"The Lesson" and "The Broken Window"

Note: this book is organized as "The Lesson" (Chapter 1) and as "The Lesson Applied" (All remaining Chapters).

In the first chapter (The Lesson) Hazlitt writes that the fallacies so abundant in economic thought are a result of two phenomena: 1) the "special pleading of selfish interests," and 2) the "fallacy of overlooking secondary consequences."

Let me address them in reverse order.  Recounting Frederic Bastiat's famous work, That Which is Seen, and That Which is Not Seen, Hazlitt claims that the "Broken Window" fallacy, or the tendency to see only the immediate effects of a policy on a specific group at the expense of seeing the long-term effects on all groups, is to blame.

In chapter two (The Broken Window) Hazlitt explains how a young vandal throws a rock through a business owner's window.  And while the crowd of on-lookers grows many of them begin to see the silver lining.  After all, a new window will provide work to the window maker.  In fact, if windows were never broken many window makers would be forced out of a job.  Their conclusion is that this whole event turned out to be a benefit to society-at-large rather than a cost.

Why is this line of thinking fallacious?  Let's use Robinson Crusoe to illustrate the consequences of property destruction (as Murray Rothbard most famously used him to illustrate the rights to property).  Crusoe has just washed up on his island, and so he begins to prioritize his efforts in such a way as to maximize his probability of survival.  If he attempted to build a permanent shelter first he may very well die of thirst before he got the chance to look for water.  In other words, certain productive efforts can only be realized after other, more basic and more necessary tasks have been completed and realized.

Let's assume Crusoe has effectively prioritized and that he now has 1) water, 2) a fire, 3) a temporary shelter, and 4) a store of food.  He begins to imagine a more permanent structure to provide him shelter and a greater degree of comfort.  But before he begins to build, his store of food is ravaged by a pack of wild beasts.  Now, for Crusoe to begin to build his house before he replenished his food would be folly.  This is why destruction (of a window or anything) is always a loss to society.  A community cannot advance to greater and greater levels of sophistication if it is continually repairing its capital base.  In fact, if windows could be made that would never break, this would be a great advance in productivity.  Yes, the window making industry would significantly contract, but now all that labor is free to move on to produce more advanced and more useful goods and services.

If the fallacy of "overlooking secondary consequences" is the cause of bad policy, it is the "special pleading of selfish interests" that determines who benefits at the expense of whom.  This brings up the idea of the concentration of benefits and the diffusion of costs.  If the benefits of a certain policy are concentrated into a group that can effectively organize itself, a lobby may develop to advocate for policy in their favor.  Conversely, if the costs of this policy are concentrated in a group that can also organize itself, the first group may find its efforts frustrated by an equally influential counterparty.  However, if the costs are spread out among many groups and the cost to each individual is minimal, the former group will likely take advantage of the latter.

The rest of the book consists of illustrations of the broken window fallacy in current (as of the writing of the book) policy.  I'll try to add some more current illustrations.