Destruction Is Creation?

by Don Boudreaux on July 30, 2009

in Economics, Technology

Here’s a letter that I sent to the Boston Globe back in July:

Adam Smith argued that the wealth of nations is enhanced by labor specialization, capital investment, and peaceful trade. Economist Mark Skidmore argues that wealth is enhanced by destroying things: "When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up" ("How disasters help," July 6).

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.

Sincerely,
Donald J. Boudreaux

Good thing that economists who commit such fundamental mistakes in reasoning as Mr. Skidmore – economists who applaud destruction as a key to wealth creation – don’t win illustrious prizes.

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Anonymous July 30, 2009 at 7:47 pm

The Mises folks have the idea of giving out a “Broken Window” award to professional economists who say things like this. It’s likely, though, that Krugman would have to buy a storage shed to house all of his awards.

Anonymous July 30, 2009 at 9:11 pm

Stocks and flows… stocks and flows. This is Econ 101 stuff – we have stock variables (wealth) and flow variables (income). That criticism only demonstrates that the Mises folks don’t know what Bastiat was talking about, don’t know what Krugman was talking about, or both.

Nathan Scott July 30, 2009 at 9:36 pm

So what exactly are you talking about?

Anonymous July 31, 2009 at 12:20 am

Don’t even try to ask. Keynesians have a pathological mental block when it comes to concepts of wealth creation and increasing productivity. To them, economics is all “stocks and flows”.

Anonymous July 31, 2009 at 9:53 am

Commonly – probably not all the time – when the Bastiat fallacy is raised the person being criticized is talking about GDP (a snapshot of production in one year), while the criticizer is talking about wealth (all cumulative production that hasn’t depreciated). In other words, I think in most cases that you hear people cry “Bastiat”, they’re confusing apples and oranges.

IR July 31, 2009 at 3:08 pm

But isn’t it the point of fallacy? People talking about the wrong thing (GDP growth instead of total wealth) leads them to wrong conclusion that destruction is good for economy. So actually it is “person being criticized” is “confusing apples and oranges”.

Methinks July 31, 2009 at 2:19 am

Well, to be fair, usually Krugman has no idea what he’s talking about.

Surfisto July 30, 2009 at 7:52 pm

I think this is interesting, if he wreck’s his car and house won’t he have to buy a new car and hire construction workers to build a new house stimulating his community in the short-term? He is left worse off, but those workers are better off, assuming he can pay for it. Maybe that savings could have gone to a person taking a small business loan that would have benefited the community more?
What about the time lost by Skidmore or if he works from home and now his business becomes insolvent. I guess there are many ways this could go and unmeasurable.

Anonymous July 30, 2009 at 10:17 pm

If the house or car were worth anything to anyone and they are now destroyed, the community is worse off. There is less wealth. Period.

If the guy could afford to have a new house built (and he actually wanted or needed one), he would have sold the old one to someone else who would now possess it. Since it’s destroyed, nobody gets it–the community has to exert more effort just to get back to what they had before!

Think of it this way–If the whole neighborhood burned down, would we all be better off? We’d certainly have plenty of jobs to do, but we’d be dirt poor!

dg lesvic July 30, 2009 at 7:59 pm

The Wall Street Journal, Jan. 8, 2009, recalled that “During a 1934 dinner..after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.” Though he could hardly have been invited to another civilized dinner, he was invited to run our lives, and, after a time in limbo, supposedly, is back in vogue, and now “we’re all Keynesians again,” and, no doubt, armed with statistics, ready to attack the root of our problem, clean towels, and economic orthodoxy.

You may have the statistics; I’ll stick with the orthodoxy, and clean towels.

Anonymous July 30, 2009 at 8:10 pm

No, surfisto, there aren’t many ways for this to go. In your example, if he didn’t lose his house & car, he could still choose to pay the workers to build him a second house & car. Then he’d have 2 of each. But, he has better things to do with that money. You’ve simply removed the benefits of his other choices from the equation. It’s simple. In option 1, he has a house & car & all of his savings. In option 2, he either doesn’t have a house & car or he doesn’t have any savings any more. No amount of mental gymnastics is going to make up for that. It’s actually the one & only difference between the 2 stories. In one story there is a house & car, with some value, and in the other story, there isn’t. All other factors are equal, except in story 2 you’re making him spend his savings on a house & car, whereas in story 1, he is free to spend his savings on things with more value.

Surfisto July 30, 2009 at 8:18 pm

I see my error Kebko (Honestly I am not being sarcastic). I am new to Economics and want to learn as much as possible.
Now what if I live on the ocean and the gov’t pays to rebuild my house and insurance pays for my new car. Now I have all my savings, a new car and house that are worth more than before and contruction workers were hired.

cordblomquist July 30, 2009 at 8:22 pm

The insurance company loses money, others pay higher rates, and opportunities elsewhere are therefore lost. Same as the other scenario. The flaw in your thinking here is that the insurance company is a free source of money, which can’t be true.

Surfisto July 30, 2009 at 8:31 pm

Ok, almost fully on board, I see my error with the insurance, now if the gov’t prints the money for his house?

Nathan Scott July 30, 2009 at 9:26 pm

If there are 100 people who each have 1 dollar, and the government gives each of them all another dollar, did their wealth increase?

They all just have twice as much money worth half as much (this isn’t a guaranteed phenomena, money may take time for all participants to realize what has happened). When the government prints money it is directly taxing those who currently have money or are making a constant wage.

Anonymous July 30, 2009 at 10:33 pm

If the government prints new money for the house, it simply distributes the cost across every individual in the country (or every individual who holds dollars).

The effect of the decrease in the value of money isn’t immediately perceived, and so it has the effect of creating confusion in the marketplace. Consider NathanS’s example–If you were one of 100 people with an extra dollar, you could now buy twice as much! But since there are no new goods to purchase, people would very quickly discover that goods are now underpriced. The people who spent their new money first will have ripped everyone else off, and the rest of the money in the system will be worth even less!

hamilt0n July 30, 2009 at 8:14 pm

It used to surprise me that this fallacy was very clearly explained by Bastiat more than 150 years ago but is still in heavy use.

Surfisto, read the Wikipedia page:
http://en.wikipedia.org/wiki/Parable_of_the_broken_window

Surfisto July 30, 2009 at 8:32 pm

Thank you for the link, it cleared the battle in my head.
Bastiat is on my “to read” list, but #7 I think. I read Wealth of Nations, now I am on Free To Choose.
Anyone I should add please let me know.

Sam Grove July 30, 2009 at 9:59 pm

Do you have Economics in One Lesson on your list?

Surfisto July 30, 2009 at 11:04 pm

I did not and it’s free, thank you.

David July 31, 2009 at 3:06 am

Nothing’s free. Just think of what else you could have done with the time that it will take you to read it.

Anonymous July 31, 2009 at 3:19 am

I guess I should read the rest of the comments before posting, eh?

Anonymous July 31, 2009 at 9:58 am

The General Theory of Employment, Interest, and Money is also very good. Read that and Friedman’s “Monetary History of the United States” (they usually sell the 200 page portion of the book that specifically addresses the Great Depression separately – I’d recommend that specifically), and you’ll get some very good insights into what’s going on right now.

Anonymous August 1, 2009 at 5:52 pm

The General Theory is only good for 1.) learning what not to do; or 2.) committing the same errors that have continually gotten us into this mess in the first place.

Surfisto, read: Economics in One Lesson by Hazlitt, then go full force into Human Action by Ludwig von Mises.

Lizzaroni August 2, 2009 at 9:40 pm

Well, to run with the title of this blog post (kind of), I’d suggest Schumpeter’s “Capitalism, Socialism, and Democracy.” I thought it was a bit of a thick read at first, but got a lot out of it.

