In the past week, we have seen hurricanes devastate large parts of Texas and Florida, with more hurricanes suspected to be on the way.
Some in the media have suggested that while there’s an obvious human impact and a short-term economic impact, in the long run, the economy may be stimulated by all the infrastructure spending that will be needed in the reconstruction effort.
The argument amounts to the following.
The destruction wrought by the hurricanes has led to widespread damage of housing, public infrastructure, business premises etc.
To re-build these, large sums of money will be spent on hiring construction workers, buying of construction materials etc, which will lead to a massive boom in these industries, and lead to new employment opportunities.
This boom will ripple out throughout the economy, leading to overall economic growth. In its essence, it’s an argument that states that destruction leads to reconstruction and that reconstruction is a net benefit to the economy.
This argument is often used to support “Military Keynesianism”, which largely states that war is good for the economy as it causes massive military spending, decreases unemployment through hiring of soldiers and military hardware assembly etc.
However, this is all a mistaken belief.
Frederic Bastiat, a 19th century economist and one of the most respected thinkers in the school of Classical Liberalism, put forward the beautifully simple theory of “The Parable of the Broken Window” which he wrote on in his 1850 essay “Ce qu’on voit et ce qu’on ne voit pas”(That which is seen and that which is not seen).
The point of the parable is simple. It tells the story of a little boy who often breaks windows which irritates his father, the town shopkeeper.
His friends placate him by saying “It’s an ill wind that blows nobody good”. They calm him by saying that his son breaking windows at least helps the town glazier who has to replace all the windows.
One can then take this logic to then mean that breaking windows can actually be a good thing as it causes money to circulate in the town economy.
Bastiat says that this is true, but that this is only “what is seen”.
He makes the argument that if a pane of glass costs 6 Francs, then yes, the glazier will benefit from 6 Francs. There is although “what is not seen”
That 6 Francs could have been used by the man whose window was broken elsewhere. It could have been spent on adding another book to his library, buying a new pair of shoes, etc.
It could have been used on something that he would have actually wanted as opposed to simply replacing his broken window. Having to replace his broken window leads to an inefficient use of his capital.
This is the issue when trying to argue that disasters or wars are actually beneficial to an economy.
All the money spent on reconstruction could have been used on something better and more useful had the destruction not taken place.
It is hard to argue hiring huge numbers of soldiers going out to fight in war is an efficient use of capital.
Soldiers do not, themselves, produce anything. You are taking people away from productive industries and putting them in one that is unproductive, and of course if the worst happens and those people die in war, they will never be able to produce anything.
The millions of men who died in the World Wars could have been at home being carpenters, construction workers, entrepreneurs etc. In the case of war, the cost of “what we do not see” is the great things that those poor souls who perished in war could have achieved had they not gone off to die in war.
Likewise, all those who worked in the factories producing tanks and guns could have been using their talents elsewhere. Those talents, applied elsewhere in fields that they were more suited to, would have been more beneficial to an economy perhaps than simply working on an assembly line.
Of course, this is not to say that wars do not need to be fought on occasion, it’s simply a statement that war itself is not and never will be an overall economic positive.
Likewise with natural disasters. Anyone who makes the argument that destruction wrought by a natural disaster, could be an economic benefit is incorrect. This is, of course, ignoring the rather ghoulish undertones of trying to make a positive out of a human disaster that ruins lives.
In all economic transaction, there is the concept of economic cost. If you have the choice of buying a pair of shoes for £50 or a new jacket for £50, and you choose the shoes, the jacket is your opportunity cost.
It is what you are forced to forego in order to purchase what you choose. Essentially, it’s another term for a “trade-off”.
In the instance of war and natural disasters, this opportunity costs is forced upon you. If your house is destroyed, you HAVE to replace it either with a new house or paying to rent elsewhere. The choice of what you may have WANTED to spend that money on is forcibly taken away from you.
When viewing economic stories or indeed any transaction, it is good to heed the advice of Bastiat. Do not simply focus on what is seen, focus on what is not seen. It is wise to think one step deeper.
Dukemusings 