Boaz discusses Frederic Bastiat’s parable of the broken window, with an extended digression about international trade.
David Boaz: The 19th-century economist, Frédéric Bastiat, wrote about how the important question in looking at economic policy is what is seen and what is not seen. And he started by talking about a broken window. He says, “Imagine a community that’s going along peacefully. And then one day, a bratty little boy throws a rock through a window. And everybody says what a brat. But then an economist comes along, and he says, well, now wait a minute. Think about it. The tailor has a broken window now, so the tailor is going to have to go out and buy a piece of glass and get it installed. So now the window-maker has some money, and he can go out and buy a new piece of furniture. And now the furniture-maker has some money, and he can go buy a suit from the tailor. So everybody is better off. Economic activity has been generated.” The problem with that is now the community has just as many resources to produce and satisfy needs, except they have one less window than they used to. So the community is slightly poorer than it was. And however you allocate these resources, the total is slightly less than it was. Some people said, “The reason Germany got rich after World War II was that the English and the Americans bombed all their factories, and they had to rebuild them. And therefore, they had lots of construction jobs.” Strangely enough, these economists did not say to Winston Churchill and his successors as prime minister, “Why don’t you bomb Britain’s factories so Britain could get rich?” Nobody was that stupid.
You also hear this broken-window fallacy every time there’s a natural disaster. Hurricane comes through Miami. Lots of destruction. People say, “Oh, isn’t that terrible. People have lost their homes. It’s awful.” The second day, the newspaper stories will say, “New construction will generate economic activity in South Florida.” Well, that’s true. There will be some new construction, and there will be activity. What you will not see… And this is where Bastiat talked about what is seen and what is not seen. What you see is the guy with the broken window going to buy a new piece of glass. What you see is the construction jobs in Miami because of the destruction the hurricane created. What you don’t see is all the money those people, those individuals and businesses, would’ve spent on if they hadn’t had to rebuild their homes and businesses. So you have to rebuild your house. It means you can’t start a business. It means you no longer have retirement savings. It means you can’t send your children to college because you had to rebuild your house. The business that was going to expand, open a new outlet across town, now has to reopen its first outlet. All this money has to be spent on that. The community has fewer resources the day after the hurricane.
So strangely enough, it turns out people were right in the first place. A hurricane is a bad thing. It destroys resources. Even if it doesn’t kill anybody, if it destroys resources, you’re worse off. Now you may build a nicer house. You may say, “I’m glad I have a nicer house.” But probably, for less money, you could’ve added on to your house or upgraded the kitchen than it cost to rebuild the house. So what is seen and what is not seen? And it’s actually gotten much greater applicability than that. Every time the government proposes to do something with money, it says, “We’re going to feed the children. We’re going to provide another school. We’re going to build a road.” These may be useful things to do, but that money is taken out of the community. The community is now poorer. The money is being spent here. The individuals from whom the money was taken can no longer spend it on what they would have spent it on to satisfy their own needs. What is seen is, “Oh, look, we built this road.” What is not seen are all the other roads, the houses, the businesses, the circuses that were not built with the money that people had taxed away from them.
When I was young, one of the first political policy battles that I got involved in was the bailout of the Chrysler Corporation. The Chrysler Corporation turned out not to be very good at anticipating what consumers wanted. They could not build cars that people wanted to buy. And so they went to the government, and they asked for a bailout. It seems so quaint now they asked for $1.5 billion. That’s a rounding error in today’s bailouts, but at the time it was shocking. It was front-page news. It saved the Chrysler Corporation. And after that, the people who had done it, the advocates of activist government said, “Look, we saved the Chrysler Corporation. We saved all those jobs. In fact, they didn’t save all the jobs, but they saved some of them, and they saved the Chrysler Corporation. That is what is seen. What is not seen is what would that $1.5 billion do if it hadn’t been given to Chrysler. Maybe it would’ve been borrowed by a guy with an idea for an iPhone 25 years ago. Maybe it would’ve been borrowed by a guy who wanted to build a house. Maybe it would’ve been borrowed by a woman who wanted to open her own business. And I say borrowed because the specific thing they did was guarantee loans to Chrysler. So a loan guarantee moved Chrysler from the bottom of the credit-worthy borrowers up to the top because they had a government guarantee. So somewhere down the way, there were a whole bunch of people who didn’t get a loan that year because the money that would’ve been lent to them got lent to Chrysler. And it’s really impossible for a journalist or an economist to identify who is it who didn’t get the loan that went to Chrysler instead. What we know is that money that was allocated according to the best estimates of the people with the money to the products and services that were most likely to satisfy consumers would probably have resulted in satisfying more consumer needs than money allocated by politicians in Washington who were not spending their own money. When you consider lending your own money, whether you’re just one person or a bank aggregating money from other savers, you’re pretty careful about who you lend it to. You want to be sure it’s going to be paid back. And you charge interest according to the likelihood of it being paid back. When you’re the government, it’s no skin off your nose, it’s not coming out of your pocket, and so in general, you’re going to make worse decisions than competing private bankers, angel investors, kick-starter investors, and so on.
