The Broken Window Revisited - Hubertlerch.com - HubertLerch.com

The Broken Window Revisited
by Hubert Lerch
Introduction
Frédéric Bastiat (1801-1850) was born into the France of Napoleon I. Napoleon Bonaparte, a
soldier by profession, began his political career with a coup d'état in 1799. In 1804 he made
himself Emperor of the French. The Battle of Waterloo in 1815 marked the fall of his Empire.
Napoleon reorganized France, exported the French mercantile model to Europe, and thought of
merging the European states into one. A child of the French Revolution, he believed in a state
that resembled a military encampment with a chain of command, provisioning, pomp and glory.
Neither did Napoleon care about casualties, nor did he waste any thought on how such display
of power would be paid for. For all these reasons we can say that the history of the modern
state begins with Napoleon I. All modifications
– the militaristic states of Germany, Italy, Russia,
Japan, and the U.S. today – are mere copies and perfections of the original model.
With Napoleon in command, Bastiat experienced statism writ large first hand. Never before had
France been more centralized, more planned, more militarized, in short more “ state ” in the
modern sense. That which is seen, and that which is not seen, published in 1850, is Bastiat's
answer to Napoleon's despise of freedom and the free market. Two years before the book was
published, Napoleon's nephew, known in history as Napoleon III, had already been elected
president of the National Assembly. A year later he should carry out his own coup d'état
followed by the proclamation of the Second Empire, to the day 48 years after his uncle's
coronation. Napoleon III became famous for the reconstruction of Paris, a typical mercantile
project, and a number of military adventures, among them the Crimean War of which AJP Tayler
said “ the war that did not boil ” although it helped to stabilize the regime domestically.
Intercaled between these two Napoleonic Empires we find the Restoration, divided into the
Bourbon phase with Louis XVIII and Charles X, both brothers of Louis XVI who was murdered
during the Revolution, and the Orléans phase from 1830 to 1848. The political ups and downs
during this period of French history stand in stark contrast to its economic continuity. What a
great subject to study for a man who was not taken in by appearances, nor by bombastic words
or gestures!

The Broken Window is Chapter I of Bastiat's book. And Henry Hazlitt, who should make it
famous, opens his Economics in One Lesson with the Broken Windows fallacy. He 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
This essay does not argue the economic side of The Broken Window. Instead, it applies
Bastiat's model to politics, more precisely to the problem 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 basic model little by little 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 ignore the passive mass formally represented as producer P.
Model 1: Natural Order challenged

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.
In Bastiat's model we completely miss any hint to the state: there is no mayor, 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 threedimensional
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 differentiation of which
bureaucratization can be used as reliable indicator. 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 an increasing number of public functions to
grow beyond democratic control. What some criticize as undemocratic, others defend as more

efficient (so Colin Crouch in Post-Democracy). 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 section 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 in Hidden Order has pointed out that any investment of
scarce resources – time and energy – is disproportionate to the expected gain. Seen from
the viewpoint of legitimization, it does not matter what the voter actually does, he has
only three options:
• to choose between several faces (valid ballot)
• to reject all faces (abstention)
• to select more than one face (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.
In a liberal democracy
–
and all our positive associations with democracy stem from this early
phase of its mutation
–
we see a society held together by strong historical, cultural, religious,
and similar bonds where the production of majorities is relatively easy. The history of our party
landscape confirms this picture. At the beginning we find two parties, the monarchists and the
constitutionalists (groupings who, for purely selfish reasons, preferred to entangle Leviathan in a
system of obligations or checks and balances) while the electorate was limited to men of age
and property. Majorities were more difficult to come by when societies industrialized. The
socialist division into two parties, although with roots in their theory, must also be understood as
a desperate attempt at reducing growing complexity.
Little is left of the liberal ideal but the liberty to equality in the voting process (so Christoph
Möller in Demokratie
–
Zumutungen und Versprechen. 2008). In a society of powerless,
illiterate, and poor individuals majorities can only be gained through technology because, as

Jacques Ellul had argued convincingly half a century earlier, the illusion of modern man consists
in the fact that all do the same while they strongly feel that they act freely and independently.
Modern mass tourism could serve as a good illustration for Ellul's point.
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 of which they themselves are merely pieces. 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 all
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 saleable 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 their world. That is exactly what images are meant to accomplish.
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. Model 4 explains the need to underpin perception with substance. As we know
from studies in mass psychology, words and the images they convey sway the masses. Charts
and numbers support and objectivize images and create expectations. With them comes the
optimistic belief in amelioration, today primarily expected from technical solutions (the word
“ solution ” itself is a purely technical term, like so many others in our political jargon).
However, even the best and most subtle propaganda will eventually fail if the masses see it
disconfirmed by their collective experience. Hitler without full employment is just a big mouth.
Few asked how full employment was achieved. But full employment as a fact was a powerful
argument in his favor. And yet he only applied Keynsian economics, like so many others after
him until the present day. That Hitler blindly trusted a banker, Hjalmar Schacht, when it came to
financial jugglery also set a precedent. But Hitler took special care to play off the various
interests against each other, even within his own party, so successfully that party, state, and
nation in the end would only function as long as he was at the helm. As soon as he was no
more, all political organs quickly disintegrated.
Today's cartel of power, military industrial complex, money, and opinion is not organized around
a dictator, not even a single party. Even where the state is traditionally strong, i.e. in countries
with a de facto single party structure, the four players act in concert. Democracy's lauded
multistability results from the smooth functioning of this cartel more than from the daily operation
of its non-legitimized bureaucracy because of the vested interests that brought it into existence
in the first place.