I suppose recommending anything by Hayek would be unnecessary given where we’re posting, huh? =P

Surfisto August 3, 2009 at 12:05 am

Thank You,
I have Schumpeter & Road to Serfdom now, but in line to read. Also the fatal conceit is on the list, but the list is getting pretty long, yikes.
How about a good text book, (grad level) would one of these help?
I re-read my micro theory book from college already.

cordblomquist July 30, 2009 at 8:18 pm

Certainly one could imagine some sort of scenario where value lost through destruction could be made up by added efficiency of whatever replaces it, but these would be the rare, rare exception to the rule. Also, one would wonder why the old wasn’t traded for new prior to the destruction.

If there are examples of destruction leading to net gain out there, perhaps regulation plays a part in the story. I can imagine that after natural disasters, certain rules are waived. Historic preservation restrictions, for example, are suddenly gone when the historic buildings have been demolished by mother nature. This could lead to efficiencies that otherwise would have gone unexplored. But this doesn’t prove that destruction is good, but rather that regulation is bad.

Outside of the rigid confines of an over-regulated economy, it’s hard to imagine many examples of what Skidmore is suggesting.

Anonymous July 30, 2009 at 8:18 pm

Too bad there is currently a policy called “cash for clunkers” that is destroying automobiles; a colleague of mine is sacastically bragging about how he is being “stimulated”. Today he informed me that not only will he be getting $4500 for his “clunker” he will also receive money in recompense for the scrap value of his clunker.

Anonymous August 1, 2009 at 12:59 pm

Why more people are not bringing this up and connecting it to Bastiat’s parable, I’ll never know. it seems like a very good time for the pundits to discuss those things which are not seen — to include any real reduction in pollution for what it costs.

Anonymous August 4, 2009 at 3:36 am

LowcountryJoe

Good point and I heard yesterday that not only will cash for cluckers cost expend $1billion of taxpayers money, but the HOUSE of REPS voted 3 to 1 for allocating an additional $2 billion for this uncreative destructoin.

________________________________________

Anonymous August 4, 2009 at 5:54 am

LowcountryJoe

Good point and I heard yesterday that not only will cash for cluckers cost expend $1billion of taxpayers money, but the HOUSE of REPS voted 3 to 1 for allocating an additional $2 billion for this uncreative destructoin.

________________________________________

Andrew July 30, 2009 at 8:30 pm

Normally, I just read these in the RSS feed, but I thought this post was hilarious.

Anonymous July 30, 2009 at 8:52 pm

I think sometimes these Bastiat “gotchas” are a little overblown.

Take that Krugman Op-Ed that someone referenced about that everybody always refers back to. He was saying that destruction can increase GDP – a flow variable. People retort “he’s committing a Bastiat fallacy because wealth decreases”. He’s actually not – because Bastiat was concerned with wealth – a stock variable. The stock does decrease. The flow increases. There is no fallacy on Krugman’s part – Krugman and Bastiat are just talking about two different things. And since there was no real or at least regular treatment of flow variables as something distinct from stock variables in Bastiat’s time, it’s no wonder that Bastiat and Krugman are talking about different things.

This guy’s post seems similar. Don is clearly concerned with wealth – a stock variable. Prof. Skidmore is concerned narrowly with the quality of the specific item that’s destroyed – and all he’s saying is that that quality will increase AFTER it is replaced. He is not claiming that wealth increases, as Don seems to be saying he is. Krugman might add that whether or not the quality is improved, GDP – the flow variable – will go up as well.

The question is – what is important? Production or income in a given year is very important to me. I live my life year to year, after all – so I’m concerned about my income in a given year. So Krugman’s flow variable is important to me. But I also care about the total wealth of society – Bastiat and Don’s stock variable. They’re not in conflict, though.

Nathan Scott July 30, 2009 at 9:41 pm

Wait, so wealth (capital) has no effect on your ability to produce income? If I were to destroy your computer you could more efficiently write backward analogies on various websites?

Anonymous July 31, 2009 at 10:09 am

Sure it does. I’m not celebrating destruction here, people. And the lowered level of total wealth will have an effect on production. But the spur on demand will also impact production positively. Do you know which effect will dominate? I don’t, personally.

Remember – Bastiat never disputed the fact that the broken window would put glaziers to work. He simply (accurately) disputed the fact that it would make the town better off.

Anonymous July 31, 2009 at 12:37 am

Flushing my dollars down the toilet grows the GDP my the mere swirling of the dollars in the bowl.

GDP is an index of transactions. If the transacting parties each trade up (as in voluntary trade), the corresponding GDP growth reflects wealth creation. If the transacting parties trade down (as in theft), the corresponding GDP growth reflects wealth destruction.

Likewise, if widespread stealing stops, the corresponding GDP drop reflects wealth growth.

If only voluntary transactions are allowed, then GDP is a reliable index of wealth creation.

Anonymous July 31, 2009 at 7:03 am

Daniel, you should stick to masturbating. It provides an immediate reward, it doesn’t confuse anybody else, and you won’t demonstrate your ignorance to other people.

Anonymous July 31, 2009 at 10:11 am

Very classy russnelson. I really hope this is someone other than the real Russ Nelson.

The fact that I can tell the difference between GDP and wealth isn’t a sign of my ignorance.

Anonymous July 31, 2009 at 5:30 pm

The problem here is that ALMOST NOBODY UNDERSTANDS BASTIAT. You’re trying to argue that a nuance is in play here. It isn’t. It’s just a fuckwit ignorance of the Broken Window Fallacy. It’s like a black hole. You can’t play around the edges and expect to not fall in. You’re like arguing that it’s okay to go backwards on a one-way street — obviously, because you MUST go backwards in order to parallel park thus, we MUST ACCEPT backwards driving on one-way streets. And I’m like yo, moron, go tell it to the judge.

Maybe you understand more economics than you make plain. But economics is SO badly taught that most people don’t understand even the least thing from Econ 101. So don’t come to me arguing about stocks and flows, and trying to defend Keynes or Krugman. They’re the fuckwits. If you defend them, it rubs off on you.

Anonymous July 31, 2009 at 5:40 pm

There’s no nuance whatsoever “russnelson”. That’s what’s especially disappointing that this is even an issue. GDP is production in a single year, which is different from wealth. God help us if that counts as a “nuance” or something that’s only familiar to those who know economics. It should be self-evident.

GDP isn’t a tiny exception like going backwards to parallel park. It’s a big, freaking deal – not a nuance, but also not the only thing to be concerned about.

MWG July 31, 2009 at 4:42 pm

I’m reading this in a meeting… hopefully nobody saw me laugh.

Anonymous July 30, 2009 at 9:00 pm

Sorry Daniel. If destruction of your property really “bumped you up” as Prof. Skidmore claimed, then no one would actually wait around for their property to be destroyed. They’d discard it voluntarily and replace it with the newest, latest, best models.

Anonymous July 30, 2009 at 9:08 pm

But Don, you take the liberty of infering that by “bump you up” he meant “create wealth”, when he quite explicitly said what he meant by “bump you up” – namely, “You might use updated technology, you might do things more efficiently”.

If you have a functioning car marginal quality improvements may not make you voluntarily discard the car and get a new and improved one. If your car is destroyed it’s a sunk cost of sorts, and your demand for any car increases, and the new car you get is going to be new and improved – a bump up. That logic is just fine, Don.

He didn’t say he’d be better off or he would create wealth, as you assert he did – he said that his new stuff would be updated and more efficient.

James July 30, 2009 at 9:32 pm

Daniel, the title of the article is “How Disasters Help”. Of course disasters help some people. Anybody in the business of furnishing the thing destroyed in the disaster is likely better off. But the point is others are worse off, to a greater degree than those who are better off. There is a net loss.

