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Saturday, March 12, 2011

Economic Fools

I am not the first person to realize this, some other people already brought this to attention. But I am not surprised that they are saying this. The argument that a lot of people are using right now is that the earthquake in Japan is good for the economy because all the work needs to be done. In a way the disaster in Japan is stimulating their economy. This is the exact same non-sense argument people use with regard to war. They say that war is good for the economy because all the work needs to be done drives up the economy.

If you do not believe me here are some sources that say this point-of-view:

One of the people in those links is Larry Summers, strangely I just mentioned him in one of my recent posts. Somehow I am mentioning him again. That is right, Larry said that this earthquake is good for the Japanese economy because it increases spending.

Here is the really funny part. If you go to Wikipedia and search for Larry Summers, Wikipedia already linked to the economic error he mentioned in his article (and people say Wikipedia is slow):

In March 2011, in relation to the earthquake disaster in Japan, Summers made
himself supposedly guilty of what is known in Economics as "the broken window
fallacy" by stating in an interview on CNBC that the earthquake could
temporarily boost the economy of Japan.

Paul Krugman did not seem to say anything about this earthquake positively affecting the Japanese economy, though he did say, "the catastrophe will, of course, require large public spending to aid recovery". Is that an allusion to the broken window fallacy again? Could be, I am not sure.

Why is this a fallacy? The answer is very simple. There is an entire good book written on this called, Economics in One Lesson, by Henry Hazlitt. The general argument of the book is that the single common mistake in economics is to look at the seen and overlook the unseen.

Consider this story. Suppose I break the windows of your car. You catch me and ask me what I am doing. I respond to you, "I am stimulating an economy". You would ask, "how?". And I will respond, "because now you need to go to a car shop which will fix your window, and so my destruction is creating jobs". This argument is actually appealing to a degree. Most people would fall into it. Most people would probably say, "I guess you are right, it is just wrong to break people's windows". But this argument in favor of stimulating the economy is wrong. For the following simple reason. If you pay attention to what is being done (the seen) then it is clear that a lot of work is being done and the economy is being stimulated. However, it makes much more imagination to realize the unseen forces. In other words, if the window of the car was not broken, then you would be richer, and so you would spend that money elsewhere. If it costs 500 dollars to fix a window, and I did not break the window, then you would spend that money on something else. You would probably buy yourself some books or whatever on that extra money. And so you are still stimulating the economy in a different way. However, people do not realize this because it is unseen. In the end of breaking the window there is no actual stimulation, and you lost a window, so there is a total economic loss as a result of that. The exact same argument is applicable to war and to earthquakes. It is sad that these economic "experts" cannot realize such a basic common sense notion.

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