Walking on Broken Glass?
March 12, 2011
Can we avoid natural disasters? Probably not. Can we avoid disastrous economic ignorance? Yes. The disaster in Japan provides yet another tragic illustration of how fallacies permeate the public conversation.
First, destruction is not production. It never is, and society isn’t better off because of it. To claim otherwise is to fall victim to the Broken Window Fallacy, a fallacy that was exploded by Frederic Bastiat almost two centuries ago.
The story goes like this: a kid throws a rock and breaks a shopkeeper’s window. Someone claims that this will, in fact, make everyone better off because now the shopkeeper has to buy a new window. This creates work for the glazier, who might use the money to buy a new suit. This would create work and income for the tailor, who might use the proceeds to patch his roof. And so it goes: the unanticipated increase in spending works its way through the economy and brings prosperity to all.
Or does it? The shopkeeper could have done something else with the money had his window remained intact. Perhaps he would have bought a suit of his own. Perhaps he would have saved the money. It could then be lent to an automaker to finance the production of new cars that would employ the glazier making windshields. When a window is broken, we’re poorer because of it (here is Steven Horwitz with more).
Here’s another practical illustration. My cheap IKEA office chair broke while I was working on this article. It’s pretty clear that our spending on a new office chair will create wealth. But not so fast: the money we might spend on a new office chair will have to come out of our bank account, or we will have to reduce the money we spend on other things. If we take $100 out of our savings account to buy a new office chair, that’s $100 less that someone can borrow to buy a house or invest in a new business. If we reduce our grocery bill by $100 to buy a new office chair, that’s $100 less than our local Kroger would have earned if the chair hadn’t broken. The net effect is that the world is poorer by one office chair.
There is also another important lesson in the tragedy. Policy makers and pundits are fond of claiming that there is more to life than wealth. After all, man does not live on bread alone.
Alas, however, wealth is what shields us from nature’s fury. As I write this, I’m protected from the elements by walls and windows. If we were richer, our walls and windows would probably be a lot stronger. The additional safety we could enjoy (but don’t) is been one of the costs of growth-reducing policies over the centuries.
The destruction caused by the tsunami should also motivate us to reflect on the policies we have that create perverse incentives. As Friedrich Hayek argued, one of the virtues of the marketplace is that it harnesses the “particular circumstances of time and place” and guides people away from activities that waste time, energy, and resources and toward activities that produce wealth.
We don’t have to rely on a central planner to arrange an optimal pattern of industrial, residential, and commercial location when risks can be priced. This allows people with varying degrees of risk preference to measure the costs and benefits of different courses of action and make the choice that they think is most in line with their preferences.
One of the tragedies of government policy is that it systematically distorts the feedback mechanisms that would guide people’s decisions. Through things like government flood insurance, for example, we essentially pay people to put themselves in harm’s way. Rhetorically, we insulate ourselves from some of the consequences by telling ourselves the lie that “at least it’s good for the economy.” This is precisely what we did after Hurricane Katrina, for example, and I can only pray that we don’t pay a terrible price for it in the future.
|Art Carden is a Research Fellow at the Independent Institute in Oakland, California, and Associate Professor of Economics and Business at Rhodes College.|