Yes, flows may go up, assuming the capital exists to replace whatever was destroyed, but this is like saying, “Hey, my arm was cut off in a combine accident, but look how much I save on new suits!” If the benefit is less than the cost, there’s no benefit at all.

Anonymous July 30, 2009 at 9:41 pm

James – if it wasn’t clear, I agree with that. I just think the Bastiat criticism is often lobbed at people who aren’t even discussing the issues that Bastiat was addressing.

Slawson July 30, 2009 at 10:20 pm

It’s the same. You are not better off if the kid down the street breaks your window. You are also not better off if an earthquake breaks your window. The results are the same, more work for the glazier, less work for the girl making you a sweater, and the same number of windows in the world.

Nathan Scott July 30, 2009 at 9:50 pm

But to use “updated technology” you must get a loan which will essentially cost you negative income which by definition gives you less total income than before (otherwise you would have already made the upgrade). This isn’t the only fallacious part of this argument. You may argue that one individual is hurt but society gains through increased productivity, in reality have bid away resources from another productive endeavors or used money printed out of thin air that is essentially taxed away from all current capital stocks which now provide less value to their prospective users.

It just doesn’t work, and is ever more evident the more circular your logic becomes. It’s a drain on stocks and flows.

Anonymous July 30, 2009 at 10:34 pm

But I am going to buy that new car (if I can afford it) with income I was going to direct towards savings or another purchase. I didn’t want to buy a new car, I had to. How does that make me better off just because I can buy a newer model?

Anonymous July 30, 2009 at 11:02 pm

Daniel, are you going meta on us? Are you demonstrating how the destruction of some of your posts would actually lead to greater stocks & greater flows for readers of this blog?

I am duly converted. Well played, my friend. Well played.

;-)

Methinks July 31, 2009 at 2:39 am

He didn’t say he’d be better off or he would create wealth, as you assert he did – he said that his new stuff would be updated and more efficient.

Oh, I see. So when skidmore says “”When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up,”, in your view by “bumps you up” he means you’ll be at the same level you were before the bump up. Shouldn’t he have said it just bumps you. If newer, more efficient stuff is not better, then what is it?

If he continued and said,”but the bump up in your sparkling new abode could come at the cost of your child’s college fund.”, then we could conclude that he didn’t necessarily mean that you’d be better off. But, he didn’t say that.

Anonymous July 31, 2009 at 8:26 am

In the real world we deal with things like “costs” and “benefits.” So long as I look only at the benefit of a thing, IOW what you are doing, then it makes sense to drive over my camera so I can buy a new, better model. To heck with the cost of replacing it, with which I could have taken more photos on my older camera, as well as done other things. “Stocks and flows.” You’re using accounting lingo to mask bad economic thinking.

Anonymous July 31, 2009 at 1:22 pm

jacoboost -
You’re misunderstanding the argument completely. Yes – there is a real cost and that cost is the destruction of wealth.

But your camera contributed to GDP from 2002 or whenever you would have bought it. Destroying your camera doesn’t reduce GDP at all – it increases demand, which boosts GDP – although it does boost it by diverting it from other uses (which is why you don’t want to go around destroying cameras). This has nothing to do with accounting – it’s economics lingo. GDP in 2009 is production in 2009. If you do something that requires additional production in 2009, you are increasing GDP and keeping more people employed in the short run.

Unfortunately, you’ve lost a perfectly functional camera and are worse off for having to spend your money on a new one rather than on something else.

James July 31, 2009 at 3:22 pm

Daniel,

Again, you’re assuming an unlimited supply of capital. At some point, people just stop replacing what was destroyed. When this happens, GDP will not increase.

Further, as I’m sure you’re aware, GDP alone doesn’t mean squat.

Anonymous July 31, 2009 at 6:44 pm

GDP is just a record of money changing hands, it only implies economic growth if it means a net growth in wealth of the country. Any idiot can boost GDP artificially, but that would mean nothing. To determine prosperity we have to determine our actual wealth, our actual standard of living in terms of goods and services. GDP, incomes, etc., are just indicators

Sam Grove July 30, 2009 at 10:06 pm

the State Information Center, a Chinese government research body, announced that the massive rebuilding effort, and the billions of dollars it would pump into the Chinese economy, would far outweigh the economic losses from the quake,

Evidently, the Chinese government has an underground reservoir of dollars that it can pump up as needed to make up for losses.

mandeville July 30, 2009 at 10:13 pm

The usage of the word “destruction” is metaphorical. The consumers “destroy” producers and sometimes chains of second and third tier producers by their choices. What they buy instead might be something new or better. In a dynamic economy, new things are always replacing old things. When new technology destroys (replaces) old technology, wealth is usually created. That said, the way Mr. Skidmore described it, you might not think he understood it correctly.

James July 30, 2009 at 10:38 pm

Well, the usage could be metaphorical. But, in this case the article was literally about natural disasters. Nothing metaphorical about it.

S Andrews July 30, 2009 at 10:13 pm

Oh, My! Daniel Kuehn is serious about this. LOL. Bastiat was talking about flow; he was talking about a changing in direction of the flow, from local baker to the local glazier; he was talking about a change with a net effect of wealth destruction.

Anonymous July 31, 2009 at 10:18 am

See the response to slawson above – there’s nothing I disagree with in this entire post of yours.

The only quibble I have is if you presume to be able to know that the loss to the baker is equal to or greater than the gain to the glazier.

But absolutely no one on this board has disputed the fact that the net effect is wealth destruction.

sandre July 31, 2009 at 3:03 pm

You said this yesterday…

“Stocks and flows… stocks and flows. This is Econ 101 stuff – we have stock variables (wealth) and flow variables (income). That criticism only demonstrates that the Mises folks don’t know what Bastiat was talking about, don’t know what Krugman was talking about, or both.”

You should have started your responses posted today with an apology. And yes, TANSTAAFL.

Anonymous August 2, 2009 at 1:33 am

How do we know when gains are greater than losses, or losses greather than gains? The price system tells us.

Anonymous August 2, 2009 at 2:07 pm

Well, prices will tell the glazier and the baker if their personal losses are greater than their personal gains – but I don’t know what single price we could look at to understand if there’s a net gain to GDP or not.

mandeville July 30, 2009 at 10:37 pm

Disasters always destroy aggregate wealth. There is no question about this, but some individuals gain if things get rebuilt.

Contrary to popular wisdom, Bastiat was not a good economist. Like Hazlitt, he was more a writer than economist. The Mises folks are good economists. Krugman bends economic theory to suit his chosen ideology–which is more egalitarian than libertarian.

MattW July 30, 2009 at 11:07 pm

It seems that this is exactly what the cash for clunkers is doing:
http://www.autoblog.com/2009/07/30/cars-tells-dealers-how-to-kill-a-c4cs-engine/
The old cars are being destroyed, even though there is still value in some/many/most of them. It helps dealers, but it only helps buyers because of the rebate, which hurts non-buyers.

Anonymous July 30, 2009 at 11:59 pm

MattW,

I posted the cash for clunkers connection about 2 hours ago; it is well worth repeating though in my view and your link is helpful.

Jack July 31, 2009 at 2:13 am

Consider Prof. Skidmore’s published article ”Do Natural Disasters Promote Long-Run Growth?” (in Economic Inquiry, a respectable journal). He finds that ”Though disaster risk reduces the expected rate of return to physical capital, risk also serves to increase the relative return to human capital” and therefore leads to ”improvements in total factor productivity”. Fair enough. But isn’t it more likely that people living in disaster-prone regions have to compensate for these risks? In other words, over the long run disasters may force people in a disaster-prone region to increase productivity, but this does not imply that a disaster occurring in a region where such are rare would have the same beneficial effect. (Because disasters are not perfectly random shocks.)

