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

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

  1. Henry Hazlitt, Introduction to Frédéric Bastiat’s Economic Sophisms, The Foundation for Economic Education Inc., Irvington-on-Hudson, NY, 1964, p. xiii.
  2. Ibid., p. xiii.
  3. Alan S. Blinder, Hard Heads, Soft Hearts: Tough Minded Economics for a Just Society, Addison-Wesley Publishing Co., Reading, Mass., 1987, p.1.
  4. Ibid., p. 3.

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.

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

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Because wages are the principal cost of everything, widespread wage increases, without corresponding increases in production, simply increase the cost of everybody’s living.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

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:

  1. 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.
  2. Boat builders would suffer and towline, whip and harness makers would be left destitute.
  3. 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

About the Author

Mr. McTeer is chancellor of The Texas A&M University System and former president and CEO of the Federal Reserve Bank of Dallas.