On this blog I have commented extensively about the broken window fallacy and Bastiat’s wonderful essay that was the origin of the phrase. I have also noted that the broken window fallacy is more properly called the principle of opportunity costs and that a litmus test for separating good economists from bad ones is their understanding of this basic premise. Thus, when the mainstream media began to parrot the line that hurricane Sandy would stimulate economic growth, I was not going to respond. Not only am I tired of having to point out something that should be obvious to anyone with a rudimentary understanding of economics, but Pater Tenebrarum of Acting Man Blog and others have clearly shown the absurdity of the mainstream media’s views on this matter.
However, it occurred to me that another analogy may be worth presenting. Let us set up this analogy by quoting some of Tenebrarum’s critiques of those who believe that destruction of life and property is good for the economy: “Why is it that modern-day economists always seem to insist that the destruction natural catastrophes and wars bring about is really a ‘good thing’ economically? We believe the main reason behind this stance is the unquestioned acceptance of one of Keynes’ great fallacies: namely the idea that all economic activity – even unproductive activity – is somehow ‘good’. Keynes for instance famously advised that governments could battle recessions by paying people to dig ditches and then fill them up again. He also published variants of this train of thought, as e.g. in his references to the joys and advantages of pyramid building.”
This is an important insight and one of the primary examples of the quackery that is Keynesian economics. Let us use an analogy from physics to further elaborate. In physics, work is defined as: , work is force applied through a distance. If I exert force by pushing an object there are two possible outcomes. If the object moves, then I have performed work. If the object does not move, I have NOT performed work. Note that positive effort, the force that I exert, does not determine if work has been done. The only thing that matters is that the object must move.
The analogy with economics is the following. If I exert force on an object and the object moves, thus performing work, this is analogous to engaging in production of goods or services that are desired by consumers as expressed by their purchase of such products. Work in physics is analogous to productive economic activity. If I exert force on an object and the object does not move, thus performing no work, this is analogous to engaging in the production of goods or services that are not desired by consumers.
Returning to hurricane Sandy, the rebuilding that will take place was not desired by consumers before the storm. Such efforts are not economically productive. Let us consider a man whose car has been destroyed by the hurricane and who purchases a new one. If he had intended to do so before the storm, this is economically productive activity. If he had not intended to do so before the storm, this is not economically productive activity from the viewpoint of the man at a time before the storm.
As I have pointed out repeatedly in my series of posts about mathematics versus economics, such basic concepts of economics like opportunity costs, must be explicated again and again.