Government as Window Breaker: Hazlitt's Lesson Reapplied

0:00Claim of the Austrian school that has scandalized members of other schools for really 150 years is the following. The propositions of economics are universal. The principles apply in all times and all places because they derive from the structure of reality and human action. What brought about economic growth, inflation, or the business cycle in China 300 B.C. are the same institutions that drive phenomena in the United States in A.D. 2008. The circumstances of time and place may change, but the underlying economic reality is identical. That claim has made other economists, to say nothing of sociologists, historians and politicians, scatter like pigeons.

0:48The historical school poured scorn on the idea, and Carl Menger, the founder of the Austrian School, fought them tooth and nail. The Chicago School of Positivists found the claim preposterous, and Mises and Hayek and Rothbard battled them. The Keynesians have long been outraged, and the postwar Austrian generation re-asserted the truth. The Socialists, who posit that rearranging property titles will transform all of reality, say the claim is absurd, capitalistic nonsense. But there it stands. No matter where or when, the essential prerequisite for economic growth is capital accumulation in a framework of freedom and sound money.

1:34The consequence of price control is shortage or surplus. The effect of money expansion is inflation and the business cycle. The effect of every form of intervention is to make society less prosperous than it would otherwise have been. The list of universals is endless, which is why every age needs good economists to explain and articulate the truth. Well, I'd like to add that there are also universal fallacies. Frederic Bastiat pointed to one, the belief that the destruction of wealth fuels its creation. He explained this by means of the allegory that has come to be known as the story of the broken window. Most famously, it was retold in the opening of Henry Hazlitt's economics in one lesson, probably the best-selling economics book of all time.

2:26A kid throws a rock at a window and breaks it and everyone stands around, regretting this unfortunate state of affairs. But then up walks a man who purports to be wise and all-knowing. He points out that this is not really a bad thing after all. The man fixing the window will get money. Then that will be spent, perhaps on a new suit, and the tailor too will get money. The tailor will in turn spend this money on other items and the circle of rising prosperity will go on without end. What's wrong with this scenario? As Bastiat put it, it is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he hadn't not had a window to replace, he would perhaps have replaced his old shoes or added another book to his library. In short, he would have employed his six francs in some way which the accident has prevented.

3:24You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all the windows up and down the block? Indeed, why not break down all the doors and the walls? Why not tear down all the houses so they can be rebuilt? Why not bomb whole cities so producers can get busy rebuilding? It's not a good thing to destroy wealth. Bastiat put it this way, Society loses the value of the things that are uselessly destroyed. It sounds like an unexceptionable claim, but herein lies the core case against everything the government does. Perhaps then we can see why this allegory is not better known.

4:12If we took it seriously, we would dismantle the whole apparatus of American economic intervention. If you were with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction is actually a good thing. Let me show you that the fallacy is as pervasive as ever. After every natural disaster, at the Mises Institute we start what we call the broken window watch. After Hurricane Katrina, President Bush's labor secretary said, what will happen, and I've seen this happen in previous catastrophes and hurricanes, is that there's a bright spot. New Jobs Will Be Created The magazine The Economist says, while big hurricanes like Katrina destroy wealth, they have a net positive effect on GDP growth as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins.

5:15The New York Times said, economists point out that although Katrina has destroyed a and a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding. After last year's California fire, we heard this from Alan Ginn, a University of San Diego economist. He said, In the odd nature of economic accounting, this will be a stimulus. There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments. CBS Market Watch said, Economists have noted the perverse reality that in the wake of disasters, reconstruction spending helps the economy, even as people are still struggling to recover from their personal losses.

6:03Now note that personal loss here is deemed rather irrelevant compared to the beneficial macroeconomic effects. Here we have a theme we find often in economics. The attempt to drive a wedge between what makes sense for individuals and what is allegedly good for society. We see this on display in a recessionary environment where people are told to spend, spend, spend, even though most people understand the recessions are times for saving. Continuing on, we find the broken window fallacy popping up after 9-11. Timothy Noah of Slate wrote, We live in a very wealthy nation that responds to horrible disasters by spending large sums of money. This will provide a meaningful, Keynesian stimulus to the national economy that, let's face it, was on the brink of recession before September 11th.

6:57The recession may still come, but the counter-cyclical spending will help shorten it. Another economist declared, initially this could provide a significant boost for the economy that had been slumping. The construction industry will benefit from the rebuilding process. There may also be a boom for slumping tech sales in replacing lost equipment. Thus we can see the continuing relevance not only of Bastiat's allegory, but also of the characters in the story. The posturing wise guy who says that breaking windows is a good thing for the economy keeps reappearing time and time again. So entrenched is this mistake that we might call it the official economic doctrine for the whole country. I ask you to consider the absurd discussion of a stimulus package designed to rescue the economy from recession.

