Broken Window Fallacy Besets Japan & U.S.

Broken Window Fallacy Besets Japan & U.S.
by Daniel J. Flynn (more by this author)
Posted 03/21/2011 ET

In economic terms, the Japanese have lost billions in property damage, countless diverted labor hours, and thousands of their island’s greatest natural resource: people. But to hear some talk, one might think that they'd hit the lottery instead of gotten hit by an earthquake.

“Paradoxically, natural disasters—and the need to rebuild—can prove a catalyst to economic activity,” Robert Cookson and David Pilling write in the Financial Times. Lawrence Summers, former secretary of the Treasury and president of Harvard University, flirted with the earthquakes-are-stimulus theory. Summers, director of the White House National Economic Council for President Obama, conceded on CNBC that the natural disaster may “add complexity to Japan’s challenge of economic recovery,” but highlighted the possibility of “some temporary increments ironically to GDP [gross domestic product] as a process of rebuilding takes place.”

Did the tsunami short out their mental circuits?

Production, not destruction, is the engine of growth. More than 150 years ago, Frederic Bastiat observed his fellow Frenchmen falling for the notion that “it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it." Simpletons noticed the man with the broken window paying the glazier to replace it. They could not have noticed that had the window not broken, the man would have had money to buy something that he wanted—and still have a window.

It’s called the broken window fallacy. And despite its simple logic, liberals have acted as though it was never written. From Franklin Roosevelt’s wild-eyed idea to pay farmers to plow under crops and slay livestock to Barack Obama’s mush-headed cash-for-clunkers program that subsidized the destruction of functional automobiles, liberal schemes perpetually confuse destruction for production.

If the broken window fallacy weren’t, well, fallacious, then graffiti taggers and vandals prolific in economically depressed urban areas might be regarded as harbingers of good times rather than symptoms of decline. Instead, government rightly punishes rather than pays such ne’er-do-wells.

Nobody prays for a blizzard, a volcano eruption, or a hurricane. They pray after one. Natural disasters provoke economic activity the way burglars do. The victims expend capital to replace lost items. But they would have possessed their items and their money had the crime never occurred.

What makes falling for the broken window fallacy so foolish in the case of Japan is that people, not just property, were broken. Human capital is the most valuable resource of all. You can replace broken windows. You can’t replace broken people.

Whether through an act of God or an act of government, vandalism as stimulus works about as well as redistribution—a kind of pocketbook vandalism—as stimulus. This is because both destroy existing wealth rather than create wealth. Growing the economy is not a parlor game—rearranging Monopoly money or compelling the guy with the most chips to put them back in the pot. It’s about producing. Liberals rarely do this, and never get this.

The broken window fallacy is just one of many pernicious, enduring economic falsehoods. Reversing the moral incentives of the market by rewarding failure and punishing success is on display in bailouts and “progressive” taxation. Government, rather than buyers and sellers, setting the price proved disastrous in 1970s gas lines but will return through ObamaCare omnisciently overruling the market. Marx’s theory of surplus value—the idea of profit as theft—would be the death knell of free enterprise if codified, yet serves as the basis for about half of Michael Moore’s pronouncements.

The no-competence, high-confidence engineers of such policies are a dangerous mix of certitude and stupidity. There is no reasoning with such people. There is no teaching them either.