Destruction Is Creation?

Skidmore is essentially correct, though we may shudder at the implications: Pillage and plunder is profitable!

If you are a glazier and you break your neighbor's windows and he employs you to repair them it is not much different than if you'd simply stuck him up for the money and left his windows alone.

If your country destroys a neighboring country's infrastructure and that country contracts yours to rebuild it it is not much different than had your country extorted that money from them and left their infrastructure intact.

National wealth, by the only measure that can count, per capita, is a function of a country's demographics. The greater the national skill level the higher value products it can produce and the richer it will be. If a nation is increasing in skill it will get richer. If it is declining it will get poorer. Demographics is destiny. IQ is an excellent proxy for

skill.

America's IQ is declining as it imports low IQ third world immigrants who go on to outbreed the higher IQ old stock American population and as the old stock higher IQ population breeds with the lower IQ immigrants and low IQ old stock, predominantly black, population. Decline is assured. Demographics is destiny.

Wave your flags all you like; cite Mises until the cows come home; facts are facts and care not for mushy sentiment.

A hurricane is not random destruction because it strikes a limited area, so if there is something special about that area it could make the world as a whole better off (if all the Bolsheviks were in Cuba in 1917 and there was a huge hurricane that could have helped Russia).

Would killing all Bolsheviks in 1917 (if someone could kill anyone just by snapping their fingers) have made Russia better off? I think only random destruction is guaranteed to have negative effects.

I think that what Prof. Skidmore says is both plausible and wrong in 2 ways.

First, semantically. The phrase "creative destruction" as used by (correct me if I'm wrong here) Adam Smith, refers to something that actually happens, and has a positive effect: profits and losses lead inefficient allocations of capital to be replaced by efficient allocations, companies with high production costs are replaced by companies with lower production costs, etc.

The important distinction between this and the "destruction" that Prof. Skidmore writes about is that it's not usually physical destruction of a plant or equipment. The productive asset itself does not necessarily become less useful, which means that "creative destruction" as it's classically used in economics doesn't accurately describe the effects of a natural disaster.

A second important fault with that article's assertion is the underlying assumption that a natural disaster followed by a rebuilding, would result in a net gain in efficiency over the situation prior to the disaster. I think this is unlikely for the following reasons.

Assume that "X" is the expected return from a plant upgrade. "Y" is the cost of the upgrade itself, prior to the disaster. "Z" is the damage from a disaster which strikes the plant.

If X were greater than Y, then it would make sense for the company to perform the upgrade in any case. Therefore I'll focus on the case where X is less than Y pre-disaster.

Let's suppose that the damage from the disaster and some of the resulting repairs are going to decrease the cost of the upgrade from Y to a new value, U. (This could happen if, for example, the upgrade required larger electrical cables, and the old electrical cables are now destroyed and in need of replacement.) Let's also assume that the new upgrade cost U is less than X so that the upgrade now is feasible from the company's standpoint.

For the disaster to be beneficial on net, the cost of the disaster Z would have to be less than the difference between X and U. But since Y(the original upgrade cost) is greater than X, this implies that the reduction in upgrade cost due to economies of scale would be greater than the cost of the disaster. I really don't see this as being realistic except in the case of an extraordinarily complex/difficult to physically replace piece of capital and/or a disaster that's localized to productive assets which are on the verge of obsolescence.

In short, it's right to say that the owners of capital assets may benefit from a disaster, just like someone who sets their house on fire for the insurance money might get away with it. A nation as a whole probably doesn't benefit because the insurance money has to come from somewhere.

Posted by: flix | Oct 17, 2008 6:41:38 AM

flix,

Not challenging your info but I'd like to know your source so I can read the particulars.

Isn't he just embroiled in the "fallacy of glazier"?

Yes, East Germany wasn't quite the basket case that the rest of the Warsaw Pact was, but it was yet a basket case.

And reparations? Well, it didn't always have that name after WWII as it certainly did after WWI, but reality is that after WWII, the USSR moved Poland into Prussia and stole a lot of Germany's industrial infrastructure. Due to great engineers and a lot of hard work, they came back a bit, but nobody would ever confuse the Alex with the Ku-damm before the wall fell.

building a new infrastructure more dependent on more stable renewable resources such as solar and wind power

Petro energy would be much more stable if there weren't so many political factors involved.

It is unfortunate that centralized power generation became the norm.

Consider the rural electrification program which subsidized the delivery of power to rural areas. This led to the virtual abandonment of what used to be common in farm and ranch country, windmills.

Who knows what technology may have developed sans this distortion of the market.

Skidmore merely makes the mistake of putting the cart before the horse. He says disasters help. Well, as long as capital is of no importance to you, they are wonderful.