Bottom line, if you lose your house and build a new, better house, you end up with a better house, but you paid for two houses. Period.

Anonymous July 31, 2009 at 3:16 am

Good thing that economists who commit such fundamental mistakes in reasoning as Mr. Skidmore – economists who applaud destruction as a key to wealth creation – don’t win illustrious prizes

…Paul Krugman…

nuf said (unfortunately)

Anonymous July 31, 2009 at 8:19 am

I could never be an economist, because I couldn’t get along with 90% of my fellow economists. IMO, the profession is full of hacks and quacks, most of whom understand econ very one-dimensionally and who would be better suited to the accountancy profession. The truly scientific and insightful economists are people like Friedman, Hayek, Smith, Sowell, etc.

Anonymous July 31, 2009 at 10:17 am

With falling house & car prices, his house and car might be overinsured, so there could be money in it for you, Prof. Boudreaux.

Apart from that, given the amount of people that earn their salary in the USA by making weapons whose only task is to destroy things, he’s maybe looking for a job as chief economist of the Pentagon.

Anonymous July 31, 2009 at 10:55 am

I think this is taking “Creative Destruction” out of context, either that or it’s attributing to Smith that which comes from J. Schumpeter…

Creative Destruction is the term given to the effect on the status quo industry or standards brought by newer disruptive technologies and ideas replacing their contemporaries with fitter ones. It’s the effect of blowing up the older, not on purpose, but because something better has replace it in usefulness. An example would be, over time, when the horse and carriage industry died in favor of automobiles. The former industry was destroyed, but not with bombs and window shards.

Kids these days.

Tim July 31, 2009 at 2:33 pm

I’d have to agree. I think this interpretation of Schumpeter’s idea is quite common. It sometimes appears that people who adopt this line of thinking natural disasters with fundamental structural change.

Anonymous July 31, 2009 at 11:15 am

Skidmore apparently understands the broken window fallacy and presumably does not commit it in the linked article. He wants to correct a broken window fallacy fallacy. Sure, breaking windows simply to create work for window makers is destructive, but replacing a leaky, cracked, foggy window in a rotting frame with clear, double paned glass in a new, more durable aluminum frame could add more value to a house than the cost of the replacement, while salvaging the old window might not be work the cost.

Anonymous July 31, 2009 at 11:40 am

To be fair to danielkuehn, he’s acknowledging that breaking the windows or destroying the clunkers is reducing the overall wealth of the community. And I think he’d acknowledge that in a normally functioning economy, you’d never want to break windows or destroy functioning old cars on purpose.

But suppose we’re in a situation where the ‘Paradox of Thrift’ has gripped the town. People are reluctant to spend because economic activity is down and incomes are down, and economic activity is suppressed by those fears. In such a situation, the stock of wealth isn’t being actively destroyed, but new wealth is being created at a very slow pace–possibly not even fast enough to make up for natural wealth destruction through time & decay.

In such an unusual situation, one might argue that a natural disaster could be beneficial by kicking-starting the community out of its bad, ‘Paradox of Thrift’ equilibrium by forcing those whose houses are damaged to be the first movers in resuming spending. And conceivably, the temporary wealth destruction might even make the community richer if the resumed activity created more wealth than was destroyed (as compared to the no-disaster ‘control condition’ where the community stayed stuck in recession).

I don’t believe this (New Orleans did not benefit from Katrina. Instead, it’s population has been substantially reduced — probably permanently). But it is possible to understand Bastiat’s ‘broken windows’ parable (as I’m sure that Paul Krugman does) and still believe there might be rare economic conditions where broken windows would be useful in jump-starting a stalled economy.

Anonymous July 31, 2009 at 1:13 pm

I’m getting through to someone! Yes – observing that it’s possible for disasters to boost GDP is by no means a justification for disasters precisely because it reduces wealth. Not only would you not want to break things in a normally functioning economy – you wouldn’t want to break things in an abnormally functioning economy! It’s simply the point that wars and such can have short term silver linings, however thin.

I think you just have to be very, very, very, very careful when you say something like “jump starting a stalled economy”. If you mean increase GDP, I think there are circumstances where that can happen. The article quite deliberately used the words “short term boost”. I think we should take those words seriously.

But as S Andrews pointed out above, when something is destroyed you also destroy productive capacity. So I don’t think we can just assume that the additional demand is going to boost GDP. It may not – it may be outweighed by destroyed productive capacity (then again – that just increases the demand for productive capacity, which also has to be produced). So it’s not something anyone can predict with certainty – but we shouldn’t be surprised at all if massive destruction boosts GDP at the same time that it destroys wealth.

Anonymous August 1, 2009 at 4:55 am

so why do you unilaterally assume that an increase GDP is a good thing. considering it is C+I+G +net exp, increase consumption alone would be enough to boost GDP .but if you consume without having the savings,on borrowed money..ie just like americans did in the last decade, then a lowering of prosperity is guaranteed when the bills are due.
gdp is a silly aggregate measure.it has no meaning to individual economics.you cant add apples and oranges and come to a logical conclusion if it is ‘good’ or ‘bad’.

Anonymous August 1, 2009 at 10:42 am

dsylexic –
Well the same could be said about wealth. The wealth produced by an overleveraged public over the last decade is still wealth. Is that wealth “bad” in your opinion? Wealth is just a cumulative measure of income, so if you think GDP is ridiculous you must think wealth is ridiculous too.

This is all besides the point – of course there are some ways of creating GDP or wealth that have serious costs associated with them. Overleveraging is one bad way. Arguably, the east Asian strategy of cranking up net exports is bad too. Perpertually relying on government spending is also unsustainable. But that doesn’t make the whole concept of GDP meaningless, does it? It’s certainly no more meaningless than wealth. Where do you think wealth came from, if not from prior years’ GDP, minus depreciation?

Anonymous August 2, 2009 at 1:43 am

Wealth isn’t a cumulative measure of income, wealth is made up of goods and services. Incomes and other prices just tell us how much this wealth is worth to society. *Artificially* monkeying around with GDP is what’s meaningless.

Anonymous August 2, 2009 at 1:40 am

Even if you’re correct (and I’d say that the benefits of holding off on purchases until peoples’ nerves settle down and the economy and start growing again outweighs the costs involved in a disaster to trigger demand) there is no possible way for a central planner to know exactly how much demand needs to be stimulated or how to go about stimulating it. It’s the fatal conceit.

Markets aren’t always efficient, otherwise we would never say that they have to correct themselves, but they are MOST efficient. They lead to less of a waste of resources than central planning.

Stalled economies don’t stay stalled long, when left to their own devices.

mandeville July 31, 2009 at 12:56 pm

I think what needs examination is the “parodox of thrift” and the belief that spending, at the cost of savings, is the catalyst of wealth creation. None of this is true, so a disaster of any size is never a catalyst for the creation of wealth. Thrift is necessary for capital accumulation and thereby investment in capital goods. Under conditions of monetary expansion, spending rises. Spending also rises when people are led to believe by their government that their future security will be provided to them by others. If these types of stimuli are removed, the spending-savings ratio adjusts to where it should be. Too much thrift would lower the return on savings, making it unattractive and more attractive to spend. And if spending, per se, created wealth, then why not outlaw savings? But isn’t saving required for the intensification of the division of labor–to expend the length of time of the production process–which is what creates new wealth?

The spend/thrift behavior of people in an economy has no bearing on the creation of wealth. It is a fallacy to think that we are richer than China because our people spend and their’s save. We are richer for other reasons. Spending will not offset the loss of wealth from a natural disaster of any sort. A society never catches up from a disaster. It is a permanent loss of wealth, just as wealth lost from market interference is permanent.

