In my last post I shared a lesson from Henry Hazlitt (from his book Economics in One Lesson called “The Broken Window”); in summary:
Some yahoo breaks the window of a bakery. Did he create employment by causing $250 in repairs, thus giving the window repair man more money to go and spend in a kind of economic ‘mini stimulus package’?
Well, no, as many of my readers were quick to point out …
Hazlitt identifies the missing pieces:
What is missing from the thought experiment of the gathered crowd is the fact that the baker was going to buy a suit with that $250 but he can no longer do that since he is $250 poorer. The suit he was going to buy can no longer come into being since the tailor is not going to get that $250 to make the suit. So in this community, the window repair man and all of the merchants he would spend the money with make out but the tailor and all of the people he would spend his money with lose out. So, was there really any net loss or gain? Other than for the baker, no. Instead of having a window and a suit, he just has a window and is now $250 poorer.
Well, d’uh!
But, “the main reason why no one typically considers the tailor and the merchants he would buy from is that, since the suit never came into being and was not readily visible, it never entered into anyone’s thoughts. The window, however, is quite visible and it does not take much to reason through who would benefit from the broken window.”
This issue of visibility is central to the way that most people manage their finances: the money goes where the need is most visible … now!
AJC.
PS Before you point it out, I know that the image, above, isn’t the Hazlitt Maneuver … it’s the Heineken Maneuver, of course 😛
Thanks for the example, never thought about it. It certainly depends on the point of view. The windows repair man is probably happy about the hoodlum’s act :-). Not the same can be said about the shop owner. As for the tailor, he doesn’t even know he’s at loss.
On a greater scale, the same is true about any war or major act of destruction. There are certain groups enjoying the economical benefits (the Halliburtons of the world) and some other people paying for them both abroad (the losing party’s citizens) and locally (think of the soldier’s families, for example). But in total it’s a certain loss.
Regards,
Vasile
The fallacy is really about opportunity costs. For every action taken there are unseen side effects. For the benefits, there are unforeseen costs. The broken window fallacy is obvious in its fallaciousness, but there are many other examples of opportunity costs that are much more subtle, like subsidies and bailouts.
I talk about opportunity costs some more on my site, and I’ve also recently reviewed Economics In One Lesson. It’s a great read!
Maybe apply this principle to the recent announcement of QE2 by Bernanke.
The markets rose, the dollar tanked (1 USD buys 98 Australian cents!)
Who are the seen and unseen winners and losers?
What about the opportunity costs?
I guess the Federal Reserve never read Economics in One Lesson!
-Mike