Monday, 2 September 2013

This can't be said too often

Natural disasters and wars never generate prosperity. They always destroy it, by definition.
This is Oliver Hartwich, Executive Director of The New Zealand Initiative, writing at What we should learn from this is that things like the Canterbury earthquakes and the resulting rebuild does nothing for the economy.

Yes, there is no doubt that the rebuild is triggering lots of economic activity here in Canterbury. But as Hartwich notes,
But such positive developments cannot obscure the fact that as a direct result of the quakes, hundreds of firms went out of business, tax revenue was lost, and the government's budget was pushed deep into the red. And these are obviously only the economic costs of the natural disaster, not counting the loss of lives or the physical and mental health effects.

If the earthquakes had never happened, there would not have been a need to deal with them. All the resources now devoted to cleaning up and rebuilding would have been employed elsewhere.

While we would not see such a pronounced construction boom, there would be across the board positive effects in other sectors of the economy. Meanwhile, instead of footing part of the bill of the rebuild, the government could have either returned the budget to surplus earlier, cut taxes or invested elsewhere.

With large projects, it is always easy to acknowledge the activity they have triggered. What is more difficult to ascertain is what other activities would have happened in their absence. We simply cannot see the business that would have taken place in Christchurch if the earthquakes had never happened.
To say that disasters are good for the economy is what economists call the Broken Window Fallacy. The fallacy is due to Frederic Bastiat.
19th-century political economist Frederic Bastiat offered an answer to such a question in his 1850 essay "That Which Is Seen and That Which Is Unseen." (This was, of course, translated from the French "Ce qu'on voit et ce qu'on ne voit pas.") Bastiat's reasoning goes as follows:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, 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.

No comments: