The Broken Window Revisited

by Hubert Lerch "Economics is haunted by more fallacies than any other study known to man" (Henry Hazlitt, Economics in One Lesson, p. 15) says the man who popularized The Broken Window, Chapter I of Frdric Bastiat's That which is seen, and that which is not seen (1850). Hazlitt identifies "the broken-window fallacy, under a hundred disguises," as "the most persistent in the history of economics" (Hazlitt, p. 25) and consequently dedicates his whole book to issues like: the confusion between demand and need (especially evident in the alleged blessings of war) the illusion that printing money makes a nation richer the myth of supply-driven prosperity Not only economics but the social sciences as a whole would be much more advanced than they actually are if we just looked beyond "what immediately strikes the eye" (Hazlitt, p. 16). This essay focuses less on economics but on politics, more precisely on the question of order. For this purpose we first state the problem using Bastiat's simple model, replacing the boy by a Security Competitor and the glassmaker by a Windfall Producer. Then we modify this model to gain deeper insights into the very nature of the modern state. First, we replace the Security Competitor by a Security Monopolist and the Windfall Producer by a Security Provider. Then we introduce, one at a time, a Perception Manager, a Money Manager, and finally a Dream Factory. The parameters used in this essay are the following: Model 1: SC = Security Competitor WP = Windfall Producer P = Producer Model 2: SM = Security Monopolist SP = Security Provider

Model 3: PM = Perception Manager Model 4: MM = Money Manager Model 5: DF = Dream Factory

Model 1: The Question of Order

In The Broken Window a boy smashes a shopkeeper's window. We do not know anything of the boy's motivation, whether it happened on purpose or by accident. Eventually we learn that the shopkeeper has his window repaired and that he pays the glassmaker the due price for his new window. The villagers discuss the incident and conclude that the boy was not an evildoer but a benefactor. After all, didn't the glassmaker receive money from the shopkeeper? Bastiat insists that what we see is only half of the story. While it is true that the glassmaker's trade was stimulated by the incident, the shopkeeper pays for something that he already had rather than spending his savings on things he wished to possess. On the surface we only see a normal business transaction: the shopkeeper gives money to the glassmaker in return for a good, the new glass. The villagers, at first upset by the disturbance of public order, soon forget that the shopkeeper loses twice, first the old window and second the money earmarked for consumption or investment. But the shopkeeper is not the only one who loses. Equally important is the fact that not only other producers but also everyone else in the whole community lose because the multiplier effect of the shopkeeper's planned expenditure fails to materialize. The problem posed in the Broken Window is however not only an economical one. Psychological, political and moral questions are also addressed. For further investigation we divide the local community (society) into two groups: the majority of the passive spectators but formal decision-makers (the voters) and the minority of the actors, on and behind the stage, whose game is about power and wealth. If we assume that the players want to continue to play the game, we can neglect the passive majority because they are only needed inasmuch as they allow the players to play the game again. The following graphical models focus almost entirely on the actors and ignores the passive mass formally represented as producer P.

We now can distinguish between two kinds of order: the original order before the boy smashed the window pane and the new order in which the boy appeared in a favorable light. The first reaction of the villagers clearly shows that they saw the boy's action as an act of destruction, morally unacceptable, socially disruptive, economically destructive, and therefore a challenge to order.

Model 1: Natural Order challenged

In Bastiat's model we completely miss any hint to the state: there is no policeman, no public prosecutor, no judge. Why do the villagers eventually accept the challenge to order in the absence of coercion? What prevented them from sympathizing with the shopkeeper and punishing the boy? As interesting as these questions may be, we should not be sidetracked by them. Irrespective of their response to the challenge, at one point they will restore the old order, even after an interlude of chaos. The reason for a return to such a natural equilibrium, or natural order, is man's constitution or nature. The old order is grounded on a coordinate system with the vectors justice, property, and contract. Despite the promise so many utopias make to completely eradicate this coordinate system and supplant it by a new one, in practice all these experiments in social engineering have failed, as they were flawed in theory.

