Sunday, November 04, 2012

Do Wars and Natural Disasters Help the Economy?

It is amazing how many mainstream economists, pundits, politicos, and everyday people think that war, hurricanes, public-works programs, inflation, and other forms of stimulus actually help create jobs and build up the middle class. Frédéric Bastiat, a 19th century political philosopher and economist, exposed the logical fallacy of this reasoning (back in 1850!) that seems attractive on first glance. He called it the "Parable of the Broken Window" (original title: "Ce qu'on voit et ce qu'on ne voit pas" - "What is seen and what is not seen").

This line of thought was cited (essentially retold in English) as Henry Hazlitt's 1946 work Economics in One Lesson.

The above video sums up the fallacy well.  Nevertheless, how often have we been taught that World War II brought America out of the Great Depression - as if massive destruction and the slaughter of millions of people could actually be economically helpful!  This is the Broken Window Fallacy writ large.  FDR's government works programs, LBJ's Great Society initiative, Richard Nixon's wage and price controls, and the Bush-Obama stimulus and bail-out packages were more of the same.  They are all based on this simple fallacy.

Politicians depend on this kind of smoke and mirrors to enrich themselves and their cronies to our detriment.  This line of reasoning is behind things like government bailouts and "too big to fail."  This is also why we have so many lobbyists and why businessmen who wish to get ahead are virtually forced to bribe politicians - albeit legally under the aegis of "campaign contributions."

We Americans are in dire need of economic education rooted in markets and voluntary trade that is not the Broken Window Fallacy.

By the way, if you are interested in free copies of these authors, click here for Bastiat and here for Hazlitt.

Bonus: A John Stossel video featuring Dr. Walter Williams addressing the Broken Window Fallacy.  And here is another take on it.  Now, can we just get the guys in DC to look at these videos?  After all, we know they don't do a lot of reading there...

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