Hurricane Sandy swooped through the east coast, which means one will now start hearing about how great the economy will boost from such a disaster. In fact, articles are already beginning to pop up online (such as this one here).
We must now revisit the commonly dispelled myth of the “broken window” as Bastiat called it. Frederic Bastiat, a French economist from the early 1800s, spoke in great detail about That Which Is Seen and That Which Is Unseen. That is, economic truths must not only be discovered by observing immediate results, but that one should also examine the long term consequences of such actions. In modern day economics, this is referred to as opportunity cost.
Given that a hurricane, earthquake or any other natural disaster would require “stimulus” to clean up, the modern day Keynesian economists would argue that spending by local, state and federal governments (including private individuals) would “boost” the economy. Bastiat compared this frequently discussed dichotomy to that of a broken window.
Let’s say a kid throws a rock through a shopkeeper’s window. Bastiat wrote,:
“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.”
Bastiat concluded that breaking the shopkeeper’s window did not actually create wealth and prosperity for the community. Instead, it destroyed six francs worth of a window. The money simply shifted hands and nothing more, yet this common misconception of economic wealth creation still exists to this day.
To put jobs programs, stimulus programs, natural disasters and any other “stimulating” event into perspective, wealth is simply destroyed and never created. One destroys another man’s wealth for his own benefit. In this case, the people who would install the window would profit from such activity, but the shopkeeper is still missing his six francs.
If society truly believed in such ideas, why is it that we make terrorism illegal or bombing subways? Why is it that we don’t just set off an atomic nuclear bomb on the entire east coast and “stimulate the economy?” Certainly with this fallacious thinking, we would create plentiful amounts of wealth. One does not do this because it is wrong, ill conceived and downright stupid.