Vulgar Keynesianism at Full Gallop

by Don Boudreaux on October 30, 2012

in Myths and Fallacies, Seen and Unseen, State of Macro

Here’s a letter to the Philadelphia Inquirer:

Peter Morici argues that hurricane Sandy might prove to be an economic boon (“Disaster has economic benefits, too,” Oct. 30).  There’s nothing surprising in Prof. Morici’s argument that the spending necessary to repair damaged buildings and other assets can help the economy.  Predictions of economy-wide wealth springing from devastation are issued after every natural disaster.  These predictions are examples of what the English jurist A.V. Dicey called “the idle contentions of paradox-mongers”* – predictions that are just clever enough to strike economically uninformed people as being profoundly insightful.

But what appears to many to be profoundly insightful is, in fact, fallacious.

If Prof. Morici is correct, then surely he also applauds, say, the economic consequences of drunk driving.  As with hurricanes and earthquakes, he can bemoan the loss of life caused by drunk driving and then get on with explaining how, paradoxically, the economy benefits from drunk driving.  After all, drunk driving creates unnecessarily large numbers of destroyed automobiles to replace, damaged automobiles to repair, dead victims to bury, and injured victims to be cared for by first-responders, doctors, nurses, physical therapists, and hospital administrators and clerks.

If you sense – as you should – that the economy in fact does not benefit from drunk driving, then you should reject Prof. Morici’s argument that the economy benefits from natural disasters.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

* Albert Venn Dicey, Lectures on the Relation Between Law and Public Policy in England During the Nineteenth Century (London: Macmillan & Co., 1905), p. 139.

See also these other links to sound arguments against the man-in-the-street fallacy peddled here by Peter Morici:

Vero de Rugy

Mark Steckbeck

Joe Carter (inspired by Bryan Caplan)

And (posted here again because it’s so good) Tim Worstall

UPDATE: Someone named “Aaron the Aaron” sent to me, without comment, a link to this recent post by our friend Daniel Kuehn, in which Daniel accuses me of either lying, or at least of being “misleading,” in suggesting that Peter Morici, in the essay linked above, (quoting myself) “argues that hurricane Sandy might prove to be an economic boon.”  I will grant that in this essay Morici focuses his comments on the communities actually damaged by Sandy rather than on the U.S. economy as a whole. Those devastated communities are the ones that, in Morici’s telling, might well be economically improved by Sandy’s devastation.  (Too bad, then, that Sandy wasn’t bigger so that it could have destroyed yet more property in more states, and thus spread it economic benefits even more widely.  If Morici – as I gather interpreted by Daniel – is correct, folks in places such as St. Louis and Phoenix should be disappointed, at least as far as their material standard of living goes, that they were denied Sandy’s munificence.)  I did indeed suggest in my letter that Morici sees hurricane Sandy as a potential economic boon to the economy as a whole and not simply to the communities whose economies are so fortunate to have been devastated by Sandy.  Perhaps I misjudge Morici, mistakenly seeing in his essay today views that he expressed more clearly in the past – say, as in this essay written in the wake of 2011′s hurricane Irene.

I leave it to fair-minded readers to judge if I’ve misled anyone about Morici’s argument.

Two other points: First, Daniel believes that something important and profound in this discussion turns on distinguishing stocks from flows.  I disagree – perhaps because my sense of what people such as Morici and the many other vulgar Keynesians assert about natural disasters differs from what Daniel senses these pundits to mean.  The point, as I understand it, made by the vulgar Keynesians is quite simple: higher demand to replace destroyed assets can lead to a sustained uptick in economic activity – a sustained uptick that will eventually leave the economy healthier and people generally wealthier than if the disaster had not occurred.  And my (well, not my; lots of sensible people’s) point is that this vulgar Keynesian notion illegitimately treats the using of resources to rebuild as having no opportunity costs.  For a variety of reasons – many of which are hidden by even sophisticated Keynesian aggregates – this assumption of a pool of free resources is unjustified.  And no fancying-up the discussion with talk of “flows” being distinct from “stocks” changes this conclusion one iota.

Second, I suspect that Morici does not regard himself to be a Keynesian.  But the myths he peddles are the atavistic man-in-the-street myths about the economy that lie at the heart of even the most haut sophisticated Keynesian theory.  These are the same myths and naive demand-side focus that lead even Nobel laureate economists who identify themselves as Keynesians to celebrate the potential economic benefits of terrorist attacks.  It’s irrelevant whether or not Peter Morici is aware that he’s peddling vulgar Keynesianism; the fact is, he is peddling such illegitimate ‘economics.’

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