7:49The idea is that the government will inject funds into private markets to stimulate them to the point that they will run on their own. Not once in this debate have I heard anyone ask, aside from Bob Higgs, where will the money come from? It seems that Washington wants us to believe that they have some magic machine that can run up $150 billion in new assets without anyone having done anything to make these assets appear. One wonders, then, why we need to wait until a recession to stimulate the economy. Why not magically create hundreds of billions every day? And not just for this country, but for the whole world. Why are we holding back? Now, the ideas of the stimulus package are not 100% awful.

8:37Some people are talking about tax cuts, which is a good thing, although perhaps pointless without spending cuts. I'm particularly intrigued by the underlying assumption here that taxes work as a drag on the economy, whereas tax cuts fuel expansion. If that is the case, and is indeed the case, although for different reasons than Washington gives, why wait for the recession to cut taxes? If taking less from us is good for the economy, shouldn't we institute this as a universal policy? One great lesson of political economy, emphasized for centuries, is that the government creates no wealth of its own. Everything it has, it takes from you and me, one way or another. It can tax us, it can borrow, and finally it can inflate by means of credit market manipulation.

9:29This third option is the most disguised. When people hear the words monetary policy, they figure that this is something they will leave to the experts. And central bankers have an astonishing talent for obfuscation to the point that no one knows with certainty what they are doing. The whole show is designed to make us go to sleep and not to think about what is really going on. The unvarnished truth is that when the Fed artificially lowers interest rates, it is creating new money that waters down the value of the existing money stock and yielding a lower purchasing power for every existing dollar. This is a form of breaking windows. It is wealth destruction. No matter that there will be more dollars to spend, because prices will be higher and wealth has been drained out of the private sector and redistributed within it, it is Bastiat's fallacy reinvented in a new form.

10:34New Money distorts the production structure. At the very time when the market is pressuring long-term investment to pull back, the lower rates encourage expansion in ways that prolong the crisis. It only delays and worsens the inevitable. The Great Depression taught us that government is capable of doing this to the point that a crisis can last for 17 years. So this is no small matter. A government determined to prevent recession is a government that might end up sustaining one to the point of the collapse of civilization. It is a perverse belief, but pervasive nonetheless. It is believed by both parties. It is held by the President, by the media, by the Congress, except of course for Ron Paul.

11:20It is a reflexive belief, one that reflects a failure to think between stages and see the unseen effects of government intervention. One reason that Bastiat's example has power is that it applies not to just one area of policy, but to all areas. If it isn't true that breaking windows creates wealth, it is not true that government spending and inflating is a boon to the economy. It only ends up draining wealth from the private sector, which is the only source of wealth creation. It doesn't matter what the government spends its money on. For example, building pyramids with tax dollars is not good for the economy, despite what Keynes claimed. But neither is waging war good for us, nor the victim country, despite consistent claims to the contrary.

12:09As Bob Higgs pointed out, it is surely one of the most deadly myths that the Second World War ended the Depression, when in fact, it simply prolonged it, no matter what the phony data claim. And consider all the spending on the war on terror. If government spending were capable of stimulating the economy, we would not have a recession right now. Chris Wesley assembled some data on the last seven years of economic conditions, and it's sobering. Since 2000, tax revenues are up 25%. That's wealth destruction. Government spending is setting records for expansion, with $1 trillion added to the federal budget. Military spending up $250 billion over the egregious $400 billion spent annually in 2000.

12:56and this, by the way, according to their own slightly phony statistics, as Professor Higgs has pointed out, we can pretty much just double the Pentagon figures to get a more accurate idea of what they're actually doing. But it's certainly, whatever the actual figure, it's wealth destruction. The national debt is up 59%. That has to be paid. More destruction. Social security liabilities are up 60%. That, too, is the promise of future destruction. The money supply is up 72 percent, more destruction. Inflation itself has risen, in terms of the CPI inflation, 20 percent. So the dollar of $2,000 is now worth $0.80. The gas price alone is up 118 percent, so that too is wealth destroyed. As an indication of economic trouble, the gold price is up 206 percent.

13:49Here is the story so far of the government's great stimulus. It has led to hard economic times. More of the same will create more of the same and worse. The unemployment rate is rising. Savings are falling. Prices are rising. We're less secure, less prosperous, and we have fewer opportunities than ever to dig our way out of this mess. Government expansion has actually created the absurd scenario mentioned above. The boy threw the rock, the crowd in Washington believed the sophist, and now they're plotting to raise all the homes on the block in the name of economic recovery. Have we learned from the Great Depression? Ben Bernanke believes that he has learned something.

14:35He believes that the key problem of the period was a failure of the central bank to pump in enough money and credit. He has never observed the critical observation of Rothbard that the Fed did attempt to pump up the money supply from 1929 to 1934. They used every mechanism, but the credit markets found few takers and without their cooperation the money supply does not expand. The real lesson of the Great Depression is that there is nothing that the central bank can do to forestall a recession whose time has come and nothing a government can do to improve to improve the recession, once the recession, excuse me, to improve the situation, once the recession has arrived. Everything it attempts to do, except that is shrink, only ends up making matters worse.

