Natural Disasters, It Turns Out, Are Bad
It seems that we may never rid ourselves of the broken-window fallacy. it's not only that disasters just have a silver lining: economists have long believed that natural disasters and wars are actually good for the economy! Until recently they have not made any attempt to empirically test their views. Now the good news. A recently published paper in Economic Inquiry by Cuaresma, Hlouskova, and Obersteiner brings the positive benefits of disasters into question. FULL ARTICLE
Comments (76)
This article should not be needed - as it is wild folly to think that fire, flood and earthquake (etc) are "good for the economy".
However, sadly the "broken window fallacy" persists (including in the economics departments of universities) so articles like this are needed.
Published: May 7, 2008 10:25 AM
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Regarding natural disasters, read these two
books about what's coming because of the
phenomenon of PRECESSION OF THE
EQUINOXES:
"Fingerprints of the Gods," by Graham Hancock
and
"Not by Fire but by Ice," by Robert Felix
Precession phenomena take out civilizations,
as it causes mass extinctions.
Whatever happened to the old saw?:
"Adversity is the mother of invention,"
which suggests that natural disasters and
wars DO PROMPT innovative rebuilding
of what had been lost. And, yet, such a
"benefit" is counter-intuitive.
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Published: May 7, 2008 10:34 AM
Good article, if not only for the small point that there is no such animal as a natural disaster. Didn't your science teacher drill in you that these are natural phenomena? Human settlements unwisely located in the paths of these natural phenomena and not built to withstand worst case scenarios will obviously be adversely affected when these natural phenomena occur. It is ironically, "if you build it, they will come." There is nothing disastrous about nature, man only makes it disastrous with his follies.
Published: May 7, 2008 10:40 AM
Wartime increases in production do produce an increase in "Welfare" - for the poor sods who have been sent into battle to do or die for "their" country.
(N.B. the term "their" is to be construed in the way in which a slave can speak of "his" master - but not in the way in which the master can speak of "his" slave: though both slave and master are speaking perfect English.)
I digress. The grunt on the field of battle is very poor if he lacks ammunition (and all other convenient warlike stores he may need,) and "wealthy" - in a military sense, of course - if he is well equipped, supplied, fed and watered. He is also more likely to be able to return home unharmed, as an economic asset to his country. Of course, as far as the other poor sods who he helps to die for their country, we may wish to describe it in some other way. Malfare?
Published: May 7, 2008 10:48 AM
Things like this are why I don't proscribe to Utilitarianism and the GDP measure in general.
Published: May 7, 2008 11:43 AM
This goes to show the folly of GDP measuring. These folks who believe in destruction, mayhem and death ONLY see the increase in output to rebuild things. They miss the decrease in stored capital it takes to rebuild.
The other measuring flim-flam is that government gives money to the disaster affected folks and uses a hidden inflation tax to stiff the millions of other folks. Of course the government sees this descreased money value as capital. Again it is an accounting issue.
Published: May 7, 2008 1:42 PM
While natural disasters may benefit specific industries, the net effect is usually an empowerment of the state. That would explain why this misconception still receives such wide acclaim.
Published: May 7, 2008 3:28 PM
"This goes to show the folly of GDP measuring. These folks who believe in destruction, mayhem and death ONLY see the increase in output to rebuild things. They miss the decrease in stored capital it takes to rebuild."
I've met some national income accountants, but, thank goodness, no-one who believes in destruction, mayhem and death. At least no-one who believes these things are good.
National income accountants attempt to measure current production of goods and services by GDP, and the fact that, say $10 billion of this current production is for rebuilding that which was destroyed does not matter for this purpose. But, when looking at what has happened to real wealth, national income accountants would subtract from the asset side of the national balance sheet when physical destruction takes place. If the destruction is estimated at $15 billion, the event would certainly be acknowledged by national income accountants to have reduced real wealth by that figure. Bad. Very bad.
Published: May 7, 2008 3:33 PM
Yep. Natural "phenomena" are neither good nor bad. They are indifferent to mankind. The appropriate question to ask is Natural Phenomena: Do they adversely affect the economies located within their destructive power?
And the answer depends on many things, a primary variable being of what industries dominate that particular economy. For example, if a particular economy is dominated by the construction and health care industry which is fueled largely by old or fixed income money that does not rely on the current state of affairs to retain its value and that region is hit by a hurricane, then how adversely affected would that economy really be?
The answer: very little. In fact the economy would see a short-lived jump in GDP once construction began and the residents were being treated and problems resolved, along with a decrease in unemployment. If long terms projects were made part of the recovery effort, then the GDP may increase over the long term.
Sound familiar?
Yes, you guessed it. Certain Parts of Florida.
Published: May 7, 2008 3:37 PM
Good point. The state does benefit itself by natural disasters. Given the theories followed by the Army Corp of Engineers they almost seem to be creating ever larger disasters. See the book Rising Tide by John Berry which is excellent. FEMA seems like a dangerous outfit to me.
Published: May 7, 2008 3:55 PM
I would like to believe that there is an office someplace that believes in correct accounting but I just don't see it or if it exists then it does a poor job of publicity.
