Sunday, December 21, 2008

The Broken Window of "Patriotic Duty"

In one of the best books on economics Henry Hazlitt gives us Economics in One Lesson. The book is available here. Hazlitt borrows from the 19th century French writer Federic Bastiat who wrote what is seen and what is not seen. Hazlitt uses this for the first chapter of part 2 in his book which is reproduced in full below. The first part is The Lesson.

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.

So what has this got to do with us? Well, below I wrote how the flow of consumers North of the border may be an example of price discromination. In another intervention Minister for Finance Brian Lenihan has urged shoppers to do their “patriotic duty” and resist the urge to avail of bargains in the North. However if people can save €50 or €100 on their weekly shop this is extra money that they can spend in pubs, restaurants, cinemas and on taxis and other services in this country that can't be bought on a shopping trip to the North.

Brian Lenihan's patriotic duty involves reducing the incomes across a whole range of occupations. It just that these are unseen and not seen like traffic jams into Newry on a Saturday morning.

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