Posted on 10/21/2024 6:21:34 AM PDT by Diana in Wisconsin
In times of disaster and destruction, a common narrative often emerges that rebuilding efforts will lead to economic growth. The idea that repairing damage and replacing destroyed goods creates jobs that spur consumption and stimulate economic activity is tempting. However, as French economist Frédéric Bastiat explained in his famous “Broken Window Theory,” this reasoning is fundamentally flawed. Rather than generating net economic benefits, destruction diverts resources and wealth that could have been used for more productive purposes, ultimately stifling real economic growth.
Recent events, particularly the devastation caused by Hurricanes Helene and Milton in 2024, provide a clear example of why destruction does not create long-term economic prosperity. Despite the short-term boost in economic activity from rebuilding efforts, the broader economic implications are far more detrimental. In this post, we will delve into Bastiat’s Broken Window Theory, apply it to the aftermath of the hurricanes, and explain why destruction and the need to replace lost goods drag forward future consumption rather than create new economic value. The Broken Window Theory: A Lesson in Opportunity Cost
Frédéric Bastiat introduced the “Broken Window Theory” in his 1850 essay “That Which is Seen, and That Which is Not Seen.” The theory is illustrated by a simple example: A boy throws a rock through a shopkeeper’s window, breaking it. While some may argue that this destruction benefits the economy—after all, the shopkeeper must now pay a glazier to fix the window, creating work—the key insight lies in what is not seen.
Had the shopkeeper not needed to replace the window, he could have spent that money on something else, perhaps new inventory, equipment, or even personal savings. The repair creates no new wealth; it merely replaces what was lost. The shopkeeper’s forced expenditure on the window diverts resources that could have been used to improve his business or save for the future.
Bastiat’s principle extends beyond a broken window to any form of destruction, whether natural or man-made. Destruction leads to the misallocation of resources, pulling future consumption forward and leaving society no wealthier than before. This is a critical point that often gets overlooked in post-disaster economic analysis.
*SNIP*
Analysts’ use of Bastiat’s argument that destruction creates economic prosperity rests on a misunderstanding of wealth creation. True economic growth occurs when new goods and services production increases society’s overall wealth. On the other hand, destruction forces the replacement of existing goods and services, leading to no net increase in wealth.
Think about it this way: if destruction is beneficial to economic prosperity, why not have an annual event where the Government carpet bombs a major city? When viewed in this manner, the illogic of the argument of “creative destruction” becomes evident.
*SNIP*
True growth comes from policies that support increases in productive investments, innovation, and the efficient allocation of resources. As investors, we should hope for those policies. As citizens, those are the policies we should demand.
I never understood the delusion that destruction of useful things produces prosperity by their direct replacement (not to be confused with upgrades, tearing down an aging building with a better one, etc). I won’t become prosperous if every monday wednesday and friday I dig a hole, and on tuesday, thursday, and saturday fill it back in.
Similarly I recall an article in Forbes some years ago claiming that the refugees in Germany were good for the economy as they will get government money to spend at shops, etc. ...as if the germans weren’t capable of spending their own money.
People need to ask cui bono.
Usually it’s Deep State.
Thanks!
“I won’t become prosperous if every monday wednesday and friday I dig a hole, and on tuesday, thursday, and saturday fill it back in.”
You’re gonna be in big trouble talking like that! That’s Mother Government’s, ‘path to prosperity’ for all of us. ;)
Shame on you, it is more correctly called ‘Non Binary Government of no particular gender or orientation but capable of chest feeding.’
LOL! She’ll always be a ‘mother’ to me! ;)
Similar reasoning applies to giving welfare payments to the underclass.
If there was no underclass, taxpayers could have spent the money on themselves.
Excellent point. Society will always have poor people; churches and other charities were quite successful in helping them out.
Once Mother Government could buy votes by making it a ‘generational lifestyle’ she had to keep a gun pointed at the heads of others to pay for it.
Check any ‘government program’ that was designed to ‘help.’ None of them are ever self-funding.
Grrrr!
Thanks for posting. Bastiat BUMP!
In addition, losing a war may lead to better economic circumstances for a society in the form of peace, the cancellation of the debts of the prior regime, and the installation of a better regime that fosters rebuilding and economic growth with a small military establishment. Germany and Japan both experienced this after WW II.
The war was a net benefit to neither Japan, nor Germany. Nor to Britain nor America. At least it ended the Roosevelt administration’s fixation on “managing” the economy, but that would have happened once Roosevelt died, anyway.
Thanks Mewzilla!
(1) As part of the price of American help in wartime, Britain had to give up her system of imperial preferences and permit American goods into her empire and make her patents in radar, nuclear power, and much else free to American manufacturers;
(2) America's manufacturing base expanded immensely and dominated the world economy for decades after the war;
(3) The US and her system of allies became and remains the dominant world political and economic power in the decades after WW II; and
(4) The American alliance formed during and after WW II was able to defeat Soviet communism during the Cold War, thereby extending the world's long era of general peace and prosperity under American leadership.
(5) During the 1970s and 80s, the American dollar became the world's primary trade and reserve currency, which has permitted the US to enjoy cheap and abundant financing for its welfare state and for hundreds of millions of Americans to enjoy a secure and healthy retirement.
In the long run of history, the US and Allied victory in WW II made the US and the world more peaceful and prosperous.
I will agree to the degree that America was less harmed by the war and gained RELATIVE advantage. Had America sided with Germany, she might have “benefitted” even more. America, and the world would have been better off without the war. Giving Commonwealth countries the freedom to trade with the U.S. was mutually beneficial.
The rest of the two keywords, sorted:
America siding with Hitler and the Nazis in WW II would have been a nonstarter, to put it politely. The end of Britain’s system of imperial preferences benefitted her colonies but hurt Britain, as did the loss of potential patent earnings. Supposedly, British negotiators were shocked at the hard bargain they had to accept from the US.
No way we could have supported Germany in WWII.
Now, WWI was an entirely different animal. Had Britain actually allied with Germany, in the Central Power’s fight against Russia, I could make the case that we would have been much better off.
The UK should have stayed out of it and would have if Germany hadn’t gone through Belgium. WWI without the UK would have been a replay of the Franco-Prussian War with maybe a Balkan sideshow!
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