I have begun reading Economics in One Lesson. I had thought of waiting until I finished all of it before posting something, but I’d like to write down my thoughts before I forget. And it seems the sections are relatively self-contained, so I don’t expect to find a justification for the first lesson in the last one.
The Broken Window
In this section, Hazlitt seeks to show that the “new” economists are primarily focused on the short term to the detriment of the long term. Now, while it certainly seems that Hazlitt thinks that there is a “right” economic policy, he does imply two value-neutral outcomes that will result from the implementation of “his” policy. These things are: (1) there will be more goods in the given society and (2) the majority of the people will prefer this outcome to the alternative. I think it is best from an economic standpoint to look at factors such as these as opposed to saying something like “you shouldn’t break someone’s window because breaking someone’s window is inherently wrong.” The latter is a moral position. While I may have argued against such a moral position in other threads on this board, I have no interest in doing so here. I am interested in an economic theory to the extent that it can explain and predict.
Hazlitt begins with the scenario of someone breaking a baker’s window and ends thusly:
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
http://steshaw.org/economics-in-one-lesson/chap02p1.html
While this seems reasonable enough at first, I fear that Hazlitt may be falling into the same nearsightedness that he accuses his opponents of. Let me present three scenarios that take the same premises and expand on them with additional details that could possibly be in play.
Scenario 1
Let’s assume that all the characters have the following possessions, abilities, and desires at the beginning of the scenario:
Baker:
- Possessions: 1 window, $250
- Ability: making baked goods
- Desires: 1 suit, money
Glazier:
- Possessions: None
- Ability: making windows
- Desires: 1 suit, money
Tailor:
- Possessions: None
- Ability: making suits
- Desires: baked goods, money
Now let’s look at two possibilities: whether the window is not broken or broken.
Possibility A: No broken window
If the window is not broken, then the baker pays the tailor $250, the tailor makes a suit for the baker, the tailor gives the baker $250, and the baker makes baked goods for the tailor. All desires capable of being fulfilled having been completed, the transactions stop. The gains and losses in possessions can be expressed as follows:
Baker:
- Gains: 1 suit
- Losses: None
Tailor:
- Gains: 1 baked goods
- Losses: None
Glazier:
- Gains: None
- Losses: None
Now let’s look at possibility B.
Possibility B: Broken window
If the window is broken, the baker acquires a desire for a window that supersedes his desire for a suit. The baker gives the glazier $250, the glazier makes a window for the baker, the glazier gives the tailor $250, the tailor makes a suit for the glazier, the tailor gives the baker $250, the baker makes baked goods for the tailor, the baker gives the tailor $250, the tailor makes a suit for the baker. The transaction thus ends, and we are left with the following gains and losses:
Baker:
- Gains: 1 suit
- Losses: $250
Tailor
- Gains: 1 baked goods, $250
- Losses: None
Glazier:
- Gains: 1 suit
- Losses: None
Let’s look at the two predictive claims that Hazlitt makes and compare the outcomes of the two possibilities.
(1) Which possibility produces more goods?
Final goods in possibility A: 1 window, 1 suit, 1 baked goods, $250
Final goods in possibility B: 1 window, 2 suits, 1 baked goods, $250
The only difference is one extra suit in possibility B. So breaking a window produces more goods than not breaking it.
(2) Which possibility would the majority of the people prefer?
Baker: gains 1 suit in both, but loses $250 in B. Prefers Possibility A.
Tailor: gains 1 baked goods in both, but also gains $250 in B. Prefers Possibility B.
Glazier: gains nothing in A, but gains a suit in B. Prefers Possibility B.
Thus, a majority of people prefer the result that breaking a window would produce.
Conclusion: Hazlitt’s prediction is false for Scenario 1.
Scenario 2
The glazier is starving but has no money to buy food. His only skill is to make windows but no one wants windows. The glazier dies of starvation.
Next year, after saving up more money, the baker decides to build a second bakery. The bakery needs 5 windows, but there is no glazier in town to make them. The baker has to hire a glazier from out of town who charges $500 to install each window. If the original window had been broken, the glazier would have lived, the baker would have saved $1000, and no fuel would have been destroyed by the out-of-town glazier traveling from long-distance.
Scenario 3
Suppose the baker had $500. He wants to spend $250 on a suit but has no use for the other $250. If the window is broken, the baker can still buy the suit and nothing less is produced.
While these three scenarios indicate that breaking a window can indeed meet Hazlitt’s two goals, I do not mean to imply that this is always the case. And I suspect that the Keynesians don’t believe that either. Nor do I mean to suggest that breaking the window is the best solution. Stealing the money, for example, would probably require less total work than breaking and remaking the window while achieving the same end result. And, particularly in scenario 2, it might be in the baker’s best interest to simply give the money away.