The Value Equation

Chapter 9Opportunity Cost

One of the great books in business is Economics in One Lesson by Henry Hazlitt. First published in 1946, he wrote it when he served as the principal editorial writer on finance and economics for The New York Times. The first chapter in this book is entitled “The Broken Window,” where he describes the economics of a broken shop window, together with the thoughts that often accompany such an event. For example, you might say that, while a nuisance, the broken window simultaneously creates a societal opportunity. A job will be created to replace the window and the income earned by the associated labor force will then benefit others as the money they earn flows through the economy. Such thoughts are commonplace as we consider the repercussions of accidents or natural disasters. In making such observations, our tendency is to think about what is and what we can see.

Henry Hazlitt

In this case, the window is broken.

But what about what could have been? Had the window not been broken, the shopkeeper could have taken the money needed to replace the window and spent it elsewhere, benefiting other businesses. In turn, that same money would have flowed through the economy to create new jobs and perhaps build new buildings, rather than just repair existing ones. But that opportunity was lost, with the resultant cost of the broken window.

Instead, the shopkeeper ...