Haiti and the Broken-Window Fallacy
Earthquakes are not creative destruction.
In the days following the tragedy we are now witnessing in Haiti, I was wondering how long it would take before someone in the media would commit the broken-window fallacy — the belief that destroying a valuable asset will create net wealth as long as it’s replaced. That is, paying $100 to replace a broken window somehow creates more prosperity that having an intact window and spending that $100 on something else. What I didn’t expect was to find it splashed across an entire page of the Wall Street Journal.
In the midst of reports of the continuing misery in the earthquake’s aftermath, there it was, covering the front page of the “Weekend” section, a full-page spread on how we seem to have lost sight of the “truism of the modern age that disasters were instruments of progress.”
The author, Kevin Rozario, an associate professor of American studies at Smith College, explains how after the great fires of Lisbon (1755), London (1666), Boston (1676), Chicago (1871), and San Francisco (1906) “the enormous reconstruction projects demanded … put capital into circulation, produced enormous profits for some and enabled economic innovations that increased productivity.” He goes on to argue, citing the Journal, that the Northridge earthquake of 1994 “generated intermediate- and long-term economic gains that more than offset initial losses.” And after noting that the Sichuan earthquake of 2008 did kill 80,000 people, he sagely reminds us that after all it did “trigger a building boom that would boost national economic growth by 0.3%.”
Is he serious? Yes, I’m afraid he is. And they say that economists are cold and calculating!
This is the same “logic” behind the notion that the bombing of great cities to rubble during World War II was good for economic development because it was an opportunity to construct modern infrastructure that would have otherwise required many years to put in place. Heaven forbid that we should have to wait for economic depreciation and normal wear-and-tear! (It was, however, good for New York, which had the great fortune of being the only major western city left standing after the war, but that of course was because New York itself was not air-bombed.)
The fallacy becomes clear when, by logical extension, one ought then to recommend deliberately making our cities vulnerable to natural disasters, by perhaps refusing to build sea walls and tremor-resistant structures. Why wait for disasters? We should invite them! Why waste resources on homeland security when just one well-placed nuclear bomb could boost our own economy, perhaps by as much as 0.3 percent? Think of the jobs! If you’re not into bombs, then how about advocating a new wave of 1960s-style “urban renewal” by unleashing an army of federal bulldozers onto our major urban areas?
Professor Rozario appears to be sufficiently innocent of economics (or even common sense) to interpret Joseph Schumpeter’s famous description of the competitive forces of capitalism as “gales of creative destruction” literally. He is evidently unable to distinguish metaphor from reality; between the “creative destruction” manifested in the competition from new products, innovations, and markets pushing out established businesses — which is what Schumpeter was actually referring to — and, well, real gales (and earthquakes and other natural disasters).
Prosperity Just Around the Corner?
Does this mean that Haiti will now prosper? No, here Professor Rozario explains, the problem is that it is not the sort of “dynamic, robust capitalist economy” for which he claims death and destruction would be good for business.
And what makes those things good for business? Well, in the case of Katrina-ravaged Gulf coast, it’s been “a fervent commitment to capitalist development.” In relatively impoverished regions “disasters have often been truly disastrous for the poor.” (Why it’s also not “truly disastrous” for all the other victims he doesn’t explain.) He points out (correctly), for example, that in Florida and New Orleans poor homeowners have been encouraged to rebuild and expand settlements “along vulnerable coastal zones, and thereby increasing the likelihood of future destruction.” Being innocent of economics, or evidently of economic history, Professor Rozario fails to mention how decades of government-funded programs to subsidize flood insurance in Florida and massive levy-building along the Gulf coast might have helped create the very situations he is bemoaning.
Moreover, Haiti hasn’t exactly been a bastion of capitalism, unless you have in mind the kind of intervention practiced by the International Monetary Fund. But this is indeed what Professor Rozario means by “capitalist development.” I won’t argue over terms here. If he wants to define “capitalist development” to include public-private partnerships, government-subsidized infrastructure expenditure, and mild top-down central planning, that’s his prerogative.
That, however, has nothing to do with the “free-market capitalism” that Ludwig von Mises, F.A. Hayek, and Milton Friedman so staunchly defended. Instead, it’s what Mises termed “interventionism,” one of the tragic unintended consequences of which is further immiserating the poor.
