Hurricane Matthew is barreling down on the southeast Atlantic coast. Sadly, the region is not only plagued by disastrous weather, but economic fallacies that compound the disaster. Like clockwork, outrage and policies against “price gouging” were the first to emerge.
For some intellectuals, common sense is for mere commoners.And now, just as predictably, the Broken Window Fallacy is emerging on the horizon. Discussion about the storm is playing out just like the famous parable of the broken window, created by Frederic Bastiat, and updated for modern audiences by Henry Hazlitt. In Hazlitt’s version of the parable, a youth throws a brick through the window of a bakery. Neighbors gather around to commiserate with the baker over his misfortune.
Similarly, decent people all over the country are sending their hearts out to the unfortunate people whose homes and businesses are in Hurricane Matthew’s path. The category 4 hurricane is sure to break a great many windows.
Of course, the damage will go far beyond broken windows. Entire houses and businesses will be flooded. Lives will be financially ruined. Some lives have already been lost entirely. It is only common sense to recognize such vast destruction as pure loss and misfortune.
But for some intellectuals, common sense is for mere commoners. They delight in using more sophisticated reasoning to arrive at contrarian conclusions, which they generously share with their ignorant, benighted brethren.
Taking Away Resources
In the parable, the clever ones among the crowd console the baker by pointing out the social good that will come from his private misfortune. As Hazlitt puts the argument:
How much does a new plate glass window cost? Three hundred dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $300 more to spend with other merchants, and these in turn will have $300 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
And now, this very morning, we have a USA Today writer playing this exact same role in the discussion of Hurricane Matthew. Paul Davidson consoles the storm’s victims as follows:
But hurricanes typically don’t harm a nation’s economic growth. And much of the losses in the region are later offset. Most damaged homes, businesses and infrastructure are repaired or rebuilt, generating economic activity. And at least some of the disruptions to retail and other businesses are made up in the following weeks and months as consumers release pent-up demand. (Emphasis added.)
The problem with Davidson’s analysis is the same problem that beset the 19th century writers who Bastiat was lampooning when he wrote the broken window parable. Their clever contrarianism is more sophistical than sophisticated. As Bastiat put it, they only look at “the seen” and entirely neglect “the unseen.” The “unseen” is the opportunity cost of repairing damage. As is so often the case, sound economics vindicates common sense by giving the unseen its due regard. As Hazlitt wrote:
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker is to learn of a death. But the shopkeeper will be out $300 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $300 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. The see only what is immediately visible to the eye.
Indeed, we can consider even more “unseen” victims of the vandal. A new suit can be considered a consumption good. But what if the baker would have otherwise spent the $300 on a producer’s good? What if he would have used it to buy a new, more efficient oven? The need to repair the window would have prevented that investment: an investment that could have increased the amount of baked goods available to the community. All those consumers who would have benefited from that greater abundance would then have also suffered a loss.
Similarly, USA Today’s Davidson sees the “economic activity” generated by the repairing and rebuilding of homes, businesses, and infrastructure that will be damaged or destroyed by Hurricane Matthew. But he neglects the economic activity that would have created entirely new goods and services: activity now made impossible because the resources needed are tied up restoring old goods and services.
Hazlitt also deals handily with the counterargument that the replacements will be more modern and better than what was destroyed:
It is sometimes said that the Germans or the Japanese had a postwar advantage over the Americans because their old plants, having been destroyed completely by bombs during the war, could be replaced with the most modern plants and equipment and thus produce more efficiently and at lower costs than the Americans with their older and half-obsolete plants and equipment. But if this were really a clear net advantage, Americans could easily offset it by immediately wrecking their old plants, junking all the old equipment. In fact, all manufacturers in all countries could scrap all their old plants and equipment every year and erect new plants and install new equipment.
The simple truth is that there is an optimum rate of replacement, a best time for replacement. It would be an advantage for a manufacturer to have his factory and equipment destroyed by bombs only if the time had arrived when, through deterioration and obsolescence, his plant and equipment had already acquired a null or a negative value and the bombs fell just when he should have called in a wrecking crew or ordered new equipment anyway.
We do the victims of Hurricane Matthew no service by offering them false consolation. Sound economics, common sense, and common decency all arrive at the same conclusion: that natural disasters truly are disasters to those afflicted. And the victims deserve our unstinting sympathy and support.