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Broken Glass, Candle Wax and Rainbow
Stew
Reflections on the Challenges of Economic Education
Dallas Business Review
Autumn 1994
"Economics is
preeminently a practical science. It does
no good for its fundamental principles to
be discovered unless they are applied, and
they will not be applied unless they are widely
understood." [1]
—Henry Hazlitt |
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As someone in the applied economics
business, I couldn’t agree more with the above quotation
from Henry Hazlitt’s introduction to the English-language
edition of Economic Sophisms by Frédéric
Bastiat. Bastiat, a French economist of the first half of
the nineteenth century, has been described as a third-rate
economist but a first-rate popularizer of sound economic ideas.
I disagree with the third-rate part. Being the all-time world-champion
economic educator makes him a first-rate economist by any
standard.
Hazlitt was no slouch himself. His 1946
book, Economics in One Lesson, is a classic analysis
of economic fallacies written in prose so simple even I can
understand it. Bastiat and Hazlitt offer inspiration to those
of us who aren’t on the cutting edge of economic theory
but who hope to contribute to economic welfare through economic
education.
I often tell high school teachers in
the Dallas Fed’s economic education programs that they
should adopt Bastiat as their spiritual godfather because
he demonstrated that you don’t have to be a rocket scientist
pushing the envelope of economic theory to contribute.
Wrote Hazlitt:
Bastiat was not primarily an original
economic theorist. What he was, beyond all other men, was
an economic Pamphleteer, the greatest exposer of economic
fallacies, the most powerful champion of free trade on the
European Continent.... Anyone who has ever read and understood
Bastiat must be immune to the protectionist disease, or
the illusions of the Welfare State, except in a very attenuated
form. Bastiat killed protectionism and socialism with ridicule.[2]
Bastiat might have killed protectionism
and socialism for a time, but modern economic debates prove
that they arose from the dead. We need to bring him back to
drive a stake through their hearts.
Many American students are familiar
with Bastiat; his attack on protectionism is cited in textbooks
frequently. Bastiat’s famous tongue-in-cheek petition
to the French Parliament on behalf of the French candlemakers
requested passage of a law requiring the closure of all the
windows in France, thereby blocking out the sunlight. In turn,
production would be stimulated and jobs created in the candle
and related industries. The competition from the sun was unfair.
Bastiat’s petition is relevant
to the NAFTA and GATT debates, as well as many other current
issues. It sheds a harsh light on all proposals for which
the main justification is the jobs they will create. The most
pervasive fallacy in economics today is what I call "The
Fallacy of Job Counting." As I will explain below, jobs
are, from a social standpoint, a means rather than an end.
Jobs will be created by useful pursuits as easily as by foolish
pursuits, so we shouldn’t waste them on the latter.
The Broken-Window Fallacy
The point is made differently in
another Bastiat story. As retold by Hazlitt, it is known as
"the fallacy of the broken window." To make a long
story short, it seems that some teenagers threw a brick through
a baker’s window. A crowd gathers and laments about what
a shame it is for the baker. But soon, the crowd feels the
need for philosophic reflection and someone dutifully points
out the silver lining in the situation. The glass repairer
will get some business he wouldn’t have had otherwise.
This gives him more money to spend with other merchants, and
they with other merchants and so on. You know the drill. By
the time all the secondary, or multiplier, effects are added
up, a single act of vandalism has created an economic boom.
Sound familiar? We have local hurricane
and earthquake booms as well. And you can imagine how much
business counterfeiters could generate if they were left alone.
Variations of the broken-window story have become so familiar
we often don’t question them. But question them we must,
in the spirit of the old Texas proverb that states, "No
matter who says what, if it don’t make sense, don’t
believe it."
The answer lies in what Paul Harvey
might call "the rest of the story" or, more precisely,
the story that’s not told. In this case, the untold story
is what would have happened had the baker not spent his money
on window repair. He might have bought that new suit for which
he had been saving. Then, the tailor would have spent the
money with another merchant, and he with another and so on.
Or he might have saved the money in a bank, which might then
lend it to someone to start a new business.
The glass repairer’s gain is merely
the tailor’s or new entrepreneur’s loss. No net
new business or employment was added; they were only diverted.
The philosophers in the crowd thought only of the parties
to the transaction and what they expected to happen. They
forgot about what would have happened had the brick not been
thrown. They will not see a new window installed. They won’t
see the new suit because it won’t be made; they won’t
see the new business because it wasn’t established. The
stories that get told crowd out the stories that don’t
get told.
