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In Henry Hazlitt’s classic book Economics in One Lesson he describes the “broken window” fallacy. The idea is that a brick has been thrown through a shopkeepers window and he must fix the window by paying a glassmaker. Crowds gather and conclude that since the glassmaker will now have extra business he will have extra money to spend at other merchants and those merchants will have more to spend “providing money and employment in ever-widening circles.” The crowd concludes that the brick thrower far from being a menace is actually a public benefactor. So then logically wouldn’t that mean breaking windows is good for the economy? In fact, don’t most teachers tell us that World War II ended the Great Depression under this exact premise? Breaking windows, dropping bombs, its all good, right?

Of course, the fallacy is that to the extent the glassmaker has made more money the shopkeeper now has less and therefore has less to spend on going to the movies, buying gas for his car, etc. So to the extent that the glassmaker is better off, the shopkeeper and other businesses are worse off and there is no net gain from any of this (in fact there is actually a net loss as the money had to be consumed on glass rather than say invested in capital or something more productive). Hazlitt uses this simple idea to explain common economics fallacies across the board from public works projects to taxes to minimum wage laws and beyond.

The deeper psychological or philosophical point is that people naturally focus on the observed direct consequences of an action and do not focus clearly on what does not happen as a result of an action. In his example, its easy to see the broken glass and the money being spent at the glassmaker. One can only “imagine” what would have been if the glass was not broken, and it turns out that humans are very poor at imagining what does not happen.

This effect has profound origins in human psychology. Harvard psychologist and author Dr. Daniel Gilbert in his book Stumbling on Happiness devotes a chapter “The Hounds of Silence” to this effect stating “when the rest of humankind imagines the future, it rarely notices what imagination has missed – and the missing pieces are much more important than we realize.” He goes on to describe various psychological experiments that bear out this thesis and shows how dramatically it can affect human decision making and thus human happiness.

I point this out because the effect is so endemic it makes it difficult to discuss solutions to certain problems without causing an almost hysterical reaction.

For example, I often argue with people that roads and highways should be completely privatized. That is, the roads and highways should be privately owned and the users (drivers) should pay the owners to use them (novel concept, eh?). The state has no business “owning” roads and does a horrendous job maintaining this infrastructure and capacity which leads to daily misery for millions of people. Most people accept this as a simple fact of life that can not be changed and can not “imagine” it being any other way.

For example, when you are in a traffic jam what is really happening? Demand is outstripping supply and you are physically experiencing the economic concept of a shortage. This is identical in principle to the scenario discussed in my “price gouging” posts where the government artifically forces the price of gasoline to be lower than the market is willing to pay thus creating long waiting lines and/or empty pumps. Also in that post, I pointed out that when demand increases relative to supply the price should naturally increase thus leveling current demand to current supply. This is economic science 101, right? If McDonalds started giving away Happy Meals for 1 cent, I imagine there would be a line around the block and they would run out of supplies pretty quickly, right? When you drive on a highway during rush hour for free it is the equivalent of waiting in a long line. If you have been to the post office you may be familiar with government lines – is this a coincidence?

Add to this that the government has no profit incentive to increase the capacity of the highway it means they are constantly under supplied and only react to political pressure to increase it (and now thanks to the ecology movement it is harder than ever to build more roads). Their solution is to encourage “car pooling” and the like which is the equivalent of discouraging people from using their product. Could you imagine a private business encouraging its customers not to use its product? This would be like K-mart advertising to please only buy 1 shirt and tube of toothpaste at a time so that they don’t run out!

So, if roads were private the owners would have an incentive to provide capacity, safety, and invent a pricing mechanism that would enable traffic to flow freely. However, most people can not even imagine this because they are so immersed conceptually in the way they see that it has always been done. They think only of the current government solution of 3 lanes on one side, 3 lanes on the other, toll booths, etc. and just can’t imagine it any other way.

If you were making the road and you had limited space what would you do? How about creating different levels vertically for express traffic below and local traffic above? Imagine a road through town that went under an intersection with an ramp to local streets so that you didn’t have to stop at a light. Imagine the safety considerations since safer roads would give an operator a competitive advantage. Imagine the new and creative ways that could be invented for people to pay for usage such as magnetic bar codes and scanners. Prices could increase during “rush hour” to discourage people from travelling at the same time. These are just a few ideas and I have little incentive to figure it out. I don’t have all the answers to what could be done – that is the point.

Why is it that when we go to most private businesses you rarely have to wait for very long and if you do you have recourse by shopping somewhere else? How is it that when you go to the grocery store they seem to always have just enough cereal, milk, eggs, bread, etc.? Now with RFID technology, self-checkout scanners, etc. retail stores are becoming more efficient at checkout to maintain competitiveness with other stores and the internet. Yet, here we sit in our cars in the year 2007 going 10 mph on a jam packed highway, burning expensive gasoline, with dangerous construction everywhere while one guy in a bobcat moves dirt as 10 others sit around in orange hats talking to each other. Every day there are more deadly accidents. This is literally a life and death matter that could easily be solved.

The same argument can be applied to public schooling which I argue should be completely privatized for the exact same reasons. I will discuss this in a future article. But for now, imagine what you can’t see and couple it with the principle that private ownership and the free market are moral and practical.

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Doug Reich blogs at the The Rational Capitalist with commentary, analysis, and links upholding reason, individualism, and capitalism.