Anonymous July 31, 2009 at 2:15 pm

A society never catches up from a disaster. It is a permanent loss of wealth, just as wealth lost from market interference is permanent.

This statement is simply tautological. Your “disaster” is a permanent loss of wealth, but breaking a window and replacing it with a new window is not necessarily a disaster. It might be, or it might not be, depending on the specific window broken.

Skidmore clearly addresses this qualified wreckage, not just any wreckage.

Anonymous August 1, 2009 at 5:04 am

if the rotten window didnt warrant replacing in the judgement of the guy who owns it, then destroying it perforce because skidmore doesnt like it just means that skidmore gets to decide about what the window owner does to his property.
that definitely makes the window owner buy a new window,but now he has to put off the purchase of the economics book writteb by skidmore that he wanted to buy.
i am glad skidmore sees that as a good bump.

summary: unless you are a country with no value for property rights, it is net destructive of wealth -unequivocally ,unlike daniel here pretends- if the glazier gets jobs at the cost of the baker’s window

Anonymous August 2, 2009 at 1:17 pm

You simply bicker with straw men here. Skidmore’s research doesn’t address what Skidmore likes. It addresses hurricanes. Skidmore is not a hurricane and has no authority over hurricanes. You’re the one with delusions of Godhood here, not Skidmore.

mandeville July 31, 2009 at 3:05 pm

Anything destroyed is a loss of wealth. I can’t believe the sophistry going on here. Voluntary replacement of windows constitutes a destruction of wealth too, because the value of the old window, whatever was remaining, is lost. The new window purchased is a separate expenditure, or exchange of equal value, money for the new window. Wealth is continuously being lost as new wealth is created, but with a natural disaster, new wealth can never be created as fast as what was suddenly and involuntarily lost. The man forced to replace a window would have spent his money on something else, or saved it. The gain of the window company is offset by the loss of where the money would have been spent had there been no disaster.

My best friend lost his job last year in this “economic disaster”. 12 months later he got a new job. In the interim, he had to pull his kids out of private colleges. His savings earmarked for schooling were converted to paying his mortgage, cars, and feeding his family. In any disaster, the losses are shifted around.

Anonymous July 31, 2009 at 8:02 pm

Anything destroyed is a loss of wealth.

No. Sometimes, the cost of recovering any value from a derelict building is greater than the value recovered. At this point, we tear it down and start over, assuming that the value of the land beneath it exceeds the cost of demolition. If not, we wait for the local town council to condemn it and tear it down at taxpayer’s expense. I’ve seen it happen, even if you can’t imagine it.

Healthy Markup July 31, 2009 at 3:13 pm

I can see one reason why Skidmore could be correct. Socialists, “social” democrats, and other barnacles are perpetually thinking of ways to impoverish (minimum wages, “environmental” restrictions, zoning laws to protect “heritage” buildings, diminished property rights) which might fall by the wayside during a big collapse. I mean, the American revolution destroyed lots of stuff and killed lots of Americans, but it scraped off the barnacles for a while and maybe the realignment of a vile society through less murder-intensive destruction could lead to gains simply because the status quo ante was so crappy.

Anonymous July 31, 2009 at 8:06 pm

Hayekians of all people should understand how vague generalizations, uninformed by specific information relevant to specific circumstances, can misinform. Why do you think central planning fails?

But everyone is sure that his own favorite platitudes are unassailable.

Anonymous July 31, 2009 at 11:38 pm

Are you saying we don’t understand that vague generalizations are wrong? Martin, I swear you shift between rationality and wingnuttery on an hourly basis.

Anonymous August 1, 2009 at 6:24 pm

“Wingnuttery” is a vague generalization.

Skidmore states, “When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently.” [my emphasis]

This statement does not exhibit the broken window fallacy. It does not extol the virtue of destroying wealth simply to create demand for further wealth creation, and it does not state that destroying wealth necessarily leads to greater wealth creation. Applying the broken window fallacy to this statement overgeneralizes the argument.

Skidmore only claims that breaking a window to replace it does not destroy wealth de facto. We need more information about the specific circumstances to reach this conclusion. Breaking a window to replace it might be a rational choice. Skidmore says nothing else, so the criticism is unwarranted.

Nathan Scott August 1, 2009 at 8:17 pm

Purposely destroying the window to replace it with a more energy efficient replacement can indeed be a valid economic decision made by the owner. This is absolutely correct.

The point that Don and many other have made is that the window would have already been broken and replaced if this was a net positive on the economy, so we can de facto be sure that destroying someone elses property without their consent destroys wealth. The amount of wealth it destroys might not necessarily be the entire perceived price of the original or new window, but we must still conclude wealth was destroyed.

Anonymous August 1, 2009 at 8:20 pm

I think it depends on the context of the destruction. If a thief destroys the window, there is no wealth creation. But if it’s part of a planned efficiency upgrade, then wealth is created. Bottom line, creative destruction actually means “the context of destruction”.

Anonymous August 2, 2009 at 3:52 am

The point that Don and many other have made is that the window would have already been broken and replaced if this was a net positive on the economy …

To an empirical economist, it’s not a point. It’s a question, because optimally profitable decisions are not logically necessary in reality. No inviolate law of economics implies that people always replace windows that could be replaced profitably as soon as they can be replaced profitably. I know for a fact that people don’t always behave this way, because I don’t always behave this way myself.

Furthermore, no law of economics implies that people even know that replacing windows is valuable until after many windows have been replaced. Market economics is not simply about rational actors calculating the most valuable course. It’s often about people tossing dice and markets selecting the best toss for economic survival. In other words, market organization is like evolution by natural selection rather than “intelligent design”.

… so we can de facto be sure that destroying someone elses property without their consent destroys wealth.

No, we can’t. No law of nature or of economics implies it. The statement assumes that proprietors are perfect predictors of the future, but they aren’t. Central planners aren’t better predictors of the future, but that’s beside the point here. A hurricane is not a central planner. It’s just a roll of the dice.

The amount of wealth it destroys might not necessarily be the entire perceived price of the original or new window, but we must still conclude wealth was destroyed.

No, we need not conclude it. The conclusion is not logically necessary. It’s entirely possible that many people systematically avoid replacing windows that could be replaced profitably, because they are oblivious to the potential profit or for other reasons. Maybe people are just systematically lazy by nature.

When you write, “we must conclude”, you simple assume the answer to the question that Skidmore and Toya address with their research. You don’t logically deduce the answer without any research. Your “logic” doesn’t trump their data, regardless of the validity of their conclusions. Your application of Bastiat’s reasoning here is simply misplaced.

mandeville July 31, 2009 at 10:35 pm

A rise in GNP and employment don’t translate into the creation of wealth when a natural disaster occurs. I haven’t read all of danielkuehn’s posts here, but if he is saying that, he’s wrong.

First, employment rates have nothing to do with the creation of wealth. The poorest societies have the highest employment rates as everyone is toiling in the fields. Disasters might cause production to increase causing a rise in GNP, but it is at the expense of savings (capital accumulation), which drops accordingly. This is like a company that normally maintained a million dollar inventory being forced to liquidate it without replenishment in order to cover uncollectible receivables owed to them, and then to claim that the increased sales volume was a sign of profitability. Perhaps danielkuehn should be working for them.

Anonymous July 31, 2009 at 11:37 pm

Once again an “economist” who doesn’t understand the difference between creative destruction as part of a natural private sector process and real life destruction of capital and lives. Usually its the government performing the latter if it’s not mother nature. Thanks to Prof Boudreaux for exposing these faux-economists.

