The Lesson Applied:
The Broken Window
Let us begin with the simplest
illustration possible: let us, emulating Bastiat, choose a broken pane of
glass.
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs
out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the
gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd
feels the need for philosophic reflection. And several of its members are almost certain to remind
each other or the baker that, after all, the misfortune has its bright side.
It will make business
for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate
glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows
were never broken, what would happen to the glass business? Then, of course, the thing is endless.
The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more
to spend with still other merchants, and so ad infinitum. The smashed window will go on providing
money and employment in ever-widening circles. The logical conclusion from all this would be, if the
crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a
public benefactor.
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.
The Blessings of Destruction
So we have finished with the broken
window. An elementary fallacy. Anybody, one would think, would be able to avoid
it after a few moments’ thought. Yet the broken-window fallacy, under a hundred
disguises, is the most persistent in the history of economics.
It is more
rampant now than at any time in the past. It is solemnly reaffirmed every day
by great captains of industry, by chambers of commerce, by labor union leaders,
by editorial writers and newspaper columnists and radio and television commentators,
by learned statisticians using the most refined techniques, by professors of
economics in our best universities. In their various ways they all dilate upon
the advantages of destruction.
Though some of them would
disdain to say that there are net benefits in small acts of destruction, they
see almost endless benefits in enormous acts of destruction. They tell us how
much better off economically we all are in war than in peace.
They see
“miracles of production” which it requires a war to achieve. And they see a
world made prosperous by an enormous “accumulated” or “backed-up” demand. In
Europe, after World War II, they joyously counted the houses, the whole cities
that had been leveled to the ground and that “had to be replaced.”
In America
they counted the houses that could not be built during the war, the nylon
stockings that could not be supplied, the worn-out automobiles and tires, the
obsolescent radios and refrigerators. They brought together formidable totals.
It was merely our old
friend, the broken-window fallacy, in new clothing, and grown fat beyond
recognition. This time it was supported by a whole bundle
of related fallacies. It confused need with
demand. The more war destroys, the
more it impoverishes, the greater is the postwar need. Indubitably. But need is
not demand. Effective economic demand requires not merely need but
corresponding purchasing power. The needs of India today are incomparably
greater than the needs of America. But its purchasing power, and therefore the
“new business” that it can stimulate, are incomparably smaller.
But if we get past this
point, there is a chance for another fallacy, and the broken-windowites usually
grab it. They think of “purchasing power” merely in terms of money. Now money
can be run off by the printing press. As this is being written, in fact,
printing money is the world’s biggest industry—if the product is measured in
monetary terms. But the more money is turned out in this way, the more the
value of any given unit of money falls. This falling value can be measured in
rising prices of commodities.
But as most people are so firmly in the habit of
thinking of their wealth and income in terms of money, they consider themselves
better off as these monetary totals rise, in spite of the fact that in terms of
things they may have less and buy less. Most of the “good” economic results
which people at the time attributed to World War II were really owing to
wartime inflation.
They could have been, and were, produced just as well by an
equivalent peacetime inflation. We shall come back to this money illusion
later.
Now there is a half-truth in
the “backed-up” demand fallacy, just as there was in the broken-window fallacy.
The broken window did make more business for the glazier. The destruction of
war did make more business for the producers of certain things. The destruction
of houses and cities did make more business for the building and construction
industries. The inability to produce automobiles, radios, and refrigerators
during the war did bring about a cumulative postwar demand for those particular products.
To most people this seemed
like an increase in total demand, as it partly was in terms of dollars of lower purchasing power. But what mainly took
place was a diversion of demand to
these particular products from others. The people of Europe built more new houses than otherwise
because they had to. But when they built more houses they had just that much
less manpower and productive capacity left over for everything else. When they
bought houses they had just that much less purchasing power for something else.
Wherever business was increased in one direction, it was (except insofar as
productive energies were stimulated by a sense of want and urgency)
correspondingly reduced in another.
The war, in short, changed
the postwar direction of effort; it
changed the balance of industries; it changed the structure of industry.
Since World War II ended in
Europe, there has been rapid and even spectacular “economic growth” both in
countries that were ravaged by war and those that were not. Some of the
countries in which there was greatest destruction, such as Germany, have
advanced more rapidly than others, such as France, in which there was much
less. In part this was because West Germany followed sounder economic policies.
In part it was because the desperate need to get back to normal housing and
other living conditions stimulated increased efforts. But this does not mean
that property destruction is an advantage to the person whose property has been
destroyed. No man burns down his own house on the theory that the need to
rebuild it will stimulate his energies.
