Then Isaac sowed in that land, and received in the same year an hundredfold: and the LORD blessed him. And the man waxed great, and went forward, and grew until he became very great: For he had possession of flocks, and possession of herds, and great store of servants: and the Philistines envied him. For all the wells which his father's servants had digged in the days of Abraham his father, the Philistines had stopped them, and filled them with earth (Genesis 26:12-15).
I begin with a little-known passage in the Bible. The enemies of Abraham and his family resented the fact that Abraham had dug wells. Water wells are a major form of wealth in a low-rain society. Abraham had wealth; his son Isaac had wealth.
The Philistines resented this. So, when they had an opportunity to do so, they filled in the wells with dirt. This did not make them any wealthier. They did not steal the wells from Isaac. They also did not rent the wells from Isaac. They did not take advantage of the water. They simply made certain that Isaac could not take advantage of the water. This is the motivation we call envy. The translators of the Kings James Version recognized this. Envy is the motivation to destroy, to tear down. It targets an individual who has an advantage. The envious person does not seek to share in the advantage. He wants only to eliminate the other person's advantage.
Most of us find it difficult to believe that people are motivated in this way, but some people are, and they have been throughout history. They are filled with resentment.
This brings me to the topic at hand: the supreme lesson of Henry Hazlitt's book. When Hazlitt chose the title, Economics in One Lesson, he had to provide one lesson. The book has 24 chapters. But the title is an indication of what the book is about. Hazlitt only allowed himself one lesson.
Here is the lesson: Bastiat's broken window fallacy. Hazlitt chose that as his guide, which was an act of near genius. He discovered an idea that had been buried for a century. Bastiat's analogy was rather like Isaac's wells: filled in with dirt by Philistines. Hazlitt dug deep and got the water flowing again. Then he applied that principle in every chapter in the book. So, the title of the book is correct: he really does teach economics in one lesson. But it took 24 chapters to get this lesson across.
I take the broken window fallacy very seriously. Specifically, it is about envy. It is not about jealousy. This is why it is limited in dealing with those aspects of modern politics which we think of as the welfare state or wealth redistribution. Here is why. Envy is defined as the impulse of an individual who seeks to destroy somebody else's advantage, even though he is not benefited directly by the other person's loss.
Jealousy is different from envy. Jealousy is based on the recognition that somebody else has an advantage, but if you can apply some degree of coercion, maybe you can force the other person to share some of his advantage with you. This is the impulse of wealth redistribution by legislation. But envy is far more perverse. You cannot buy off the envious person by offering him something. You cannot make a deal with him. The very fact that you can offer him a benefit enrages him. It reminds him that you have what he does not have. He knows he is never going to have it, but he is determined to make certain that you do not have it either.
When societies adopt policies of wealth redistribution by the state, which do not increase wealth, but which make things more difficult for people who are wealthy, these policies are based on envy, not jealousy.
Bastiat's analogy begins with somebody who throws a stone through another person's window. This is an act of envy, not jealousy. Bastiat and Hazlitt did not spell this out, but we need to understand it from the beginning. It takes a self-conscious act of destruction to break a window. The window is not broken by a hurricane or other natural disaster. It is broken by somebody who resents the fact that somebody else owns a building with a window. In other words, this person has a deep-seated resentment against the owner.
Bastiat's goal for the analogy was simple: to help people understand that the money spent to repair a broken window has to come from somewhere. The cost of repairing the window is whatever the individual with the broken window must give up in order to repair the window. Whatever he spends to repair the window comes at the expense of whatever he would otherwise have done with the money.
This seems like a simple principle. But Hazlitt shows in 24 chapters that most voters do not perceive this fact: state intervention of all kinds inaugurates the broken window process. In other words, there are no free windows. This illustrates the fundamental principle of scarcity: there are no free lunches. Put differently, we cannot get something for nothing. This is a very important principle to understand. If it is true, then we had better look carefully at every political promise that a majority of voters can get something for nothing. Somewhere in the picture, there will be somebody's broken window.
I begin the discussion of the broken window with a discussion of who this somebody is. This somebody is the window's owner.
