(The Idaho Freedom Foundation continues providing commentary from our contributing writers. Levi Ellis is a graduate of Hillsdale College where he earned his Bachelor of Arts degree in Political Economy. While in college, he worked for The Heritage Foundation in Washington, D.C. Levi was born in raised in Idaho and resides in Boise with his wife.)
In 1946, economic journalist and Austrian Economist Henry Hazlitt published a book which has since become a timeless classic in economic literature, earning numerous reprintings since its first publication. Mr. Hazlitt had the brilliant audacity to reduce all of economics to one clear, yet continually overlooked and ignored insight. He says in his famous book entitled Economics in One Lesson that, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” In other words, Hazlitt says one must not forget the opportunity costs associated with actions or public policy.
Public policy makers must never forget the costs born by all of society both now and in the future when constructing and enacting legislation.To highlight the lesson, Hazlitt reiterates the famous example of Frederic Bastiat known as the “broken window fallacy.” The story is of a boy who throws a brick through a shop owner’s window. The shop owner then has to hire the glazier to come replace the broken window. As the people discuss the boy’s actions, they determine that rather than being a menace to the shop keeper, he is really the salvation for the glazier by providing work and income for him, with which the glazier can use to spend at the cobbler, who in turn uses the money to spend at the baker etc.
The crowd determines that the boy is stimulating the economy by breaking the window, and he is really no menace at all. This fallacy is abundant in society today. How many people believe that World War II pulled America out of the Great Depression by stimulating our industries and economies? Or that Hurricane Katrina generated thousands of new jobs for people to clean up the mess and rebuild?
Employing his lesson, Hazlitt reveals why the boy (i.e. destruction) is no benefit to the local economy, but vandalism that does not stimulate the economy. Prima fascia, the boy did create work for the glazier.
However, when one considers the entire economy, the picture is different. To begin, the shop owner had a sum of money, and a window. After the boy destroys his window, he must spend the sum of money to replace it. Therefore, at the end of the story, the shop owner has the window he had at the start of the story, but he is out of his money. What the people who gathered outside the shop did not consider is where else the shop owner could have spent the money had the window not been broken. Hazlitt says the owner really had planned to buy a new suit from the tailor, but instead had to spend the money on the window the boy destroyed.
The tailor is forgotten altogether. Hazlitt’s lesson is that the “tailors” of the economy must not be forgotten when considering policy, they must always be considered and accounted for when enacting laws and regulations.
Allow this analogy continue with a different twist. Remove the boy, and assume the government replaces the glazier. The shop owner has his window and his sum of money, but the sum of money must go to the government to pay his taxes. Popular mantra today is that government can stimulate the economy by spending tax dollars on infrastructure, construction projects, research etc. and create a multiplicity of jobs for the unemployed in the process. This is the broken window fallacy all over again. This thinking is the false belief that government spending stimulates the economy when in reality, government prevented economic growth in the first place by taking the money from the shop owner who had plans to use the money to buy a new suit, or to add an addition to his shop, or to hire a new employee, etc.
It is easy to believe the fallacy that government stimulates the economy because politicians are able to concentrate the funds of millions of taxpayers into a single, highly observable project such as a bridge or freeway expansion. When people have the money and spend it in minutely concentrated portions such as for a new suit, it is difficult to see the stimulating effect. However, when the government takes taxes from the people and concentrates it on a large road project, people drive through the construction every day. They see the workers working and think these are the jobs the government spending has “created.”
One must never forget that government cannot spend which it does not first take. Taking $5 out of one pocket and putting into the other has not generated, created, or stimulated anything. Generating, creating, and stimulating are the roles of the entrepreneur. These roles are denied to the government by the nature of government, and by simple arithmetic, as it is impossible to subtract a sum of tax money from the economy, then add that sum back in, and achieve a greater sum than originally existed.
The consequence of ignoring Hazlitt’s lesson is bad public policy. Either bad policy will benefit one group at the cost of others, or the policy will benefit the current population at the expense of future populations. Unfortunately, policy makers have largely ignored Hazlitt’s lesson. Instead, they favor the philosophy of John Maynard Keynes that the long run is misleading and irrelevant to public policy because in the long run, everyone is dead. However, the problem with reality is that it does not change or go away simply because it is convenient and popular to believe it does. The long run will arrive whether one is dead or not, and there will be people who must suffer through the long term costs of bad public policy of today and yesteryear.
Hazlitt first taught his lesson more than 60 years ago, yet the lesson is as relevant today as it was when he first explained it. Government officials of all levels enthusiastically support and defend the notion that through legislation and taxation, government can spend and stimulate the economy to robust times. However, if one remembers Hazlitt’s lesson, one will not be manipulated and deceived by the politicians. One will recognize that government action is incapable of creating or generating economic growth, regardless of the politicians’ passionate promises and speeches. One will look past the construction workers, the roads, the bridges, and all the plans for generating employment, and remember the tailor, who has one extra suit still on the shelf.
Reach Levi at [email protected]