Anonymous August 1, 2009 at 6:44 pm

The author of this article draws the analogy with Schumpeter’s “creative destruction”, and he apparently is not an economist. He doesn’t attribute the analogy to Skidmore or any other economist cited. The analogy seems weak, because Schumpeter referred to competition between innovative, economic organizations competing to profit, not to natural disasters, but nothing in the article suggests that the analogy reflects any economist’s understanding at all.

Anonymous August 1, 2009 at 2:03 pm

daniel,

gdp is an aggregate measure.wealth is an individual measure. net-worth is real stuff .it excludes debt/liabilities.my point is that looking at an aggregate measure is useless.ultimately it is about individuals. if there is any measure which tells us what %ge of the population has positive and increasing ‘real’ networth , then an increasing number would be useful. what measure of wealth are you trying to use?. per capita income?. median salaries?.. pretty much useless.

Anonymous August 1, 2009 at 6:54 pm

From the article:

“Other, more recent academic work has taken a broader look at the question. Mark Skidmore of Michigan State, along with the economist Hideki Toya of Japan’s Nagoya City University, published a 2002 paper in the journal Economic Inquiry that mapped the disaster frequency of 89 countries against their economic growth over a 30-year period. The paper controlled for everything the authors could think of that might skew the findings – including country size (large countries would presumably experience more natural disasters), size of government, openness to trade, and distance from the equator.

“Skidmore and Toya found that, in the case of climatic disasters – hurricanes and cyclones, as opposed to earthquakes and volcanic eruptions – the more the better: nations with more climatic disasters grew faster over the long run than the less disaster-prone. Why only climatic disasters? The authors suggest that, as we’ve gotten better at forecasting violent weather, its human costs, at least, can be mitigated much more easily than with geological disasters, which still take us by surprise.”

This sort of study is fraught with all the peril that Russ attributes to perfunctory regression analysis, but the result is interesting, and we might discuss its significance, if any, rather than misapplying Bastiat’s reasoning and trotting out our self-congratulatory, one-size-fits all, straw man arguments.

Anonymous August 1, 2009 at 6:59 pm

Interesting that countries with climactic disasters all the time(Bangladesh) are very very poor. Correlation does not equal causation. America is better at dealing with natural disasters because of the character of our nation, not because we get natural disasters.

Anonymous August 1, 2009 at 7:07 pm

“Character of our nation” seems a little vague to me, and I don’t see the relevance here.

The question is: if we could hold “national character” and other variables constant, would economies with more frequent natural disasters of a particular sort grow faster, up to some limit at least, as the disasters accelerate adoption of more productive economic organization? It’s a reasonable question, and the answer is not obvious, and Bastiat didn’t deduce the answer from a simple truism a century and a half ago.

Anonymous August 1, 2009 at 7:10 pm

Then there’s the fact that Bangladesh is simply no place to have a human community. It doesn’t help that they overpopulated on such a tiny piece of land. America is better situated with respect to climate(temperate zone), and we have the good sense not to overpopulate. That’s part of national character, the ability of the men to keep it in their pants enough.

Anonymous August 1, 2009 at 7:17 pm

Hong Kong is a much tinier piece of land with a much higher population density. In fact, population density correlates very strongly with development and productivity. The more populous regions tend to be the more productive.

http://www.juliansimon.com/writings/Articles/CATONEW.txt

Anonymous August 1, 2009 at 7:05 pm

“This sort of study is fraught with all the peril that Russ attributes to perfunctory regression analysis, but the result is interesting”

welcome to the bogus world of psuedo economics aka econometrics.with a little effort you can data-mine whatever bull you want to propound

Anonymous August 1, 2009 at 7:11 pm

This objection applies to any economic analysis whatsoever, so it’s not unique to this analysis. Specific criticisms of this specific analysis and its conclusions are more useful, but they also require reading the article and other tedious tasks.

Surfisto July 30, 2009 at 11:13 pm

Ok, I think I understand now.
Would it be safe to say I thought there was a “Free Lunch” somewhere in this story? Am I getting that analogy correct? Or should I mitigate my losses now and go into politics.
The last couple of months have been humbling.
Thank you for the comments.

Anonymous July 30, 2009 at 11:31 pm

Yep, you’re using the expression right.

No worries, the same thing would have confused me just as much a year ago!

Don’t resort to politics just yet :D

Anonymous July 31, 2009 at 3:18 am

Surfisto, don’t worry. I was in that boat not too long ago too. In our time it is very important to learn the basics of economics. A perfect place to start is Henry Hazlitt’s “Economics in One Lesson.” It is very easy to read and understand. You can find it on Amazon, but I got it at the Cato Institute bookstore for pretty cheap. Mises.org also sells a nice hardback version. Also, if you haven’t already, Bastiat’s “The Law” is also a must-read.

Surfisto July 31, 2009 at 6:36 am

Probably drink so I guess I am investing in human capital (mine)? Or is killing my brain cells creation through destruction or creative destruction?

Anonymous July 31, 2009 at 10:14 am

Again, nothing I disagree with in this entire statement of yours, slawson. What’s not getting through?

What neither you nor I know is whether the additional demand for windows gives more work to the glazier than it takes away from the girl.

Anonymous July 31, 2009 at 2:48 pm

“What neither you nor I know is whether the additional demand for windows gives more work to the glazier than it takes away from the girl.”

- We do know that without the broken window, there is both a window and a new sweater. With that window broken, there is only a replacement window.

Anonymous July 31, 2009 at 2:54 pm

Yes – I haven’t heard anyone challenging that. I agree.

Anonymous July 31, 2009 at 3:22 pm

Why is GDP the wrong thing to talk about? Don’t we care about both wealth and GDP?

I have nothing against the “broken windows fallacy”. Bastiat is exactly right. But Bastiat was criticizing the sentiment that people were better off.

If the person being criticized states they are talking about short term employment and production then I think the only question is whether YOU, the reader care about that sort of thing or not. But they aren’t committing the logical fallacy that Bastiat teaches us about unless they make a statement that’s broader than that. And of course, whether their short-term, GDP statement is even accurate or not is an empirical question – it may not be in a great deal of cases. But it’s quite possible that it is.

Anonymous July 31, 2009 at 3:28 pm

I’m not assuming that at all, James. And I’ve said in several places at this point that the destruction of productive capacity is going to hurt GDP growth. We just don’t know what will dominate in the end – reduced productive capacity or increased demand.

Anonymous July 31, 2009 at 6:07 pm

The nuance here is that you’re trying to argue that no, no, Skidmore really *does* understand Bastiat, or else that we don’t understand Bastiat (your first comment). The problem is that 99.9% of the population will fall into the Broken Window Fallacy if EVER if EVER you say that destruction of capital can increase your welfare. If you are wise, you won’t ever say that; not even in the supposedly nuanced way that you defend Skidmore for.

IR July 31, 2009 at 6:46 pm

We do care about both and that’s my point. Concentrating on only one aspect (e.g. short term GDP growth) is the wrong thing to do in this particular case because everything looks better than it actually is. And this is the fallacy. I think this exactly what Bastiat was talking about. Where does the sentiment that we are “better off comes” from? From looking only at one side of the problem of course. You have to consider all facets. It is either disingenuous or stupid just to look at one facet (e.g. GDP growth) and say that you get “bump up” (whatever this means).

By the way the article doesn’t just talk about short term. Here is the sentence right before the quote:
“forcing the transition to a sleeker, more productive economy in the LONG term.” (emphasis mine)

I guess my point is that, yes, they might be right in one limited sense as you describe. However, they should never present the issue in the limited sense, especially to a casual reader. It gives totally wrong impression.

