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A Classical Refutation of the Glazier’s Fallacy

John Quiggin has a good post up on the Glazier’s Fallacy (which I’ve more commonly heard referred to as the broken-window fallacy).

Here’s the original argument from Henry Hazlitt:

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Quiggin’s response is basically Keynesian (which is fine by me):

Suppose that the glazier, having been out of work for some time, has worn out his clothes. Having fixed the window and been paid, he may take his $50 and buy a new suit. To make the story stop here, we’ll suppose that the tailor is a miser (a vice traditionally associated with the clothing industry, as with Silas Marner), and puts the money under his mattress. So, in this version of the story, the glazier and the tailor are both paid, and the social product is increased by a new window and a new suit.

What if the window had not been broken? Under the assumptions made so far, the shopkeeper would buy a new suit for $50, the tailor would hoard the money and the glazier would remain unemployed. The shopkeeper is better off, since (before the window was broken) he preferred a new suit to a new window. On the other hand, the glazier is worse off, since he gets no work and no suit. For society as a whole, both output and employment have increased.

So, the seeming refutation of the glazier’s fallacy falls apart on closer examination. On the one hand, Hazlitt uses language that implies the existence of unemployment. On the other hand, he is implicitly assuming that private and social opportunity cost are the same. The Second Lesson tells us that this won’t be true in general if the economy is in recession.

It’s a good response, but this argument isn’t going to move anyone who’s already inclined to dislike Keynes.  Instead, I think it’s better to deconstruct Hazlitt’s argument from a classical perspective.   As I see it, the problem with the Classicalists is that they view income as exogenous.  The most important thing that Keynes showed, however, was that income is endogenous–fixed at the level of spending.   Once that point is understood, it’s clear that Hazlitt’s scenario is a very special case even in the Classical tradition.

So, let me change Hazlitt’s thought experiment slightly.

First, suppose it is not the shop window which has been smashed, but a window at the shopkeeper’s home and suppose further that the shopkeeper doesn’t like to hang out at his now drafty house.  Technically, we say that the window is a complement for home-leisure activities which the shopkeeper likes to engage in when his home is intact.

In this case, the relative opportunity cost of working is lower (his alternative to working are home-leisure activities in a now drafty house), and so on the margin standard theory would imply that he would substitute work for leisure.   Longer hours working means that the shopkeeper’s income is higher, which presumably you can again talk about his propensity of spend that extra income on goods-other-than-home-leisure.

The rest of the story is the same, but in my scenario it is only the labor-leisure tradeoff, rather than unemployment, which does the work.

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  1. Min
    June 4, 2015 at 9:48 pm

    I just discovered this blog, so please excuse the late comment. 🙂

    From a scientific point of view, Hazlitt’s analysis violates Occam’s Razor by introducing a new entity, the tailor, who was not part of the original scenario. Yes, doing so makes for a good story, but it is a different story from the original, and does not really help us to understand it.

    Typically when reasoning about phenomena embedded in environments or systems about which the details are unknown, we make some appeal to general properties of that environment or system. In this case the villagers do so with the phrase, “Then, of course, the thing is endless.” The $50 circulates in the economy, but we know nothing of the details. The counterfactual if the window is not broken is also that the $50 circulates in the economy, but we know nothing of the details. Hazlitt’s appeal to the tailor only confuses matters by introducing a detail into the counterfactual. We do know that in one case the $50 starts circulating from the glazier and in the other case from the baker, but we do not know what difference that makes.

    That gives us two scenarios to compare: 1) The $50 circulates in the economy; 2) the baker cleans up the mess and gets a new window from the glazier, and then the $50 circulates in the economy. Put it that way, and the difference is fairly clear. We can ignore the circulation of the $50 in the economy, just as an economically naive person would do.

    Whether the economy is in a recession or not may affect how the $50 circulates, but that would still seem to be equivalent in the two scenarios.

    Quiggin’s story is even worse that Hazlitt’s from the standpoint of Occam’s Razor. Not only is there a tailor, but the tailor is a miser, the economy is in recession, and the glazier is unemployed. There is no refutation of the Broken Window Fallacy, only another story. However, Quiggin’s story does indicate a good point. It may well be that the circulation of the $50 in the economy is not equivalent in the two scenarios. Why? To use the temperature metaphor, buying a new window has heated up the economy to some degree. This difference in the temperature of the economy could affect the circulation of the $50, for instance, by making it circulate more quickly or widely in the second scenario than in the first. There is no need to change the story to reach this conclusion. Of course, the idea of temperature would need to be developed, but would it be a question of Keynesian vs. non-Keynesian economics?

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