Economists don't understand economics
Hoo boy. Did you know that the fires in Southern California are actually good for the economy? Oh, you didn't? Yeah, that's because they're not.
From the article:
"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.
That's unbelievable from a professor of economics. HT to Lew Rockwell, whose e-mail correspondent suggests that people need to be taught Bastiat's lesson of the broken window. Indeed, and in the spirit of offering people a choice let me recommend that people just read Harry Hazlitt's Economics in One Lesson. That will teach you Bastiat's insight quite nicely.
The insight, in short, is as follows. Wars and disasters do not "boost" the economy. How could destruction ever be an economic boon, on the net? All the economic 'activity' that is spent fixing the destruction uses resources that would have been used on other things if the destruction hadn't happened. If the destruction hadn't happened, then you would have had all the original property still in tact, and other things being done with the money. If the destruction happens, then all that money goes to replace the lost property, to getting us back to "square one", as it were.
12 comments:
Wouldn't that depend on why he said it? Somehow it seems unlikely to me that an economist would just forget about Bastiat's broken window. Maybe he wasn't basing his claim on the notion that, in general, wars and disasters boost the economy.
Maybe he has some more specific reason for his claim.
Perhaps he is reasoning that a lot of that money used on rebuilding in CA would have been spent outside of the region if the disaster hadn't happened.
This actually seems likely to me (thinking off the cuff) since a lot of that money is going to come from insurance companies, and those funds would otherwise have been profits for people who own stock in those companies, many of whom live outside of the region affected by the fires.
So, while clearly the result is going to be a net negative for the nation (in acc. w/ Bastiat's principle), it might be a net positive for the region, because of the way insurance works.
I don't know if this was the economist's reasoning, I'm just speculating. Even if this wasn't what he was thinking, I doubt he would make the kind of simple mistake you seem to be attributing to him. But it's hard to tell what he was thinking, since the journalist who quoted him didn't give much in the way of context.
Hi, Christopher!
I'm glad you brought this up, actually. I was just reading a thread on the Mises.org blog, and somebody made the same observation. This is a reasonable interpretation of what Gin might have meant, so I apologize publically for assuming the worst of him.
However, in my defense I do think that this kind of foolishness is fairly prevalent, even among trained economists. There are many people in positions of academic or popular economic influence who don't 'get' Bastiat's insight.
And certainly at the popular level, like in U.S. history books, we hear this all the time. How many times do we hear people say that WWII "pulled us out of the Depression?" For example. (And the other major alternative offered by historians, that FDR's New Deal pulled us out of the Depression, is just as bad, but that's another matter).
In any case, though, I agree with you that Gin's comment need not be construed as badly as I construed it. So thanks!
Fair enough. Still, I remain skeptical of your more general claim for the same reason I was initially skeptical of your specific claim. Why do economic historians think the War pulled us out of the depression? The "obvious" reason is that they don't get Bastiat's broken-window principle. But since even a little bit of economic education should've cured them of that, I wonder if they might have a more sophisticated reason.
--Chris McC
Have you ever read Hazlitt's Economics in One Lesson? I'd recommend it with gusto. His first chapter debunks this kind of economic theory (using Bastiat, if I recall). There are certainly aspects of huge rebuilding efforts that, considered in themselves, are beneficial. To move from there to a total benefit to the overall economy is madness. Destruction's not profitable.
HAHAH... nothing like NOT reading the last paragraph of the post. It's unfortunate that my last comment's NOT a joke. Well.. at least you know I'm trackin' with ya!
Feeling idiotic, Tim
What of a war that secures resources away from others, who may not have seen in them, and thus would not have utilized them, the potential the conquerors do?
Charles, that'a a really good question, and I think in that sort of situation you could certainly say that the war has a positive economic effect (on the net) for the victor. But I think the 'broken window' analysis addresses a different sort of argument about prosepirty coming from war, which is the argument that the very fact that you are at war 'gets the economy going', creates jobs, etc. The sort of stuff you and I both thought about WWII when we were in high school (I remember talking about it). That kind of thinking commits the 'broken window' fallacy.
But certainly conquistadores can genuinely profit from seizing valuable resources from others. But the activity required to do the conquering, particularly all the destruction and death and what have you, is not profitable. It may turn out to be profitable, on the net, for ONE side (the victors), in very particular sorts of wars, but the general activity of warfare is not an economy-booster.
Even the mercantilistic wars between the major European powers back in the glory days were economic disasters. They were intended to make the mother country richer, but in reality they ended up putting all the participants (winner and loser, motherland and colonist) into debt.
I think the following is more likely to fit the WWII situation. It's also more complicated, and so will take longer to explain.
