The Broken Window

0:00We're ready for part two of our series, and I'm here with Thomas DiLomenzo from Loyola University. We're going to get into the very heart of the book, Economics Among Us and Now, here with you. But I'd like to just read this one sentence and ask you to defend it here. He says, it is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths. What do you think about that? We were talking about the broken window fallacy, I assume, in that passage. You can't really be an economist or think like an economist and let you understand the broken window fallacy, I think, which is the essence of opportunity cost.

0:54And one way I explain it to my classes is, you know, I teach at a Catholic university and we're always encouraging students to engage in some sort of community service. So I tell the class that the economics department has our own version of community service. We're going to buy each of you an aluminum baseball bat and we're all going to march down North Charles Street, which is the main street north and south in Baltimore. We're going to bash in all the windows of the cars all the way down. and it's a job creation program. That's our community service, I tell them. And then I asked them, what kind of jobs do you think we'll create in the city of Baltimore? Will it reduce unemployment? Will it reduce poverty? And they scratched their heads for a minute, and they said, well, glass repair, garbage collection, extra private security guards, and I write down on a blackboard a list of all the jobs we're going to create.

1:46And then I asked them, well, why don't we burn down some buildings on the way? We'll eliminate poverty altogether, won't we? And then they start thinking about it, well, wait a minute, there's something wrong here about this. And so, if they've already read sort of the theory of opportunity costs, they'll catch on that, of course, that's what's seen, those jobs are seen, the glass repairmen and all that. What is not seen is all the resources that had to be transferred from somewhere else or reallocated and jobs destroyed there so that we can fix up the glass and hire the security guards and so forth. And so the whole key to thinking like an economist really is to think about what is not seen as well as what is seen in the words of the immortal Friedrich Bastiat.

2:33Well, Annette, it seems like it would be something easy to understand, once you hear the story of the broken window, and to understand the fallacy, and perhaps you were following it. If that's so, why is it so persistent? I think economic miseducation has a lot to do with it. I think economists, especially including academic economists when they teach, are so enamored with mathematics and model building that they ignore or downplay really the basic fundamental truths of economics, like opportunity cost, because it's so mundane. You can't really model it or can't express in Mathematics that well, and they tend to forget about it. And then students who take classes, they might learn these sophisticated models, but they don't learn really basic economics. And that's why the Austrian School of Economics has always been so appealing to me. It's always been rooted in understanding how the economic world works, as opposed to showing off your math skills. And I think economic miseducation is the main reason why so many people and members of the public

3:45So, opportunity costs are always invisible, so they don't show up in the economic data. Right. Not always. Sometimes, some of them do. And this makes it less interesting than for an empirical economist. Right. On the empirical side, the old joke about the economist looking for his watch across the street when he knew he lost it on the other side of the street, and when he's asked, So why are you looking for your watch over there when you know you lost it over here and he says the light is better over there? That's very true about economists because when they undergo their research, if they do empirical research, they're limited by what kind of data they can get. Even though there are very important questions that need to be asked and addressed that you just can't measure empirically all the time.

4:37And so they tend to ignore these things and so there's a lot of truth to that old joke about the economist and his watch. So it has the causes, chapter two, after he explains the lesson, he calls it the blessings of destruction. Right, but he talks a lot about war and the idea that things such as war can be good for the economy, war prosperity, you heard that phrase. And of course some people do become wealthy through war, the people who sell munitions to the government and so forth, that's what's seen, you see that. but then once again what is not seen is all the resources are taken out of the pockets of the taxpayers to pay for it and also another slightly more sophisticated part of this is that you know the market system is one big network that displays the international division of labor and it's peaceful and cooperative we work together to produce goods and services or buy and sell from one another war is just the opposite war is blowing things up and destroying

5:36and so the very idea that war can produce prosperity in any sense is absurd on the face of it and Henry Haslip explains that as simply and straightforwardly as anybody I've ever read in just a couple of paragraphs really and von Mises does a great job of that also in Human Action in his chapter on war and the economy. It's also true with natural disasters. We played this game on the Mises blog anytime. There was a fire or a flood or anything. We didn't see how many days it would be before a professional economist makes a statement. Yeah, we always end up digging up an article from the New York Times or the LA Times, so we have some pseudo-economist saying, well, the bright side is that it's good for the economy. In fact, there was an earthquake in Southern California yesterday as we sit here at the Mises Institute on July 30th.

6:27And sure enough, I bet tomorrow if we do a web search, we'll find a statement like this. Thank goodness in this time of the housing crisis and the subprime crisis and we're in a recession, God sent us an earthquake in Southern California. Somebody's going to say something like that. And when they do, I think we should send that person a copy of economics in one lesson. Whatever reporter we discover says that thing. So do you find that your teaching in your introductory classes consists of just that today applying this lesson? Oh yeah, not just introductory classes. I taught a new course I put together called the Political Economy of War. And the very first week of readings involved the Broken Window Fallacy and Ludwig von Mises on War and the Economy, Do you think this new edition will be helpful to you?

7:38Oh yes, it's a beautiful edition and it's priced very well and congratulations on being I'm sure I'll be buying box loads of them, because I always have, for 20 years I've been buying copies of Economics in One Lesson, because as an economics professor I run into people all the time who ask me, what one book can I read that's not too complicated and technical, a lot of math, and understand economics, and Economics in One Lesson is that book. Well thank you very much, Dr. Ludwig.

8:14The Theory of Money and Credit