After making a rather incoherent comment on Hazlitt’s ‘broken window’ parable at a libertarian book club meeting, Abhi Sivasailam suggested I write a post to clarify. My thought was to extend the insights from Hazlitt with observations from institutional economics.
The ‘broken window’ parable is used to distinguish the economic interactions that occur when a person buys a suit from the economic interactions that occur when the person has forgo the suit to repair a window a thief broke. The key insight is that the forgone opportunity to purchase a suit is itself an implicit cost that people often fail to consider when comparatively evaluating both interactions.
My thought was to extend Hazlitt’s analysis further. When we look at the glazier and the tailor and the brick and the suit that wasn’t made, we can compute the immediate implicit costs of the vandalism. But it doesn’t stop there. Every transaction, real or forgone, implies an extensive chain of economic activity. After the brick is thrown people have more reason to think about the security of their persons and their possessions. A brick through a window means a whole host of interactions happen: people demand more security services, either public or private. The increased demand for laws and mechanisms to protect property from loss resolves itself in a manner that involves a whole system of costly interactions.
The world post-brick is not simply a world of a forgone sales opportunity for the tailor. It is a world of forgone opportunities for everyone in the community, because there is a cost to the cleanup, to the search and prosecution and punishment of the criminal; costs that everyone in a community might be expected to be reasonably invested in. These costs shape and determine the underlying institutional costs that the community faces both now and in the future.
A thought for a further post: in the real world, some market actors invariably engage in rent-seeking behavior. This is particularly evident in our justice system. There are insights from Sam Bowles’s ideas on ‘guard labor’ that are relevant here.
Ducks and Economics 