Suppose that a nation is suffering from very high unemployment. These people would like to work. If they were employed they would be producing wealth, and they would have an income, on account of which there would be a higher demand for goods and services -- high enough to justify corporations in hiring more people to produce more. But since they don't have those jobs the demand for goods and services is low, so the corporations won't want to produce as much as they could, so they won't hire those workers, so those workers won't have income, so demand will remain low. Both laborers and corporations would prefer a high-demand / high-production environment -- but no one agent is in a position to bring this about, for if one company hires more workers and produces more than than its market share, its hiring (when no one else does) won't have a significant effect on the market, and it will just loose money. Only if all the corporations in the nation acted in concert would the increase in production coincide with an increase in demand. So you have a nice little prisoners' dilemma. Much of the productive potential of labor is not being put to use. Everyone wishes it were. But any individual's agent's attempt to fix the problem would only hurt himself.
Now insert a large spending program by the government, such as occurs during a major war. The activity of war, of course, destroys wealth, but, in the situation we are considering, since it gives income to many who otherwise wouldn't have it, it increases the total demand for goods and services in the economy, which causes more of the productive potential to be utilized. Whereas before the war, lots of able-bodied men are out of work; during the war, those men are overseas, with an income, and their wives and daughters are working, so that the total extra ammount being produced is greater than the ammount being destroyed by the war.
Bastiat taught us that the wealth that was spent to fix a broken window could have been spent on other things, and since the breaking of the window is itself a destruction of wealth, the total wealth in the economy, ceteris paribus, is not increased by the breaking of the window. But in the sitation I described, ceteris ain't paribus. Whereas the broken-window situation involves only (1) the destruction of wealth (breaking the window) and (2) the moving around of wealth (paying the glazier rather than the cobbler), in the situation I described there is (1) the wealth-destroying acts of war, (2) the moving-around of wealth (taxing and spending), and (3) the creation of more wealth by tapping into unutilized potential in the labor force. More people are working, and more wealth is being created, than would have been the case had the war not occurred. And that wealth-production in (3) might well outweigh the wealth-destruction of (1). This sort of thing could even result in a net gain for both beligerent nations, if both were in a depression prior to their war.
I'm not sure this analysis is right. But I am pretty sure that, if there is some mistake being made, it is not the naive mistake that results from not "getting" Bastiat's broken window principle.
--Chris McC
Well, Chris, I thought I had already relented on this point, though I did try to save a little face. But you'll have none of it! :-)
I don't think your hypothetical analysis is correct, but I agree that it would not succumb to the bw fallacy.
Sorry. I just like to argue. I especially like to argue with people who are careful, logically astute thinkers. And when I find someone like that -- especially someone who shares my most basic commitments -- I hope I may be forgiven for being over-eager. Although I've been attacking your claim about economists, I will grant that far too many people who are supposed to be generally educated don't get Bastiat's principle. I'll join you in bewailing that.
Political philosophy has been much on my mind of late. I'm unsatisfied with standard popular conservatism and have been seeking a coherent alternative. Russell Kirk has impressed me, but he doesn't give much guidance when it comes to economics. Except negatively. Kirk-style conservatism rules out both "command economy" socialism and principled libertarianism, but doesn't give much positive guidance between those extremes. So I'm especially eager to figure out how to think about the government's role in the economy. That's part of what motivated my long comment.
My instincts make me wary of meddling with free markets, so I'm even supicious of my own analysis there. But I'm also suspicious of my quasi-libertarian instincts, and I can't actually see where my analysis goes wrong.
--Chris McC
Chris, it sounds like you are going through much the same process of political re-thinking that I have over the last several years. First I was dissatisfied with as you call it 'popular conservatism', then I started looking for an alternative. I read Kirk, and Weaver, and some of the 'southern agrarians.' I got turned on to "Chronicles" Magazine, and even started self-identifying as a 'paleo-conservative'. Big on 'social conservatism' and the general idea that western civilization is inherently Christian and is something special and that Islam is our perpetual enemy, yet skeptical of 'interventionist' foreign policy and 'interventionist' economics. Pat Buchanan, basically.
But the hang-up for me was still economics. If socialism isn't right, but free-market libertarianism isn't right, then what is the alternative. To be fair, some paleoconservatives do claim to offer some kind of alternative. The most common suggestion you will usually hear is for GK Chesterton's 'distributivism'.
But the real difference between Chestertonian distributivism and socialism seems rather thin. Chesterton's prescriptions in the end just seem like a 'soft' socialism--he wants government to enforce how big of a 'share' of the economic pie each family has, but he naively thinks that this can be done without widespread unintended consequences through the rest of the economy and without heightening government power into something that is much more distasteful than the economic conditions he dislikes.
