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Thursday, February 2, 2012

The Broken Window Revisited

The Broken Window Revisited 
by Hubert Lerch 

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 
• 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. 

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 
• 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 20th 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
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.

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