Hazlitt and the glazier’s fallacy

I’ve been working for quite a while now on a book which will respond to Henry Hazlitt’s Economics in One Lesson a book that was issued just after 1945 and has remained in print ever since. It’s an adaptation of the work of the 19th century French free-market advocate Frederic Bastiat for a US audience, specifically aimed at refuting the then-novel ideas of Keynes.

My planned title is Economics in Two Lessons. In my interpretation, Hazlitt’s One Lesson is that prices are opportunity costs[1]. My Second Lesson is that, in the absence of appropriate government policy, private opportunity costs (market prices) won’t reflect social opportunity costs. Here’s a central piece of the argument, responding to Hazlitt’s exposition of Bastiat’s glazier’s fallacy.

Here’s Hazlitt

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? 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 $50 more to spend with other merchants, and these in turn will have $50 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 $50 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 $50 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 argument is compelling at first sight, but there’s a subtle problem. Implicit in the crowd’s reaction is the assumption that glaziers are short of work. If (as sometimes happens) glaziers have more jobs than they can handle, then there is no extra window – at best, the shopkeepers order simply displaces some other, less urgent, repair. Similarly, for Hazlitt’s riposte about the tailor to work, there must exist unemployed resources in the tailoring industry, so that the shopkeeper’s suit represents an addition to output. If not, the additional demand from the shopkeeper will raise the price of suits marginally, just enough to lead some other customer to buy one less suit. So, the story seems to imply that the economy is in recession, with unemployment across a wide range of industries.

With these facts in mind, we can tell a different story. Suppose that the glazier, having been out of work for some time, has worn out his clothes. Having fixed the window and been paid, he may take his $50 and buy a new suit. To make the story stop here, we’ll suppose that the tailor is a miser (a vice traditionally associated with the clothing industry, as with Silas Marner), and puts the money under his mattress. So, in this version of the story, the glazier and the tailor are both paid, and the social product is increased by a new window and a new suit.

What if the window had not been broken? Under the assumptions made so far, the shopkeeper would buy a new suit for $50, the tailor would hoard the money and the glazier would remain unemployed. The shopkeeper is better off, since (before the window was broken) he preferred a new suit to a new window. On the other hand, the glazier is worse off, since he gets no work and no suit. For society as a whole, both output and employment have increased.

So, the seeming refutation of the glazier’s fallacy falls apart on closer examination. On the one hand, Hazlitt uses language that implies the existence of unemployment. On the other hand, he is implicitly assuming that private and social opportunity cost are the same. The Second Lesson tells us that this won’t be true in general if the economy is in recession.

None of this means that it’s a good idea to go around smashing windows during recessions. Obviously, the benefit to society in replacing a window is less than that from a new window (for example, in a new shop). Moreover, there’s no reason to suppose that the propensities to save and spend will work out as they have been assumed in the story here. Perhaps the glazier is a miser and the tailor a big spender.

But governments can do much better than this. First, they can spend money on things that are more useful than breaking windows and repairing them (or, in Keynes’ presentation of the same argument, burying bottles full of money in coal mines and letting people dig them up). They can give money directly to individuals and families through benefits or tax reductions. Alternatively, they can create jobs by undertaking public works or by expanding public services.

Second, they can target their efforts towards groups who are likely to spend any additional income (in the economics jargon, they have a high marginal propensity to consume), most obviously low-income families.

The crucial point is that, under conditions of high unemployment, the wage received by a newly employed worker is not a measure of the opportunity cost of their labour; the opportunity cost is the time they would otherwise have spent in idleness.

fn1 Hazlitt describes his one lesson, in terms derived from Bastiat’s “What is Seen and What is Not Seen”, as

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.

But this doesn’t describe any particular idea about economics; it merely assumes what is to be proven, that a complete assessment of policy will yield free-market conclusions.

21 thoughts on “Hazlitt and the glazier’s fallacy

  1. Indeed the dismal science can be fun. As one of those who hadn’t quite got round to finishing my holiday reading in the shape of Das Kapital I was amused to find in Francis Wheen’s biography of Marx an illustration of his observation that Marx was writing satire. The example was the work the criminal provided for police, lawyers, magistrates, gaolers et al.