I wonder if these are the same folks who predict a 133 billion dollar budget deficit next year? Or the same ones that predicted a Senior Citizen Drug Giveaway for 500 billion over 10 years?
Published: May 7, 2008 9:11 PM
Alex i hope your right says:
I would like to believe that there is an office someplace that believes in correct accounting but I just don't see it or if it exists then it does a poor job of publicity.
accounting is impossible for opportunity costs - should be self-evident. like "how happy would i be now if i'd married my first girlfriend?".
Published: May 8, 2008 12:38 AM
Governments like GDP because it gives them a guage on the current activity going on in their country.
Measures of wealth and assets are fine but they are not any good because they are static and do not produce any needed goods and services themselves.
Of course a country needs to also take account of the value of goods damaged by a natural disaster and it often is through the numbers you hear on the news. But sooner or later those numbers are forgotten because what actually matters here and now is what is happening HERE and NOW.
No accounting or economic measure is perfect and is just one plank of efforts by governments to measure the health of their country. GDP is used to see whether 'activity' has increased and it is well known that more 'activity' means more people are working and getting fed.
It is well known that GDP is seasonal and also that the acitivites that constitute it may or may not be continuing in the future or that they are unsavoury. A GDP figure for an oil producing nation would need to be caveated by acknowledgement of the number of years of oil left etc. In the same way a natural disaster such as Katrina would be noted as a blip in the economy of those areas...but it may be more.
Economic activity can often beget more activity until you get full-on perpetuitus activity. So the rebuilding in New Orleans may in fact leave the City with more jobs than before the Hurricane came.
The point is that lamenting the losses is only really an issue if it makes a maningful impact on our economic activity now and in the future. If there was not more wood and nails in the world because Katrina got rid of them all then we really would be in a 'loss' position.
Until what is lost in a disaster cannot be replaced within the forseeable future then counting it as a cost is a bit futile when in actual fact the economy might be humming along without a care in the world.
As it is I struggle to see how the 'broken windows' fallacy does not have at least a few holes in it.
Does this suggest that we should go around smashing things to increase GDP? No, because we can think of more productive ways to spend money such as by investment in science and technology and existing needed services. Destruction only forces us to rebuild what we already had.
Published: May 8, 2008 4:02 AM
Owen,
The broken window fallacy does not "Lament Losses" It is simply stating the fact that the losses and opportunity costs are not part of the equation when making statements about GDP growth related to disasters, and thus said analysis is incorrect. What specific holes are there in that? Where do the economists take these things into account in their formulations showing that there will be economic growth?
If I want to buy a TV and now I can't afford it because my basement got flooded and I had to have the carpet replaced, the carpet manufacturer will be happy but the TV manufacturer will not. I'm no better off than I was before, and I don't have a new TV... But I did contribute to the GDP because I bought carpet! Of course my point is an increase in GDP doesn't necessarily mean an increase in living standards as seems to be assumed with the fallacy. In fact, now that I've depleted my savings to buy carpet, My living standard was lowered because I have to build by savings up again if I want to buy that TV! Disaster = No new TV.
Published: May 8, 2008 10:26 AM
Problem is Erik,
GDP is not and never has been touted as the be-all and end-all of living standards. There is alot of work going on in mainstream economics in order to better accomodate other measures into what constitutes 'quality of life' than just GDP but as you probably know GDP is still the one used most often but political spin merchants and the rest.
Economics (mainstream ones) know that GDP measures ACTIVITY not wealth.
You have to then ask yourself as a citizen or consumer whether you would like activity or wealth?
The two are different. Weath is static but activity is dynamic. Food, entertainment, education, research, sports, communication, travel and cultural activities and many more are all considered by many people to be part of their QUALITY OF LIFE and these are captured more adequately by GDP than by any wealth measure.
You are attacking GDP when you don't fully understand the advantages it has, and as I said mainstream economists have, ever since GDP was invented as a measure, accepted the shortcomings of GDP in that it doesn't measure changes in wealth, nor does it measure what kinds of activities caused the given level of economic activity.
Besides, if by buying the carpet rather than the TV you would have spent more money from your savings (or borrowed) then all other people in the economy would have been incrementally better off for this happening. GDP does not deny this it is just indifferent as to the source of the economic stimulus.
But no-one is suggesting wilful damage because there are better uses for new money in the economy than your carpet - such as research, technology and education for just some.
Published: May 8, 2008 12:27 PM
Owen: "Economics (mainstream ones) know that GDP measures ACTIVITY not wealth."
What good is knowing how much "activity" if there is no value attached to the activity?
Let's say your kids bring home a report card from school, but, instead of being graded on how much they learned, they bring home a record of how much activity they participated in. I don't think you would take a look at the card and say, "Wow! You were really busy. Good job. What a great school!"
They could be exhausting themselves learning nothing. What good would that do?
Published: May 8, 2008 8:58 PM
Kevin:
I get what you are saying but...there is a very strong correlation between GDP per capita and material standard of living.
The problem with your analogy is that people within an economy are left to their own devices to make their own decisions subject to complying with the laws. Therefore it is assumed that the GDP on average represents activities which the people consented to do and in fact chose to do otherwise they would not have done it.