Model 2: The Monopolization of Security

Model 1 discussed the challenges to the old order and the restoration of a natural equilibrium in the absence of coercion. In the next step we create an environment where a natural equilibrium cannot be reached due to systemic violent intervention. Model 1 tacitly assumed that the boy acted spontaneously, irrationally and irresponsibly. Model 2 replaces the singular agent by an agency, commonly known by the name of state. Both boy and state use violent means to accomplish their goals but the agency called state (from the Latin stare meaning to stay) differs from the agent in respect to duration which results from

a higher degree of organization. With the Security Competitor (SC) replaced by a Security Monopolist (SM), we have another new player, the Security Provider (SP). The boy lacked any concept and the glassmaker only harvested the windfalls of the boy's inconsiderate action. Now we are dealing with two professional players in the game. Both specialize in the production of security and both depend on each other. It is obvious that their cooperation benefits both monopolists to the detriment of everyone else. That both co-prosper can be derived from the following assumptions: The Security Provider finances election campaigns offers posts to ex-politicians (for example, as consultants or members on the board of directors) creates jobs in strategic quantities (in numbers just big enough to be propagandistically exploitable) serves as national identifier delays marginalization finds in the Security Monopolist a big and dependable buyer for uncompetitive products helps to legitimize institutionalized robbery (taxation) in the name of security The Security Monopolist grants subventions and protectionism has a specialized and dependent supplier has a scapegoat to blame for self-inflicted problems domesticates capitalism and makes it "socially acceptable" gains the image of a competent crisis manager enjoys stability through moderate, controlled change At this point it is important so see that with organization comes complexity. Not only interaction between the two monopolists, or interaction between the active and the passive elements of society change in quality, the individual agencies also become bigger, more differentiated, more difficult to control. In short, the agencies become subject to bureaucratization. While their original purpose remains unchanged to realize and protect their monopoly on violence their sheer growth in combination with their errors weaken their legitimacy. Bureaucratization is the price to pay for higher complexity. But organization also requires more

rationality, specialization, and, in general, competence. Athenian democracy managed more or less to keep bureaucratization minimal but only at the expense of competence. If every citizen can fill any public position, the quality of the decisions made must by necessity be low. Modern mass democracy, being less egalitarian, tolerates a growing number of public functions to grow beyond democratic control. What some criticize as undemocratic, others defend as more efficient. In any case, the democratically legitimized political sector is more and more burdened with the task to legitimize all the sectors where democratic influence is minimal. With the growing imbalance between Security Provider and Security Monopolist in favor of the first whose trump card is better organization, the Security Monopolist slowly mutates into a Security Legitimizer. We do, however, not follow up on this development here.

Model 2: Natural Order replaced by Artificial Order

Model 3: The Production of Majorities

Model 2 discussed the institutionalization and monopolization of security. Omitted were the influences cooperation between Security Monopolist and Security Provider have on society. The production of security is expensive. We find many examples in history of how it ruined even large and rich societies. We also know from history that the production of security is influenced by a number of factors like geography (conflict only occurs where cooperation is possible), technology (weapons of mass destruction do not only need mass societies but also mass technology that makes destruction easy and cheap), constitution and others more. Here we are only interested in constitution or, in modern language, political system. The reason for this is simple: we want to find out how power is legitimized. And depending on the political system, power is legitimized in different ways. In a democracy, power is legitimized by the people , more precisely by a majority of the demos (those given the right to vote). A closer look confirms two things:

 legitimization in large, complex societies always means umbrella legitimization Almost all activities of state organs police, judiciary, military, education, welfare, to mention only the central ones are not directly subjected to the will of the voters. And yet they all claim to act in the name of the majority. In the previous sector we attributed this phenomenon to a higher degree of organization. legitimization is, and can only be, formalized and ritualized Without formal framework legitimization fails. Occasions must be created, occasions like elections on all levels. Often times it suffices to merely dissipate doubt. However, legitimization, in order to be seen as such, must continuously be formally or informally reenacted. Election campaigns have become void of content and highly ritualized. On election day the average voter finds himself confronted with the problem to choose between images and image carriers (faces) rather than ideas and programs. That he acts irresponsibly defined as incapable of making a reasonable decision cannot surprise the observer. David Friedman has pointed out that any investment of scarce resources time and energy are disproportionate to the expected gain. Seen from the viewpoint of legitimization, it does not matter what the voter actually does (he has the choice between several faces, abstention, and invalid ballot. Since any of the voter's three possible actions legitimizes the Security Monopolist in the same way, the voter inevitably fades out of the picture.

