Broken window fallacy defended
Bloomberg finds economists to refute Christopher Westley on Mises.org. Yes, they argue that disasters can generate economic growth so long as they are predictable and frequent. Broken and destroyed property is usually replaced using better technology, they say. Using this logic, the federal government should spur greater growth and technological development by regularly and frequently bulldozing random homes and businesses across the country.
Comments (21)
Would he argue that beatings administered to economists can do them a world of good, as long as they are predictable and frequent? That way, their old and broken hypotheses can be beaten out of them and replaced with newer, better hypotheses.
Published: January 3, 2005 6:25 PM
Wow!!! It never dawned me that beatings had such a beneficial impact. This may explain why the Huns faciliated the explosive growth of early europe.
Published: January 3, 2005 7:36 PM
Destruction of property does help the economy. Property destruction helps the economy when the desturction of the property is brought about by the owner deciding that something better could be built there, or that the current property has worn out its useful life. The fact that this was not the case for the properties in question shows how absolutely absurd the proposition that these disasters spur economic growth really is.
Published: January 3, 2005 8:19 PM
The problem being that these so-called "economists" never apply their theories to their own lives.
Let them prove those benefits by devastating their own and their families lives and property merely to drain their own bank accounts to rebuild.
This "destruction is good" is just rehashed "people are saving too much" crap.
The difference between a Keynsian "economist" and an Austrian "economist" is that the Keynsian bestows the benefits of their theories on others, but not themselves. The Austrians are more inclusive, by including themselves.
Published: January 3, 2005 8:40 PM
It seems to me that under certain circumstances, a disaster actually could increase per-capita income for the survivors. For example, if a disaster, perhaps a plague, were to take a great toll in human life without damaging capital goods, the productivity of the survivors would be much greater due to a higher concentration of capital.
Which is not to suggest in any way that there might be a clue or two among the broken-window crowd, of course.
Published: January 3, 2005 9:16 PM
Berg-
Of course that can be said in the immediate seconds after huge loss of life, but we all know that because of the massive loss of presumably lower income working class, and GDP would fall dramitically from its normal levels.
Published: January 3, 2005 10:19 PM
" Every time annual floods or hurricanes levels a house or factory or some other physical capital, the replacement usually involves some technological improvement, which is good for economic growth"
If you could predict annual floods or hurricanes why would you build a house or a factory in that area?The only "technological improvement" I can think of would be to make the house or factory flood and hurricane resistant which would defeat the purpose of this ridiculous hypothesis.
Published: January 3, 2005 11:04 PM
From the Bloomberg article: "That was the title of a 2002 study by economists Mark Skidmore of the University of Wisconsin at Whitewater and Hideki Toya of the Nagoya City University in Japan, who showed that disasters like floods and hurricanes that are easier to predict and occur more frequently do indeed fuel long-term economic growth. Harder-to-forecast and more infrequent events like earthquakes and tsunamis don't have a beneficial impact."
From a Hoppean perspective, there is some truth to this thesis. Hoppe argues that negative events result in longer time preferences across society to the extent that they are anticipated. I have sometimes wondered to what extent harsher weather conditions in northern Europe, over the course of centuries, resulted in a culture that needed savers relative to southern Europe and equatorial countries, and the extent to which this contributed to the Industrial Revolution in England, France, Germany, and places north. (Such a theory would not be as obvious to economists like Skidmore and Toya because it is not conducive to econometric testing.)
Some textbooks, including Mankiw's Intermediate text, argue that the Black Plague spurred economic development in Europe by increasing the marginal productivity of capital. I can buy that as an important factor, but certainly other environmental factors also played a role.
Published: January 4, 2005 12:13 AM
Mr. Berg's comments piqued my imagination and I would have to agree with his central thesis: a disaster actually could increase per-capita income for the survivors.
For instance, if a tornado, hurricane, asteroid, plague-of-frogs or locusts were to destroy Congress, the IRS and the Federal Reserve, vast quantities of productive capital could be freed for efficient reinvestment endeavors as well as increase disposable income levels, some of which could be placed in savings; and so on and so forth...
Published: January 4, 2005 1:21 AM
Q.: Might harsher weather conditions in Northern Europe lead to higher saving than in areas further south?
1. The first great *world* civilisation was the Islamic - it stretched from the Pyrenees through North Africa & the Middle East through Persia to Central Asia & India. Muslim travellers of the time have left accounts of their encounters with the Northern Europeans. These read like Victorian descriptions of the 'savage' tribes found in eg, Africa.
2. The peoples of Tibet, Kashmir, & other Himalayan regions, & the Inuit, all live in even harsher conditions than the peoples of northern Europe. But it is the latter, not the former, who saved & invested.
Published: January 4, 2005 7:08 AM
Malinvestment can be broken down into two broad categories. The one that we Austrians are critical of is malinvestment because of government-created market distortions. Those cause businesses to misread consumers' time preferences. I hardly need to explain the details in this forum, nor would I be likely to improve on the explanations already available here.