Ownership above all is the right to exclude. "This is mine. You can gain access to it only on my terms." Christian economics identifies when this right began. "And the Lord God commanded the man, saying, Of every tree of the garden thou mayest freely eat: But of the tree of the knowledge of good and evil, thou shalt not eat of it: for in the day that thou eatest thereof thou shalt surely die" (Genesis 2:16-17). In short: "This tree is mine."
Someone owns the window. He may have purchased the building, and the building came with a window. Maybe he inherited the building. Legally, he is the owner. He therefore is entitled to rights of ownership. These rights are defended by the society at large. They are honored by the society at large. They are defended by the civil government.
He has a right to this property. What does this mean? He has legal immunity from other people's theft or destruction of his property. He has legal sovereignty. The owner also has a legal right to defend his own property. Society grants him this right. More important for my discussion, God grants him this right. The owner is not alone (autonomous). He is not a lone wolf attempting to defend territory. Ownership is a social function. Therefore, he has a moral right to the property, and this moral right is established by law: God's laws, society's customary law, civil law, and the individual's law.
I must make myself clear. The owner possesses legal sovereignty. This is a matter of legal responsibility. Put differently, it is a matter of legal representation. He represents God. This legal sovereignty conveys economic authority. This means that he represents society economically. He is the recipient of constant bids for the use of his property. These bids come in the form of prices. There is no escape from this economic burden, other than selling the property.
The owner of the window enjoys the window. The window provides him with a stream of income. This income is psychological. He enjoys light inside the building. The window lets in the light. The light is an economic asset. The window enables him to access this light during the day. It keeps the weather from getting inside the building. It also keeps out bugs and other critters. A window is a wonderful invention. We would hate to give up our windows, and this was especially true in 1850, before there was electrical light.
The owner has a legal immunity from violence. Nobody is allowed to steal his window. Nobody is allowed to throw a stone through his window. In other words, nobody is supposed to use violence against him by means of violence against the window.
The owner of the window makes several assumptions. He assumes that nobody is going to throw a stone through his window. He assumes that there be continuity in his life. The light will continue to shine in. The cold will continue to stay out. He trusts society in general to defend his interests. He makes decisions in terms of the assumption of continuity. This assumption of security rests on trust. If this trust is violated by an act of violence against him, although directed against his window, then his life will become less secure. He will not be able to make decisions in confidence. His future is more uncertain in a society in which the rights of ownership are not defended: by moral law, by custom, and by civil law.
The window is not merely the capital asset. It is a representative asset. It points to ownership as such. It points to a social order that defends the rights of ownership. It points to a stable social order. Every piece of property is representative in this sense.
The owner is also a representative. He owns the building. He owns the window. He holds this in trust. He holds it in legal trust for God. He holds it in economic trust for society in general. The window represents a stable social order that is based on what we call property rights, but which are in fact rights of owners to enjoy whatever benefits a piece of property conveys to them.
The window has a price. This is why the person who throws the stone throws the stone. He wants to destroy the value of the property. The property has value, and this is reflected by its price. It has a price because there are other people who would like to own it. There are buyers out there who would like to buy the building and the window. The existence of a price testifies to demand for ownership. The competing bids of all those who would like to own the building and the window are what produce an objective price.
The free market has an economic rule: "high bid wins." This is the rule of every auction. The free market is a gigantic auction.
The highest bidder is the existing owner. He has to maintain this bid at all times. By not taking the highest bid among all the competing would-be owners, he forfeits the use of the money that the highest bidder would have given to him in exchange for the building and the window. So, as an owner, he must allocate the use of the building and the window. There is no escape from this economic responsibility.
The owner allocates a scarce resource. He allocates it to himself, but he does not do this at zero cost. He must forfeit whatever would have been offered in exchange for the building and the window. This decision costs him money. It costs him whatever the money would buy. This reminds him, day after day, that he must forfeit something for the ownership he enjoys.
