• Alan Stevens - AWAH - Libertarianism, Freedom.

HS2 and the Broken Window Fallacy

Updated: Oct 28, 2020

People seem to welcome government spending announcements, no matter how ill conceived. They do not see the ‘opportunity costs’ of better things that they might have got with the money taken from them by the state.

People seem to welcome government spending announcements, no matter how ill conceived. They do not see the ‘opportunity costs’ of better things that they might have got with the money taken from them by the state. As Bastiat explained, destructive activities such as breaking windows do not add to prosperity. The latest breaking windows scam is HS2.

Bastiat was one of the two greatest French economists of the 19th Century. In his essay, ‘What is seen and unseen’, he introduced what economists call the broken window fallacy. If most of us actually understood the broken window fallacy, support for government would fall back down to its core vote. (i.e. mainly comprising those who prefer to live by robbing and bullying others).

The story begins with a boy maliciously breaking the windows in a baker’s shop. The following morning a badly upset baker commissions the local glazier to replace all his windows. The glazier is of course delighted to have the business. No doubt he does an excellent and conscientious job of repairing the windows. For him business is booming.

If the wretched boy continues his reign of malicious stupidity, the glazier may need to take on new staff. People observe his prosperity and immediately come to the wrong conclusion. They think that the ‘economy’ has been ‘stimulated’ by the vandalism. The broken windows seem to them to be almost a good thing.

But it is not a good thing, as will be discussed below. The problem lies in how people, especially acting as voters, think. As voters, productive people have no influence on the political world. They sensibly devote less thought to politics than to their daily lives.

Unfortunately, as long as the state is allowed to survive, productive people’s notions about the well-being of society – and their civic responsibility to society - will remain under-developed. The ragged myth of representative democracy – that you can leave the country in the hands of elected thieves and incompetents – makes the electorate more infantile, unenlightened and irresponsible than its members are individually.

It is not helped by state mal-education. It is said that the sign of an educated mind is that it can think about two contrasting ideas or views at the same time, without accepting either. Another way of saying it is being able to see two sides of a question, or putting oneself in someone else’s shoes. People are mostly uneducated in these terms nowadays. Perhaps they always were.

People generally think about what they see, and not what remains unseen. Most human beings find it difficult to think in terms of the unseen knock-on effects of actions. Nor are they trained in the evaluation of contending logical arguments about reality. Otherwise the mass, and social, media could never have got the corona virus hysteria going.

Real economics, in its proper Austrian School form, is based on the understanding that society is a self-ordering system. It is made up of individuals trying to cooperate with each other to make the best use of always ‘scarce’ resources; land, knowledge, energy and materials, accumulated consumables (‘capital’ or ‘saving’). Above all, it’s about using our irreplaceable time well (our ‘labour’ or ‘entrepreneurial skill’).

Society is a complex, constantly changing weave of millions of voluntary agreements or deals. All parties hope their preferred deals will result in the best, often just least bad, outcomes. In the real world, it’s all about making the right trade-offs in cooperative agreements. In politics it’s about hiding the bad trade-offs and unintended consequences of coercion and theft from voters.

Right, that said, let us return to the broken windows. The first order consequence of the boy’s vandalism is the obvious one that the glazier gets more business. That is seen by all. But what is the second order, unseen effect? The baker had other uses for the money he is now obliged is spend on windows. He had other things he wanted to do instead of repairing windows.

Maybe he wanted a new suit, a few crates of fine wine or a chance to go on holiday. So the second order effect of breaking the windows is the ‘opportunity cost’ of not consuming other goods or service instead. These now lost purchases were valued more highly by the baker than was having to replace window glass. The sum of human well-being – society’s psychic income as the Austrian School would say – has been diminished.

And somewhere a tailor, wine merchant or hotel owner has lost business by the same amount that the glazier has gained. Simply measured in terms of current economic activity, the window breaking did harm once unseen second order effects are factored in.

But there is more. There are potential third and fourth order effects which are still more damaging. But they are also still harder for most people to comprehend. Instead of spending his money on consumption, the baker may have been saving the money. He may have wanted to buy a more productive oven, or buy shares in a capital project. Or he might have been saving up to get married, or to help someone else in need, or top up his pension pot. These saving and future investment activities would have added to progress and promoted human flourishing.

