Broken glass

I’ve been going through Hazlitt’s Economics in One Lesson, a basic introduction to economics and economic fallacy by way of delineating a plethora of engaging examples. One in particular stood out to me: The Broken Pane of Glass.

Suppose a hoodlum were to throw a brick into a small bakery. The window is broken, pies and pastries now scattered in a pile of broken glass. What are the consequences?

One may be tempted at first to point out that the incident will surely create business for some carpenter, who will in turn create business for other merchants, which will then create even more business, ad infinitum.

But what about the loss in business stemming from the loss in capital in regards to the bakery? Because the window is broken, the owner of the bakery will have to allocate capital toward repair.

Suppose the owner of the bakery wanted to purchase a new suit, instead of the suit and a window, he must be content with just the window. In other words, the community is in a net loss because of the incident. No new suit has entered into the world.

The fallacy here lay in focusing too much on parties who are in direct participation: the bakery and the carpenter. By negating the importance of the potential third party, the one who is in position to lose business, one may be tempted to become complacent with the idea that the hoodlum’s action results in net positive gain for the community.

The Parable of The Broken Window as it is often referred to, is occasionally used to denounce the idea that war is a positive benefit for the economy. Capital spent for the war is capital that cannot be allocated toward other means. The direct allocation of capital to one sector of the economy comes with a hidden cost: foreclosed possible production in neglected sectors.

To end with Hazlitt:

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.