The tale of the broken window is a silly
little story—an elementary fallacy any of us should
see through in a New York minute. Yet we fall for its equivalent
every day. According to Hazlitt, "The broken-window fallacy,
under a hundred disguises, is the most persistent in the history
of economics." He said that in 1946. His case grows stronger
by the day.
Half Truths and Whole Truths
The broken-window fallacy suggests
why effective economic education is an uphill battle. The
rhetoric of sound economics often is less convincing, and
certainly less entertaining, than the rhetoric of unsound
economics.
Hazlitt argued that bad economists and
demagogues are usually more effective in presenting their
errors to the public than good economists are at presenting
their truths. The reason, he said, is that it is easier to
present half truths than whole truths. And bad economics usually
contains some truth.
The half truth usually addresses the
immediate and visible effects of a proposal or its effect
on a single group. The whole truth includes secondary and
longer-term consequences and the consequences for those not
included in the single group initially considered. Good economics
is about unintended consequences as well as intended consequences.
Good economics includes the stories that don’t get told,
such as the one about the new suit the baker didn’t buy.
Shopping for Sound Bites
During the great NAFTA debate,
even before the roundhouse punch of the "sucking sound"
landed, I was trying to refine my rhetoric on the advantages
of free trade. I learned early on that audiences get restless
during my standard two-hour lecture tracing Adam Smith’s
absolute advantage to Ricardo and Mill’s comparative
advantage and so on. Even reciting the petition of the candlemakers
was too time consuming in today’s sound-bite world.
So, I searched for an aphorism of my
own to settle the issue quickly and cleanly. First, I tried
to play off a quote on tariffs attributed
to Abraham Lincoln. Lincoln was instinctively a sound economist
but he was wrong on tariffs. He supposedly said that if he
bought a coat in England, he got the coat and England got
the money. But if he bought a coat in America, he got the
coat and America got the money.
As usual, that’s right as far as
it goes, but it doesn’t consider what the British merchant
does with the money: of course, he spends it on fine Texas
cotton. Imports give rise to exports. In any case, I decided
that Lincoln probably wasn’t my best choice of straw
man.
I needed something short and sweet,
so I found a quote from Henry George, who reportedly said
that protection teaches us to do to ourselves in time of peace
what enemies seek to do to us in time of war. That is, to
close our borders. Doesn’t that make the point nicely?
He also reportedly said that, in view of our preoccupation
with trade surpluses, the ideal situation must be if all the
ships containing exports sank before reaching their destinations.
Then we would have all exports and no imports.
Free Trade and "Rainbow Stew"
My search for effective rhetoric
led me down some interesting avenues. One day, while listening
to the radio, I heard my favorite economist, Merle Haggard,
singing his new recording of "Rainbow Stew." The
verse that caught my ear went like this:
When they find out how to burn water
and the gasoline car is gone,
When an airplane flies without any fuel
and the sunlight heats our home,
One of these days when the air clears up
and the sun comes shining through,
We’ll all be drinkin’ that free bubble up
and eatin’ that rainbow stew.
In Merle’s utopian version, I thought
I saw the possibility of some Bastiat-type satire of my own.
I penned a letter to the editor entitled "Free Trade
and Rainbow Stew," questioning, tongue in cheek, whether
Merle had thought the whole thing through. If we didn’t
want cheaper goods from Mexico—and based on the NAFTA
debates at the time, it seemed that most people didn’t—then
surely we didn’t want water and sunlight powering our
cars and heating our homes. Think of all the jobs that would
be lost producing that fine West Texas intermediate crude.
Three major national newspapers turned
my masterpiece down, two without comment and the other on
the grounds that its readers might not realize it was intended
as satire. But by then I had become so fond of the title "Free
Trade and Rainbow Stew" that I was willing to remove
the satire and write the piece straight just to see the title
in print. As it turned out, the Austin paper ran it—no
doubt because of the Austin City Limits connection—but
changed the title. So much for my brief fling as the Bastiat
of Texas.
The Seen and the Unseen
Even if economists today could
match the eloquence of Frédéric Bastiat or Merle
Haggard, effective economic literacy would still be an uphill
struggle. The seen blinds us to the unseen and direct effects
loom larger than indirect effects, but the simple truth is
that bad economics usually is good for its proponents and
good politics for its representatives. Bad economics creates
beneficiaries and advocates that we call special-interest
groups. But many of the special interests pass themselves
off as advocates for the general good, and most probably believe
they really are.