The poor do suffer disproportionately from natural disasters, and wealthier people and regions do recover from such things much more quickly than poorer ones. But we know, in part thanks to the work of James Gwartney, Robert Lawson, and others, that greater economic freedom translates to greater prosperity and wealth per person.
It’s economic freedom that’s most needed in Haiti, and not natural catastrophes, even should it grow into the kind of robust economy in which Professor Rozario thinks physical destruction is good for business. Please, let’s stop trying to spin these kinds of disasters into economic stimulus packages or into anything other than the human and economic tragedies that they are.
Pingback by The broken window fallacy « Niklas Elert on 19 January 2010:
[...] Publicerade januari 19, 2010 Uncategorized Leave a Comment Sandy Ikeda förklarar varför man inte kan betrakta vare sig bombningar av städer i krig eller jordbävningar som ekonomiska [...]
Comment by clay barham on 19 January 2010:
Let’s simplify this. Obama said community interests are more important than are individual interests. It is which side you are on is right or left in the current way those terms are used. On the left, communalism reigns supreme, and the few elite rule the many, which is the oldest and dominate system in the world. On the right side, you believe in individual freedom to be a creative pebble dropper or nail sticking up on the boardwalk, where the many rule themselves, which is America and greater prosperity. No matter how many ways you describe each, there are only two sides. In America, it was the Jefferson and Madison side first, and now, under the rule of the Democrats, it is Rousseau and Marx. See Save Pebble Droppers & Prosperity on claysamerica.com. (A Leonard Read disciple)
Comment by Dave on 19 January 2010:
The Broken Windows Fallacy is not a fallacy if the money for rebuilding comes from outside. Haiti does gain if something is broken and other countries pay for it. So, not a fallacy on the national level. Worldwide, of course, a huge loss and huger(?) fallacy.
Comment by Jonathan Finegold Catalán on 19 January 2010:
Dave,
Even if the capital is foreign, the broken window fallacy still applies. The idea behind the broken window is that if a shop’s window is shattered, the necessity to build a new piece of glass will require the creation of jobs and will force the circulation of money. The fact of the matter is that the shop owner has only become poorer, because he has spent double the amount of capital on what really amounts to one window pane.
In regards to Haiti, the capital may be foreign, but the disaster has resulted in a massive destruction of wealth, and any inflow of capital will not necessarily make Haiti wealthier. If they managed to rebuild Haiti to where it was prior to the earthquake, then Haiti will be only just as wealthy as they were before, at the cost of those whose capital was used to rebuild the country. But, the fallacy deals with the idea that Haiti could become wealthier from this disaster, which is untrue (even if does not cost Haiti double).
Comment by Dave on 19 January 2010:
But if someone else pays for the window, and it’s a better window, then the shop owner has indeed become wealthier. And if that someone who pays for the window is from a different town, than the town has become wealthier.
I’m not saying that Haiti will necessarily be better off after rebuilding (not least because of the immense loss of life, but also because the major underlying causes of their persistent poverty will not have changed), but in theory they could be.
Comment by Sandy Ikeda on 19 January 2010:
Robbing Peter to pay Paul makes Peter poorer and Paul richer.
The broken-window fallacy is other. It is the belief that if Paul breaks Peter’s window, the community will become richer when Peter has to shell out $100 to replace it because “now” the glazier will have $100 more to spend, and so on. The fallacy is that a similar spending cycle can occur (e.g., before his window got broken Peter was going to pay Mary $100 for her painting) without Peter’s window needing to be broken at all — and Peter will not have lost the value of his original window.
Comment by Daniel Shapiro on 19 January 2010:
Thanks to Mr. Catalan for setting this straight! Frederic Bastiat was one of the deepest and must lucid economic thinkers in history. Much of his writing was in response to the specious socialistic political-economic experiments being proposed in France during the middle of the 19th century. The principles he discovered and articulated so well are timeless.
In a very real sense Bastiat translated the 1st law of thermodynamics into the social domain which can be stated as: “you can’t get something for nothing.” The broken window fable says you can not create wealth by stealing nor destroying property (either from natural or man-made causes). I think a child could understand this concept. The real source of wealth is innovation and production. Natural law always trumps political law.
Socialist political-economic ideas consist of wealth redistribution schemes and either the elimination of private property or control thereof to somehow achieve social-economic justice. What should be seen is that in America this strategy is implicitly accepted by both the left and the right political parties. The dialectic argument they engage in is simply about who gets plundered, how much is plundered, and who gets the loot.
Do you see another broken window?
