Posts tagged Economics
War is good for the economy!
Feb 16th
Is war good for the economy? We’ve all heard that one and I heard it again recently. You also hear something similar after a natural disaster. The reporter will crow on the TV: ”Well the good news is that even though the city was entirely leveled by this Category Five Hurricane and tsunami, it’s good for the economy as the city rebuilds…”
Sure it is! And I wish I could have my home destroyed by a tornado tonight so I can support the local construction workers. Maybe I’ll luck out and get killed at the same time so the coroner has some work to do as well.
This is what’s called the Broken Window Fallacy as presented by Frederic Bastiat in his essay That Which is Seen, and That Which is Not Seen. It’s also the main theme in the classic book by Henry Hazlitt: Economics in One Lesson
Here’s the jist of of the fallacy:
If someone comes and throws a rock through a window in my house, some say we should not punish this vandal but praise him. After all, now I need to buy a new window and this puts the people in the glass business to work which is good for the economy. But what about the fact that now I have to buy a new window? Maybe I wanted to spend that money on a new suit or a new camera or another product? So the glass company has work to do, but what about the other people who could have gotten that money instead?
I know this makes perfectly good sense, but many prominent (and award-winning) economists believe that doing destructive things, and having destructive things happen, is good for everyone. In this view the vandal isn’t some rogue, but some type of rock hurling employment agency.
Like the vandal’s broken window, wartime is a waste of resources. Instead of factory workers producing something more useful like computers, cars or appliances they’re making products designed to get destroyed like bombs, tanks and planes. The people in the cities where the bombs fall (assuming they survive) now have to rebuild the city structures that were leveled instead of using those resources to enhance the city further. Soldiers on both sides are slaughtered and can’t contribute to the economy in their former professions. Politicians may come up with a myriad of reasons that a country may want to wage a war, but being good for the economy certainly isn’t one of them.
I really wish this fallacy would die. But sure as the sun will come up tomorrow, you’ll hear this dumb idea get trotted out after the next major disaster or war as if these events are some type of benefit to society. Next time you hear someone using this line of reasoning for justifying destructive acts, do me a favor and relay the story of the broken window and fix their thinking.
Can high inflation save the economy?
Dec 11th
An article in Forbes magazine tries to make the case for devaluing the dollar by 40% to help out the economy:
Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside? Here it is. Stand back. World currencies should be devalued overnight.
The Forbes article is riddled with errors about inflation and the gold standard that I won’t address in this post. The short of it is that devaluing the dollar by 40% won’t do anything at all except force the prices of everything else in the market up by 40% overnight as businesses move to protect themselves. It would also drive interest rates on loans through the roof, put many companies into bankruptcy, wipe out huge portions of savings of the average American and make a bad economy much, much worse.
So what if? After all, this is Forbes Magazine discussing the idea so someone thinks it’s good. How would you want to position your finances if the threat of a massive inflation to solve our problems came to pass?