I. Hazlitt remarks that the broken window fallacy in the last chapter is so simple, that no one should ever fall for it again, right? Wrong. He lists off those who still use the fallacy in order to advance or argue for their own special interests. The interests he lists include, but aren't limited to: "...great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities." He calls this belief in the principle of the broken window fallacy, the "blessings of destruction," meaning that they believe that destruction is good for the economy.

The author points out that the proponents seem to back off when you bring up the fallacy to them. They back away from the small act of breaking a window and other small destruction as bad, yet somehow, they believe in large, gigantic acts of breaking things and think how great it is for the economy. What are some examples of how these people think?

For instance, we've all heard the argument that World War II was good for not just the economy of the united states, but for the world. These arguments point to the increased production that comes from fighting these wars, and by this they mean manufacturing bullets and tanks and using them to blow things up.

When you tell them, "hey, you didn't create new wealth, you've only destroyed," they say, "but the destroyed peoples buildings and homes will be rebuilt, which will mean jobs for the construction workers."

In the words of our author: "In Europe they joyously count the houses, the whole cities that have been leveled to the ground and that "will have to be replaced." In America they count the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. They bring together formidable totals." He's saying that while its true there will be new homes to be built in Europe, where the destruction of WWII happened, there were homes that weren't built in the US. We weren't making stockings and socks, refrigerators and radios, for the everyday citizen. The country was forced to make bullets, weapons, and other engines of war.

In the words of the makers of the "fear the boom and bust" economics rap video on YouTube, "if everyone was staffed in the army or fleet, we'd have full employment, and nothing to eat."

As you can see, the idea that war helps the economy is merely our old friend the broken window, with new clothes.

The more wars destroy, the more people become poorer because their lives or property have been damaged, and the greater is the need to re-build society. Hazlitt says that this pro-war argument confuses need with demand. Sure, they need to rebuild their homes, but because they have to spend their time and resources rebuilding their homes, they can not demand other things that dramatically increase standards of living. Instead of investing and figuring out new innovations and inventions, they're simply re-building what they already had.

The baker can't go get a new suit, because he has to pay for the window that was just broken.

At the time the book was written (1946), as the author points out, the needs of the Chinese exceeded the needs of the Americans. Their country had been destroyed by the Japanese. They needed new homes, to plant new fields of rice, etc. However, because they spent time rebuilding the things they already had, the Chinese (and the European countries that were demolished during the war as well), had less purchasing power to spend on other ventures, like refrigerators or radios. They didn't have the purchasing power to create new business and technologies, because they were spending their time and resources rebuilding their basic necessities.

Hazlitt then makes his first reference to money and inflation. He says there is another fallacy that exists here when people talk about "purchasing power." Too many people think about purchasing power in terms of the quantity of money they have, instead of what that money can buy. The fallacy here is that just because you have obtained more money, doesn't mean you can buy more things. If there are 10 people in the group, and they each receive an extra dollar, it doesn't change anything in terms of what they can buy. All it does is raise the price because more people have more money. There is no gain in what you can buy because you didn't produce any more, everyone just had another unit of currency. (PBF: for every new unit of currency created, the value of the currency decreases just as much, so that it actually takes MORE of that currency to buy the same thing). Hazlitt finishes this point by arguing that what most people think about as "good" results from war, mainly that "the amount of money they made has gone up," is merely because of wartime inflation, not because they produced more. Sure, the amount of money they made went up, but so did the price of everything they bought. There will be more about what Hazlitt calls the "money illusion" later in the book.

Hazlitt goes on to describe those who argue for "backed up demand," which is the demand for things that couldn't be produced during the war. Hazlitt believes that this is a half-true argument. Sure, it's true that if everyone suddenly stopped spending time and money making tanks all the time (because the war is over), that there will be a sudden increase in demand for refrigerators and radios that couldn't be produced earlier, and those that produce these goods will become wealthier. This is the half-true part of the argument. This will seem like a good thing, because demand has only shifted from one thing into another.

However, here comes the scary part. Because there will be a sudden and immediate increase in demand for, say, refrigerators (PBF: because, remember, during the war nobody had the ability to make them, they were making bullets and tanks because the government said so), refrigerator companies will make more money. Refrigerator companies would make so much money in a short time, that they assume that their business is booming. More people start to move into the refrigerator business, and suddenly, when everyone has a refrigerator, the people who aren't as good at making the refrigerators lose their jobs, and have to again shift into another industry.

The war and the "backed up demand" that it caused sent a false signal to businesses. Because of the backed up demand, more people immediately bought refrigerators than they normally would. The result was an overproduction of refrigerators, and when supply increases, price must fall. After the short term increase, or boom, in the refrigerator industry, there must come an equally shocking decrease, or bust, as the market moves on from the "backed up demand," in which resources, workers, money, and investment must then spend time finding other places to grow. The more time resources have to find where to put themselves to produce, and not actually being productive, is a net loss. At the end of the day, the glory of "backed-up demand," is really "wasting time tomorrow figuring out how to get something we could have had yesterday."

Hazlitt moves on and explains that supply and demand are actually two sides to the same coin. "Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers' supply of wheat constitutes their demand for automobiles and other goods. The supply of motor cars constitutes the demand of the people in the automobile industry for wheat and other goods." This is pretty self-explanatory. A farmer's demand for other goods, his ability to get other things he wants and needs, his purchasing power, is actually his own supply of the wheat that he grows.

In the United States, we only get to fool ourselves into thinking, "backed up demand" is a good thing because, unlike the Japanese, Chinese, or Germans during World War II, we had things to demand because we weren't too busy rebuilding our houses.

Hazlitt wraps up this chapter with the point that "replacement demand" as he calls, it, does not create economic growth, and we should not be happy about war as a means to make ourselves happier. If we all spent our time and resources replacing what we already had, we would never get any wealthier.

A/N: So this one was a long one! I hope you all understood it, and if you don't! I'm extremely open to messages and questions in my inbox. If you need help with some of these principles, I'm here to teach :) Until next time!