May 212013
 

On May 6th, 2013 I interviewed Yaron Brook, Executive Director of the Ayn Rand Institute on the campus of the University of Toronto. Dr. Brook was in Toronto to speak on the morality of capitalism which is the focus of his latest book Free Market Revolution – How Ayn Rand’s Ideas Can End Big Government. We discussed the success of the Ayn Rand Institute in Canada, the virtues of being selfish, and end with the disastrous, self-sacrificial foreign policies of Israel and how that country is not doing enough to ensure its security.

Jun 232011
 

CBC Loonie LogoAs with Canada Post the CBC should be another government corporation on the auction block.  Except that unlike mail delivery the CBC could fold tomorrow and few of us would miss it.  In fact, it could be argued that the country would be far better off without the CBC.

But the CBC is not primary focus of this article.  I only want to use it as an example of an economic theory called “The Broken Window Fallacy” or the “Parable of the Broken Window.”

The parable goes like this:

“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 it 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? Two hundred and 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 $250 more to spend with other merchants, and these in turn will have $250 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 a 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 $250 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 $250 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.”

That was an excerpt from Henry Hazlitt’s Economics in One Lesson.  The Broken Window Fallacy was first conceived by the French economist and statesman, Frederic Bastiat who wrote it in 1848 in an essay entitled That Which is Seen and That Which is Unseen.  In over 150 years the lesson has yet to be learned.

Common examples of the Broken Window Fallacy are: war is good for the economy, government stimulus spending and inflation are means to stimulate the economy, public works projects create jobs, and minimum wage laws.

Now what does this have to do with the CBC?  On June 18th, in an article in the London Free Press by Brian Lilley we learn that

“The state broadcaster commissioned a study from Deloitte and Touche which claims its annual $1.1 billion subsidy generates an additional $2.6 billion in economic activity for the Canadian economy.”

This is incorrect for a couple of reasons.  Firstly we can think of the ever widening circle of economic activity as mentioned in the parable.  To stop at some arbitrary figure of say $2.6 billion from the $1.1 billion spent is just that, completely arbitrary.  But that is not the main error of Deloitte and Touche.  What is not seen, as Bastiat would have put it, is the effect on the economy if Canadians would have been allowed to keep their $1.1 billion.  They would have spent it on other things to be sure.  Perhaps a new suit would have been one of the millions of items bought.  But we will never know.  The CBC has taken that money and has spent it on other areas of the economy without our permission.

To complete the analogy, what if the glazier had secretly paid the hoodlum to break the baker’s window?  He would have been considered a criminal for this because he took the baker’s money with pre-meditated malice.  Now how is this different from our government taking our money knowing full well that they are going to give it to some third party to spend for their own benefit and we are left the poorer for the transaction?

The CBC in this case is the glazier, we are the baker, Deloitte and Touche would be the unthinking crowd, and the government?  The government would of course be the hoodlum.

(Originally broadcast on Just Right #205, June 23, 2011.)