For me, I ended up coming back towards the 'paleo-libertarian' position on economics. I grew up in my popular (naive) conservatism as a free market advocate, but I really didn't understand much about how it was supposed to work and so in college and then later through reading some of the paleocon writings I had become skeptical of free markets. But when I decided to actually read free market stuff, and I mean the most 'radical' free market stuff out there (Austrian school, von Mises, lewrockwell.com, Murray Rothbard, etc.), I came back around to my former 'popular' position and became convinced for real that free markets are the only way to economic prosperity (and I think that economic prosperity is desirable, of course).
So at this point I'm some sort of "paleoconservative" who happens to side with the libertarians on economics. Which means I'm really more of a 'paleolibertarian' with a heightened concern for 'Christendom', or something like that. I don't know, but I wish you well on your own journey. If you find a shortcut to a coherent political philosophy that keeps all our basic commitments and also makes good sense of economics, then let me know. :-)
"Paleo-conservatism", as you describe it, doesn't fit me very well. I don't think Western civilization is inherently Christian, although it has been influenced by Christianity (and there is wisdom even in the pagan sources), but I do I think that modernist dismissals of our intellectual heritage are rooted in an anti-Christian Enlightenment ideology, which in turn is rooted partly in pre-Reformation Unbelief, and partly in the Revolutionary heresies of the "radical Reformation" (a synthesis of Eric Vogelin and Groen van Prinsterer). -- Islam is certainly an enemy of true religion. But this needn't translate into political enmity, unless they start flying planes into our buildings. At which point I become rather hawkish. Not at all like Pat Buchanan. I think Bush is right to point out that oceans don't provide the kind of barrier that they did in George Washington's day. Nor is it any longer the case that, in order to do large-scale damage to a nation, you need to be able to muster large armies. We face threats from non-state entites that were not present in ages past. Governments have an obligation to protect their people from these threats, and only a hegemonic super-power is in a position to orchestrate the quasi-policing of the world that alone can provide this protection. No, not like Pat Buchanan at all. -- But not like Fukuyama either. I am opposed to using our geopolitical hegemony to spread democracy around the world. I'm enough of a reactionary that I don't believe democracy is a good thing to begin with. And even if you replace "democracy" with "political liberty", defined conservatively, our government should be "the friend of liberty everywhere, but the protector only of ours." If a democratic (French-style-)Revolution in Pakistan would be detrimental to our anti-terrorism efforts, as it would, we may be wise to support the current regime and oppose the Revolutionaries. And I think this is consistent with a conservatism that's even older than paleo-conservatism. I'm thinking of Edmund Burke. "Paleo-conservatism" isn't paleo enough for me. It's too Jeffersonian; that is, too liberal.
And I don't think my -- shall I call it 'antiquated conservatism'? -- can be so easily modified to fit with libertarianism. At least not what I'm calling "principled" libertarianism. The principled libertarian says individuals have a right (over against government) to do what they want with their own property. So, first, even apart from whether free markets lead to prosperity, governments shouldn't intervene, because to do so would be unjust. Second, if free markets do lead to prosperity (as they argue) then government should not intervene in ways that decrease material prosperity even if they increase other social goods -- better to let individuals decide which "goods" they are willing to pay for. Take, for example, the issue you addressed in your last oeconomicus post: should government intervene to protect small family farms from agri-business competition? You were certainly right to point out that to do so would lead to less total prosperity, and would especially hurt the poor, since food represents a larger segment of their income than it does for wealthier folks. But the sense of community, the family commitments, the moral stability, that are fostered by a small-scale farming lifestyle are goods that must be weighed in the balance against increased material prosperity. You'll have noticed, perhaps, that crime, illegitimacy, and irreligion -- not to mention liberal political views :-| -- are more prevalent in cities than in the country. A society in which a larger percentage of the people live in the country is likely to be a safer, healthier, wiser, and godlier society than one where more people live in big cities. Unlike "principled" libertarians, I can't decide, a priori, to prefer material to non-material goods, nor can I say, again a priori, that the government should just stay out of it and let individuals make their own decisions. That kind of individual "liberty" -- mine or my neighbors -- : being-able-to-do-what-we-want-instead-of-having-to-do-what-somebody-else-tells-us-to ... why I should prefer that to safety, health, wisdom, and godliness?
There are, however, reasons to be wary of increasing people's dependence on government -- reasons that have nothing to do with whether capitalism promotes material prosperity nor with individualistic property rights. Weighing these non-material, non individualistic reasons in the ballance might -- just might -- leave us with something close to free market policies. On the other hand, it might not. That (in addition to the fact that I'm not entirely convinced that free markets always do the best job of promoting prosperity) is why I'm not a libertarian.
I don't know much about it, but I'd probably agree with you that Chesterton's distributism is not really different from socialism. Do you know of any other viae mediae? I haven't studied economics enough to develop one myself, but maybe I could write up something on what sort of presuppositions would have to underlie such a thing.
--Chris McC.
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