By The News Doctors
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TND Exclusive:  Charles Horton | 

Outside of the realm of economics, Frederic Bastiat is relatively unknown.  Perhaps it is because he died at a relatively young age (49).  Because of this the volume of work that he was able to produce was rather limited.  Certainly had he lived another 20 years his influence would be much greater today than it is.  Still I think the main reason he is relatively unknown is because, to understand what he had to say is a great threat to Statists and Statism everywhere.  One such example is his Broken Window fallacy.

Simply stated The Broken Window Fallacy points out that when judging an economic event one must look at the seen and also the unseen.  In Bastiat’s story a baker suffers a broken window from an act of vandalism and has to pay a glazier to replace it.  Yes it is true that the glazier will profit from replacing the window, and he will be able to consume more of the baker’s product because of this.  This is the seen.  There is also an opportunity cost from replacing the window, that is to say, if the baker did not have to replace the window he would have invested or spent the money somewhere else and society as a whole would have his window intact as well as what ever it was he spent the money on.  This is the unseen.

Recently an article, written by William Anderson, appeared at mises.org.  The article reviewed the effectiveness of stimulus spending as a government response to the recession which began in 2007.  To sum up his findings the stimulus wasn’t effective at all, despite propaganda to the contrary issued from the White House.  When he looked at why it may have failed to produce the results that were promised, the first and only place he had to cite was Bastiat’s Broken Window Fallacy.

So you say, “big deal”.  This is too simplistic to explain the economic chaos that we are witnessing.

And, I say, “If this is your response, you really don’t understand what Bastiat was saying.”

When you understand what Bastiat was saying, it is almost like you get a pair of special sunglasses a la the movie “They Live”.  You find yourself seeing broken windows nestled in between normal windows everywhere you look.  Without a complete understanding of what Bastiat was saying, these broken windows just aren’t apparent to the casual observer.

If one is still falling for the broken window stuff, one probably hasn’t learned the truth at a level of complete understanding. Reading it in a book is only exposure. Really understanding it allows one to apply this knowledge and see how WW II didn’t bring us out of the Great Depression for instance. One begins to understand how every government action is in a sense breaking windows, as the economy the government produces comes at the cost of the economy that is stifled from the removal of capital from the marketplace.  And, since the government produces

no wealth, society is left more impoverished than it was before the government “broke the window” it needed to break in order to undertake it’s current objective.

Early on it becomes apparent that taxation has a negative affect on economic growth, these kinds of broken windows are pretty easy to see after all, so they try to hide their theft of wealth by borrowing from the future in the form of bonds.  As these bond payments begin to pile up, the interest on this debt becomes a problem for the government entity, so interest rates are lowered, supposedly in order to “stimulate” the economy, but really it is to enable more growth of government, and break more windows.

The lowering of interest rates creates a stimulus alright, but it isn’t focused where the free market would be focused.  The baker in our broken window fallacy seeing that his cost of borrowing had been lowered, might try to expand his business by purchasing a bigger oven with borrowed money.  But, other bakers see the same thing and also buy larger ovens allowing them to produce more bread.  Soon the market has an excess supply of bread and prices fall in order to clear the excess, and the uneaten bread that has spoiled has to be discarded.  These broken windows are a little more difficult to see, and the casual observer may get caught up in blaming greedy bakers for trying to make more money, but the observer who understands the fallacy correctly sees that the government action caused the bubble that collapsed and broke many windows all at once.

Finally governments begin to fail in the selling of their debts to those willing to hold such income instruments because their debt has increased faster than the economy they plunder to pay the interest on those debts.  Faced with this problem they begin to create more and more money out of thin air, explaining to the masses that this is necessary in order to avert economic collapse.  The money is used to service the existing debt, but as we know from the law of Supply and Demand, the excess supply of money soon increases the demand for all products being produced in the marketplace.  This increased demand causes all prices to rise in an every increasing spiral, upwards.  As this occurs windows begin to be broken at an ever increasing rate.

Our baker at first sees an increased demand for his product, but this is followed almost immediately by higher costs for the flour he needs to make the bread.  He raises his prices to cover this cost and now fewer people can afford to purchase his bread.  This cycle repeats until very few can purchase the bread that the baker produces as the cost is too high, despite increasing wages, and the baker finds that he can only afford to purchase a small amount of flour anyway because of the increased cost.  The economy of the baker’s village grinds to a halt.  All the windows have been broken.

When government spends a dollar, it breaks a window.  The only ways the government can have this dollar to spend is through taxation, selling debt based bonds, or inflating the money supply.  All of these actions as we have seen above, break windows.  And, because the government never produces any wealth, the replacement of these broken windows falls to the private sector.  This slows the growth of the economy, and in fact, the more the government spends, the slower the economy grows.  Eventually the economy will begin to shrink as more windows are broken than can be replaced.  This is the state of our present economy.  It is easy for those who truly understand Bastiat to see this.  They just have to slip on their special glasses…

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