  2. Gideon Haigh has contributed to the latest Griffith Review talking about the decline of manufacturing, which in some cases has meant losing the benefits of meaningful and satisfying work. This sort of link is omitted from standard economic accounting. On yesterday’s The Drum Gideon said the problem comes from dissociating economic and social policy. Hear hear!

    On the question of simplifying economics for the masses and demythologising – Ha-Joon Chang’s Economics: The User’s Guide is very good.

  3. Indeed… the “hoodlum” is the first unemployed character to appear in the story, but of him nothing further is heard. Worse, his unexplained existence sits alongside his (for him) unproductive efforts; he is a hoodlum without purpose, a thief without loot to show for his efforts, and has no obvious gain in his activity. In Queensland we have the story (urban myth?) of the possum removal service that removes the nuisance possums from your ceiling only to release the beasts a few blocks away, where in short order a new removal is required, and so on ad infinitum, to the enrichment of the possum remover. Hazlitt’s hoodlum, what does he do? Smash the tailor’s window, next, to combat miserliness and keep the economy on its toes? Meanwhile, the baker may well raise his prices to pay for both his window and his suit. His insurance company will raise premiums, if he makes a claim. The police will demand extra resources to cope with the surge in vandalism, and taxes will rise, or expenditure on other government programs will be diverted to street safety. Local traders may form a neighborhood watch group. None of this benefits the original miscreant, who conveniently disappears from the story and from the history of economic thought, it seems. So much more than opportunity costs is at sake here. PS: historically, much apparently pointless vandalism is not visited upon the petty bourgeois but on the institutions and apparatus of the state; more likely that some public property was smashed than a private shopkeeper’s window.

  4. FACTORY windows are always broken.
    Somebody’s always throwing bricks,
    Somebody’s always heaving cinders,
    Playing ugly Yahoo tricks.

    Factory windows are always broken.
    Other windows are let alone.
    No one throws through the chapel-window
    The bitter, snarling, derisive stone.

    Factory windows are always broken.
    Something or other is going wrong.
    Something is rotten–I think, in Denmark.
    End of factory-window song.

    Or at least that’s what Vachel Lindsay wrote.

  5. Speaking of private and social opportunity costs, the following thought always occurs to me when I go to a holiday destination with lots of holiday accomodation.

    Here we all are (the people at the holiday destination) living in alternative accommodation, having left empty our perfectly good accommodation at home. Thus there clearly is a superfluity of accommodation in this society such that we can waste home accommodation while frivolously living somewhere else for days or weeks.

    However, this same society, which can spend so much in the way of money and resources in duplicating accommodation for the middle class, cannot solve the homeless problem.

    If we look around, we can see this problem played out over and over. We can build beer palaces everywhere (pubs, taverns) but we have to close schools (in Qld recently). Or look at the US, they can make beer and wine for people (strictly speaking an unnecessary luxury) but they can’t, or won’t, allow thousands of poor households in Detriot to have running water.

  6. @Ikonoclast

    It’s a thought that I frequently have. So much of the world’s labour power is applied to usages of negative or near zero value to human wellbeing and too little to usages that underpin human dignity.

    I don’t regard that as mere happenstance of course.

  7. @Fran Barlow

    As someone pointed out recently, just up the road from Detroit are the Great Lakes. Detroit is on the banks of the Detroit River. The metropolitan area includes the St. Clair River, Lake St. Clair, and the west end of Lake Erie. The Great Lakes are the largest surface freshwater system on the Earth. They contain 84% of North America’s surface fresh water and about 21% of the world’s supply of surface fresh water. Yes, capitalism has an astonishing ability to create local dearth in the face of regional plenty. It’s no accident as you say.

    This is not to say that water shortages (as an element of Limits to Growth) will not bite naturally in other areas. Lake Mead on the Colorado is at a record low. And the Ogallala aquifer is depleting. “A recent study in the Proceedings of the National Academy of Sciences tried to come up with an answer for the crucial Kansas section of the aquifer. At current rates of use, farming in that area is likely to peak by 2040 or so due to water depletion.” – Washington Post.

  8. @Midrash That’s not satire its big business and private “corrective” services need a steady supply of crims.