However, putting the horse in front of the cart, one realizes destruction is inherent in economic advance. We have, for example, a great deal invested in an infrastructure heavily dependent on a highly volatile fossil fuel market. It could be reasonably argued that, while destruction of much of this infrastructure would cause tremendous pain in the short run, building a new infrastructure more dependent on more stable renewable resources such as solar and wind power America has in abundance could create an economy less beset by "crises". A more stable energy foundation helps the rebuilt economy to be more predictable, making the markets' job of weeding out inefficiencies easier.

A good analogy can be found in fetal development, wherein cellular death is a key component in making way for the growth of a viable organism.

This is not to say Skidmore's take is right. It is something akin to saying "Extinction is good for life". Being a mammal I can appreciate not having to compete with dinosaurs in the economy of nature, but I am uncomfortable with committing myself to extinction out of an adherance to a theoretical common good.

vidyohs,

yes after WW2 Germany paid reparations for more than 50 years to France. Only the called it "CAP"... but it involved more money than WW1 Reparations.

Good marketing is essential to avoid resentment.

reparations & bike bubba,

Germany (East or West) had to pay reparations after WWII? I guess I was lost the day that information was published.

I wasn't aware that any nation was tasked with paying reparations after WWII.

I believe you guys were thinking of WWI.

I offer to test Prof. Skidmore's thesis by wrecking his car and burning down his house. If he's correct, he'll surely want to reward me with a handsome payment.





How about finding out how to send his job to a third-world country? Do so in a way that makes it nearly impossible for him to regain it.

Crusader,

Yes Skidmore is full of strawman "logic". I was just using that strawman argument in the context that you were describing.

Doesn't anyone remember that Henry Hazlitt wrote in "Economics In One Lesson" about Americans who complained that Germans and Japanese were getting brand-new factories? Of course, they weren't willing to have their own cities bombed and rebuilt -- showing the true value of the "upgrade."

Tom: the American Revolution was a political development, not an economic one. The economic "net positive" was only because the colonies had to use force to free themselves from British mercantilist policies.

Martin: as someone else pointed out, that's not the "broken window" fallacy. But the one economic fact you can determine from it is that even the neighbors collectively value the house as worth more to stand there, as opposed to spending money to clear it. That is, that's how they presently value it.

Now, it may be that someday a neighbor will go around and successfully persuade everyone to contribute to a fund that will demolish the house and clear the lot. This person would be a Kirznerian type of entrepreneur for "discovering" the opportunity to align supply with demand.

Rudy: yes, Krugman said after 9/11 that "Ghastly as it may seem," the destruction could spur economic growth in downtown NYC. Walter Williams has called him on that a few times.

Oil - that is more straw man-ish type "logic". I'd refrain if I were you. I came to Cafe Hayek for spirited, logical debate.

Crusader,

Shouldn't wider conflagration bring on even more prosperity? At least according to Skidmore

Sam - torching a house could lead to a wider conflagration. Why not just demolish it?

Gee, I wonder to which particular economist that last sentence in the post is referring... a P and a K come to mind.

Some people are missing another point. After a disaster, it's good to just survive for another generation. Let the next generation prosper.

So if someone were to torch this house in your neighborhood, there will be a net benefit over letting it stand or demolishing it?

Skidmore's point is that we can't assume that the net effect is negative simply because the catastrophe was destructive, or if the net effect is negative, we can't calculate the cost simply from the value of assets destroyed, because replacement assets can be more valuable.

I think you're ignoring the opportunity costs of those investments.

Even if we accepted that point, is the nation better off?

Skidmore's point is that we can't assume that the net effect is negative simply because the catastrophe was destructive, or if the net effect is negative, we can't calculate the cost simply from the value of assets destroyed, because replacement assets can be more valuable. I don't expect catastrophes typically to be so beneficial, and I certainly don't expect war typically to be so beneficial, but a specific catastrophe could be beneficial, particularly if assets suffering the most damage tend to be least valuable compared with potential replacements. Redistribution then adding exogenous value could be beneficial. No law of economics prevents this outcome.

Wasn't Krugman, the recent Nobel prize winner, a believer in the "broken window" theory too?

@Bike Bubba: Well, I want to be cautious but as far as I know especially France took a good deal of reparation and surely not from the east of Germany.

Of course it needs more than reparations to archive economic progress (as you mentioned eastern Germany). But with the reparations, the damages of the bombings, their will to work and the Marshall plan money Western Germany hat a good economic start in the after war period. And you might consider within the eastern Block also the GDR did not perform too badly.

It just occurred to me, if Global Warming really does mean more hurricanes, wow! Think of all that potential economic growth!

Take 2:

No Martin, that is not his point.

He's not talking about any sort of selective destruction as you are. He's referring to the mass destruction of earthquakes and hurricanes and such.

In the article, they make the point that after the earthquake in Alaska, Alaska had more government capital inflows and then draw the conclusion (out of thin air) that Alaska was better off.

Even if we accepted that point, is the nation better off?

No Martin, that is not his point.