A major thesis, Hard Heads, Soft
Hearts, a book by Alan Blinder, the new vice chairman
of the Fed’s Board of Governors, states that the disuse
and misuse of economics in policy-making is not just bad luck.
Rather, it is systemic and is caused largely by the tendency
of politicians to choose economic solutions that are politically
correct.
Unfortunately, there seems to be a
systematic tendency of good economics to make bad politics….Public
ignorance of simple economics, unthinking attachments to
myths and slogans, and interest-group politics often lead
to the rejection of sensible economic policies that would
improve the lot of millions. [3]
Perhaps the best example of good advice
not taken was when Congress passed and President Hoover signed
the Smoot–Hawley tariff of 1930 over the objections
of 1,028 petitioning economists.
A related problem is that good economics
generally favor market solutions, rather than government solutions,
to perceived economic problems. To the uninitiated, however,
market solutions sound too much like "do-nothing"
solutions. And "do-nothing" sounds too much like
"don’t care." Red-blooded Americans demand
action. "Don’t just stand there," they say,
"do something," while a good economist might well
say, "Don’t do something, just stand there. You’ll
do more harm than good. The Market will work it out."
Jeremy Bentham had it about right when he said, "In political
economy, there is much to learn and little to do."
Such restraint, however, requires wider
popular understanding of economic principles than currently
exists. That’s why the highest priority of economic education
should be to explain the market mechanism to the average citizen
in ways that do not cede the moral high ground. We need to
explain our free-enterprise system in ways that explain its
antipoverty, antidiscrimination and proconsumer characteristics.
Good economists are not bad people necessarily.
If You Lay All the Economists End
to End…
I don’t consider myself an
economist, but in my job, I keep company with quite a few.
One handicap they have is the public’s perception of
them as forecasters. Economists cannot predict the future
very well, but they have allowed themselves to be defined
that way, which hurts their credibility in other areas.
A more serious handicap economists have
is their tendency not to talk publicly about the major things
they agree on but to air only their minor points of disagreement.
Their incentive structure encourages product differentiation
to a fault, and the resulting apparent absence of a united
front on important issues robs them of influence with the
public and legislators.
Blinder, not a bad economic educator
himself, has labeled this phenomenon Murphy’s Law of
Economic Policy: "Economists have the least influence
on policy where they know the most and are most agreed, they
have the most influence on policy where they know the least
and disagree most vehemently." [4]
The public’s misperception of the
lack of consensus among economists is illustrated by the continued
popularity of the tired old joke that if you lay all the economists
in the world end to end, they still wouldn’t reach a
conclusion. This perception encourages the public to look
inward for their answers and to generalize from their own
experiences and observations. People become their own economists,
even though they wouldn’t think of becoming their own
physicians or automobile mechanics.
The Fallacy of Composition
Generalizing from personal experience
makes us vulnerable to "the fallacy of composition,"
since what’s true for us as individuals is frequently
not true for society as a whole.
One example of this fallacy with widespread
repercussions is what I referred to earlier as the fallacy
of job counting. Jobs are valuable indeed to their holders.
Jobs earn us incomes that enable us to buy what we need. For
society, however, jobs are a cost rather than a benefit—a
means rather than an end. We have only so many potential workers
to produce what we need, so we don’t want to waste workers
in less than optimal pursuits. We certainly don’t want
to waste jobs producing something we don’t need or inefficiently
producing the things we do need.
Obvious examples of job waste come from
international trade, through which imports are often less
expensive than domestic products and can be paid for with
efficiently produced exports. Other examples include featherbedding
practices that protect high-income jobs for the few at the
expense of the many and limits on occupational entry that
raise the incomes of those admitted at the expense of customers
and workers denied entry. Certainly, earthquake and hurricane
cleanup produces good jobs for some but are to be avoided
if possible. Yet, we still hear job creation cited as a principal
reason for many government programs. Repeat after me: "Jobs
are the means rather than the end."
Our confused view of jobs is illustrated
by this parable from a textbook, as reported by economist
Paul Krugman:
An entrepreneur starts a new business
that uses a secret technology to convert U.S. wheat, lumber,
and so on into cheap, high-quality consumer goods. The entrepreneur
is hailed as an industrial hero; although some of his domestic
competitors are hurt, everyone accepts that occasional dislocations
are the price of a free-market economy. But then an investigative
reporter discovers that what he is really doing is shipping
the wheat and lumber to Asia and using the proceeds to buy
manufactured goods—whereupon he is denounced as a
fraud who is destroying American jobs. The point, of course,
is that international trade is an economic activity like
any other and can indeed usefully be thought of as a kind
of production process that transforms exports into imports.
