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Destroying Predatory Institutions Differs Categorically from Destroying Physical Assets and Resources

Here’s a response to someone who asks a question that is surprisingly (to me) common:

Mr. Schubert:

Thanks for your e-mail and excellent question. You write:

You have argued on your blog that the oft-made claim that destruction can be good for the economy is spurious (the economic logic behind your rebuttal seems impeccable to me). On the other hand, Milton Friedman has claimed that: “Only a crisis ​ actual or perceived ​ produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.” If Friedman is correct, then it seems to me an empirical issue whether the damage done by a crisis (e.g., destruction) is greater or less than the good that may result from the consequent change. Of course it would be nice to have the positive change without the crisis, but if the two are in fact linked, then mightn’t destruction be beneficial?

The difference is this: The crises to which Friedman referred – as did Mancur Olson, more systematically, after him – involve destruction of political and social institutions, not of physical assets and resources. And while an upending of political and social institutions that suppress growth can possibly clear the way for alternative institutions that encourage growth – and while such an upending might be accompanied by some destruction of physical assets and resources – neither Friedman nor Olson ever wrote that growth is promoted by the destruction of physical assets and resources. Each was too good an economist to have ever suggested such a thing.

Genuine economic growth is, of course, encouraged when predatory institutions are destroyed and replaced with non-predatory ones. But unlike with the destruction of valuable physical assets and resources, the destruction of predatory institutions does not itself divert resources from valued uses to which these resources would otherwise have been put. And so unlike with the destruction of valuable physical assets and resources, destroying predatory institutions and replacing them with non-predatory ones is all gain with no opportunity cost (except that which is suffered by decommissioned predators).

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030