Monday, September 27, 2004
On this day:

Broken Windows

Seriously, though...

The idea that economic growth may be enhanced by disaster seems absurd. Yet, it is an idea that is often restated in some form or another in the wake of natural or man-made disasters. For example, after Hurricane Floyd devastated South Carolina in 1999, the Wall Street Journal ran an article entitled "Hurricane Floyd May Leave Robust Economy in its Wake." Following the terrorist attacks of September 11, 2001, some "economists" like Paul Krugman of the New York Times speculated that the ensuing cleanup would end up being good for the economy.

Disasters do create opportunities in certain sectors of the economy, and so it is inevitable that some people will perceive a boost in their own economic conditions. For example, construction workers should be in good shape financially over the next several months. However, on a broader scale, the efforts to clean up after disasters such as the recent hurricanes divert resources from more productive uses, and overall economic growth will likely suffer as a result.

USA Today, the Wall Street Journal, and the "economists" they cited in their stories all fell for the "broken window fallacy". This concept was first enunciated by French economist Frederic Bastiat in his essay That Which is Seen and That Which is Not Seen. In it, he talks about the seen and unseen effects after a careless young boy breaks a shopkeeper's window. Read it if you want, but here's the main conclusion: "Society loses the value of things which are uselessly destroyed", or more simply, "destruction is not profit."

That's a simple and sensible conclusion. But, with the absurdity of the broken glass fallacy being routinely stated as fact in the press by people who should know better, it's no wonder that economics can be so confusing.