In 1850, French economist Frédéric Bastiat wrote about what is known as the parable of the broken window. In his 1946 masterpiece, Economics in One Lesson, Henry Hazlitt borrows from Bastiat to open his book with the lesson of the broken window. The lesson teaches us two mistakes people are prone to make when thinking about economics:
- Not considering all the parties involved
- Thinking about only what we can see and not about what we cannot see
So, let’s learn the lesson of the broken window as Hazlitt relates it in his book.
Imagine a baker’s shop in a small town. One day, a young hoodlum, as Hazlitt calls him, throws a brick through the window of the baker’s shop. The baker exits his bakery only to see the young man fleeing. He’s out of reach. Soon, a crowd gathers. The broken glass is scattered along the sidewalk and even covers bread and pies inside the bakery. The baker is, understandably, upset. Some philosophical bystanders, however, encourage him to look on the bright side: at least a glazier will gain some business out of this whole ordeal as the baker will certainly pay to have a new window installed. If windows were never broken, what would become of the glass business?
Let’s say, as Hazlitt does, that it costs $250 to repair the window. Now “the glazier will have $250 more to spend on other merchants.” These merchants, in turn, “will have $250 more to spend with still other merchants, and so ad infinitum.” The crowd might well conclude that the hoodlum, “far from being a public menace, was a public benefactor.”
Hazlitt cautions us to make such a hasty conclusion. Did the broken window actually create more employment? While it is true that the broken window did create a new job for the glazier, it didn’t create more employment that otherwise would have existed. Why? Because the baker was planning on spending that $250 to buy a new suit. Now, however, since he has to pay $250 for the new window, he has to forego purchasing the new suit. Consider the baker’s perspective, instead of having either $250 and a window, or a window and a new suit, now he only has a window. Furthermore, Hazlitt reminds us that if we think of the baker “as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.”
Remember, no “new employment” has been created. The crowd that concluded the hoodlum’s actions created employment were only thinking about two parties: the baker and the glazier. They were not considering the tailor, or the mason, or the butcher, etc. They made the first aforementioned mistake: they did not think about all the parties involved. And subsequently they also made the second mistake: they only considered what they could see. They could see the new window being installed, but since the new suit was never ordered, created, and delivered, they never saw it. Thus, in only seeing what is “immediately visible to the eye” they fail to understand the economics of the broken window.
These two mistakes, while they may seem elementary, come up again and again when it comes to government economic schemes such as taxation, public works, and tariffs.