A Window on Economics

by THOMAS G. DONLAN, in Barrons on 3.19.2011

Frederic Bastiat explained the fallacy of the broken window in 1848, but many modern economists never got the message

Please don’t take the following observation seriously: Locked these past two decades in a deflationary liquidity trap, Japan now has the opportunity to spend countless trillions of yen cleaning up after the devastating earthquake and tsunami. Construction workers, heavy- equipment operators and funeral directors will prosper and contribute to a burst of growth in gross domestic product.

This is the sort of thing that got economics named the dismal science. In this case, it’s more dismal than science. It’s the broken window fallacy, writ large on the island of Honshu.

But many economists still believe that spending money is good for any economy, anytime.

Lawrence Summers said: “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.”

The fallacy of the broken window was exposed by Frederic Bastiat in 1848, a revolutionary year of many broken windows and much bad economic dogma. Said Bastiat, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that are not seen.”

Bastiat imagined a child breaking a window. “Suppose that it will cost six francs to repair the damage. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

“It is not seen that, since [the child’s father] has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced his worn-out shoes or added another book to his library.”

Bastiat is often ignored in favor of John Maynard Keynes, who approved of all sorts of profligate expenditures, even hiring men to dig holes and fill them in again.

The Great Depression, Keynesians say, was ended by the expedient horror of World War II, which removed 10 million American men from the labor force so they could shoot and be shot at, created a near-infinite demand for explosives—the ultimate consumption goods—and put millions of people to work.

What World War II really did in the U.S. was widen and intensify the effects of the Great Depression, finally deflating the giddy bubble of the 1920s. Rationing and price controls reduced demand, suppressed production of luxuries and increased savings. The war also left the U.S. as the unravaged industrial power, able to supply the desperate postwar needs of allies and former enemies. The U.S. was Bastiat’s lucky glazier.

Fortunately for the U.S., its postwar economic policies were considerably different from those that prevailed prewar. The productive private economy retooled to produce consumer goods and capital equipment. Technologies developed for destruction were adapted for investment and profit.

For the past two decades, Japan spent 650 trillion yen on public-works spending intended to lead the country out of its economic malaise. At least the reconstruction of devastation has a legitimate purpose—we can’t say as much for public works that don’t benefit the public.

The destruction of a fishing boat, for example, is not a good thing for fishermen or fish-eaters or tax collectors, even if it is a good thing for boat-builders and construction workers.

Money—whether private or public, whether taxed or borrowed—spent on replacing building boats and buildings is money that could have been spent on something else. Demand for everything else that consumers and the government buy must fall while formerly useful assets are replaced.

The Japanese economy has lost the capital invested in the buildings and boats destroyed; it has lost the production of goods made in the region; above all it has lost the accumulated knowledge and skills of the people lost in the disasters.

There’s nothing ironic about it: It’s a horrible waste of resources.

If Bastiat is right, it won’t be counted that way. He knew that it would always be difficult to make people listen and learn.

“What a lot of trouble to prove in political economy that two and two make four; and if you succeed in doing so, people cry, ‘It is so clear that it is boring.’ Then they vote as if you had never proved anything at all.”


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s