Replacing Broken Windows
During a CNBC interview, former Treasury Secretary Lawrence Summers said that Japan’s massive earthquake “…may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”
Commenting on the interview, the WSJ reminds us that 19th century economist Frederic Bastiat (1801-1850) said “destruction is not profitable,” because disaster recovery replaces what was lost. So, although GDP could surge, national wealth is not necessarily any more and could indeed be less than it was before disaster struck.
The Economic Lesson
Calling it “the fallacy of the broken window,” economist Bastiat questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, 6 francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”
Bastiat then points out that the money given to the glazier would otherwise have been spent on new shoes or a book. And, having been able to spend the 6 francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.