A further point is our irrational view
of jobs. We accept job losses that result from new technology
that we are reluctant to accept as a result of trade.
What’s true of our view of jobs
is even more true of our view of money. Money especially is
subject to the fallacy of composition since it represents
real wealth to its individual owners but not to society as
a whole. More money for you and for me makes us richer. We
can buy more. But more money for the economy, not accompanied
by more production, only creates inflation. It’s like
selling more tickets to the football game after all the seats
are filled.
Dealing with the paradox of money is
the Fed’s job, and that paradox is the main reason that
the better the Fed does its job, the more unpopular it will
be in some quarters. People operate in their own microworlds,
where resources are always available at a price.
Scarcity isn’t apparent. The Fed
must operate in the macroworld, where resources are scarce.
The job of monetary policy is to allow the real scarcities
of the macroeconomy to show through to money to avoid inflation.
Even inflation has its constituencies,
however, although most people who believe they benefit from
inflation are not supported by economic theory or evidence.
That is one reason I believe economic education is a prerequisite
of better economic policy. Sound money is an important part
of an effective free enterprise system, but not the only part.
The Dallas Fed is committed to effective economic education
in all its aspects. We try to consider the stories not told
so that people might enjoy a heapin’ helping of rainbow
stew.
| Notes
- Henry Hazlitt, Introduction to Frédéric
Bastiat’s Economic Sophisms, The
Foundation for Economic Education Inc., Irvington-on-Hudson,
NY, 1964, p. xiii.
- Ibid., p. xiii.
- Alan S. Blinder, Hard Heads, Soft Hearts:
Tough Minded Economics for a Just Society,
Addison-Wesley Publishing Co., Reading, Mass.,
1987, p.1.
- Ibid., p. 3.
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A
Petition
From the Manufacturers of
Candles, Tapers, Lanterns, Candlesticks, Street
Lamps, Snuffers and Extinguishers, and from the
Producers of Tallow, Oil, Resin, Alcohol and Generally
of Everything Connected with Lighting
To the Honorable Members
of the Chamber of Deputies
Gentlemen:
You are on the right track.
You reject abstract theories and have little regard
for abundance and low prices. You concern yourselves
mainly with the fate of the producer. You wish
to free him from foreign competition, that is,
to reserve the domestic market for domestic industry.
We come to offer you a wonderful
opportunity for applying your—what shall
we call it? Your theory? No, nothing is more deceptive
than theory. Your doctrine? Your system? Your
principle? But you dislike doctrines, you have
a horror of systems, and, as for principles, you
deny that there are any in political economy;
therefore we shall call it your practice—your
practice without theory and without principle.
We are suffering from the
ruinous competition of a foreign rival who apparently
works under conditions so far superior to our
own for the production of light that he is flooding
the domestic market with it at an incredibly low
price: for the moment that he appears, our sales
cease, all the consumers turn to him, and a branch
of French industry whose ramifications are innumerable
is all at once reduced to complete stagnation.
This rival, which is none other than the sun,
is waging war on us so mercilessly that we suspect
he is being stirred up against us by perfidious
Albion, particularly because he has, for that
haughty island, a respect he does not show for
us. [This reference is to England and its often
foggy weather.]
We ask you to be so good
as to pass a law requiring the closing of all
windows, dormers, skylights, inside and outside
shutters, curtains, casements, bull’s-eyes,
deadlights, and blinds—in short, all openings,
holes, chinks, and fissures through which the
light of the sun is wont to enter houses, to the
detriment of the fair industries with which, we
are proud to say, we have endowed the country,
a country that cannot, without betraying ingratitude,
abandon us today to so unequal a combat.
Be good enough, honorable
deputies, to take our request seriously, and do
not reject it without at least hearing the reasons
that we have to advance in its support.
First, if you shut off as
much as possible all access to natural light…what
industry in France will not ultimately be encouraged?
If France consumes more
tallow, there will have to be more cattle and
sheep, and, consequently, we shall see an increase
in cleared fields, meat, wool, leather, and especially
manure, the basis of all agricultural wealth.
If France consumes more
oil, we shall see an expansion in the cultivation
of the poppy, the olive, and the rapeseed. These
rich yet soil-exhausting plants will come at just
the right time to enable us to put to profitable
use the increased fertility that the breeding
of cattle will impart to the land.
Our moors will be covered
with resinous trees. Numerous swarms of bees will
gather from our mountains the perfumed treasures
that today waste their fragrance, like the flowers
from which they emanate. Thus, there is not one
branch of agriculture that would not undergo a
great expansion.
