Chapter III – The Blessings of Destruction
Bad economists ofter confuse need with demand. But effective economic demand requires not merely need, but also purchasing power. The needs of India are far greater than those of the United States, but its purchasing power, and therefore the “new business” it can stimulate are incomparably smaller.
After World War II, many bad economists looked at the business resulting from the war as having good economic effects. After the war more houses were being built, as well as items that weren’t able to be produced during the war – such as radios and refrigerators (results of accumulated demand). But what really happened after WWII was that the war changed the direction of demand. You could see the houses being built and the radios being produced, but that money and man-power could have been used to produce many other things if the need and accumulated demand of certain things wouldn’t have been there.
As for the argument that the war stimulated people’s energies for production:
“No man burns down his own house on the theory that the need to rebuild it will stimulate his energies.”
When something like the destruction of property happens to a large amount of people within a community, it will always result in a net loss for the society.
Part 2 – The Lesson Applied, Chapter II – The Broken Window
Imagine yourself seeing a vandal breaking a baker’s window. The vandal runs off and you suddenly feel the need to rationalize the act from a social perspective. You realize that the baker will have to replace the window in the next couple of days. To replace it he’ll have to buy a window from a glazier for, let’s say, 250$. That glazier will have 250$ to spend with other merchants, and these will have 250$ to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever widening circles. Was the vandal then, in fact, a public benefactor?
From the first perspective the vandal definitely seems like a benefactor for the society. But let’s look at it from a different perspective. Let’s say that the shopkeeper was planning on using his 250$ (now lost on replacing the window) to buy a suit that very afternoon. Then the tailor will be in the same position as the previous glazier and produce the same effect. Instead of having a window and a suit, the baker now only has a window and now that suit will never come into being. The tailor, as well as the community, is now one suit poorer that it would have been.
In short, the glazier’s gain of buisness is merely the tailor’s loss of buisness. During your philosophical reflection you had forgotten the third party involved, the tailor, precisely because he was not there. In the following days you might see the window replaced, but you will never see that new suit, precisely because it will never be made.
Part I, Chapter I – The Lesson
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 the tracing of consequences of that policy not merely for one group but for all groups.
‘Economics is haunted by more fallacies than any other study known to man.’ The inherent difficulties of the subject are difficult enough, but they are multiplied a thousandfold by a factor that is insignificant in other fields of study – i.e. the special pleading of selfish interests. These special interest groups will hire the best buyable minds to argue for their points persistently, to the point that clear thinking on the subject can be nearly impossible.
The other big factor for the difficulties of economic study is the short-sightedness of both the public and of bad economists. They tend to look only at the short-term benefits of a proposed policy and/or the effects of that policy on only one group. Nine-tenths of economic fallacies stem from these two flaws in thinking; that of looking only at the immediate consequences of an act or a proposal, and that of looking at the consequences only for a particular group to the neglect of all other groups. The opposite error is also possible and is often made by the classical economists; i.e. of concentrating only on its long-term effects on the community as a whole, but that error is much less common than the previous one.
It is often complained that bad economists present their errors to the public better than good economists presents their truth. The reason for this is simple; that the bad economists are only presenting half-truths. They speak only of the immediate effect of a proposed policy upon a single group. The answer consists in supplementing and correcting the half-truth with the other half. But to present the rest of the truth often requires a long, complicated, and dull chain of reasoning which most of the public has a hard time following. The bad economists often just respond to the good economists with slurs like “classicism” or “capitalist apologetics” and quickly dismiss their arguments.
The following chapters will consist of illuminating these lessons by providing examples. Through them we can learn to avoid first the crudest and most palpable fallacies and finally the most sophisticated and elusive.