Montreal, February 7, 2004  /  No 137  
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Chris Leithner grew up in Canada. He is director of Leithner & Co. Pty. Ltd., a private investment company based in Brisbane, Australia.
by Chris Leithner
          At last, the remedy to what bedevils us is at hand. An excellent way to ensure prosperity is to give each member of a group of youngsters a cricket bat, lead the group to a randomly selected street in a randomly selected suburb, instruct each youth to walk in any direction he chooses and, as he walks, to smash car lamps, windscreens and panels, shopfront windows and displays – anything, in other words (including motorists, pedestrians, merchants and shoppers), that stands in his way.
          A likely consequence of this orgy of destruction is clearly that demand and perhaps employment will increase in the auto manufacturing and repair, glass production and glazing, medical and other industries. If someone smashes a shop window, then its owner will probably move quickly to repair it. Ample demand for glass and the labour of glaziers puts people to work and keeps them at work. Surely, then, vandals are actually benefactors, and the more severe and widespread their carnage the better. Would we not all benefit – indeed, would an economic boom not eventuate – if enough hooligans sufficiently frequently rampaged and destroyed everything they encountered?  
          The vast majority of people – indeed, all except those who espouse mindless destruction – would reject this proposal summarily and contemptuously. And they would be right for the simple and obvious reason that the destruction of valuable property is, under any and all circumstances, an unambiguously bad thing. To destroy such property is always to reduce – and never to maintain or improve – standards of living.  
Boosting the economy 
          The storms that tore through Brisbane, Australia, during the last week of January (like the bushfires that ravaged the nation’s capital, Canberra, a year ago) reminded Australians, if only momentarily, of this reality. Yet allegedly well-educated people in other countries seem to disagree. A prominent example is the article "Hurricane Floyd May Leave Robust Economy in Its Wake" (The Wall Street Journal, September 17, 1999). Its author, Tristan Mabry, reported that this hurricane, which caused severe damage across large swathes of the eastern U.S., "won't likely damp economic growth and may actually have churned up some extra economic activity." In the article, Marilyn Schaja, chief economist at Donaldson, Lufkin and Jenrette Securities Corp., said "the storm may actually give the economy a boost."
          Thomas DiLorenzo, professor of economics at Loyola College, Baltimore, writing in the February 2000 edition of Ideas on Liberty, notes that statements such as these exhibit an utter ignorance of the most basic principles of economics. Yes, the cleanup after the storm will generate economic activity and employment, as will the repair of smashed windows; critically, however, the cleaning and repairs will also extinguish development and jobs. This is because the resources used to repair damaged and destroyed property are resources that cannot simultaneously be used to produce other goods and services. The money allocated to cleanups, repairs and reconstruction, in other words, must be diverted from other uses; and because money has been redirected from these other goods and services, demand for them (and thus the labour and materials required to produce them) falls.  
          Hence the "broken window" fallacy exposed by the French economist Frédéric Bastiat (1801-1850) in his essay "What Is Seen and What Is Not Seen" (see also Henry Hazlitt, Economics in One Lesson, Laissez Faire Books 50th Anniversary Edition, 1996). Bastiat demonstrated brilliantly that what economics can teach (but what, alas, relatively few economists actually do teach) is an understanding of the principles that underlie the often-mundane details of everyday life.  
     “The resources used to repair damaged and destroyed property are resources that cannot simultaneously be used to produce other goods and services. The money allocated to cleanups, repairs and reconstruction must be diverted from other uses; and because money has been redirected from these other goods and services, demand for them falls.”
          What is seen is the window broken by vandals (or the house, street or suburb devastated by a storm) and the resultant employment of repairmen. What is not seen are the workers and resources in other fields that now cannot be employed because the resources required to do so have been diverted to the repair of the window and the reconstruction of the house. The glass manufacturer's and glazier's visible gain is thus the butcher's, tailor's or new entrepreneur's less visible loss; and to compensate the homeowner for damages incurred is to impose costs upon the insurer (or, more likely, taxpayer). In neither scenario is additional production undertaken – indeed, less is produced overall – and as a result people as a whole are poorer. The bread that the baker could have baked with the money used to repair the window is not baked; accordingly, as a result of the vandalism and its repair society has no more glazed windows but less bread than it would have had without the destruction. Clearly, then, what is even further obscured from view is that ends (i.e., goods and services) rather than means (i.e., jobs) ultimately benefit members of a society.  
          Most of the economists, politicians and businessmen of Bastiat's day, like their contemporary counterparts, focused only upon the immediate impact of "broken windows" (i.e., "problems" that allegedly require a policy "solution"). Bastiat showed that in virtually every instance there are unseen circumstances that must also be examined, and that these unseen circumstances usually impact significantly (and, in the instances he examined, negatively) upon long-term results. In Hazlitt's words, "we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore." Their admonition, then, is that we may commit major errors of judgement, and thereby incur considerable losses, when we focus exclusively upon short-term effects. In order to make sensible choices we must weigh the immediate and potentially positive for the few (seen) against the eventual and potentially negative for the many (unseen). 
