacy need to be careful about simply stating that when bad things happen we would somehow always (this is implied in the article) be better off if it hadn’t happened. Or even that the overall economy couldn’t possibly be better off. It could be. If I could show that WWII was beneficial to the economy (not just the canard about spending our way out of a recession, but also that it made the surviviors strong and confident enough to start new businesses and inventions they otherwise wouldn’t have) is that enough of a reason to suppor the next big war? Just assume I can prove it for a minute. I’d suggest either way, doesn’t support of deny a reason to go to war.
The issue, as always, is one of liberty and property rights. The kid broke the window and destroyed someone elses property. He is guilty, period. It doesn’t matter that the rock he threw uncovered hidden and lost chest of gold. Same with the fraud of fractional reserve banking, government taxes and transfers. Or taxes (or conscription) in payment to the military then ordered into battle. All losses of liberty and property.
One more analogy. Which person do you think is stronger/better/more fun to be around. The kid who grew up with strict but loving parents who limited his toys and free time, or the kid who grew up with very giving and loving parents who received every toy his heart desired and was given near total freedom? Now replace parent with government.
I’m not suggesting I want more government for my own or others betterment, But this is where the ivory tower thinkers are coming from. Know thine enemy, and prepare for that (type of) argument.
‘It boils down to, whatever doesn’t kill us makes us stronger.” Ed.
Another strange statement. Is that really true?
I burn down your house, it doesn’t kill you but does it make you stronger? The broken window fallacy apparently is not well understood.
As for the Crusoe analogy any scenario can be put forth to prove some imaginary outcome.
The fact remains destruction of life supporting goods whether man made or natural is ALWAYS detrimental to overall progress.
The struggle for a prosperous life is inherent in our genetic makeup, otherwise we would most likely still live in caves or less, this can be fouled-up especially with our encompassing government interventions.
The broken window fallacy is foolproof, no need to fantasize otherwise.
Ed. However your comment about the fraud (legalized theft) of Fractional Reserve Banking is absolutely correct.
Outside of the loss of money, one also losses time that he/she could be using to do something else.
My car was recently broken into. The money losses were one part. I think I lost more time than money. I had to call the police department, the insurance company, wait for my check to arrive to purchase another laptop (research a replacement), the loss of a days work with the car at the glass shop, and last but not least, I had to spend several hours cleaning out the glass from my car.
Nice Grandmaster Flash reference!!!
“Broken glass everywhere, people pissin on the stairs you know they just don’t care,
Can’t take the smell, can’t take the noise, got no money to move out I guess I got no choice…”
—The Message
And what a great song about the effects of bad economic policies, viewed from the bottom.
Ed,
You do not need disasters and catastrophies for innovation. You just have to be unsatisfied with your current state. Think of the glass half full or half empty. Then think on the margin: You just have to shift the half mark a little down and you have already created enough unsatisfied people to innovate. I agree with Matt, humans are born to be innovators. It is another thing that the majority looses this capability by adulthood. We are spoiled with government handouts.
I recently purchased 5 copies of “One Lesson”, to use as the proverbial outreach tool. I read one, and kept it to get my wife to read. I have the other 4 out, in the hands of my sister, and 3 American friends here in China. Says one “This stuff is irrefutable! This book has really brought me around to your way of thinking” We then had a short discussion about how Hazlitt, in some ways, is pretty mainstream. There are multiple locations in the book where he implies or accepts that government is necessary for this or that task.
My little group has been talking a lot about the Fed (“The Case against the Fed”), economics in general (“Human Action”, “Politically Incorrect”, mises.org), inflation, bullion, and political theory (“The God that Failed”). The idea that a monarchy might be preferable to democracy has them saying “What?”, but I think I am opening eyes one book and conversation at a time. I joke and tell them that I am approaching the lunatic fringe – but I do believe I am dragging them with me…
Ed: “If I could show that WWII was beneficial to the economy (not just the canard about spending our way out of a recession, but also that it made the surviviors strong and confident enough to start new businesses and inventions they otherwise wouldn’t have)…”
I think what you are arguing is that some good can come of any bad event. Obvious some good came out of WWII. We wouldn’t have fought it it we didn’t think some good would come out of it. The war wasn’t fought for economic reasons. But looking at just the economic aspects, it would be hard to say that the economic good that came out of the war was as great as the economic losses. Economically, WWII was a disaster for the US.