After a war there is
normally a stimulation of energies for a time. At the beginning of the famous
third chapter of his History of England, Macaulay
pointed out that:
No ordinary
misfortune, no ordinary misgovernment, will do so much to make a nation wretched
as the constant progress of physical knowledge and the constant effort of every
man to better himself will do to make a nation prosperous.
It has often been
found that profuse expenditure, heavy taxation, absurd commercial restriction,
corrupt tribunals, disastrous wars, seditions, persecutions, conflagrations,
inundations, have not been able to destroy capital so fast as the exertions of
private citizens have been able to create it.
No man would want to have
his own property destroyed either in war or in peace. What is harmful or
disastrous to an individual must be equally harmful or
disastrous to the collection of individuals that make up a nation.
Many of the most frequent
fallacies in economic reasoning come from the propensity, especially marked
today, to think in terms of an abstraction—the collectivity, the “nation”—and
to forget or ignore the individuals who make it up and give it meaning. No one
could think that the destruction of war was an economic advantage who began by
thinking first of all of the people whose property was destroyed.
Those who think that the
destruction of war increases total “demand” forget that demand and supply are
merely two sides of the same coin. They are the same thing looked at from
different directions. Supply creates demand because at bottom it is demand. The supply of the thing they
make is all that people have, in fact, to offer in exchange for the things they
want. In this sense the farmers’ supply of wheat constitutes their demand for
automobiles and other goods. All this is inherent in the modern division of
labor and in an exchange economy.
This fundamental fact, it is
true, is obscured for most people (including some reputedly brilliant
economists) through such complications as wage payments and the indirect form
in which virtually all modern exchanges are made through the medium of money.
John Stuart Mill and other classical writers, though they sometimes failed to
take sufficient account of the complex consequences resulting from the use of
money, at least saw through “the monetary veil” to the underlying realities.
To
that extent they were in advance of many of their present-day critics, who are
befuddled by money rather than instructed by it. Mere inflation—that is, the
mere issuance of more money, with the consequence of higher wages and
prices may look like the creation of more demand. But in terms of the actual
production and exchange of real things it is not.
It should be obvious that
real buying power is wiped out to the same extent as productive power is wiped
out. We should not let ourselves be deceived or confused on this point by the
effects of monetary inflation in
raising prices or “national income” in monetary terms.
It is sometimes said that
the Germans or the Japanese had a postwar advantage over the Americans because
their old plants, having been destroyed completely by bombs during the war,
they could replace them with the most modern plants and equipment and thus
produce more efficiently and at lower costs than the Americans with their older
and half-obsolete plants and equipment. But if this were really a clear net
advantage, Americans could easily offset it by immediately wrecking their old
plants, junking all the old equipment. In fact, all manufacturers in all
countries could scrap all their old plants and equipment every year and erect
new plants and install new equipment.
The simple truth is that
there is an optimum rate of replacement, a best time for replacement. It would
be an advantage for a manufacturer to have his factory and equipment destroyed
by bombs only if the time had arrived when, through deterioration and
obsolescence, his plant and equipment had already acquired a null or a negative
value and the bombs fell just when he should have called in a wrecking crew or
ordered new equipment anyway.
It is true that previous
depreciation and obsolescence, if not adequately reflected in his books, may
make the destruction of his property less of a disaster, on net balance, than
it seems. It is also true that the existence of new plants and equipment speeds
up the obsolescence of older plants and equipment. If the owners of the older
plant and equipment try to keep using it longer than the period for which it
would maximize their profit, then the manufacturers whose plants and equipment
were destroyed (if we assume that they had both the will and capital to
replace them with new plants and equipment) will reap a comparative advantage
or, to speak more accurately, will reduce their comparative loss.
We are brought, in brief, to
the conclusion that it is never an advantage to have one’s plants destroyed by
shells or bombs unless those plants have already become valueless or acquired a
negative value by depreciation and obsolescence.
In all this discussion,
moreover, we have so far omitted a central consideration. Plants and equipment
cannot be replaced by an individual (or a socialist government) unless he or it
has acquired or can acquire the savings, the capital accumulation, to make the
replacement. But war destroys accumulated capital.
There may be, it is true,
offsetting factors. Technological discoveries and advances during a war may,
for example, increase individual or national productivity at this point or
that, and there may eventually be a net increase in overall productivity.
Postwar demand will never reproduce the precise pattern of prewar demand. But
such complications should not divert us from recognizing the basic truth that
the wanton destruction of anything of real value is always a net loss, a
misfortune, or a disaster, and whatever the offsetting considerations in a
particular instance, can never be, on net balance, a boon or a blessing.