no third solution

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Forest Fires & Broken Windows

October 25th, 2007

I knew it wouldn’t take long for the broken window to come into play…

No economist worth his salt would say something like this:

“In the odd nature of economic accounting, this will probably be a stimulus,” said Alan Gin, a University of San Diego economist. “There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments.”

Nobody suggests that hurricane Katrina was a boon for the Delta economy — because it wasn’t. Nobody suggests that New York City has benefitted from terrorists taking down the Twin Towers — because it hasn’t. Nobody believes that World War I (and II, for that matter) stimulated the global economy — because they didn’t. The point I’m trying to make here, is that we are perfectly capable of blowing shit up, and that if blowing shit up was a viable path to economic well-being, we certainly wouldn’t have to wait for a forest fire or a flash flood or a terrorist attack to bring it about.

To be fair, the other economists cited in the Times’ article were not complete R-tards. But Mr. Gin, presumably a professor or an associate professor of economics has flunked the final, as it were. If the “huge amount of rebuilding” is really the boon that some people believe it is, does Mr. Gin suggest self-imposed destruction?

Not unless he’s a complete fucking idiot. Why do I say that about him?

Because economic accounting always considers opportunity costs. (For a more detailed exposition, see Bastiat’s What is Seen and What is Not Seen)

Mr. Gin and those like him fail to recognize those things which they cannot see. Of course I don’t dispute that homebuilders in SoCal will probably make a few extra bucks in the next year or two. And I don’t dispute that most of that money will be financed by insurance settlements. But the relevant consideration is what that money could’ve otherwise been used for, had people not lost literally everything they own. It would’ve been distributed to the insurance companies as profits, to the shareholders companies in the form of dividends. Some of it would’ve been reinvested in the company or in other secure assets to hedge against future catastrophes. It would’ve been spent on capital goods for the insurers, and consumption goods (primarily) for the recipients of dividends.

After the fire, the payouts, and the rebuilding, all we have are the houses – which in the absence of a catastrophic fire, we already had. Mr. Gin “sees” the demand for rebuilding. He sees the glazier, who is encouraged by broken windows. But he dare not suggest that we go about breaking windows merely to benefit the glazier. He does not see what other enjoyments might be demanded, what other industries encouraged in its stead, nor does he account for the benefit of those whose homes are ruined who might’ve otherwise enjoyed something more.

The reader must apply himself to observe that there are not only two people, but three, in the little drama that I have presented. The one, James Goodfellow, represents the consumer, reduced by destruction to one enjoyment instead of two. The other, under the figure of the glazier, shows us the producer whose industry the accident encourages. The third is the shoemaker (or any other manufacturer) whose industry is correspondingly discouraged by the same cause. It is this third person who is always in the shadow, and who, personifying what is not seen, is an essential element of the problem. It is he who makes us understand how absurd it is to see a profit in destruction.

Bastiat is rolling in his grave…

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no third solution

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