And that’s all the broken pane analogy says. When wealth is destroyed (the window pane is broken), the good that comes out of it never equals the destruction of wealth. Certainly money changes hands and some people become better off at the expense of others, but nothing replaces the wealth destroyed in the disaster. Wealth creation can only take place through capital accumulation, never through capital destruction.
Hazlitt doesn’t mention it, but I think included in the fallacy of the broken pain is the fallacy that money is wealth. Bastiat fought that fallacy more than a century ago. Wealth consists of goods, such as a good window pane, not money. Money is a means of getting goods. In the broken pane fallacy, people don’t see the window pane as wealth. They see the window repairman and the glass company as getting money, which they see as wealth. Somehow, though, they don’t see the owner of the window becoming poorer as the repairman becomes wealthier by the same amount.
The window owner had saved money to buy goods in the future. But because of his loss of wealth in the broken pane, he must give up some future consumption in order to replace the present loss of wealth in his broken pane. People don’t seem to be able to see that giving up future consumption is a loss of wealth, either.
I propose that a broken window tends to increase the rate of circulation of money. Also described as taking in each other’s laundry. See World.Com.
It should be obvious that it does not create wealth.
This is analogous to sales on a P&L, which may or may not increase the net worth.
Donald Kahn
I propose that a broken window tends to increase the rate of circulation of money. Also described as taking in each other’s laundry. See World.Com.
It should be obvious that it does not create wealth.
This is analogous to sales on a P&L, which may or may not increase the net worth.
Ironically, the same crowd, whose members sing the praises of natural disasters for “aiding” modernization, contains the people who plead for government programs to aid retraining in those new technologies…for older folks whose experience has been rendered obsolete by modernization.
Something doesn’t quite fit together here.
(Incidentally, an uneconomic increase in skill obsolescence is a generally-unseen cost of too-quick modernization. You practically have to be an old fella to see it.)
Dear Art:
The earth quake may have a favourable effect on China’s income statement (gdp) but the balance sheet has to reflect the big write-down from the damage. That means a lower book value and a smaller base from which compounding can take place – (it will take longer to get to where they want to be).
Kirk Clements
Gravelbourg, SK
This spring my wife called from the hospital where she works to tell me that our beloved 1993 Jeep Grand Cherokee had been destroyed, along with six other cars, in the parking lot by a little old lady in a Lincoln Town Car. She lost control, etc. and did all this damage before, literally, hitting a brick wall.
We had maintained the car since new. It ran great. Everything worked. It was nice inside and outside. Nevertheless, our insurance company gave us under $2,000 for it. We bought a very nice used BMW X5, admittedly a nicer car, for just over $31,000. Everyone tells us that we really didn’t lose much because the car was old, had high mileage, and our new car will last lots longer. All this is true, but we still suffered the lose of $31,000, minus the $2,000 for the insurance company, several years before we really needed a new car. Our useful asset was taken from us with little compensation–this is the loss.
Best regards,
Patrick Barron
West Chester, PA
This spring my wife called from the hospital where she works to tell me that our beloved 1993 Jeep Grand Cherokee had been destroyed, along with six other cars, in the parking lot by a little old lady in a Lincoln Town Car. She lost control, etc. and did all this damage before, literally, hitting a brick wall.
We had maintained the car since new. It ran great. Everything worked. It was nice inside and outside. Nevertheless, our insurance company gave us under $2,000 for it. We bought a very nice used BMW X5, admittedly a nicer car, for just over $31,000. Everyone tells us that we really didn’t lose much because the car was old, had high mileage, and our new car will last lots longer. All this is true, but we still suffered the lose of $31,000, minus the $2,000 for the insurance company, several years before we really needed a new car. Our useful asset was taken from us with little compensation–this is the loss.
Best regards,
Patrick Barron
West Chester, PA
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