It’s all about observing the seen as well as unseen. It’s all about calculating the opportunity costs, which are the benefits that would have been gained if a different alternative had been taken. When analysing any economic policy, economists must evaluate not only the short-run effects on specific interest groups but also the long-run implications on all groups that the policy affects. Focusing on opportunity cost, Henry Hazlitt mentions on broken window fallacy. According to the broken window fallacy, it is a mistake to believe that spending money to repair damage signals an improvement in economic output and welfare. If money is spent to fix a broken window, that money cannot be used to purchase more productive things. Frédéric Bastiat considers the ‘unseen’ effects too. If the shop owner spends 50 dollars repairing a window, he cannot spend those 50 dollars on a new suit or new equipment. Therefore, while a glazier benefits, the tailor loses out. They forgot the tailor precisely because he will not now enter the transaction. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately noticeable.
Then he hoists the black window fallacy on a larger scale. It is known as the blessing of destruction. Which is merely our old friend, in new clothing, and grown fat beyond recognition. This time it is supported by a whole bundle of related fallacies. It confuses need with demand. This theory talks about the advantages created by war by its destruction. It is true, that offsetting factors, technological discoveries and advances during the war, for example, may increase individual or national productivity at this point or that. But in short, it will change the postwar direction of effort; it will change the balance of industries; it will change the structure of an industry. This in time will also have its consequences. The belief of prosperity brought by replacement demand for the things destroyed is nonetheless a fallacy. Additional: World War II ended the great depression.
Further on he concedes to public works, but not merely the public goods alone, according to Hazlitt public works includes providing employment or adding wealth to the community. So, his first objection in the book is if the goal is to create jobs the utility of the project becomes irrelevant. So he questions policymakers about where a bridge can be built instead of where we need to build a bridge. These are the two questions he asks policymakers, one before building the bridge, second after building the bridge. Say, if a bridge is being built for one million dollars employing 500 people then the seen part of the transaction shows the employment for 500 people, but what is unseen is there is no employment creation at all. Those one million dollars will be borrowed from the taxpayers now or in future which they would have utilized for any other transaction for self-consumption. He says you just diverted the spending from one sector to another sector without any additional job creation.
When it comes to taxation, he thinks that a certain amount of revenue is indispensable in order to carry out critical government responsibilities. Reasonable taxes for this purpose are unlikely to have a significant impact on production. The type of government services provided in exchange, which include safeguarding manufacturing, more than compensate for this. However, if taxes take a higher share of national revenue, it will become a stronger impediment to private output and employment.
Foreign trade is a case where economists often fail to grasp the working process. We often see exports as something good for our economy, while imports are seen as bad. Imported things are things that workers can’t compete with, and so jobs are lost, it is often said. But as Hazlitt says: “It is exports that pay for imports. The greater exports we have, the greater imports we must have if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports, we have no exports, for foreigners will have to have funds with which to buy our goods.” Those who seek import limits are also pushing for fewer exports, but they don’t say so, either because they don’t realise it or because it’s an unintended consequence. Additional: Why protectionism hurts?
In the end, the proposition stands that “And this is our lesson in its most generalized form. Many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as a consumer no less than a producer, are considered. To see the problem as a whole, and not in fragments: that is the goal of economic science.”
Navaneeth Joshi 