15:24So it is in our time. We must ask ourselves what Washington is capable of doing this time around. I believe the answer is anything and everything. Bernanke will attempt to flood the economy with money. Washington is perfectly capable of imposing price and wage controls on the entire economy. It is capable of terrifying levels of protectionist legislation. New taxes are less likely, but taxation through debt accumulation is probably inevitable. There might be rationing, spending mandates, anti-hoarding legislation and more. The assumption that driving up consumption is the key to prosperity is particularly dangerous is dangerous and also pregnant with irony. During good times, we are hounded constantly by the intellectual elites for our consumption habits. It is said that we are a greedy nation, buying more fripperies and not looking after the long term. The American public is decried by the intellectual elites as materialist, consumerist, short-sighted. Then recession hits and the tune changes completely. Reliable leftists, Having complained about the egregious spending habits of the American consumer, suddenly

16:39turn on a dime and tell us that more consumption is the key to economic growth. They favor policies that would get us to fork over even more of our money under a belief that the core problem is a lack of demand. A recent example is Barack Obama, who said last year that the problem with popular culture is that it, quote, saturates our airwaves with a steady stream of sex, violence, and materialism. But only this week, he seemed to endorse at least one of the three. Quote, if the economy continues to decline in the coming weeks, we should send checks to people, he said. This is the quickest way to help people pay their bills and get them to start spending. In fact, less spending and more saving is what is called for during a recession, but is nothing which is nothing but a market correction writ large.

17:31Attempting to coerce spending threatens the value of the dollar itself. Here we face a very dangerous situation. If the dollar ever ceases to be the international currency of choice, and this could happen, we could face roaring inflation. Here is a problem that could cause panic in Washington. The irony here is that after a century of failed interventions and socialism, Washington is no less likely, and probably far more likely, to take the path of least resistance and accumulate ever more power unto itself at our expense. We are in an election season, so of course people ask, who would be the least bad person to head the state in the years ahead? The answer here is not at all clear, if it is not, of course, Dr. Ron Paul.

18:20As of the 1930s, among the rest, we face a choice between militaristic fascism and Keynesian-style socialism combined with environmentalism. These are two grim choices. I tell you this not to spread gloom, but merely to be realistic of other prospects of the future. But there is also good news to be considered. The private sector has raced so far ahead of the state and is so global that it is far more resilient than ever before. There are safety valves available in the form of international capital markets. The government is so much bigger now than in the 1930s, the biggest government in the history of the world by many magnitudes, the US government. But paradoxically, that makes it, of course, much less effective, which is very good news.

19:09It's a massive lumbering giant of a dinosaur, whereas the markets are a speed racer. I might also point out that the government enjoys nowhere near the respect it once had. Once the governing elites consisted of the nation's elites, coming from the best families and the best schools. Today the governing elite has never been more transparently ridiculous and even freakish. Gone are the aristocratic public servants of yesterday, or at least people who portrayed themselves as such. Today the government is made up of a class of hucksters and gangsters that inspires zero confidence. This is all to the good, for as Mencken said, it is always great when we do not get all the government we pay for.

20:06On the intellectual level, the teachings of economics in the Austrian school tradition have never been more available to the world or more frequently cited and discussed. And a recessionary environment guarantees more attention to the Austrian theory of the business cycle simply because this is the only model that makes sense of our current problems. We should never underestimate the power of ideas to make a difference. During the Great Depression, the resistance to the state was present, but weak. Today we have built up a mighty intellectual army that extends across the globe. We are prepared in ways they were not. We have thousands of students and faculty members. We have, for example, many new books that put the whole problem in perspective, such as Jesus Huerta de Soto's book on business cycles.

20:55We have the great biography of Mises, which illustrates the heroism of political dissidents, The works of Rothbard on the Great Depression and Central Banking have never been more widely circulated in physical form and on the web. So this time our masters in Washington will not go unopposed. At the Mises Institute now we're in our 26th year. And I want to acknowledge, by the way, the great founding help of Congressman Ron Paul and his great generosity in the very early days of the Institute. They made all the difference to its getting underway. At the Institute we try to maintain a careful balance between serious and fundamental scholarly work and public advocacy. We never want to lose sight of the need for research and detailed work.

21:42At the same time, there are foundational lessons of economics that must be taught again and again with each new generation. The fallacy of the broken window is one of them, and its implications are truly radical. Both Bastiat and Hazlitt saw that the government is the great window breaker, the destroyer of wealth that drives the economy backwards. The engine of creativity, recovery and expansion is the private sector, completely unencumbered by state intervention. As James mentioned, Ron Paul's newest book is called Pillars of Prosperity, Free Markets, Son Money and Private Property. That title nicely sums up the message of the economics of freedom.

22:27It bears repeating in every age, in all places, for we will never be free of the great threat of the window breaker. So long as there are governments with stones ready to throw, there will be need for someone to point out that destruction is never productive, never beneficial, never a path to the good life that we all seek.