Model 4: The Cartel of Power, Military Industrial Complex, Money, Opinion
Over the past twenty years, however, one of the four players moved to the fore: the Money
Manager. In order to understand why the tail came to wag the dog we must briefly look into the
nature of democracy. As stated above, of all poliical systems democracy enjoys by far the
weakest legitimization since it depends on “ the people ”, its whims, its moods, its appetites, its
dreams. All democracies in history sooner or later find themselves entangled in promises that
they cannot keep: the promise of happiness, the promise of a carefree life, the promise of old
age, the promise of education for all, the promise of technological progress, the promise of
peace, and many other promises. Some of these promises are purely utopian, others are simply
counterproductive, and still others are plainly idiotic. But they are made nonetheless and a huge
machinery is set in motion to realize them. That is costly and can only be justified by pointing to
an allegedly higher public good. With liberalism shed like a dead skin, “Gemeinnutz geht vor
Eigennutz ” (the common good before the private good) was made state doctrine in all
democratically legitimized countries, not only in Nazi Germany.
A politician who wants to be reelected must have a record of his “ achievements ” – a highway
here, an airport there, a park, a public library, etc. etc. And the good news is that all these
“ achievements ” don't cost money. The best politicians even insist that economic criteria do not
apply to politics. And by pumping hot air into the bubbles that politicians are selling to their
voters, the Money Manager turbocharged the machine.
The Money Manager, of course, pursues his own objectives whose main is to acquire the
biggest junk of the cake. As long as his activities contribute to the production of wealth there is
no problem. A problem arises when real resources are being replaced by promises. This, in
simple terms, is the phenomenon of the hot money bubble. Although originally a political
problem, it is not only highly addictive but also devastating because it affects the real economy.
Even though it cannot keep its promise to produce wealth out of thin air, it keeps its promise to
shift wealth from one group to another. What once was the dream of kings to have an alchimist

produce gold has become the reality of our age. The charlatans of a distant past have fallen into
oblivion but our age has its own wizzards, heroes, shakers. And with quasi religious attitude
appropriate for a secular age we expect salvation from men of god-like stature and devilish
intention.
Hot money bubbles alone, however, tend to burst dragging down what is left of the real
economy (in some economies, e.g. Britain, the real economy has dropped to a mere 10 percent
of the entire economy!). Multiple economic crises ensue, with more tax money laundered, i.e.
moved from many pockets to a few secret accounts. With the global economy the size of the
impact changes: whole continents are brought into the orbit of the Money Manager. The
European Union and its currency, both never popular among Europeans, would never have
seen the light without him. How much mighty states have shackled themselves to powerful
financial interests is a daily tragedy in all advanced democratic countries. While the Money
Manager produces bubbles rather than wealth he satisfies his state-affiliated clientele rather
than the general consumer. More and more sections of the regular economy he forces to
dysfunction. 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 the Money Manager in a system that promises milk and
honey and his role in the production of fictitious wealth. Although the system appears to be
multistable, it stomps out negative feedback and becomes a closed system without capability of
self-correction. A single trigger, which in itself may be ridiculous, can now destabilize the system
and bring it to the point of collapse which, needless to emphasize, would not only destroy the

system itself but also the world as we know it. 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 fervent 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 but unable to communicate meaningfully, 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).
While in Models 1 through 4 the producer/consumer stands outside of the game, Model 5
reintegrates him. Like in the hyperdemocratic totalitarian states of the 20 th
century, the
individual merges into the collective, only that political contents have evaporated. No more is it
about antagonistic ideologies, no longer about an apocalyptic struggle between the forces of
good and evil
–
they were anachronistically invoked for the last time to mobilize the mass
emotion against the abstract idea of terrorism. Totalitarianism has gained a new quality: instead
of control of the masses from outside, the masses now control themselves within the framework
spontaneously defined by “ the circumstances ”. The state ceases to act, it merely reacts. To
borrow from the military, we could call the new phenomenon total democracy. It is totalitarian in
its grip, democratic in its appearance, contradictory in its self-understanding, empty in its theory,
inescapable in its pretention, suffocating in its omnipresence.
Model 5: The Sweet Lethal Fragrance of La La Land

Conclusion
Beginning with Bastiat's Broken Window we asked the question of order. We stated that in the
absence of a monopolistic enforcer or Security Monopolist society would always return to the
equilibrium of a natural order. In the second model we changed one parameter in such a way
that the natural order could no longer be established. To change one parameter, however,
impacts another. With growing specialization the political system quickly loses legitimacy which
invites a third change. Words alone, as important as they are in politics, won't bridge the
widening gap between ruler and the ruled. In a scientific age, everything is quantifiable and
people want to hear numbers. He who plays with numbers wins the battle, but he who produces
them wins the war. Before it is noticed, the state finds itself trapped. Too much in love with an
advantageous can-do-image, an allure of greatness, a promise to buy the world, the democratic
state is compelled to destroy its very foundation, the people. Now a mere abstract entity, the
real people find themselves bullied and ripped off. The democratic state morphs into a
dictatorship where the end
– democracy as a utopian abstractum – justifies all means. Now,
everything is turned on its head: Injustice is Justice, Slavery is Freedom, Poverty is Wealth,
Indoctrination is Education. Orwellian Newspeak has become the language we speak in a game
that leaves most of us speechless.