If the whole of a country's GDP was made up of pointless activities that had no meaning then too bad - it is what those people chose to do of their own free will. They were not forced to do those things.
Published: May 8, 2008 9:06 PM
Owen: "You have to then ask yourself as a citizen or consumer whether you would like activity or wealth?"
For the record, we want as much satisfaction (wealth) as possible for the smallest amount of work (activity).
So, if you had a real measure of wealth (good luck on that), we would want that to go up and GDP to go down.
Published: May 8, 2008 9:08 PM
Owen,
The point they are making is that GDP doesn't tell you where you are in relation to where you were.
Published: May 8, 2008 9:12 PM
the hong kong authorities don't even compile gdp figures, and we all know what a backward, third-world standard of living they sport.
Published: May 9, 2008 2:19 AM
Kevin and Newson:
Kiddies. Tell me how you do people in your mythical land consume "wealth" without creating GDP?
It is like the man clinging to the chest of gold as he and it sink to the bottom of the ocean. Wealth does not make people materially better - consumption does.
GDP measures consumption. Game. Set. Match.
Newson making no sense as usual. Who said that GDP was necessary to manage an economy? It is one of many tools used my mainstream economists to measure economic activity. You are the king of fallicious statements.
Published: May 9, 2008 3:29 AM
Which is why reporting GDP increases as a sign of economic growth after a disaster is idiotic...
Published: May 9, 2008 5:01 AM
Inquisitor:
No it is not idiotic. It is a fact. GDP measures economic activity which for unfortunate reasons is increased by the disaster in your example.
Next you are gonna say the sun goes around the earth. (rolling eyes)
Published: May 9, 2008 5:11 AM
Economic growth, NOT merely activity.
Published: May 9, 2008 5:28 AM
In case it isn't clear, the problem is reporting these increases in GDP as a sign that a disaster is "good for the economy"...
Published: May 9, 2008 5:31 AM
Inquisitor:
It is only idiots like you that think a tornado is good for the economy. People with a life simply note that it causes an observable increase in economic activity.
GDP measures economic ACTIVITY. You have obviously never studied "real economics" have you girl?
...drowning are ya?
Published: May 9, 2008 5:38 AM
From the article: "And it's not only that disasters just have a silver lining: economists have long believed that natural disasters and wars are actually good for the economy! Until recently they have not made any attempt to empirically test their views. However, in 2002 Mark Skidmore and Hideki Toya published a paper where they found a positive correlation between disasters and human capital, productivity, and GDP growth."
Also...
http://blog.mises.org/archives/004021.asp
http://blog.mises.org/archives/008021.asp
Me:
"Which is why reporting GDP increases as a sign of economic growth after a disaster is idiotic..."
Troll:
"It is only idiots like you that think a tornado is good for the economy"
I rest my case.
Published: May 9, 2008 5:54 AM
Owen,
I don't believe you ever answered my question regarding the opportunity cost. Specifically, how are they factored into the equations that economists use to determine the GDP growth following a disaster?
If you take my analogy where my basement gets flooded as an example, GDP increases. I'm not trying to say that GDP doesn't increase. I'm saying "who cares?" when you can't buy that new TV! If the opportunity costs were taken into account, statements like "economists have long believed that natural disasters and wars are actually good for the economy!" would never occur.
Published: May 9, 2008 8:48 AM
Sort of off-topic here, but...
It's been interesting to watch the threads in which you participate, Owen, as you typically begin by calmly and intelligently presenting your viewpoint. As soon as your viewpoint is challenged, however, you begin to behave like a cornered animal, hissing and spitting in an attempt to ward off your attacker, rather than continuing to engage in any meaningful intelligent discussion. It gets worse as the thread wears on, eventually devolving into name-calling on your part. Frankly, I'm surprised you persist, as I think we all keep expecting you to shriek, "You're all stupid, and I hate you!" and storm out of the room. But kudos to you for sticking to your guns.
Some of the Austrians have suggested that you should be banned from the board, but I think you provide a valuable service to the rest of us. Most of us visit this site in an effort to educate ourselves, so we read the articles and participate in discussion and debate. It would be incredibly dull and unproductive if we all just sat around nodding and agreeing with each other, so we welcome opposing viewpoints, and we generally respond to them with rational counterpoints. Engaging in such debate helps us better understand our own discipline, gives us insight into various forms of anti-capitalist bias, enhances our ability to defend our own viewpoint, and strengthens our convictions concerning the benefits of the free market and libertarian principles.
Calling people names, however, is simply unproductive in general, and completely counter-productive to your viewpoint, as it destroys any credibility you may have gained from your initial non-combative post(s). Far from convincing us of the validity of your opinion, you simply reinforce our resolve to defend our own opinion. In fact, your ranting serves only to solidify the rationality of Austrian principles.
So THANK YOU, Owen, for challenging us and giving us the impetus to further examine and strengthen our convictions. I know it can be frustrating to try and convince such a confident group that they are wrong about everything, but you persevere, and for that you should be commended.
I look forward to your next rant.
Published: May 9, 2008 8:56 AM
I second Ron's comment.
On to the subject at hand.