Model 3: In Quest of Majorities

In a utopian democratic state where the will of the individual is exactly identical with the will of all, the problem of legitimization does not even arise. In a society where the political sphere is not legitimized by the people, a conflict of interest between the ruler and the ruled can be observed despite the fact that rulers justify their existence by referring to a greater, usually divine, order. On the other hand, the deeper the divide between ruler and the ruled in a

democratic constitution, the more legitimacy becomes an issue. We can study in history that democratization went hand in hand with mediation. During the most radically democratic phases of modern history for instance the Reign of Terror during the French Revolution, the revolution of 1848, the Paris Commune of 1870, the two Russian revolutions of 1917 we observe a steep increase in the use of enlightenment or, in more profane words, propaganda. This is not an accident. What we now call, in more scientific verbiage, perception management, becomes a necessity in a system that only acknowledges the people as the root of its legitimacy. The scheme designed by Security Provider and Security Monopolist for their mutual advantage would not be salable to the masses without mass education, mass propaganda dished out by institutions ranging from public schools to the mass media. The images the masses perceive are produced or mediated, they are not natural or self-evident. The Perception Manager's main function is to describe the world in a way that broadly corresponds with both Security Provider's and Security Monopolist's interests. It would fail, however, if the Perception Manager completely dropped the claim to somehow represent reality. An image is not simply a lie, it is a purposeful distortion of reality. As a consequence, an image cannot be proven wrong. It can only be shown inaccurate, insufficient, or oversimplistic. However, lack of complexity is a weak argument against a strategy of immunization, what image production really is. It immunizes against criticism, discredits the critic, and eventually reinforces a specific perception. Another prerequisite for an image to be acceptable is chaos or confusion. Images kick in only if the world is seen as complex, even chaotic, opinions as contradictory and confusing. The more incomprehensible the world, the more people cry out for plausible explanations that bring meaning and order into the world. That is exactly what images are meant to be.

Model 4: The Production of Fictitious Wealth

Model 3 discussed the crucial role of the Perception Manager for the legitimacy of a democratic political system. Soap bubbles alone, however, are short-lived. What is also needed is success expressed in numbers. Nothing is more convincing and powerful than the impression shared by a sizable number of people in a society. People who perceive life as deteriorating, people who think they are losers, people who are left without hope of becoming rich in the future, people who believe that the world is going to pieces any time soon, all these different people with a general pessimistic outlook are a threat to the stability of a democratically legitimized system.

Voters who don't vote and are dissatisfied with their economic circumstances are a potential threat to order.

Model 4: The Cartel of Power, Money, Opinion

The Money Managers, of course, pursue their own objectives whose main is to acquire the biggest junk of the cake. The most destructive side effect of their activities is business. They force growing sections of the economy to dysfunction, i.e. to produce bubbles rather than wealth and to satisfy their state-affiliated clientele rather than the general consumer. This process is cynically described in Ayn Rand's Atlas Shrugged Book 1. In the next stage the Security Monopolist expands so drastically and produces such a big mob of unemployed or semi-unemployed that the state officials plus the mob in combination generate enough political leverage to support the regime. Socialization intensifies, regular producers become more dispensable and are openly denigrated as "predatory capitalists", they are driven into insolvency or low-tax countries, the consumers fall back into some sort of traditionalist economy, become do-it-yourself men and self-suppliers or start operating in the gray zone. The Perception Manager paints primitive but digestible black-and-white images, simple enough for the mob to be swallowed. The mob sets the standards: sex, gossip, alcohol and sports satisfy the physical, intellectual, and psychic standards of the masses.

Model 5: The Production of La La Land

Model 4 discussed the significance of fictitious wealth comparable to the oil that keeps the machine running. But the longer the machine runs, the closer it moves to catastrophe. A single trigger, which in itself may be ridiculous, can cause the collapse of this system. A self-correcting system would immediately call political priorities in question. However, under the premise that the system sketched above serves a well defined purpose, the system must be prevented from perfecting itself. That, without a doubt, makes mandatory the construction of la la land, a land of

happy slaves living in bubbles of hot air. La la land is a deliberate effort, not inevitable. Its intellectual roots are relativism, Freudianism, and a quasi religious belief in technical progress, combined with democracy, the utopian dream of meaningful involvement. As modern man is hopelessly drowning in a sea of information and disinformation, he is starved of propaganda which alone allows him to find orientation. Reduction of complexity is what he is desperate for, and what he inevitably gets. La la land is the land of the Last Men where everyone wants the same; everyone is the same: he who feels differently goes voluntarily into the madhouse (Friedrich Nietzsche: Zarathustra).

Model 5: The Sweet Fragrance of La La Land

In this last model, producer P finds himself somewhat integrated, at least less alienated. Needless to say that the basic functioning of the system has not changed in any way.