I hope this is clear. This aspect of the free market is central to the social order. Somebody has to be held responsible for the administration of property. I argue that the owner is responsible to God. He is surely responsible to others in society. The social order that we know as free market capitalism legally links ownership and responsibility. It also links it economically. This is fundamental to the ability of the free market social order to produce both peace and wealth: ownership and responsibility are linked.
The two factors are linked economically by the free market because the person who owns the property must constantly pay to retain it. He pays specifically by forfeiting whatever would have been given to him in exchange for the property by the highest bidder in the marketplace. The owner may choose not to acknowledge this, but he bears this burden anyway. He must pay for his ownership. This is a social function. This is an economic function.
By linking ownership and responsibility, the free market forces owners to take responsibility. They must pay to retain their ownership. Other people in the society have a legal right to make bids for ownership. They are owners of whatever they own. They can offer to exchange it.
In making a higher bid than previously manifested in the marketplace, the new bidder increases the degree of responsibility in the life of the owner. The owner must now pay even more than he did before to retain ownership. This is an efficient way for any society to make sure that every piece of private property is administered in terms of the highest bids in the society. A man retains ownership of whatever he owns, but never at zero price.
The window is a physical manifestation of this responsibility. This is why it is a great analogy. It lets in the light. The light makes it easier for us to see what is going on around us.
Along comes an envy-driven person. He resents the fact that someone owns the building and the window. He is determined to get even with that person. He cannot get even by buying the building. He does not have the money to buy the building. But he can still get even. He can break the window. He can undermine the value of the building by destroying the window. This suits him just fine.
So, he picks up a stone, which is readily available. In the dark of night, he throws the stone through the window, and then he runs. No one sees him do it. He does not get caught, although he risks getting caught.
The man who owns the building now faces a problem. Much of the value of the building is dependent upon a functioning window. He is now going to have to replace the window. He wants the light to stream back in, but now he must pay for it.
How is he going to pay for it? He is going to have to get access to money, which he may have in a savings account. Or he may have to sell something else that he owns in order to get money. But he is going to have to get money because he has to pay somebody to replace the window. There are no free windows.
Someone has violated his right of ownership. This also must be paid for. He now knows he is vulnerable. Somebody in the community resents him. Somebody in the community is willing to violate his rights of ownership. It is not just that the broken window is going to let the cold come in, or the flies and mosquitoes come in. He has lost more than this. He has lost the security that he thought he enjoyed because someone in the community is driven by envy. Someone in the community figured out that he could impose a loss on the owner at zero cost to himself. He threw the stone, and he escaped into the darkness.
The owner had enjoyed the continuity of light streaming in, and no bugs streaming in. He enjoyed the continuity of security. He had thought that his ownership was secure, and now it is not.
The person who threw the stone did not just break a window. He broke trust that was associated with the window. If this continues, or if it is imitated, this can disrupt society. This is not mere academic speculation. One of the major breakthroughs in law enforcement in the 20th century was the recognition of the existence of a broken window phenomenon in the community. If a building is abandoned, and vandals begin throwing rocks through the windows, the crime rate goes up. One of the best indicators of a declining part of town is the existence of broken windows in abandoned buildings. This breakdown in social order can become a downward spiral: more broken windows leading to greater crime.
To reverse this, it takes more than a police force. There has to be individual commitment within the neighborhood to put a stop to it. The broken windows reflect a decline in community commitment. When a community will not defend private property, the community is going to experience greater crime and economic setbacks. This is most clearly manifested in broken windows. Bastiat's analogy is not just an analogy. It is a representative case.
The owner must pay to replace the window. This sets off a chain of economic events.
The general public recognizes that the owner must spend money to repair the window. Some people, who may regard themselves as budding economists, will argue that this spending increases employment locally. The person who repairs the window has to buy the glass. He has to pay employees. So, this is good for the community, the budding economists conclude.
The analogy of the broken window informs us that this is not good for the community. It is good for the repairman and those employed by him, but it is not good for the community. There are costs associated with the repairs.
The owner has to pay for the repairs. Any money that he was going to spend on something else must now be spent on replacing the broken window. We do not get something for nothing. There are no free lunches, and there are no free windows. The cost to the owner of the broken window is the cost of the most valued use he had for the money, which he must now pay to the window repairman.
