Thursday, September 01, 2005

All Fall Down

The Katrina disaster in New Orleans, and elsewhere, is producing the usual pundit nonsense where a little knowledge is dangerous. That several commentators purport to be economists, or at least familiar with markets, is worrying. Several of the good economists Blogs (see Brad Delong, Trade and Barter, The Austrian Economists, Tim Worstall, Division of Labour, Café Hayek, et al), have picked up on the stories, fantasies and first impressions posing as deep thoughts and given them the appropriate treatment. Laypeople should be treated very gently, but professionals, well they get what they deserve.

Most critics refer to Bastiat’s classic piece on the ‘broken window’ fallacy: that a broken window is ‘good news’ because it means money has to be spent on replacing it, which is good for glaziers and therefore good for business and the economy. The fallacy lies in treating the replacement of the window as an addition to national income, when it fact it takes expenditure away from where it was intending to go before the cash was used to pay the glazier, or it reduces savings. Broken windows, as with car smashes, leaking roofs and money spent on emergency medicines, are ‘distress purchases’, not intended purchases in the normal course of a day.

Whatever the consumer had intended to purchase that day – adding to the expenditure stream – is now diverted to remedy the distress of the emergency. The net effect is not positive. It may be good news for the glazier – an unexpected boost to her income – but it is bad news for the hairdresser, whose appointment is cancelled, or the restaurant losing a customer, or whatever. The more expensive emergencies – roof leaks – may simply cancel the intended holiday expenditure – again adding nothing net to total expenditure.

Similarly with unforeseen court fines for misbehaviours; they curtail spending by the miscreant in the form of the fine (apart from any extra costs of gaining a conviction).

If it were true that disasters have a sunny side to them – a Tsunami for example? – then we should welcome them, even live dangerously without precautions and watch the GNP go up! As somebody said in one of the Blogs, somebody nuking the US would be doing it a favour, a most ludicrous suggestion, even as a ‘joke’.

As a young economics student in the 1960s – where did all the flowers of our youth go? – during the high-tide of Keynesian economics, I spoke as a meeting of trade unionists in Edinburgh, who were debating a proposal of the Council to apply to run the Commonwealth Games, for which they needed to build a multi-million pound stadium.

I opined the view that they should support the Council’s proposal because the stadium would create employment (fair enough) but then, in an outburst of speaker's rhetoric, and flushed with first year Keynesian macro, plus my Samuelson, I added, that I hoped it fell down when finished, because then they would need to build another one, doubling the economic benefits I claimed.

Shortly afterwards I came across a little book in a second-hand bookshop, of which Edinburgh still has many, called ‘Economics in One Lesson’. Reading it I was mortified to find the story of the broken window, which completely undermined my enthusiasm for building stadiums and hoping they would fall down, in a misjudged analogy to Keynes’s passion for burying milk bottles at the bottom of disused coal pits and then digging them up again to stimulate growth.

Every time I hear or read of so-called silver linings from disasters, I think of my public, and still embarrassing, faux pas.


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