There are many people, including economists (people who should know better) that assert disasters have economic benefits. GDP growth is only beneficial if it adds to wealth. Activity without this purpose is called waste- a waste of time and labor, specifically. Disasters subtract from wealth. The economic activity that then occurs to replace that destroyed wealth only leaves you where you were before the disaster. The measured GDP has given a false signal of greater wealth. As Erik points out, the missing ingredient is the opportunity cost of that increased economic activity.
Published: May 9, 2008 9:25 AM
owen says:
"Who said that GDP was necessary to manage an economy? It is one of many tools used my mainstream economists to measure economic activity."
you've clearly not understand the point i made.
at best gdp is irrelevant - as others have mentioned, "activity" (digging and then filling holes) says nothing about wealth creation. also, gdp measures only final goods and services, ignoring the biggest part of the economy - the intermediate production processes.
at worst, and more often than not, gdp numbers are used as a pretext for keynesian spending initiatives, hobbling market mechanisms.
hence my point about hk's deliberate non-compilation of gdp. this dates back to the time of the late sir john cowperthwaite, financial secretary to the colony from 1961 onwards. his recommendation to poor countries interested in developing was to abolish the office of national statistics. without statistics, bureaucrats were unable to meddle and stymie market solutions. he refused to supply whitehall with anything more than the most rudimentary figures, and hong kong's stunning economic progress is a testimony to the wisdom of this man.
Published: May 9, 2008 11:17 AM
Dear Owen,
Would you agree to post your home address and agree to let us take your property? I promise to leave a few things behind. ,..for the good of the national GDP of course.
Yours in faith,
pupnik
Published: May 9, 2008 11:51 AM
he probably doesn't even have to pay taxes! i wouldn't discount this as a case of self-interest.
Published: May 9, 2008 12:13 PM
I think many of you are missing the point of what GDP measures. It measures economic activity. If economic activity is higher that means there is more of it.
Why is this good? Well for a large part, consumer interations in the market are uncoerced so therefore the GDP figures will reflect the amount of uncoerced desires of the people.
When GDP rises this means people were able to undertake or 'consume' more uncoerced desires.
Wealth is no good to a modern economy because the material living standards are not made up of 'wealth' but by consumption.
Therefore GDP measures the amount of consumption as a proxy to living standards.
This is why GDP is often used as a (crude) was to compare living standards in a country.
And it is a valid one.
Published: May 10, 2008 12:02 AM
Owen: "Well for a large part, consumer interations in the market are uncoerced so therefore the GDP figures will reflect the amount of uncoerced desires of the people."
What is used to measure GDP? Not coerced dollars, by any chance? Really, there is so much coercion it is hard to tell which way is up. Can't buy this, can't buy that. Must buy this, must buy that. Can't buy this from that guy, you have to buy it from this guy. It's as if you're saying a rat put in a maze is uncoerced. It found the cheese, which is supposed to tell us something about the economy.
Published: May 10, 2008 1:14 AM
Actually, my example is wrong. You put the rat in the maze, prod it around with electrical shocks, then measure how much running it did. Forget the cheese, that isn't important. The running is what we care about. The more it runs, the happier it is.
Published: May 10, 2008 1:27 AM
GDP measures living standards via the proxy of economic activity or consumption. It is increadibly well correlated with material living standards which is why many countries want to increase their GDP percapita.
Growth in GDP = Growth in living standards
A disaster would initially cause a loss in GDP because the value of goods and services traded would decline as frankly many would have been destroyed.
A subesquent increase in GDP CONFIRMS that the value of consuption in the country has increased and therefore so have living standards.
Those who complain that re-erecting destroyed houses is not good for the country have never heard of the 'multiplier effect'.
Published: May 10, 2008 1:27 AM
Owen,
Again, what is your reasoning when you say that an increase in economic activity or consumption (which is it, by the way?) necessarily means an increase in material living standards?
I assume you mean consumption...but how does mere consumption tell you the quatity and quality of goods available?
Also, who said that re-erecting houses is bad for the country? I doubt that anyone here thinks that. On the other hand, destroying houses so that you can re-erect them and raise GDP is idiotic, wouldn't you agree?
Published: May 10, 2008 1:47 AM
owen says:
"Growth in GDP = Growth in living standards
this is only true to the extent that government intervention doesn't destroy the balance between consumption (2/3 gdp) and production (excluded from gdp).
in most developed countries, less onerous intervention has compromised this balance less than in underdeveloped nations, and so consumption is going to grow in link-step with production (which in turn guarantees future consumption).
when moths eat your clothes, you don't get any richer by going out and re-filling the wardrobe. your closet is fuller, your wallet lighter.
Published: May 10, 2008 2:59 AM
Production is included in GDP. If you don't know why or how this is then you need to go to an economics 101 text book not troll on this forum.
Consumption is by the choice of the people in the economy so there is a prima facie assumption that even given the constrains from government invervention, those goods produced and consumed represent that MOST DESIRED goods and services for each person that bought them. Therefore questions about the quality or quantity of the goods are not relevant.
If there is no consumption there is not only no living standard, but there is no living. Increases in GDP per capita represent increases in the VALUE of each persons share of a country's economic activity.