By making this insight clear, Bastiat performed a wonderful service for people in search of economic understanding. But he did not go far enough. The cost extends beyond the window owner. There is a cost for the community. There has been a disruption in one owner's life. He had hoped for a safe enjoyment of light coming through the window, and cold and mosquitoes not coming through the window. That confidence has now been broken. There is now an element of society that does not honor the rights of ownership. Everybody is put at risk. There is a decline in trust. People do not trust each other as much as they did before. They may decide to hire somebody else on the payroll of the police department. Everybody's costs of operation go up.
The person who threw the stone targeted a window, but his real target was the owner of the window. We should also recognize that he had more than this target. He was targeting anybody in the community who owns a window. This is a classic example of the phrase, "two birds with one stone." There were far more than two birds. There were more victims than the owner of the broken wibdow. He was targeting the social order. He was targeting the confidence that people have in their rights as property owners. That stone did not just break the window; it broke people's trust in the stability of the social order. If the stone thrower is imitated, trust will be reduced even more.
The analogy of the broken window is excellent in pointing out that there are costs to the owner. But if we pursue this analogy, we will see that there are costs far beyond those born by the owner of the window.
The stone thrower sent a message to the community. The community now knows that the rights of property are now at risk. A new attitude is now loose in the community. It is an attitude that is hostile to economic inequality. It is hostile to individual wealth. It is hostile to the idea that somebody should enjoy the fruits of his labor, including the fruits of his knowledge. Everybody's property is now at risk, which is another way of saying that everybody's legal rights are at risk.
At this point, people have to make decisions. Is this a trend? Will there be more stones thrown through other windows? Is it time to start allocating money to a larger police force? Is it time to start spending money on private security services? Is it time to buy lights that go on automatically when somebody is in the yard? Is it time to buy security cameras?
It is now more expensive to defend the rights of ownership. It is not just that one person has suffered a loss associated with replacing a broken window. It is that the entire community is now going to have to consider a new threat to individual wealth. People are going to have to think about their budgets. If they want to avoid the cost of replacing a broken window, they may have to expend more money in crime prevention in the community. The costs of living in that community will go up. Money which would have been allocated for consumer spending or for investing will now have to be spent on the protection of property.
What we saw in the case of the individual who was the victim of the stone, namely, that he must now spend money to repair the window, is repeated throughout the community. People who would rather have spent the money on something else now decide that it is time to spend the money on self-defense. This increases the cost of living. This reduces people's wealth. More important, it reduces their sense of security. Uncertainty rises. Dealing with uncertainty costs money. That is to say, people must forfeit the use of whatever they would have rather done with their money because they now have to spend money to defend their property.
This reduces the value of property. If owners must spend more money to defend it, the net return from owning it falls. This reduces the value and the price of property.
This decline will reduce thrift. If the present value of consumer goods declines, then their future value will be lower if people think attacks on property will continue. People will not save money to invest today if the value of future property is expected to be lower.
If you thought a stone thrower might visit your house, would you save up for double-pane windows, or would you buy a chain-link fence and a large guard dog?
The logic of the broken window does not simply apply to the broken window. It also does not simply apply to the owner of the now-broken window. It applies to the whole community.
Let me give another example. Somebody tosses a stone into a quiet lake. He can watch the ripples spread from the stone across the lake. The tranquility of the lake is disrupted. The predictability of the lake is reduced. This does not hurt anybody's ownership. This is not a threat to the community. It is even aesthetically appealing. It is not directed against a piece of capital equipment that produces predictable benefits for the owner. It is not a threat to the community at large. But there are ripple effects.
There are also ripple effects when somebody throws a stone through a window. The tranquility of the community has been disrupted. The predictability of ownership has been reduced. We must look not simply at the cost borne by the owner of the original window. We must also look at the cost borne by other individuals -- society in general. Other individuals have been the victims of the stone thrower.
The remaining chapters in this book will consider the comprehensive costs of violence against property owners.
For documentation, go here: http://bit.ly/CEIOL-Doc-2For all chapters, go here: http://bit.ly/CEIOL
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