Frederic Bastiat: The Broken Window10th March 2013

This magnificent angel forms part of the famous Arc de Triomphe in Paris, built to recognise those who fought and died for France from the French Revolutionary Wars onwards. Such glorious architecture reminds us that what we do today is but a modest spec in the passage of time, and that many dramas have been acted out in the lives of millions long before we arrived on the scene.

As a boy I was fascinated by the Napoleonic Wars. The different styles of leadership, the Armies across Europe and beyond, the magnificent uniforms, the strategies, the tactics, the tragedy and the legacy. I know, normal kids played football, but I wasn’t normal. I have pursued that interest in adulthood by studying original maps and manuscripts, walking the battlefields, chasing around graveyards[1] and trying to understand how people react as they do when placed in certain situations. All in all, quite a good introduction to business life.

By referencing the past we understand that very little that we face today is new. The lessons that have been learned (albeit often rewritten by the victors to obscure the truth) are generally forgotten, and seemingly each new generation is destined to re-learn the hard way.  But those who have a grounding in historical knowledge stand a better than decent chance of constructively questioning our activities today.

Introducing Bastiat …

One boy, born in 1801, grew up in the Napoleonic age and became, to my mind, the foremost economic philosopher of all time. This Frenchman, Frederic Bastiat, left us a wonderful literature, written from the perspective of the common man, on the subject of money, capital, government, free trade and the law.

It is incredible how relevant his easy explanations are today in debunking much that is promoted as “settled wisdom”. We seem truly destined to repeat the mistakes of our forefathers, big time, unless we are open to the lessons of the past.

Bastiat’s remarkably simple approach is that an act, a habit, an institution, or a law, gives birth not only to an immediate effect, but also to a series of effects. The first visible and generally favourable effect is seen, whilst the subsequent and generally unfavourable effects, unfolding in a succession of consequences over time, are unseen.

His assertion was that a bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.

Why this is relevant today …

How often today in the news do we hear calls “to do this”, when the full consequences have either been given no thought, or are ignored, or happily consigned to the future to become someone else’s problem.

No wonder, the joyful electorate see the immediate effect, but are unable to ascertain, or discouraged from connecting, the future adverse consequences to the original act. In these days of immediate gratification we have seemingly lost the power of foresight to predict unintended consequences.

Bastiat wrote about (and we shall cover all of these in future blogs) everything from troops, taxes, theatres, public works, the public sector, prohibitions, machinery, credit, overseas aid, frugality and luxury, work and profit, and special interest groups. You see, the same issues we tangle with today – even though they were all worked out for us 163 years ago!

Today we kick off with one of Bastiat’s most famous lessons:

The Broken Window …

The shopkeeper’s window had been broken by his careless son. Spectators gather round, and soon start to express the view “Everyone must live, and what would become of the glaziers if panes of glass were never broken?”

Within these few lines lie the distinction between good and disastrous economic thinking. Suppose the glazier charges 6 francs (this was 1850s money!), rubs his hands and blesses the boy who broke the window. All this is seen, as is the glazier’s ability to benefit from spending this unexpected windfall. The breaking of the window caused money to circulate and the glazier’s industry is encouraged.

What is unseen is the 6 francs that the shopkeeper no longer possesses, that he can no longer spend to replace his old shoes, or consume in other ways, or invest to improve his business.

If we combine that which is seen and that which is unseen, whilst one industry has benefited over another, there has been no net gain to the economy.

If we ponder a little further we see that the economy has actually lost a resource – a perfectly good window – and the economic choices previously available to the shopkeeper – to have both a window, a new pair of shoes and to improve his business – have evaporated.

Beyond this there is now the impoverished shoemaker, who has missed out on business, yet he we have not even mentioned him during the telling of this tale.

The lessons for today …

It is all too easy to recognise political calculation in policies that appear to derive an immediate benefit, whilst the economy and all the people within it become the long-term losers. Visible monetary turnover becomes valued more highly than the true underlying strength of the economy, just as we saw in our blog on the nonsense that is GDP (click here). Yet the odd potty economist still comes out after a hurricane to proclaim the boost to economic activity from all the damage he surveys.

In business we might recognise these concepts as opportunity cost, as tough choices are made between scarce resources, and pursuing one choice means we can’t afford to try the other. In government it might be described as “stimulus” to justify removing scarce resources from someone on the one hand to give to a cause that wins positive media coverage on the other. You can witness these events every day on the news, as the crowd apparently roar in approval.

Critics of the Broken Window protest that we can’t assume that the storekeeper would have spent his 6 francs, and it may have remained idle in his safe. That may be so, but those who save do so for a reason; perhaps to be more confident about larger spending when the time is right, or perhaps for genuine investment rather than consumption. And it is investment of capital, after all, that generates sustainable employment, not one-off spending.

The baton was picked up by another equally lucid economist, Henry Hazlitt, who, in a series of books from 1916 to 1984, and in writing for the New York Times, emphasised his single lesson, that “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”.

The more windows we break, the poorer we’ll become.

[1] One of the many heroes of Waterloo, Captain Cavalie Mercer of G Troop, Royal Horse Artillery, is perhaps the most famous junior officer. He retired to my home City of Exeter where he is interred in St David’s churchyard. Amidst all the regimental and national monuments on the field of battle, I know of no other that records the position of a single man and his now famous troop of just 6 guns, who, through standing firm, in contravention of orders, held off the massed ranks of French cavalry. His multi-volume Journal of the campaign is a fascinating insight into the times.