Politicians Breaking Windows 
          Bastiat's and Hazlitt's tale is in some ways simply a silly story – an elementary fallacy that most schoolchildren can quickly recognise. Yet it is also much more. According to Hazlitt, "the broken window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labour union leaders, by editorial writers and newspaper columnists and radio and television commentators, by learned statisticians using the most refined techniques [and] by professors of economics in our best universities."  
          Indeed, prominent people occupying powerful positions are presently succumbing to a vastly larger and more disturbing variant of the broken window fallacy. Although they denounce small, localised and individual acts of vandalism with all of the rhetorical ferocity they can muster, they impute rather modest negative consequences – and potentially appreciable benefits – to massive, extensive and state-supported acts of vandalism. War, implied George W. Bush's former economic advisor (and as the American Secretary of State, Mr. Baker, stated explicitly during the expulsion of Iraq from Kuwait in 1991), "creates jobs"; further, it spurs the production of certain high-tech goods and services; and after the cessation of hostilities the world is rendered more prosperous by accumulated or "pent up" demand.  
          Immediately after September 11, 2001, pundits propounded their views about the impact of the government's response to the attacks (e.g., reconstruction and the "war on terror") upon economic activity in the U.S. Among these views: the destruction of the World Trade Centre and all the wealth embodied therein would ultimately augment rather than erode American standards of living. Will Terrorism Resuscitate the U.S. Economy? Timothy Noah answered stoutly in the affirmative: whilst "the destruction of the World Trade Centre, the multiple plane crashes, and the damage to the Pentagon are morally obscene because of the (probably thousands) of deaths and countless injuries they caused, economically the net result of the terrorists' actions is likely to be beneficial to the United States." 
          Noah continues: "OK, so the World Trade Centre disaster won't harm the economy. Why [do I] think it will benefit the economy? Simple: because we live in a very wealthy nation that responds to horrible disasters by spending large sums of money... In this case, the spending will come both from private insurers and from the federal government's Federal Emergency Management Agency, which over the past decade has established itself as a politically unstoppable source of federal largesse... In seeking to harm America, terrorists will probably end up making it more prosperous. They can make us die, and they can make us weep, but they can't make us poor."  
          Similarly, according to Larry Kudlow (quoted in The New York Post, 17 September 2001) "we may lose money and wealth in one way but we gain it back many times over when the rebuilding is done." If Noah and Kudlow are correct, then the widespread destruction of valuable property ultimately begets prosperity. From this statement it is but a small step to infer that the greatest destroyer of property, war, creates wealth and increase living standards.  
War and Bastiat's Window 
          War and post-war reconstruction, the conventional wisdom therefore alleges, is unlikely to have significantly negative repercussions and may even have positive consequences. According to Nobel Leaureate Robert Solow, "war is good for the economy in the narrowest sense, but it can be bad for the economy when innovation emphasises military and not civilian needs." Taking due care that the consumption of four-wheel-drives, winter holidays and McMansions remains unrestricted, should one therefore celebrate the occurrence of natural disasters and promote vandalism, acts of terrorism and the outbreak of war? If so, should one plan now to invest in the Balkans, East Timor, Afghanistan and Iraq? 
          Armed with Bastiat's insight, we see that this conventional wisdom ignores not just the livelihoods and lives of the inhabitants of combat zones: it also discounts opportunity costs. It assumes, in other words, that the resources required to rebuild the WTC and Pentagon, fight the war against terrorism and topple Saddam Hussein would, if they were not used for these purposes, lie idle. In reality, these resources must be diverted to these ends from other uses. Consider the scores of billions that insurers will eventually devote to the payment of WTC-related claims. This money would otherwise have been invested in the insurers' portfolios of stocks, bonds and other securities. Through these investments, in turn, this money would have been put to myriad productive uses, ranging from the construction of houses to the invention of new and better medicines. These resulting improvements of living standards will be lost as a result of the diversion of capital that followed the attacks. 
          Most government expenditure has the same effect. Taxpayers, if allowed to keep their earnings, would either buy consumption goods or save and invest (i.e., buy production goods). It is false to posit that if a government does not commandeer this money then people would bury it in the back garden. The ultimate absurdity revealed by the broken window fallacy is that if it were true, then governments could easily create and fructify wealth: they need only (and repeatedly) erect pyramids and monuments, dynamite them and immediately rebuild them. Better yet, if "job creation" were desired, then labour-intensive shovels should replace capital-intensive earthmoving equipment; and if even more "job creation" were sought, substitute the shovels with spoons (Bastiat suggested that the spoon-wielders use only their left hand).  
          Succumbing to the broken window fallacy has wider and more insidious implications. What was lost in the 9/11 and other attacks was not just physical capital, like tall office buildings, but immeasurable talent and tacit information. Kudlow's and Noah's assessment of the situation utterly discounts the creativity and productivity of the lives lost that day and the lives that will be lost in any resultant wars. This "human capital," which would have produced for many years to come, is completely lost and can never be recovered or rebuilt. To say that humankind will be richer because of the September 11 attack is therefore to assert that we will be more affluent without these thousands of human minds and bodies.
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