A somewhat different kind of malinvestment will exist regardless of any distorting factors. All businesses must make decisions based on anticipation of conditions at some time in the future. In the short term, their forecasts can be extremely accurate, such as estimating the volume of a non-durable commodity to restock periodically. In the long term, they must take into account a wider range of factors.
Every building and every piece of capital equipment has a finite lifetime. That is the fundamental assumption behind depreciation. That lifetime is limited by physical deterioration of the asset itself. It is limited by the period during which that asset is economically competitive with the available alternatives. And, it is limited by the risk that the asset will be destroyed by external threats such as a natural disaster or a war.
Malinvestment can result from an incorrect estimate of the risk that the asset will be destroyed. That estimate can be either too low or too high. Not anticipating the possibility of a natural disaster can lead to malinvestment in assets that are destroyed while they still have value. Anticipating disasters that don't occur can lead to underinvestment in capital assets with a long lifetime for fear that they will be destroyed or overinvestment in assets with a short lifetime in anticipation that they will be.
Published: January 4, 2005 8:39 AM
There are two things that might cause us to mis-identify the benevolent nature of predictable disaster:
1. Disasters liquidate some capital and make us reallocate spending from consumption to investment. It forces us to reduce our time preference. Shooting from the hip, this seems like a way to validate some malinvestments in a world with fiat money.
2. Investment decisions may be a function of expected disaster. Firms with capital that depreciates rapidly may locate in areas where land is cheap and where demolition/replacement will be relatively low-cost (prospective disaster areas, in other words).
In either case, it isn't the disaster per se that's causing increased growth. These are pretty implausible, but they're the only way I can rationalize any "refutation" of the broken window fallacy.
Published: January 4, 2005 8:55 AM
These comments are great. I haven't laughed this hard over economics in a long time.
In most professions, idiocy is discouraged, but in economics, it is apparently encouraged (at least among the mainstream and by the government). The absurd is magically transformed into the profound. Statements like "maybe nuking a city will have a positive effect on long-term economic growth" which normal people know is absurd, somehow become respectable. Other absurd statements, like the idea that we can raise minimum wage without causing unemployment -- maybe we can raise the minimum wage to $1,000,000 an hour without causing unemployment! -- also become respectable.
If someone says he's a pHD in economics, chances are very good that (unless he's an Austrian), the layman may know just as much or more about economics on the important matters than he does. pHD among the mainstream apparently stands for purified High-Density humbug.
Very smart people, working very hard, to produce very idiotic statements, like "disasters are good for the economy".
Published: January 4, 2005 10:15 AM
Great comments indeed! Maybe this Bloomberg genius get confused with the "creative destruction" text. A couple of days ago I read on the same source that equity market do well in 2005 BECAUSE statistically every year ending with 5 was doing very well, was saying the cabalist-alchimist-economist.
Published: January 4, 2005 12:28 PM
Reagan must have had Bergston-like economist consulting him on the Neutron Bomb. Remember that one? The one that kills people but leaves buildings standing? The Russians called it the ultimate capitalist weapon. Well now we know the true scope of this evil device! The Neutron Bomb kills people but leaves buildings standing and thereby deprives the surviving population of the future growth that they could have accomplished had they been flattened completely by a plain old bombing raid.
Published: January 4, 2005 1:54 PM
[quote]Broken and destroyed property is usually replaced using better technology, they say. [/quote]
What they don't realize is that this new technology would have been used anyhow to build something else if it would not have gone to replace the destruction.
Keynesias are madmen.
Published: January 4, 2005 2:23 PM
The neutron bomb is the epitome of the way those in the State view individuals: as unimportant things to be manipulated: "Kill the people, but leave the buildings unharmed!" I'd rather have a weapon that destroyed infrastructure but left people unharmed, if I had to choose.
Published: January 4, 2005 4:37 PM
We can more than double the GDP this year by imposing a 100% tax on all property in the U.S. The citizenry would be forced to develop better technologies to replace all of this property.
Published: January 5, 2005 1:26 PM
I wish all you people could settle this damn matter one way or t'other--once and for all.
I'm so confused that I don't know whether to pray that we be spared such terrible disasters as the tsunami--or ask for another one. And if the one we just saw was good, wouldn't bigger be better? (Bone up on "megatsunami"--you'll appreciate the one just past.)
Published: January 6, 2005 1:33 PM
The balance sheet has two sides. If the homicide attack on the twin towers had by mistake taken out a block slated for demolition it would have been an asset to the property owner.
In the same way, drunk drivers provide many jobs. This country would have a recession if every drunk driver went on the wagon.
Published: January 9, 2005 3:08 PM
How are windows any different from bread, clothes, automobiles and all the other goods we expect to use up or wear out?
Published: February 15, 2005 8:40 PM