What distinguishes a good economist from a bad economist? We may invoke Hazlitt’s question: Why is it that economics is haunted by more fallacies than any other study known to man? To explain this, we have to refer to two prominent figures in the world of economics: to Frédéric Bastiat and to already mentioned Henry Hazlitt. Bastiat explains that in economics every event or law entails a multitude of consequences. Some of these consequences are apparent at a first glance. Others are more remote temporally and thus harder to spot. According to Bastiat, the only difference between a bad and a good economist is that the bad economist will only pay attention to the immediate and most apparent effects, while a good economist will take into account not only those short-run visible effects, but also those hidden from sight and realized at a more distant point in time. Hazlitt adds, in turn, that a bad economist will concentrate on the short-run effects of policies on special groups, while the good economist will also pay attention to the long-run effects of such policies on the community as a whole. As for Bastiat, he also clarifies why this is so important. He argues that in every public expense, behind the apparent benefit, there is an evil which it is not so easy to discern. This also works the other way around.
To illustrate this, let’s raise the already iconic example of the “Broken Window Fallacy”, made by Bastiat, and later evoked by Hazlitt.
A young hooligan throws a brick at the bakery window and, as a result of this illicit deed, shatters $250 worth of the baker’s glass. There at the bakery a crowd quickly forms to gawk at the damages. In the crowd some people start to whisper that although the event is indeed unpleasant to the baker, its economic effects may in fact be positive. By the very fact that the baker is forced to replace the glass, he will also have to employ a glazier’s services. Some people in the crowd add a remark that generally if windows were not broken, the glaziers of this world would lose their livelihood, and in the present situation the glazier will be richer by $250. He will probably employ another producers who will in turn employ others. $250 will spread throughout the economy, thus supporting the employment of subsequent workers. Those are the only consequences a bad economist will be able to see. He will see an increased demand for glass, and the benefit for the glazier who will be employed to fix it. A good economist will look deeper. He will obviously agree that the glazier will benefit directly from the act of vandalism, but he will consider this observation only as a starting point for his considerations.
After all, the baker did just lose $250, which perhaps he was supposed to spend on a new pair of shoes this very afternoon. $250 spent on the glass cannot be spent on anything else. Were the event play out differently, this money would not finance the glass industry, but it would supply the shoe industry. In such a case the shoemaker would do the same thing as the glazier — he would use the money to give employment to successive workers. Now let us look at the economy as a whole: without a the act of vandalism, the public would have had both the window and the new shoes, but given the vandal’s act of destruction, the society is left merely with a newly fixed window. The shoemaker’s loss goes unseen and is never reflected upon and remembered. People do not feel the loss of shoes because the shoes simply were not produced. They could have been made provided the window were not broken. Now think about the reconstruction of war damages in terms of the broken window example. Well, after the war people have jobs, and the demand for building materials and various related services is indeed huge. But is the economy really healthy when masses of people have to rebuild from scratch what they already had before? Hazlitt emphasizes that every destruction is a loss and in no way can it be presented as a blessing.
Another myth busted by Bastiat and Hazlitt is the claim that the government creates jobs both through public works and by increasing bureaucracy.
Suppose the government devotes a million dollars to build a road. We can all see the laborers and the advances in their work. If the government did not allocate these resources in such a way, then in all probability those laborers would actually not do any work there. This is what all economists and citizens see. But what is left unseen? Well, the million dollars spent by the government obviously originates from somewhere. It is collected in taxes levied on the private sector. This million dollars would remain in the hands of the public and it would be spent in another way, employing other people, their services, or their products or buying their property. Every taxpayer would have extra money to buy something. This is left unseen because the government by collecting money through taxes deprives the private sector of the ability to spend this money. For every dollar spent by the government on a worker or a factor of production to build a road, there is one dollar taken from the private sector that would be spent on a worker or a factor of production to make something needed by the customers. The government does not create any factors of production such as jobs, capital, nor land; it only reshuffles them, and moves them from place to place. When the government allocates money in something actually useful and needed, we can then say that we have paid for a particular service. Of course one could argue whether the private sector would do better, but this is a subject for yet another video. The problem starts when the government spends money on a useless endeavor, and then justifies this extravagance not on grounds of its usefulness, but its ability to create jobs. But by merely creating useless jobs the government cannot make society more prosperous, just as the vandal in Bastiat’s story could not make society more wealthy by destroying its property. Instead, what will be achieved is simply useless consumption and destruction of the society’s factors of production, such as labor, capital, or land. And you cannot say that this will increase society’s well-being. It is simply untrue.
What is true in regard to public works, is also true in regard to the red tape. There is a belief that by reducing bureaucracy the government would cause a huge increase in unemployment and thus would damage the economy. The argument here is not only that the bureaucrats are themselves employed, but also that their purchasing power reinforces the economy. After all, by spending their money bureaucrats support shopkeepers, manufacturers and service providers. What would happen to the numerous businesses supplying bureaucrats with products and services? But this is only one side of the coin. True, many bureaucrats would lose their jobs. True, the stores located near public offices could suffer losses or even go bankrupt. But there is a forgotten flip side to that coin. The bureaucrats spend taxpayers’ money. For every dollar taken and spent by a bureaucrat, there is a dollar taken away and unspent by the private sector. Stores that supply bureaucrats will lose, but hundreds of stores across the country that supply the taxpayers will gain. And what about the laid-off bureaucrats? For the sake of simplicity, let’s assume that 1000 of them have lost their jobs, and that each one of them was earning $1,000 a year. Assuming that there is no budgetary deficit nor surplus, this reduction in government spending will allow taxpayers to keep one million dollars in their pockets. So the private sector not only gains 1000 people to employ, but it also gains one million dollars to spend on factors of production (including labor), which can now be used in production of goods and services for the public. When considering the unnecessary bureaucracy the difference is that before the 1000 bureaucrats made million dollars without doing anything productive, and now they have to earn their pay by doing something productive. And again, please note that maintaining a bureaucrat’s labor may be justified if his work is important and useful for the society. The problem arises when the only justification offered is the workplace itself and the purchasing power of bureaucrats’ pay. To quote Hazlitt: “We are lucky, indeed, if the needless bureaucrats are mere easygoing loafers. They are more likely today to be energetic reformers busily discouraging and disrupting production.”
I encourage you to read both books: That Which is Seen, and That Which is Not Seen by Frédéric Bastiat and Henry Hazlitt’s Economics in One Lesson. The authors address many more issues than those given in the present video. If you liked the video, please help us by sharing it with others.