"when moths eat your clothes, you don't get any richer by going out and re-filling the wardrobe. your closet is fuller, your wallet lighter."
If your new purchases end up increasing GDP the multiplier effect means that on average the rest of the country is better off for your misfortune - sorry.
Published: May 10, 2008 3:34 AM
"Those who complain that re-erecting destroyed houses is not good for the country have never heard of the 'multiplier effect'."
The same "multiplier" effect which Friedman found to be pitifully low? That one? Of course, this isn't in "econ 101".
As for GDP measuring "production":
http://www.mises.org/story/2878
It seems Owen is one of those idiots who think tornadoes increase wealth! By your "logic", we ought to bulldoze the country every few years to stimulate wealth production.
Published: May 10, 2008 4:41 AM
Friedman's conclusions on the multiplier are in his Theory of the Consumption Function, for those interested.
Published: May 10, 2008 4:43 AM
to owen:
you're right, sadly my macroeconomics 101 was full of keynesian nonsense like multipliers. gdp definitions vary slightly, but this is a fair one:
"The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports."
note: final goods and services, not intermediate! the largest part of the economy is left out of the equation. so naturally consumption assumes a role out of all proportion to its overall contribution.
Published: May 10, 2008 4:54 AM
It was never asserted by anyone that natural disasters increase wealth but that they increase economic activity, therefore living standards.
It is by living standards that people are materially enriched in their lives - not by wealth.
If peoples consumption of VALUABLE goods increases their living standards increase.
MOST people find this a good thing hence the focus on GDP.
If the multiplier effect didn't work then unespected increases in the money supply would not stimluate the economy into increased production of goods and services.
But sadly for Inquisitor unexpected increases in they money supply do increase production and consumption in the short term.
Seems that GDP is a uselful measure after all.
I think even Inquisitor will be able to advise newson that he/she has just greatly embarrassed themself by revealing a less than elementary knowledge of the economics he/she rails against. I am quite sure newson that you in fact did fail your macroeconomics classes with poor displays like that (just for your knowledge intermediate production is included).
Published: May 10, 2008 5:17 AM
But wealth is by definition the sum of economic goods (including services) in an economy, so if economic activity increases something, what is it exactly? Wealth is the sum of valuable goods in an economy - see Menger. You're the one embarassing yourself here.
As for the multiplier, how about you refute Friedman's arguments then? He demonstrated that the consumption multiplier is at best 1, not 4 - 5. He's not referring to the banking multiplier, and neither are you, so stop equivocating.
Published: May 10, 2008 5:26 AM
Inquisitor:
Actually you are embarrasing yourself only. People cannot eat wealth. When they eat or are entertained or watch TV they consume. GDP measures this consumption. Wealth is of no material use to most people if it is not CONSUMED.
People are more concerned with the VALUE of things consumed because this relates much more closely to living standards to any static measure of wealth.
Multipliers are empirically proven by others. This report (one among thousands) quotes multiple studies that estimate multipliers at between 1.5 and 2.
http://www.nukewatch.org/facts/nwd/DumasReport033103.pdf
...so what do we do now? The evidence points both ways.
Even a multiplier of 1 means that the extra dollar that rebuilt the house gets respent in the economy once during the year on something valued by someone.
Published: May 10, 2008 5:51 AM
"Actually you are embarrasing yourself only. People cannot eat wealth. When they eat or are entertained or watch TV they consume. GDP measures this consumption. Wealth is of no material use to most people if it is not CONSUMED."
Sure they can eat wealth - if that wealth consists of food. You're shifting your position now. Wealth is the sum of economic goods in one's command, of all sorts.
"People are more concerned with the VALUE of things consumed because this relates much more closely to living standards to any static measure of wealth."
An increase in goods one can consume is an increase in wealth. Speaking of value etc. makes no difference to what I'm saying.
"Multipliers are empirically proven by others. This report (one among thousands) quotes multiple studies that estimate multipliers at between 1.5 and 2."
Okay, and I can likewise say had that wealth not been burnt up on repairing the damages caused by a storm, it'd have been spent on other things seen as more valuable, again generating a multiplier effect, and in addition the savings in the bank that now have to be consumed would've lowered interest rates, stimulating investment. Instead, now money must be spent to repair destroyed wealth.
"...so what do we do now? The evidence points both ways."
"We" do nothing.
Published: May 10, 2008 6:38 AM
O.K. Guys.
Wealth represents the ability to consume broadly defined.
If you destroy wealth/capital you reduce the ability to consume.
If the capital is replaced you must either liquidate some of your wealth and/or increase your labor efforts, both of which reduce your ability to consume.
The multiplier effect of disasters is bogus as explained in the broken window fallacy. Disasters simply re-channel the so called "multiplier effect" and make it easier to witness, but the existing channel is shut down and wealth is reduced in the process.
Published: May 10, 2008 9:38 AM
Owen,
All of your points are attempting to redirect the argument to "GDP increasing = higher living standards" But that does not address the ultimate question: Are we better off because of a disaster or war?
The reason I bring this up is because the articles linked here make statements indicating that we ARE better off because of a disaster or war.
The broken windows fallacy on the other hand is arguing that had the disaster or war NOT occurred then we would be better off. It is comparative. Which way would we be better off? With a disaster or war? Or without?