Now this improvement may not happen. It’s not just that future wives and children, makers of baking ovens, officers of charities, or capital goods manufacturers lose out. Year in year out, society will also be that little bit less prosperous and flourishing than it would have been. Diverting resources to unnecessary consumption endangers growth.

But there is still more. There are hidden fourth level effects at the level of confidence. Psychology is all. Breaking the baker’s windows is a nasty, uncivil act. It is demoralizing.

Why have standards of living worldwide risen over the last couple of centuries – after thousands of years of abject agrarian poverty? The improvement began because first Britain and then other countries became places where people could invest in the future with reasonable confidence. They became, in modern terms, civilized.

One bad incident may not make a big difference to this, but it could tip the balance. Maybe the baker keeps getting his windows broken? Especially if it is part of a pattern of declining trustworthiness. Trust is needed for voluntary co-operation. Without that no progress can occur. Trust is undermined by state theft and coercion, and by Democratic Socialist support for destructive values and behaviours.

What if the baker decides his town is not a good enough place anymore? The bakery goes. There are then fewer customers around for other businesses. Before you know it, the town is becoming a dump. Can’t happen? So many once prosperous towns are sinking into dilapidation under the incompetent leadership of Democratic Socialist regimes. Across the western world, states have subsidized window breaking and window breakers of all kinds. The consequences are becoming harder for the politicians, officials and crony corporatists to hide. They are becoming less ‘unseen’.

Economists operating in a classical liberal framework clearly debunked the popular notion that unnecessary work could be a good thing. They did this by drawing attention to the opportunity costs of any action in terms of alternative, better actions foregone. These unseen costs were no less real for being hidden.

Not so the intellectual apologists for 20th century Democratic Socialism. Breaking windows metaphorically to ‘stimulate the economy’ has been the cornerstone of Keynesian doctrine. Keynes created a new discipline called macro-economics. His point of departure is a single paragraph in his 1936 ‘General Theory’. In it he admitted that Say’s Law (see April 30th ‘Why did Keynes want the State to destroy Savers?’) meant that markets tended towards full employment. Then he said if Say’s Law were incorrect – which he never demonstrated – then a whole new branch of economics would need somehow need to be created.

Macro-economics was the unhelpful result. Keynes asserted that there was such a thing as deficient demand. He therefore justified indefinite money printing to fund government and consumer spending to keep this mythic demand bath tub ‘topped up’. The inevitable result has been a steady theft of purchasing power from savers and workers by government, abetted by banks. Money has constantly lost value. Keynesian inflationism has also led to recurrent crises. The global slump now underway is likely to cause our current paper or ‘fiat’ currencies finally to fall to their intrinsic values, i.e. nothing.

Keynesian money printing has allowed governments to expand their activities and interventions much more than they ever could under a regime of sound money. Government spending is generally tantamount to a gigantic exercise in breaking windows. Whether damaging, useless or possibly productive, government activities are always a monopoly proposition. The state runs expensive, badly managed cost-plus operations riddled with Spanish Customs and scams. Its activities are indirectly funded by stolen or fraudulently misappropriated resources. In straight competition, government activities would all fail.

Like Bastiat’s baker above, the people who produced those stolen resources certainly had better alternative uses for them. They would not choose to patronize poor value for money state services, still less fund downright dangerous social engineering projects. After all, if they did want to spend their money on such things there would paradoxically be even less point in the existence of the state.

Once again, one use for those resources would have been saving and investment in new sources of employment. The country has lost wealth and sacrificed economic progress over generations in order to blow massive, unstable private and public debt bubbles.

With the state there is an extra discouraging twist. In the case of Bastiat’s 19th century broken windows story the opportunity cost of repairing the windows was the inability to spend an equivalent sum on other consumption or investment possibilities.

With government the opportunity cost of its spending is not just the amount spent (the equivalent of the bill for replacing the glasswork). It is also the other short-term and long-term cost of taxation and borrowing. The tax inspectors, the courts and police, private sector legal and compliance loads are all significant. Worse still is the distortion of activity to avoid taxation and the dead weight costs of taxation in terms of making productive activities more expensive and therefore smaller than would be the case in a free society. It is the fact that governments rely on using force against people to take resources – in contravention of the libertarian NAP principle – which makes it more damaging.

