re: EBC Book #1 - Economics in One Lesson by Henry Hazlitt

I found Bastiat's broken window fallacy a bit tricky. At first glance, and in accounting terms, it would appear the baker's account would be credited $50 and the glazier's debited $50, which would seem to be the same result as if the baker's account were credited $50 and the tailor's account were debited $50.

However, I think it's more nuanced. But for the vandalism, there still would have been the window AND there would have been a new suit introduced into the economy. That being said, what if instead of the baker buying the new suit, the new glazier bought the new suit? Isn't that the same result?

I think it's tempting to say yes, but consider this. There are only finite resources in the world, which are used to produce finite goods with finite lives. In this example, the window didn't live out its useful life, so some of the resources which were used to procure it were in fact wasted. If, on the other hand, the baker's $50 had been used to buy the suit, the window would still be living out its useful life and the suit would begin a new useful life.

If the baker paid $50 for the initial window and it had only lived 50% of its life when broken, these are the bookings:

Initial window: -$50 to baker and +$50 to glazier

Loss in value to baker due to premature "death" of the initial window: -$25

New window: -$50 to baker and +$50 to glazier

Glazier, instead of baker, buys new suit: -$50 to glazier and +$50 to tailor

The net result is a loss in value of $25 which wouldn't have occurred had the initial window lived out the rest of its life.

Maybe Hazlitt will get into more detail as I read on, but is this how y'all are thinking about this?

Sorry but for the uniformed could you tell me more about PPP?

Public-Private Partnerships

I'll get you some more info but here's a decent overview of some real-life examples:

LINK

If you read the "Parable of the Broken Window" article on Wikipedia, it does appear Hazlitt's point is that the loss in value of the non-fully depreciated asset is essentially a destruction of wealth that we'll never get back. A portion of the resources used to produce that window simply vanished into thin air.

The Wikipedia article is interesting in that the "criticisms" shown in my opinion actually bolster the argument. Note that one of the criticisms is not really a criticism in my view, but rather an exception, and that is when the window that was broken had no value in the first place (e.g. it was fully depreciated). This is no reason to destroy assets, though, as those who attempt to operate with inefficient assets will eventually be competed out of existence anyway.

Other criticisms are that there may be offsetting factors that reduce or even negate the cost of destruction, e.g. maybe war spawns technological advancement that results in the pre-war technology becoming obsolete anyway. While this may be true in the sense that it could be an indirect consequence, it's not something we can control and certainly isn't something we can base policy on. To me, it's a bit like saying "breaking your arm and losing out on wages isn't so bad because maybe in your down time you'll learn enough about investing to become a multi-millionaire."

Another criticism is that the baker's misfortune may not result in a reduction in spending by him because he may have just been saving excessively and can tap those excessive savings to pay for the new window. Again, this is hardly a policy prescription and maybe he's earning more on his savings than what the glazier would earn on his new profits.

In the "defenses" section of the article, it explicitly says that Bastiat (and the Austrian proponents) believed the loss in value of goods reduced the net value in the economy by the amount of the reduction in value of the goods.

I'd contend it's still a net loss unless the new window was somehow able to offset it.

For instance, if someone killed your non-fully depreciated workhorse (an economic loss) and you then went and bought a tractor, chances are it would be a net gain for the economy (assuming there were no subsequent loss offsets associated with the higher production of crops).

I think the point he's trying to make is that there is only x amount of economic "pie." Some things simply replace one piece of pie with another of equal attributes, while others grow or reduce the size of the pie. It seems Hazlitt is saying the broken window and war would (all else equal) be more likely to reduce the total size of the pie.

Hope is everyone doing well with the book. Out of curiosity, what kind of participation do we have? Please chime in if you are reading the first half of the book this week or plan to.

I'm 2/5 through it and think it makes a lot of salient points but leaves a lot of points open for further thought and discussion. If nothing else, it's a great conversation starter and a good first read for this group.

We still have Sowell's book on tap next if y'all still want to go that route. Or, if there's a point made in this book that the group wants to drill down further on, we can make a diversion before circling back to Sowell. What say ye?

Since this book leaves a lot unanswered, I say we do Sowell next just to get more clarity around the Austrian side of the arguments before we subject them to criticism from Marx.

We'll add something from Marx as the third selection if everyone agrees with that approach. Any books in mind, whether written by Marx himself or some other Marxist?

Thanks for the suggestion. I added it to our queue.

FYI - a very good read on Marx and Marxism in The New Yorker that is also surprisingly even-handed:

LINK

Glad to see you're enjoying what I recommended to you in that other thread RedStickBR Really glad to see an economics book club on here, because economics is something that I've really gotten into within the last year or two. So I'm gonna follow along here, although it's been a year or so since I've last read Economics in One Lesson.

EIOL is heavily based on Bastiat's That Which is Seen, and That Which is Not Seen which I read directly after I read EIOL. For those of you considering reading it, I'd suggest skipping it unless you really want to read it--EIOL is much easier to read and pretty much covers TWISATWINS.

I'll be reading Applied Economics with you guys (I haven't read it before). I hope we do The Road to Serfdom soon, as I've got a copy and it's been on my list but I haven't gotten around to it.