Stephen Brown's Broken Window

Given all the coverage of the hurricane, it was guaranteed some idiot would say the following (page 2):

But economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding.

"Longer term, in the wake of a number of hurricanes there is actually an increase in measured output that even shows up at the national level, because there is a whole bunch of rebuilding activity," said Stephen P.A. Brown, director of energy economics at the Federal Reserve Bank of Dallas.

Copyright © 2005 the International Herald Tribune All rights reserved

This is what's called the Broken Window Fallacy. It essentially says, Dude, terrible suckage about all that damage...but hey!, it'll drive growth in the industries related to rebuilding! The implication is that destruction can create net growth.

This, I tell ya, is total bullshit. More than a hundred years ago, a Frenchman named Frédéric Bastiat kicked the legs out from it.

That Which is Seen, and That Which is Not Seen

Suppose it cost six francs to repair the [broken window], and you say that the accident brings six francs to the glazier's trade - that it encourages that trade to the amount of six francs - I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

[...]

Now let us consider [the shopkeeper] himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Bastiat applies the concept of opportunity cost to this scenario. While the window does get fixed, the money that was spent on it would have gone towards other things...meaning the end result is to spend money to reattain a previous position. Had the window been untouched, that money would have gone towards some other good or service...meaning the end result is both a window and that good or service.

Destruction always results in a net loss to the owner of the property destroyed, in other words. But what about the alleged trickle-down effects of that window repair to the rest of the economy?

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier's trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker's trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

That money would have been spent anyway, so the net gain is zero.

That idiot Stephen P.A. Brown should be ashamed of himself. Not only is he ignoring a vital principle of economics (and he works for the fucking Federal Reserve!!), but he's also callously setting aside what the people affected by this are thinking now and will see when they return home: the destruction of things irreplaceable, the damage of things too expensive to fix, and the cumulative loss of property to the point of driving them away from the area permanently. All of those items are economic losses that cannot be addressed by Home Depot and Wal-mart enjoying a spurt of duct tape and hammer sales.

Morons were making the exact same dipshit arguments when 9/11 happened. (see: that fabled New York Times Op-Ed writer, Paul Krugman) Morons make the same arugments everytime a disaster occurs. Don't get taken in by them.

Link via the Mises Blog.

Posted by Drizzten at August 31, 2005 02:55 PM