The same holds true for
shipping. Thousands of vessels will engage in
whaling, and in a short time we shall have a fleet
capable of upholding the honor of France.…It
needs but a little reflection, gentlemen, to be
convinced that there is perhaps not one Frenchman…whose
condition would not be improved by the success
of our petition.
—Economic Sophisms,
pp. 56–60. |
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Economic
Principles of Abraham Lincoln
You cannot bring about prosperity
by discouraging thrift.
You cannot strengthen the
weak by weakening the strong.
You cannot help small men
by tearing down big men.
You cannot help the poor
by destroying the rich.
You cannot lift the wage
earner by pulling down the wage payer.
You cannot keep out of trouble
by spending more than your income.
You cannot establish sound
security on borrowed money.
You cannot build character
and courage by taking away a man’s initiative
and independence.
You cannot help men permanently
by doing for them what they could and should do
for themselves.
—Courtesy of the Clint
W. Murchison Sr., Chair of Free Enterprise, University
of Texas |
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Ten
Pillars of Economic Wisdom
Economics truly is not a
rocket science. These Ten Pillars are a collection
of non-partisan economic truths that form the
basis of a scholarship speaking contest for high
school students sponsored in part by the Free
Enterprise Education Center in Houston, Texas.
From the mouths of babes come truths so simple
that any economist, politician, or citizen should
be able to grasp them.
- Nothing in our material world can come from
nowhere or go nowhere, nor can it be free: everything
in our economic life has a source, a destination
and a cost that must be paid.
- Government is never a source of goods. Everything
produced is produced by the people, and everything
that government gives to the people, it must
first take from the people.
- The only valuable money that government has
to spend is that money taxed or borrowed out
of people’s earnings. When government decides
to spend more than it has thus received, that
extra unearned money is created out of nothing,
through the banks, and when spent, takes on
value only by reducing the value of all money,
savings and insurance.
- In our modern exchange economy, all payroll
and employment come from customers, and the
only worthwhile job security is customer security;
if there are no customers, there can be no payroll
and no jobs.
- Customer security can be achieved by the employee
only by cooperating with management in doing
things that win and hold customers. Job security,
therefore, is a partnership problem that can
be solved only in a spirit of understanding
and cooperation.
- Because wages are the principal cost of everything,
widespread wage increases, without corresponding
increases in production, simply increase the
cost of everybody’s living.
- The greatest good for the greatest number
means, in its material sense, the greatest goods
for the greatest number which, in turn, means
the greatest productivity per worker.
- All productivity is based on three factors:
1) natural resources, whose form, place and
condition are changed by the expenditure of
2) human energy (both muscular and mental),
with the aid of 3) tools.
- Tools are the only one of these three factors
that humans can increase without limit, and
tools come into being in a free society only
when there is a reward for the temporary self-denial
that people must practice, in order to channel
part of their earnings away from purchases that
produce immediate comfort and pleasure, and
into new tools of production. Proper payment
for the use of tools is essential to their creation.
- The productivity of the tools—that is,
the efficiency of the human energy applied in
connection with their use—has always been
highest in a competitive society in which the
economic decisions are made by millions of progress-seeking
individuals, rather than in a state-planned
society in which those decisions are made by
a handful of all-powerful people, regardless
of how well-meaning, unselfish, sincere and
intelligent those people may be.
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January
21, 1829
To: President Andrew Jackson
The canal system of this
country is being threatened by the spread of a
new form of transportation know as "railroads"
and the federal government must preserve the canals
for the following reasons:
- If canal boats are supplanted by "railroads,"
serious unemployment will result. Captains,
cooks, drivers, hostlers, repairmen and lick
tenders will be left without means of livelihood,
not to mention the numerous farmers now employed
growing hay for the horses.
- Boat builders would suffer and towline, whip
and harness makers would be left destitute.
- Canal boats are absolutely essential to the
defense of the United States. In the event of
the expected troubles with England, the Erie
Canal would be the only means by which we could
ever move the supplies so vital to waging a
modern war.
As you may well know, Mr.
President, "railroad" carriages are
pulled at the enormous speed of 15 miles per hour
by "engines" which, in addition to endangering
life and limb of passengers, roar and snort their
way through the countryside, setting fire to crops,
scaring the livestock and frightening women and
children. The Almighty certainly never intended
that people should travel at such breakneck speed.
Martin Van Buren
Governor of New York |
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| About the Author
McTeer is president and
CEO of the Federal Reserve Bank of Dallas. |
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