Based on the template of this article you could write an article about cancer titled “How cancer help”. There you could make a totally valid points that cancer helps overweight people lose weight and encourages advances in medical technology. According to you there is no fallacy here.

Anonymous August 1, 2009 at 1:08 pm

The destruction of an item, only to replace that item with a newer substitute, will either reduce wealth or cause a break-even in GDP. The spending it takes to purchase the newer substitute, it is assumed, would have been spent elsewhere causing the same spending to show in the GDP. If, that money is not spent, it is invested or saved and adds to wealth. There’s no way else to spin this and no defending it as being somewhat good on net.

Anonymous July 31, 2009 at 6:58 pm

So your concern is essentially that he didn’t write about everything that we’re concerned about in one article? I suppose that makes sense, but it isn’t something I’d fault him for.

It’s one thing to say “I wish he talked about X, Y, and Z, as well”, which is what you’re doing here. That’s fine. But it’s different to say that he’s committed some sort of error when he hasn’t.

IR July 31, 2009 at 7:17 pm

So you would be fine with the cancer article that I describe?

It is not that I wish that he talked about X, Y, and Z. You would probably agree that whenever you write about something there should be certain things that must be said about the subject to give correct picture. Notice I am not talking about complete ( this is what you seem to imply). Not including X, Y, and Z here leads to fallacy not just to shallow understanding of the subject.

Anonymous July 31, 2009 at 7:28 pm

Huh? There’s no silver lining to weight loss from cancer. It’s a bad weight loss. The point is, at least GDP and employment growth is unambiguously good – that’s a silver lining.

A better comparison than cancer would be “being an organ donor saves lives”. There is a silver lining despite the fact that there is no net improvement in the number of lives (and since transplants fail, probably a net loss). But it’s good because CONDITIONAL on the loss of life to the accident victim, there are benefits to the person who gets the organ.

And perhaps that’s the way to explain it – conditional on destruction as a sunk cost of sorts, there are benefits – real benefits, not like the kind of weight loss you go through during cancer. That’s certainly a meaningful and relevant statement, don’t you think?

You don’t have to walk around hoping for car accidents to be happy that someone dying from liver failure will get a shot at life. Picking out silver linings isn’t the same thing as shadenfreude

Anonymous August 1, 2009 at 1:46 pm

I have always contended that it will reduce wealth.

Whether or not it increases GDP is an empirical question. We know demand will increase. That has to increase GDP unless all labor and all capital is fully utilized, creating a situation where the item to be replaced exactly displaces some other item that would have been produced.

You seem to assume that this complete crowding out HAS to occur. Why? What’s the basis for assuming that? Is there a problem with the way I’m thinking this through? that’s an honest question. Under what conditions would an exogenous demand shock NOT increase GDP? It seems to me that it wouldn’t only if all labor and capital is fully utilized.

I don’t think anyone has claimed that it is good on net – have they? Simply that there is a gross positive effect that partially offsets the larger gross negative effect.

Anonymous August 1, 2009 at 2:40 pm

If there’s a large scale destructive event then demand will increase. But, if there’s the destruction of one item while its owner lives through the event, it does not neccessarily mean that the item will be replaced or repaired by the owner (in other words, spending/demand and therefore GDP increasing is not a given).

On the other hand, we do know that if the owner opts to replace an item that was destroyed or damaged, the money s/he spent on this will likely make it more difficult to spend in other areas of his or her consumption. That earned or saved income used to replace or repair a destroyed item has to be viewed a bad even if the GDP captured in any given year sees an increase. Eventually, today’s wealth will be converted and used for consumption sometime in the future. And wealth is typically parked in ‘vehicles’ (or assets) that spur even more wealth and thus more future consumption.

I do not see how you cannot conclude that there will be certain crowding out. Though, in fairness to what you’re arguing, it (the crowding out) may not and probably will not be captured in the current year’s GDP in which the event occured: in fact, it may even look positive on its surface. You do see the fallacy in this a looking like a positive, right?

Anonymous August 1, 2009 at 4:52 pm

I’m having a hard time understanding where you suppose there is a disagreement between us in what you just wrote. Yes, it is a net negative. There are notable gross positives associated with it.

Anonymous August 1, 2009 at 5:45 pm

This argument is pointless: there is no net benefit whatsoever, in either the short-run or long. You have agreed that wealth is destroyed, but then can honestly cheer GDP expansion? Tell me, which sector comprises the GDP growth as a result of these destructive events? Government spending! If private wealth were so interested in redeveloping these areas, it would not take a disaster for that to happen. GDP is a terrible economic indicator, and, in my eyes at least, is completely worthless for determing real economic growth so long as it continues to count government spending in its criteria.

Shouldn’t using communist China as a measure for potential economic expansion (by way of GDP growth because of natural disasters?) have tipped you bright guys off?

Anonymous August 2, 2009 at 2:11 am

I have a hard time understanding why your upstream post on this sub-thread was written.

Anonymous August 1, 2009 at 7:23 pm

The history of Hong Kong is completely different to Bangladesh. There’s a reason one if a first-class city-state, and the other is a 3rd world hell hole.

mandeville August 1, 2009 at 10:34 pm

Buying a window is not a creation of wealth.

mandeville August 2, 2009 at 12:17 pm

Man is not systematically lazy. He acts 100% in accordance with his valuations at the moment of action. He keeps an inefficient window because he doesn’t value replacing it yet, not because he is lazy. By calling him lazy, you are making valuations for him. That is spurious reasoning.

There is a difference between wealth and value. If I decide to buy new clothes and throw out old clothes, this is a loss of wealth. The value of the old clothing to me was less than what time it would have taken me to find a buyer for them. Further, giving them away would also not gratify my ego enough to expend the time to do so. However, the old clothing would have had “value” to someone and is a measure of “wealth”, however subjective.

Anything thrown out or destroyed that has value to someone is a loss of wealth. Replacing it is not a creation of wealth. Wealth is created when less labor or capital are required to produce things in the present than in a prior state of time. This phenomenon is the intensification of the division of labor. If a flood wipes out all the crops of a village, replanting and harvesting is not a creation of new wealth. New wealth is only created when less people and capital are employed in the process than before.

Anonymous August 2, 2009 at 1:37 pm

Man is not systematically lazy.

You may simply define “laziness” out of existence if you want, but your usage is irrelevant to my point. Men could systematically fail to maximize the productivity of resources they govern. You may argue that some writ handed down by God on stone tablets entitles established proprietors not to maximize the productivity of their resources, but that’s a separate issue.

Personally, I have little faith that God ever hands down titles to property. Statesmen do that. My theology distinguishes acts of statesmen from acts of God, but God does raise hurricanes from the sea in my way of thinking.

There is a difference between wealth and value.

There is a difference between market value and one proprietor’s value. Proprietors don’t decide the market value of their resources.

If I decide to buy new clothes and throw out old clothes, this is a loss of wealth.

Not necessarily. The new clothes could be more attractive to potential consumers of your services and so raise your value in the market. For example, you might be a professional actor, and the clothes might be your costumes, and you might have exhausted the market for some Shakespearean play. In this scenario, replacing costumes for the Shakespearean play with other costumes might increase your value as an actor.

If you’re entitled to decide that ground suited to grow cotton should lay fallow instead, that’s a loss of cotton potentially valuable to the market. You may decide that leaving the land as a nature preserve is more valuable by some other measure, but when we discuss “profit” in this economic context, we discuss a market’s valuation, not your personal valuation.

Anything thrown out or destroyed that has value to someone is a loss of wealth.

No. A dynamic, growing, market economy continually replaces the old with the new. Often, it transforms the stuff of the old into the new. Destroying the old to replace it with the new is not necessarily a loss of wealth.