You seem to be a war monger! ( :
Published: May 10, 2008 10:25 AM
Owen's problem is that he clearly doesn't understand the concept named "wealth".
Published: May 10, 2008 11:20 AM
Inquisitor:
Eating weath consists of consumption which is captured by GDP so you just proved my argument not yours.
An increase in consumption is strongly linked to living standards. Wealth less so. Wealth is useless unless it is CONSUMED. and GDP captured this consumption.
You would be right that if there was no disaster there would be different preferences of consumption BUT when a disaster increases GDP (which is the focus of this thread) then the greater economy bebefits through the multiplier effect. They can purchase 1.5 - 2 times the amount of desired goods they would have previously.
Unfortunately for you interest rates are controlled by reserve banks and in times of turmoil or disaster they are more likely to lower than raise interest rates so you are wrong there too. Man you are an expert in getting things wrong.
"We" do nothing? Stalemate, I love it! Almost like you are waving the white flag.
Mark and Yancy
Yes if you destroy wealth you destroy the ability to consume, hence GDP. But how then do you explain increases in GDP following disasters?
You also seem to think that (real) economists like disaster or war. They don't. They simply acknowlede the fact that following natural disasters in developed countries GDP can often be raised as reconstruction efforts involve greater investment. The upshot of this is that because of the multiplier effect, the money spent on reconstruction is then spent on regular consumer and giving a kick-start to the economy.
You are also overestimating when and where GDP is raised following a disaster or war. In lebanon it is unlikely GDP will be raised because so much capital and wealtjh was lost, so too anywhere in Africa and in Europe soon after WW2.
However if you look at Japan 20 years after WW2 it had greatly increased it's GDP partly as a result of reconstruction fuelling a general increase in economic activity.
I think you have no idea of the complexity of the economy and the effects that stimulus and activity can project into the future for many years. It all comes down to an injection of money capital into the economy - in Europe, Korea and Japan it came from the USA, in American natural disasters it is more likely to come from fiscal stimulus packages, insurance payouts and lowered federal interest rates.
Published: May 10, 2008 8:16 PM
to owen:
gpd excludes intermediate goods!
to sort out your confusion, refer to reisman's article on gdp (http://blog.mises.org/archives/007771.asp). he calls intermediate expenditure productive expenditure. here's a teaser:
"Productive expenditure is expenditure for the purpose of making subsequent sales. It is the expenditures made by business firms in buying capital goods of all descriptions and in paying wages. Capital goods include machinery, materials, components, supplies, lighting, heating, and advertising. In contrast to productive expenditure, consumption expenditure is expenditure not for the purpose of making subsequent sales, but for any other purpose. In the terminology of contemporary economics, consumption expenditure is described as final expenditure."
sean corrigan has a dig at gdp in this article (http://rnsa-bs.livejournal.com/76430.html).
a snippet:
"Here, at last, we come to the half-truth hidden in the familiar cliche, for the data with which we are so familiar are compiled, a la Maynard, in such a fashion that consumption is indeed 60 per cent of the aggregate — if only because the supposedly gross product in fact nets out the literally trillions of dollars of intermediate goods and services which are essential to the continued satisfaction of human needs and in whose delivery the majority of the population earn their own daily bread."
you'll find the bureau of economic analysis (bea) does include intermediate goods in its calculation of "gross output", and that's why it dwarfs gdp.
happy homework, and go easy on the keynes - it's alice in wonderland stuff!
Published: May 10, 2008 11:40 PM
newson:
I hate to break it to you but the price of a final good includes the cost of all intermediate goods used in it's production.
This reisman sounds like he has never even read a macroeconomics book to say crazy stuff like that.
Published: May 11, 2008 12:13 AM
to owen:
right, so reisman's crazy, corrigan's crazy, i'm crazy - have you got anything intelligent to say about the bea? (your beloved government, remember).
Published: May 11, 2008 12:26 AM
newson:
"The price of a final good includes the cost of all intermediate goods used in it's production.
Because firms must sell goods at a profit to stay in business, the final goods price must necessarily include all the costs of bringing that good to market."
Wow you are are still trying to assert something that a 15 year old high school student would be able to prove wrong.
Published: May 11, 2008 12:38 AM
to owen:
clearly you've not read, or not absorbed what reisman (whose book you can download from mises.org) says. i'll give you another taste, because hope does spring eternal:
"The truth is that the great bulk of spending and income payments in the economic system is concealed under net investment! Net investment is analogous to an iceberg, nine-tenths of whose volume is concealed beneath the surface. Only in the case of net investment, what is concealed can easily be much more than nine-tenths."
Published: May 11, 2008 2:11 AM
newson:
That statement is wrong. GDP covers every every purchase made in the economy using money be it primary intermediary or by the final consumer.
Explain how it doesn't - I have already explained how it does.
Published: May 11, 2008 3:23 AM
"Eating weath consists of consumption which is captured by GDP so you just proved my argument not yours."
Owen, what does this have to do with anything? You're jumping around pointlessly. The above response was to "you cannot eat wealth", which is nonsense. You can, if it's good.