Comment by Dave on 19 January 2010:
I made it clear, did I not, in my first comment that I understand perfectly well that it’s a net loss?
The loss, though, will be borne largely by people _other_ than Haitians, and if we bear all of it and rebuild Haiti even a little better than it was, they will have been made wealthier.
Comment by Rocket Man on 19 January 2010:
Think of it this way. If every building in the world fell today, would the world be better off economically or in in ANY way?
Comment by dave on 19 January 2010:
Think of it this way: If YOUR building fell, and a fella from across town rebuilt it for you for free and better than before, would you be better off economically?
Comment by Daniel Shapiro on 19 January 2010:
Dave says: “Think of it this way: If YOUR building fell, and a fella from across town rebuilt it for you for free and better than before, would you be better off economically?”
Hmm. The person who built it for free would be worse off and would bear the costs which could have been used to improve his life as he saw fit. The one who received the free building would be a charity case unless he paid back the builder.
A better way to handle this is to purchase an insurance policy and innovate and construct higher quality buildings that can better withstand fire, high winds, thieves, and earthquakes – a rational longer-term strategy. Or we can pretend we’re little children and rely on uncle Sam to steal money from others and/or print money to bail us out of life’s predicaments. More broken broken windows!
Comment by Matt Hisrich on 19 January 2010:
While I certainly agree that broken windows do not generate economic prosperity, it’s hard to say that Rozario actually argues this in his article. Prof. Ikeda seems to go to great lengths to selectively quote and create a straw man to tear down. That’s unfortunate because there probably have been examples in the media where the broken windows fallacy is actually used, and it would be much more productive to address real cases.
Comment by Sandy Ikeda on 19 January 2010:
Matt,
You say: “Prof. Ikeda seems to go to great lengths to selectively quote and create a straw man to tear down.”
You’ve charged me with intellectual dishonesty. What is your evidence?
Comment by Daniel Shapiro on 19 January 2010:
As far as I’m concerned, there is no rational argument against Bastiat’s broken window! The broken window story is actually a part of a longer essay by Bastiat called: “That which is seen and that which is not seen”. In a way, the title says it all. Selective fact fitting and only considering superficial effects while ignoring the other less obvious and longer term effects of economic action are why most economists are really witch doctors and typically the lackeys of power hungry politicians. I’ve observed that most politicians seem to thrive on broken windows which they break through their interventions.
From what I’ve read in this blog, some people want to confuse the principle with the idea of voluntarily investing in better machinery to become more competitive and profitable. Clearly this is not destructive, but constructive. Or am I breaking a window when I decide to replace my automobile?
P.S. Where’s this straw man in Ikeda’s editorial that Matt referred to?
Comment by Arne Fischmann on 20 January 2010:
In the Dezember issue of a German magazine (Mare) was an interesting report on people living on the Molukken islands that were affected by the 2004 Christmas Tsunami. Due to the huge amounts of help from all over the world, the people are better off now than then, despite the fact that their homes were destroyed. For some extraterrestrial, the whole planet will surely be worse off after the Tsunami, but for the local population that survived, it is a huge improvement. And I doubt that many people would have given money without the Tsunami.
Comment by Dave on 20 January 2010:
Geez, some of you people have a hard time understanding.
I KNOW that it’s still a net loss. I KNOW that if we pay for the rebuilding then we are worse off. YOU need to understand that within a limited area, with help from outside, a broken window CAN lead to an economic improvement _in that area_.
Comment by Matt Hisrich on 20 January 2010:
Sure thing.
You say, “The author, Kevin Rozario, an associate professor of American studies at Smith College, explains how after the great fires of Lisbon (1755), London (1666), Boston (1676), Chicago (1871), and San Francisco (1906) ‘the enormous reconstruction projects demanded … put capital into circulation, produced enormous profits for some and enabled economic innovations that increased productivity.’” The full paragraph includes an explanation that this was the discovery of “one newspaper correspondent.”
You say, “He goes on to argue, citing the Journal, that the Northridge earthquake of 1994 ‘generated intermediate- and long-term economic gains that more than offset initial losses.’” The actual sentence is “The Wall Street Journal reported that major calamities like 1989′s Hurricane Hugo and the 1994 Northridge earthquake in California had generated intermediate- and long-term economic gains that more than offset initial losses.” Again, he is citing an argument, not making one.