Replacing it is not a creation of wealth.

Replacing the old with the new can be a net creation of wealth.

Wealth is created when less labor or capital are required to produce things in the present than in a prior state of time.

Wealth grows as more productive resources replace less productive resources. The more productive resources are more valuable. At some point, the value of horse drawn carriages becomes negligible compared with competitive modes of transportation. At this point, simply leaving all the horse drawn carriages sitting in museums to “preserve their value” is folly. A few carriages might be valuable in this way but only a few.

This phenomenon is the intensification of the division of labor.

More intense division of labor is one possible mode of this development, but it’s not the only possible mode. Technology can also progress so that less specialization is more productive.

For example, only a few years ago, creating a blog required highly specialized skills. Now, with tools that earlier web developers have created, practically anyone can create a blog, and blogs have exploded as a consequence.

If a flood wipes out all the crops of a village, replanting and harvesting is not a creation of new wealth.

But if villagers use more productive techniques to plant and harvest after the flood, their yield after the flood could increase, so that in only a few seasons, their cumulative yield is greater than it would have been without the flood. This effect on growth is what Skidmore’s research tries to establish.

Anonymous August 2, 2009 at 2:11 pm

Man is not systematically lazy.

Since you’ve broken my “laziness”, I’ll replace “lazy” with “risk-averse” here. I’m betting that the new argument is more productive than the old.

Experimenting with new windows is risky, and people are systematically risk averse. We don’t know and can’t know that replacing old windows with newer windows is more profitable ultimately. We can only experiment, and some experiments in profitable organization necessarily fail to profit; otherwise, they aren’t really “experiments”.

So a hurricane creates many experiments in productive organization that systematically risk averse proprietors would have avoided otherwise.

mandeville August 2, 2009 at 8:38 pm

The act of disposal, where something is removed from the market, is a loss of wealth. The subsequent purchase of a replacement or substitute is a separate transaction, and merely an exchange of goods, which, per se, is not a creation of new wealth. Nor is the profit made by the supplier of the new product a creation of wealth. Only if the new product was produced with greater efficiency, or as you say, using less resources, would it constitute new wealth and only by the marginal difference between the resources required to produce it before and after.

Technological innovations are a main cause of the intensification of the division of labor. You are treating these as if they aren’t related. My description is the all inclusive one. In every case of wealth creation, the division of labor intensifies. It is technological innovation that doesn’t necessarily create new wealth. For example, innovation could happen in components used in products that are becoming obsolete for other reasons.

Your havest example is valid only to the degree that new methods of harvest are marginally better than prior ones, but it doesn’t prove that growing a new harvest replaces the wealth lost from the flood, nor does it prove that had a flood never happened, the yields wouldn’t have improved anyway on future harvests. In other words, your point made no sense because increased yields have nothing to do with the loss of wealth from a flood. You did not address the issue that the flood caused a loss of wealth. Labor and capital were lost to nature and there is no replacing them free.

Anonymous August 3, 2009 at 12:28 am

The act of disposal, where something is removed from the market, is a loss of wealth. The subsequent purchase of a replacement or substitute is a separate transaction, and merely an exchange of goods, which, per se, is not a creation of new wealth.

The issue is the effect on subsequent productivity. Is the replacement more productive? Skidmore claims that certain natural disasters tend to accelerate adoption of more productive technology and that the result is more rapid economic growth in regions with more natural disasters.

Naturalists will also tell you that occasional forest fires are healthy for an ecosystem and that artificially limiting these fires can have unintended consequences, like more explosive and destructive fires ultimately.

Nor is the profit made by the supplier of the new product a creation of wealth.

The greater productivity of the new technology supplied creates greater wealth.

Only if the new product was produced with greater efficiency, or as you say, using less resources, would it constitute new wealth and only by the marginal difference between the resources required to produce it before and after.

The “products” I’m discussing are capital goods, goods involved in producing other goods, rather than final consumption goods. Many goods are both to some extent.

Technological innovations are a main cause of the intensification of the division of labor. You are treating these as if they aren’t related.

No, I’m not. I’ve said nothing about the division of labor. If more advanced technology requires a greater division of labor, then more rapid adoption of this technology accelerates the division oflabor, regardless of people’s motives for adopting the technology.

Skidmore’s only point is that natural disasters accelerate the adoption of new technology as a matter of fact, so that regions with more natural disasters adopt new technology more frequently and thus experience greater rates of economic growth. He nowhere says, and I nowhere say, that the division of labor is not accelerated.

If the rate of technological advancement happens not to be so great, then adopting new technology more rapidly isn’t such an advantage and might not result in higher rates of growth, so we might expect natural disasters not to have the same effect on growth in the dark ages, when technology advanced less rapidly, for example.

My description is the all inclusive one.

You flatter yourself. Few descriptions of anything are all inclusive. Even Newton’s Gravity turned out not to be all inclusive. The only all inclusive statements are tautological, like “all poodles are dogs”.

In every case of wealth creation, the division of labor intensifies.

I don’t know what sort of tautology you’re constructing here, but I can easily imagine wealth creation accelerating as a division of labor becomes less intense. I’ve already given one example. “In every case” seems hyperbolic

Again, only a few years ago, you needed to know a lot about web technologies to create a blog. Blogging was highly specialized, and most blogs were created by geeks for geeks. [I'm a geek myself btw, so I'm not insulting anyone here.]

Now, practically anyone can create a blog, and blogging has exploded. Because some blogs are valuable, the value of blogs generally has also exploded, but this explosion does not result from more intensive division of labor. It results from tools enabling non-specialists to create blogs as easily as specialists. Specialization is part of this process, because specialists create the tools, but the trend is actually toward less division of labor, not more.

It is technological innovation that doesn’t necessarily create new wealth.

Sure. Different technology isn’t necessarily more productive. Change for its own sake isn’t necessarily valuable.

Your havest example is valid only to the degree that new methods of harvest are marginally better than prior ones, …

Obvously.

… but it doesn’t prove that growing a new harvest replaces the wealth lost from the flood, nor does it prove that had a flood never happened, the yields wouldn’t have improved anyway on future harvests.

I’m not asserting any general law of nature here, and neither does Skidmore. He only observes empirically that regions with more frequent natural disasters have higher economic growth rates, and he attributes this correlation to a higher rate of adopting more productive technology.

Again, in a different age, with a different rate of technological advancement, the effect of natural disaster on these regions could be different. We happen to live in an age of truly staggering technological advancement. Much of the technology I use on a daily basis hardly existed when I was born. My whole job description didn’t exist when my father was born.

In other words, your point made no sense because increased yields have nothing to do with the loss of wealth from a flood.

That a point makes no sense to you could indicate something about your comprehension of the point.

Increased yields have to do with more productive technology adopted after hurricanes and similar natural disasters. Skidmore and Toya claim to have found this result empirically. You can dispute their finding if you want, but you aren’t doing that here. You’re only arguing the semantics.

You did not address the issue that the flood caused a loss of wealth.

I address the issue that the article addresses. No one denies that floods destroy things. The issue is what replaces the things destroyed. When technology advances rapidly, a broken window isn’t simply replaced by an identical window. It can be replaced by a superior window, and replacing many windows (and other things) can increase the productivity of a region compared with a similar region that didn’t experience the disaster.

Labor and capital were lost to nature and there is no replacing them free.

No one says anything about replacing anything “for free”, but the benefits of adopting more recent technology can ultimately exceed the cost of replacing technology destroyed by a natural disaster, and Skidmore and Toya say this often does happen in practice, so that regions with more frequent natural disasters can actually grow more rapidly than regions with less frequent disasters, because the disaster prone regions are forced, by acts of God, to adopt advancing technology more rapidly.

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