"An increase in consumption is strongly linked to living standards. Wealth less so. Wealth is useless unless it is CONSUMED. and GDP captured this consumption."
But wealth is the sum of economic goods in one's command. So this is nonsense.
"You would be right that if there was no disaster there would be different preferences of consumption BUT when a disaster increases GDP (which is the focus of this thread) then the greater economy bebefits through the multiplier effect. They can purchase 1.5 - 2 times the amount of desired goods they would have previously."
Also nonsense. The statement is of a comparative nature. No real "growth" has occured.
"Unfortunately for you interest rates are controlled by reserve banks and in times of turmoil or disaster they are more likely to lower than raise interest rates so you are wrong there too. Man you are an expert in getting things wrong."
I am speaking purely in terms of real factors, not the artificial actions of state agents which might in fact worsen things further. Please stick to the topic at hand.
""We" do nothing? Stalemate, I love it! Almost like you are waving the white flag."
No, it means I do not associate with cretins.
Published: May 11, 2008 8:13 AM
"Also nonsense. The statement is of a comparative nature. No real "growth" has occured."
-should be: "that wouldn't have otherwise, if not in greater quantities."
Published: May 11, 2008 8:43 AM
"That statement is wrong. GDP covers every every purchase made in the economy using money be it primary intermediary or by the final consumer."
"ACCORDING TO contemporary economics, the value of a "final product," i.e., a consumer good, such as a loaf of bread, counts not only itself but also the value of all the various "intermediate products," i.e., the capital goods, that have directly or indirectly contributed to its production, such as flour and wheat. Contemporary economics further holds that because the value of the final product already counts the value of the intermediate products, it is a positive error to attempt to count the value of the so-called intermediate products separately from and in addition to the value of the final product. Such a procedure, it claims, constitutes "the error of double counting.""
"Intermediate goods, which are used up in producing final goods and
services, such as the sugar in a candy bar or the energy used to
produce steel, are also not counted separately as part of GDP. They
are not counted separately because to do so would be to count them
twice, as the value of the final goods already includes the value of
the intermediate goods."
"In opposition to this view, I will argue in what follows that the value of final products completely and utterly excludes the value of intermediate products, i.e., that it does not count their value at all, with the result that if GNP/GDP is to consist exclusively of the value of final products, as is held almost universally, then the value of intermediate products is not counted even once. And if that in fact turns out to be the case--as I will show indeed that it does--then GNP/GDP as presently conceived and calculated is not in fact a concept of gross product, but rather is almost entirely a concept of net product. In other words, I will show that what is today called gross national product or gross domestic product is in fact essentially net national product (NNP) or net domestic product (NDP)."
If you have a complaint, take it to Reisman or the various authors of economics textbooks he cites who disagree with you.
Published: May 11, 2008 9:14 AM
For anyone who's wondering, the above is from Reisman's article "The value of "final products" counts only itself: today's gross product is net product" - the blog won't let me link it. Just google it. Skousen's "Beyond GDP: A Breakthrough in National Income Accounting " is also worth reading.
Published: May 11, 2008 9:20 AM
*if it's good = if it's food
Published: May 11, 2008 9:30 AM
Inquisitor:
Eating wealth becoms consumption which is measured by GDP.
Your one-line answers didn't actually succeed in saying much at all lest of all in opposition to mine. You have a problem with communication.
Then you resort to name-calling after it is quite obvious you have had you @#* handed to you on the multiplier issue. Sad.
The point you are sadly missing is that the monetary stimulus from the disaster has increased GDP. Monetary stimulus' do that - funny huh?
Problem was with all your cutting and pasting in your final comment you missed out the amazing magical argument where intermediate goods are actually left out. So your post is meaningless. If anything you confirmed the assertion that GDP does include intermediary goods. Thanks.
Published: May 11, 2008 6:54 PM
"Eating wealth becoms consumption which is measured by GDP."
Which contradicts your prior contention.
"Your one-line answers didn't actually succeed in saying much at all lest of all in opposition to mine. You have a problem with communication."
You have a problem in comprehension. Remedy it.
"Then you resort to name-calling after it is quite obvious you have had you @#* handed to you on the multiplier issue. Sad."
Where? When? In your imagination? Sad.
"The point you are sadly missing is that the monetary stimulus from the disaster has increased GDP. Monetary stimulus' do that - funny huh?"
What "monetary stimulus" is it you're speaking of? You are full of nonsense. The fallacy is to say a disaster is "good" for the economy because it increases wealth. It doesn't, not relative to the economic activity that must now be forgone to cope with the disaster.
"Problem was with all your cutting and pasting in your final comment you missed out the amazing magical argument where intermediate goods are actually left out. So your post is meaningless. If anything you confirmed the assertion that GDP does include intermediary goods. Thanks."
But it doesn't. Read Reisman's article. He disproves the assertion that it does therein. If you think he's wrong, email him.
Published: May 11, 2008 7:22 PM
Specifically, you contradict this contention here:
"Actually you are embarrasing yourself only. People cannot eat wealth. When they eat or are entertained or watch TV they consume. GDP measures this consumption. Wealth is of no material use to most people if it is not CONSUMED."
