Saturday, March 12, 2011

Broken Windows and Japan

Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, trots out the classic "broken window" fallacy, regarding Friday's horrendous tragedy in Japan:

"If you look, this is clearly going to add complexity to Japan's challenge of economic recovery," Summers said. "It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place."

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.

When confronted with a contradiction, we should check our premises. If GDP does in fact rise due to tragedies such as these, perhaps we should question its validity as a measure of wealth, rather than assuming destruction leads to plenty.

Let's hear from Bastiat on the issue:

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, 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.

Frederic Bastiat - What Is Seen and What Is Not Seen; Selected Essays on Political Economy (1848)

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