You say, “And after noting that the Sichuan earthquake of 2008 did kill 80,000 people, he sagely reminds us that after all it did ‘trigger a building boom that would boost national economic growth by 0.3%.’” The actual section points out that the “general principle that disasters promoted economic growth… was a conviction that was by no means exclusive to the U.S. The Chinese State Information Research Center claimed that the earthquake that killed 80,000 people in Sichuan Province in May 2008 would trigger a building boom that would boost national economic growth by 0.3%” As before, you distort Rozario’s explanation of a set of historical beliefs into a claim that he is arguing for this position.
I’ll grant you the Schumpeter confusion.
You say “In relatively impoverished regions ‘disasters have often been truly disastrous for the poor,’” but leave out the sentence just before, which wholly undermines your entire argument that Rozario’s piece is solely about the benefits of broken windows – “In truth, the dominant narrative of disasters as instruments of progress has always been contested.”
You say, “Moreover, Haiti hasn’t exactly been a bastion of capitalism, unless you have in mind the kind of intervention practiced by the International Monetary Fund. But this is indeed what Professor Rozario means by ‘capitalist development.’” He actually says, “critics of neo-liberalism are arguing that the disaster was the result of capitalist development, as mandated by the international community,” right after quoting someone from the Heritage Foundation with an opposing view.
You say, “Professor Rozario thinks physical destruction is good for business.” His position actually seems far less certain. What does he say? “This disaster, like all disasters, then poses a question. What is the lesson here? What is the opportunity? Unsurprisingly, there is little agreement in our polarized world.” And, “Perhaps this is a time to listen to Voltaire. First, the obligation to help the victims. Then, time to study, to learn, to discover the particulars of history, to ponder which type of development is best for Haiti.”
Perhaps I’m missing something here, but I don’t see an opinion piece on the economic benefits of destruction. Instead, this is more of a historical meditation how humanity has viewed the economic implications of catastrophes in the past and a question about what to do in the wake of the earthquake in Haiti. Rozario’s article may not be appropriate for The Freeman, but it is hardly the article described in your piece.
Comment by sandy Ikeda on 20 January 2010:
Matt,
The point of the first three paragraphs and the penultimate paragraph of your last comment is in support of your accusation that “As before, you distort Rozario’s explanation of a set of historical beliefs into a claim that he is arguing for this position.”
Am I (deliberately) miscontruing Rozario’s thesis? Look, if I am then his editor at the WSJ is also misconstruing it when he added the subtitle:
“NATURAL DISASTERS HAVE BEEN ENGINES OF DEVELOPMENT AND ECONMIC GROWTH THROUGHOUT HISTORY. KEVIN ROZARIO ON THE LESSONS OF PAST CATASTROPHES, AND WHY HAITI MIGHT BE DIFFERENT”
Not, “might have been engines of development” or “thought to have been…” but “have been engines of econmic development.”
And the economic support Rozario gives for this thesis is in a citation that invokes the effect of disasters in stimulating demand, which is indeed the BWF. (In a future article I plan to explain how one might correctly argue, without committing the BWF, that disasters could promote economic development.) The examples he gives then support this thesis, EXCEPT for Haiti and New Orleans because they are so poor. So he DOESN’T commit the BWF in these cases, although I try to point out other errors in his analysis there.
Yes, I did leave off the sentence, “the dominant narrative of disasters as instruments of progress has always been contested,” but I don’t think that adds anything to the sentence that follows which I quote, “disasters have often been truly disastrous for the poor,” which makes the point even stronger, no?
I do think that his treatment of Haiti doesn’t quite fit in with the rest of the article, which may be a source of confusion. I suspect, though of course I have no proof, that Rozario had the article finished before the eartquake struck and then naturally felt he had to add something about Haiti, which however obscured the main point. Again, this is just speculation.
You’re right that he rarely comes out and says “this is what I think is the case” and instead uses a lot of citation. It’s as if I were to argue against central planning by saying, “well, Mises says that rational economic calculation is impossible under socialism, and Hayek says that there’s a fundamental knowledge problem that central planning cannot overcome, and Rothbard argues…” giving the IMPRESSION that I’m against it without actually saying so.
His editor got it right, however.
Finally, I believe your reading of Rozario’s piece as an “historical meditation” is plausible, but I respectfully disagree. I regret that you think it necessary to add the accusation of intellectual dishonesty in your disagreement with me.