Please don’t take my word for this. Warwick Lightfoot, a (former?) civil servant wrote the excellent ‘Sorry We have No Money - Britain’s Economic Problem’. In it, he reports a British Treasury estimate that every £1 of UK Government spending inflicts opportunity costs of £1.60 on society.

Let’s apply that to the UK Government’s planned expenditure - before the virus hysteria – of £850 billion pounds in this year. The damage to society, the hidden opportunity cost, is not just that £850 billion amount of alternative expenditure on things people actually want more than they wanted the coerced state spending.. It is also another 60p of totally wasted cost per pound of annual state expenditure. That is another very roughly £500 billion of loss and foregone prosperity, or around £7,000 annually per man, woman and child in the UK. It is a lot to add to the £13,000 per person burden of annual spending.

Keynes actually recommended paying people to dig holes and then fill them up. This useless activity, or rather printing or borrowing money to pay for it, would supposedly remedy his incorrectly formulated problem of deficient demand. Whatever one thinks of most government activity, digging and filling holes is a close analogy to the broken window fallacy. In both cases money is spent unnecessarily to end up back at the original start point.

Ever eager to please, the state has produced the latest 21st century version of digging useless holes. It is called HS2. It is a pure broken window proposition, draining what remains of Britain’s sparse pool of investible capital. It is a prestige project to build yet another passenger main line between London and a handful of post-industrial cities in northern England.

It started off as a super TGV designed, as ever, to rival the French. So super that it will apparently run a lot faster than French TGVs can, or indeed any passenger trains in the world. And at these so far unachieved faster speeds it is to take 18 trains each way per hour. A suitably high-tech signalling system is envisaged to make it possible to brake all these trains without an immense pile up.

One is reminded of the CrossRail project under London. Over £20 billion has been spent on London’s answer to, yes you guessed it, the French. (Why imitate France? It must be western Europe’s most depressed and resentful society – except maybe Italy.) This time, anyway, the model was Paris’s RER through-rail tunnels. But trains still cannot run through CrossRail on to the existing lines as intended. There is a problem with, er, the signalling system. Never mind that neighbouring underground lines handle comparable traffic volumes without apparent difficulty.

The extra speed planned on HS2 was said to be needed to achieve worthwhile journey time savings compared to Britain’s excellent fast conventional passenger trains. ‘Worthwhile’ was interpreted in terms of how much businessmen would pay to reduce unproductive time spent sitting on a train. Until, that is, Whitehall caught up with the fact that people can get a great deal of work done on trains. Then they decided that the HS2 was now needed because capacity was running out on existing lines. This assertion was dubious at best before the current slump. All that was needed was re-organising a few flat junctions on the existing main lines. Expensive but not even a small fraction of HS2’s crazy £100 billion cost estimate.

I’ll do the political class the courtesy of taking it for granted that none of the prospective £100 billion expense has ever been, or will ever be, anywhere near the bank accounts of any UK political party or member thereof. And there doesn’t seem to be an industrial strategy case. We are kindly building up foreign rail manufacturers by vastly over-ordering rolling stock, signalling systems etc from them. No, the whole thing just seems to be an honest mistake, a pure example of intentionally creating something of a modern broken window with no real use at all.

You may be wondering what would happen in a free society. A post on road and rail in a free society is on the stocks. Suffice to say this, in advance of the post’s appearance. In a free society the promoter would suggest investors subscribe a sum equivalent to about £2,500 per household in the UK to build yet another railway line to the North. Total cost could be £100 billion. But it might well be more. After £5 billion spent so far, the contractors have only now discovered they were expected to do the design work themselves on their own contracts. Possible revenues, given the presence of several competing lines and companies? No more than a billion pounds or so annually? Result, in a free society? Everyone falls about laughing and the subject is never mentioned again.

If only. People really will be impoverished to the tune of at least £2,500 per household by this latest broken window scam. That is just to meet the overt estimated £100 billion cost. But that opportunity cost will be, as Bastiat explained, unseen. So too will be the extra shadow £60 billion cost of lost resources and economic growth inflicted by the process of taking the original £100 billion from productive people.

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