One more topic may be in the area of the economy, and that is the idea of international trade. Somehow, you draw a national border, and people get all confused. Do you have any idea how much money you spend? Let’s say you live in Virginia. Do you have any idea how much money you spent last year on products made in North Carolina? Of course not. And nobody tabulates that. We don’t know how much. Does Virginia have a trade deficit with North Carolina? Nobody knows. Who would care? Each individual buys what they want. Each individual buys something they believe will satisfy their needs. But suddenly, you make it an international border. Oh, we’re buying things from Canada. Do we have a trade deficit with Canada? I have a trade deficit with Canada, I’m sure, because Canada never buys my services, which are labor services here, provided in Washington, DC. But I buy some things that are made in Canada, so I have a trade deficit with Canada. Why do I care? I have a trade deficit with the grocery store as well. They never buy any of my books, but I buy groceries every week. The problem is getting confused by the international border. It doesn’t matter. Eventually, trade is going to balance. Wouldn’t it be great if Japan would send us computers and phones year after year and we’d never have to trade anything to them? Or if they’re willing to just take dollars… because we can print dollars faster than they can build iPhones. Just send them dollars, dollars. But eventually, they take those dollars and they want to buy something. They buy American real estate. They buy American insurance services. They buy American movies which produce jobs for lots of Americans and profits for lots of Americans. Eventually, all of that trade is going to balance.
Another point when you hear people worrying about the trade deficit today and whether we’re buying American and everything is what does American even mean. You have a product that is designed in America, built in Japan, from pieces that were made in Malaysia. You have companies. You have American companies that take Egyptian textile to Uganda where it’s made into T-shirts and then shipped to Europe. Is that an American product, an African product? If you look at the back of your iPhone, you will see that it probably says, “Designed in California by Apple. Manufactured in China.” Apple kind of wants to make the point that it’s not just a Chinese import, you know. We’re making a lot of money here in America by designing these products, and we’re just getting it made wherever it’s cheapest. We will go to wherever in the world we can get this product made cheaper because we’ll satisfy more consumers that way. Apple shareholders will have more money, which they will then use to buy things. So just stop worrying about trade deficit. Stop worrying about international trade. These national borders are an artificial thing as far as economics goes, and you should no more care whether you’re importing from China than you care whether you’re importing from Pennsylvania.
Free markets make the world richer. They make economic growth happen. It is free markets or nearly free markets or halfway free markets that have taken us from the world of backbreaking labor and early death to a world of longer, healthier, more comfortable lives. And that’s why libertarians are so committed to preserving and protecting and expanding free markets.
Question: Can things like subway or water or electricity be provided effectively by competition and free markets?
David Boaz: You’re asking are there natural monopolies. That’s what economists say, that some things are a natural monopoly. They couldn’t be competitive. There’s only room for one supplier; therefore, they should be provided either by the government or by a regulated, private company. It strikes me. If you look at the history of it, there have been cases of things that are supposedly natural monopolies that were provided competitively. For instance, telephones originally were provided by many companies. Now there’s an interconnection problem. But do you think the companies were going to be so stupid that they would set it up and say, “If you have a Smith telephone, you can only talk to people with Smith telephone.” I think they would’ve worked it out pretty fast to get interconnection. So you could talk to anybody with a telephone. And indeed, we went through a long period of government-protected monopoly, the Bell system in the United States. And then eventually, we broke that up. And now you can buy phones from lots of different suppliers. And now the wireless may be from different suppliers. And apparently, it’s not a natural monopoly. So there might be some things that are natural monopolies. But the question is do you trust politicians to figure out what those are. I would rather trust the competitive market process to decide whether something is a natural monopoly or whether it is not a natural monopoly. If it turns out it really is a natural monopoly, then I assume one company will emerge and be the supplier. But as long as it is subject to potential competition, it will have to take account of improving its product and holding its prices reasonable because otherwise, it might encourage competitors.
Now when you say something like subway, there probably are going to be restrictions on how many people can dig up the streets in New York. So that might be difficult because the streets are owned by the government. If they weren’t owned by the government, even in an anarcho-capitalist society, the streets would probably be owned by a community association of all the businesses in Manhattan or something, so they might only want one subway system anyway.
But water? We’re having water shortages right now because we don’t have a competitive market supplying water. We don’t have prices. Nobody cares how much water they use. You don’t care how long your shower is because you’re either not paying for it or you’re paying a tiny amount of money, and it’s not worth worrying about. Nobody cares about the amount of money that they’re spending when they water their lawn. And what has this led to? It’s leading to water shortages, at least in California and maybe some other places. If California had water supplied by competitive, private, priced suppliers, then it would not currently be having mandatory water restrictions. So there may be a natural monopoly somewhere, but I think there’s reason to be a) very skeptical that any of these specific examples actually are, and b) cautious about allowing politicians to decide which things are natural monopolies.