Published: May 11, 2008 7:26 PM
Wealth = economic goods in one's command. That is all. They can be consumed, saved away etc. etc. If wealth diminishes, one has fewer goods at their disposal to consume, and conversely if it increases. This is the sense in which the term is used within Austrian economics. Hence to speak of wealth that cannot be eaten, as if it's some abstract ethereal quantity is to speak nonsense.
Published: May 11, 2008 7:36 PM
Specifically what your infantile brain cannot comprehend Inquisitor is that once wealth is consumed it BECOMES consumption and the consumption is what it measured.
If wealth is consumed it is no longer wealth it is consumption.
Did you finish K12?
Published: May 11, 2008 8:00 PM
"Specifically what your infantile brain cannot comprehend Inquisitor is that once wealth is consumed it BECOMES consumption and the consumption is what it measured."
If wealth is consumed it is no longer wealth it is consumption."
And as I said, increased wealth means increased economic goods under one's control, hence increased consumption possibilities, both present and future. Why individuals should not care about this or why consumption matters independently of the stock of goods that make it possible is beyond me. You said people cannot eat wealth - but if what is wealth at one point is consumed at another, clearly they can. Your contrast was pointless.
"Did you finish K12?"
Did you learn how to count past 3?
Published: May 11, 2008 8:10 PM
Wealth is no good unless it is consumed. GDP measures this consumption.
Wealth measures something which is not related to living standard. GDP does so it is a superior measure.
Published: May 11, 2008 10:08 PM
What Inquisitor and newson don't understand is the simple concept that GDP measures consumption NOW and that consumption is the best proxy for standard of living.
Wealth represents POTENTIAL standard of living and is therefore necessarily a future oriented measure and is valid in it's own right but this does not take away from GDP which measures a different thing - namely actual standard of living as opposed to potential.
People often want to know both - how we are NOW and how we could be in the future.
Seems that all those needless attacks on GDP have come to nothing then...
BTW i read that article on intermediate goods and it wass a hoot, best laugh I have had in ages. It is complete crap and totally wrong - I can't believe it got published. I noticed it wasn't published in a major economics journal but just a side one. If his critique actually held any water is would have been published in a much more prestigeous journal.
Ha ha - good laugh though!
Published: May 12, 2008 3:52 AM
Owen, repeat it ad nauseam, ad perpetuum. I bore of you. I am not the one contrasting wealth with GDP. You did it. I mentioned disasters cannot increase wealth - and they can't, relative to a situation where the disaster had not occured. You then objected "but can one eat wealth?" They can, but so what? You did not refute my premise on its own grounds - rather, you threw in a red herring.
"BTW i read that article on intermediate goods and it wass a hoot, best laugh I have had in ages. It is complete crap and totally wrong - I can't believe it got published. I noticed it wasn't published in a major economics journal but just a side one. If his critique actually held any water is would have been published in a much more prestigeous journal."
Then email him and refute it, if you dare. Refute it here, now. Demonstrate what is wrong with it, or the joke is on you, clown. Argumentum ad verecundiam will not save your trollish arse at this stage.
Published: May 12, 2008 8:00 AM
OK People. Let's get off this shouting and name-calling rant and get back to business. No one is learning anything from this.
Published: May 12, 2008 9:22 AM
to owen:
here's gerry jackson (brookesnews.com) illustrating the pitfalls of gdp:
"But what matters is not GDP but total spending — especially spending between the stages of production. It looks like the Bureau of Economic Analysis is in sympathy with this approach. Taking 2000 as an example, GDP came in at about $13 trillion while the bureau’s figure for total economic output in terms of dollars came in at nearly $23 trillion, with business-to-business spending making up the difference. (My own estimate put total spending for 2000 at about $28 trillion). The BEA's approach is in keeping with the Austrian view that what matters for the economy is total spending."
your claim that gdp includes all intermediate steps seems to be wrong to the tune of $10 trillion for 2000. any thoughts?
Published: May 12, 2008 10:24 AM
to owen, from the us bureau of economics:
"Gross Output," an annual measure of total spending at all stages. GO is defined as Intermediate Input plus GDP.
Intermediate Input represents the sale of all products in the natural resource, manufacturing, and wholesale markets. GDP represents the final retail market."
note that this gross output series only started in 2001, and that textbooks are written to a keynesian script, in large measure.
Published: May 12, 2008 10:52 AM
to owen:
actually, to cut you a bit of slack, reisman himself acknowledges that textbooks almost universally accept that the cost of the final good and service includes intermediate costs.
not that the textbook treatment makes it correct, as skousen points out here:
"Most students of economics are unaware of the fact that GDP was created by Simon Kuznets during World War II to quantify final aggregate demand according to the new economics of Keynes. As such, GDP ignores all intermediate spending in the economy, based on the tenuous argument that earlier stages of production constitute double counting.
Published: May 13, 2008 12:54 AM
to owen:
another point made by skousen is that the retail input into leading indicator indices is minimal. the indices are essentially compiled from production numbers of various types, not retail.
in japan, there is no retail component of the leading indicators index. so gpd is again tacitly acknowledged as an inaccurate compass of the overall economy.
Published: May 13, 2008 11:11 AM