He's not talking about any sort of selective destruction as you are. He's referring to the mass destruction of earthquakes and hurricanes and such.

In the article, the make the point that after the earthquake in Alaska, Alaska and more government capital inflows and then draw the conclusion (out of thin air) that Alaska was better off.

Even if we accepted that point, is the nation better off?

Wait a second here. Only East Germany made "reparations" after WWII, and the result was that not a block from the Alexanderplatz in East Berlin, you could still see a LOT of buildings still bearing the marks of U.S. bombers and Soviet tanks in 1989. The only comparable thing along the Ku-damm in West Berlin was the Kaiser Wilhelm Kirche, left as a memorial to the barbarity of war.

So to claim that paying reparations helped the Germans is to just deny history. No one who ever visited while the Wall still stood should ever make this mistake. (it fell 3 months after I visited, and to this day, just thinking of Reagan's Brandenburger Tor speech brings tears to my eyes)

Skidmore could take this variation on the broken window fallacy too far, but he does have a point, and Boudreaux doesn't address the point. A house stands condemned in my neighborhood, because its roof is irreparably damaged by rot. The house might have been saved years ago, but it's now beyond repair and stands empty.

The owner hasn't demolished this house years after it was condemned, because the cost of demolishing the house and clearing the lot exceeds the value of the empty lot. Other homeowners in the neighborhood might be willing to absorb this cost, but the owner of the house itself will not, because the value of clearing the lot doesn't accrue to him as much as it accrues to everyone else in the neighborhood.

Have you ever wondered why normal people think of economists as sociopaths?

Hint: The economists who have not wondered about that are the sociopaths.

Quote from Don Boudreaux: "I offer to test Prof. Skidmore's thesis by wrecking his car and burning down his house. If he's correct, he'll surely want to reward me with a handsome payment."

This reminds me of a joke my old Russian language teacher used to tell about communism.

Communist: In communism, if I had two houses and you had none, then I would give you one house. If I had two cars and you had none, I give you one car.

Non-communist: So if you had two shirts and I had none, then you'd give me one shirt?

Communist: No, I have two shirts.

When I got it right the reparations Germany had to pay after WW II were not too bad in the end. Getting whole factories shipped to the winner's countries allowed a restart with more effective up-to-date technology.

Being forced to a re-start could also encourages hidden power to be set free. And if system fails due to severe failures it is not the worse to reconsider changes in the future.

And destroying is done in normal economy e.g. by replacing an old ineffective plant (though it is still working) by a newer one.

Of course it would nevertheless be stupid to fetch a large hammer and start destructing whatever you see :)

By Skidmore's reasoning, foreclosures on your block are a good thing, because the buyers will swoop in and fix them up to be better than they ever were. So are the unkept yards in houses that have remained on the market for months. These literally add thousands of dollars of value to your on property now! Skidmore is a genius.

Other than Pearl Harbor, WW2 was fought abroad. Not in the US. So WW2 didn't destroy the US, WW2 destroyed Europe & Japan. WW2 ramped up US domestic spending as we manufactured goods for the war.

As for the destruction causes wealth article. His premise is correct. Destruction does cause us to build things better than before. But when the initial investment added to the costs of replacement and the opportunity cost of using the resources elsewhere, this would be a net loss every time. For that reason his reasoning is faulty. He is guilty of omission.

applaud destruction as a key to wealth creation - don't win illustrious prizes.

Paul Crookman..... :-)

Yes! Bastiat's fallacy! Now I can stop thinking about it.

And here it is: http://www.econlib.org/library/Bastiat/basEss1....>

Destruction can increase wealth- but not mere physical destruction.

Often physical destruction is accompanied by relational destruction and the modified relationships are significantly better than what they replaced, so prosperity results.

For example, the American Revolution caused physical destruction and relational destruction and creation- that ended up a very large net positive.

You're thinking of Bastiat. Frederic Bastiat.

Dom, I've always heard it refered to as the Broken Window Fallacy. I've never heard another name for it.

Isn't there a name for this error. It was a frenchman's name -- the guy who first wrote about. He used the example of a broken window. Anybody remember?

This ranks right up there with the claim I've always been suspicious of: that WWII ended the Great Depression.

Correlation is not causation. Wars don't produce, they destroy. You don't create wealth building tanks to be destroyed on a battlefield no matter how many tanks you build. I also seriously doubt if anyone living during the war felt the depression was over.

I'm not a scholar but two points which I suspect contributed to ending the Great Depression after the war are 1) the U.S. was one of the few industrialized nations that hadn't been bombed into the dirt and 2) protectionism came to an end.

Come on... still with this nonsense? I know you fail econ class with an answer like that. Maybe he was just joking, Skidmore will go to the next AEA meeting and laugh it up with his buds, "Yea, I told them the one about how destruction of property is good, they fall for it every time and it makes them feel better after a war or a disaster."