Comment by Matt Hisrich on 20 January 2010:
The confident subtitle doesn’t seem to square with the rest of the rather ambiguous article. As someone who has submitted numerous articles to editors, I’m sure you’ve had the experience of editors choosing titles and subtitles that do not reflect the thesis of the article.
And it is the thesis that is at issue here. You’re right to be disappointed in the WSJ for running a fairly unfocused piece when a far more clear understanding of economics could have been articulated. For whatever reason, the Saturday personal journal seems too often to feature this sort of column.
But that’s just the problem. As you acknowledge in your response to me, Rozario never really comes out and directly says what you accuse him of. Unfortunately, you don’t offer the slightest indication in your article that he does anything but stridently defend the BWF.
Now, I don’t think I ever used the term intellectual dishonesty and I fully acknowledge that writing a rebuttal of a general impression probably makes for a less exciting read, but I do think there is a trade-off involved in glossing over the subtlety (or confusion) of another author’s viewpoint to get your own across. We can certainly agree to disagree, but I believe your article could have been stronger if you attacked Rozario’s article for what it is rather than what it is not.
Pingback by Much to Learn: Links on Haiti « Structure & Conduct on 23 January 2010:
[...] 8. Haiti and the Broken-Window Fallacy [...]
Comment by Stuart on 25 January 2010:
I hope we all concede that the tradgedy in Haiti is a net asset and human capital loss for the global economy at large. However, it is not that simple. I believe the article in the WSJ was attempting to point out the practicle outcomes of this tragedy, i.e. the cohesive effort of a people united and determined to rebuild despite the tragic loss, which sometimes translate into other intangible goods, such as economic or social will to survive.
On the books it is a loss. It will and has caused the outflow of monetary resources for things we wish we were not obliged to pay for, but this event has possibley created another resource, motivation and cooperation. This human element of the economy spurs creative production that otherwise might not have occurred in Haiti. Think of this Haiti situation as being similar to a case where a family member dies and feuding siblings both in attendance at the funeral have an oppurtunity to barry the hatchet.
The point is that like it or not, tradegey has the ability to bring people together in away that simple economic priciples do not. It would be nice to belive that we could always come together and be innovative and productive under non-tragic circumstances, but it does not always work out that way as we see. A better question is what type of society have we become when tradgedy is the cheif impetus to economic productivity and voluntary cooperation.
Comment by Sandy Ikeda on 25 January 2010:
Stuart,
I agree, disasters CAN effect productive changes that might otherwise be very difficult to unleash, but not because it stimulates demand and spending, which is the BWF, but because it CAN clear the way for the formation of, for example, productive social networks that support “motivation and initiative.” As I mentioned in an earlier comment, I will elaborate on this in a later article. Thanks for the comment.
Comment by Daniel Shapiro on 9 February 2010:
Right. Free demolition services from mother nature. Never mind loss of life and temporary loss of living standards due to poor construction, primitive economy and primative social structure due to socialism. Everyone loves capitalism when they want something done.
Comment by Bart Simas on 5 July 2011:
This actually is indeed Awesome experience having writing and many because of yahoo search engine choose up me on here. I liked reading your content and added to the e book marks. The strategies you used to place up was clearly understandable. My husband also appreciated after reading this post. Let me undergo for extra earlier.
Pingback by Chicago Daily Observer » Blog Archive » "Natural disasters," not "economic stimuli" on 29 August 2011:
[...] economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more [...]
Pingback by Hurricane Irene as Economic Stimulus | Cato @ Liberty on 29 August 2011:
[...] businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more [...]
Pingback by Is the Road to Economic Growth Paved with Broken Windows? | The Oregon Catalyst on 5 September 2011:
[...] than having the original window and spending the money on something else. But, as economist Sandy Ikeda asks, “If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not [...]
Pingback by Stimulus plans do not work but liberals like Brummett and Obama do not get it « HaltingArkansasLiberalswithTruth on 6 September 2011:
[...] businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more [...]
Comment by hyip investment on 4 February 2012:
Haiti and the Broken-Window Fallacy | The Freeman | Ideas On Liberty I was suggested this web site by my cousin. I’m not sure whether this post is written by him as nobody else know such detailed about my problem. You are incredible! Thanks! your article about Haiti and the Broken-Window Fallacy | The Freeman | Ideas On LibertyBest Regards Justin
Trackback by stop spam plugin on 7 February 2012:
Spam Stop…
[...]usually posts some very interesting stuff like this. If you’re having a hard time with spam links, this should help 100%[...]……