    One could speculate on the reasons behind shock jock loud mouth Hadley efforts to successfully derail a successful policy to reduce recidivism in NSW. Recidivism is a major cost to NSW budget.

  9. Peter Chapman :
    In Queensland we have the story (urban myth?) of the possum removal service that removes the nuisance possums from your ceiling only to release the beasts a few blocks away, where in short order a new removal is required, and so on ad infinitum, to the enrichment of the possum remover.

    Off topic, but it’s apparently a legal requirement:

    “NOTE: It is illegal to move possums more than 25 meters from where they were trapped. This is because of the territorial nature of the creatures.”

  10. @bjb

    If your possum trapper does his/her job correctly this is not an issue. First, the trapper repairs any possum entry points into the roofspace. Note: Possums can squeeze through remarkably tiny gaps. Then any possum(s) left in the roofspace are caught in traps. Possums, if any, will be in the traps within 24 hours. Then the possum(s) are released outside and the properly secured roofspace is safe from possums. Add a few possum “houses” to your nearby gum trees if you want to reduce their incentive to break back into the roofspace. And that’s the answer, possums!

  11. I would have thought that the fallacy is the assumption that the world is a closed system, that one person’s gain is always anothers loss and that the baker can’t have a new window AND a new suit. These type of ‘legalistic’ examples are interesting but not particularly useful and should be thought of as applicable in the real world of human interactions. Of course that hasn’t stopped actual policy makers actually attempting to implement actual policies based on these plutonic assumptions and look where that’s got us. We are constantly having to modify the engine as we try to get it to behave as these models say it should.

  12. @patrickb
    It’s all based around a time before the world revolved around debt. Today’s version would be something like: window is broken, baker draws an extra $50 from his overdraft to pay for the repair, but he has to pay back that $50 with interest of which a non-trivial portion of such goes to bank profit of which a non-trivial portion of that goes overseas to major shareholders… blah blah… ie. it’s all too complicated to model.

  13. I know it’s not sufficient to say a model doesn’t have realistic assumptions if the purpose is expository or analytical, but “jobbing production” in a closed system seems so distant from a modern economy that using it to garner support for a Keynesian stimulus seems a stretch. The tailor’s opportunity cost means he can’t hoard the money, the factors of production want their cut. Flexible production, capacity underutilisation, mothballed plant and demand volatility (including exports) seem to me to make measurement of private opportunity cost of incremental production a fraught exercise. And drawing from finished goods stocks or importing dulls the employment effect of stimulus.

    But then maybe I’m thinking too much about the manufacturing model beloved by textbooks. Unis have obviously hugely expanded casual teachers to service demand increases, and can calibrate them at short notice. While Hazlitt might imply recession and general unemployment, the modern scene in Oz anyway is one of underemployment and insider/outsider labour markets, with minimum labour prices which don’t reflect private opportunity costs.

    I’m a bit slow on the accounting logic, still thinking about it.

  14. @Troy Prideaux
    That’s exactly the reality I had in mind. To base your model of the world on essentially pre-modern assumptions (pre-economics really) is pretty much a pointless pursuit. Nonetheless my 80 year old father and, it would appear, many on the LNP side of politics continue to live in those times long gone when the specie was king and the devil take the hindmost.

  15. @bjb Thanks for the legal insight! Of course, the labour of the possum(s) remains uncosted and certainly unpaid… and the marsupials are certainly unaware of the minor contribution they make to the local economy.

  16. What is the status nowadays of the rational expectations prediction that the higher future taxes anticipated from stimulus resulting in people reducing their private consumption, cancelling out the public stimulus effect? It sounds contingent on the specifics of institutional relationships. Are there empirical measurements of this effect? Personally the hypothetical effect on my future taxes has little credibility to me so no behavioural impact, and I’ve never heard anyone else talk like that either. There’s also the fact that my decisions won’t affect tax policy change, so why modify my expenditure.

  17. of course the economist is blind to social benefit. A society might find there is a lot of work to be had in deconstructing its cities and grinding people into dust. The fact that society does not benefit from such work is of no consequence to the economic bottom line. Human advancement is a process perhaps dependent on economics, but is not to be measured by it.

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