Well, it didn't take long until I heard the first reports on news and finance media oulets to come up with the age old fallacy, or idiocy, that a natural disaster, or war, will "stimulate" the economy. Euro News, CNBC and Bloomberg have all commented on or interviewed "economists" of the Keynesian ilk, that are stating that all the destruction will provide a huge economic boost to Japan and other countries. I predict that Paul Krugman will come up with something along these lines in one of his next columns; I think the last one was written before the earthquake.
So what makes me say that it is fallacious or even idiotic to believe that a natural disaster proves beneficial to the economy? It all goes back to a brilliant parable written by French economist Frederic Bastiat in 1850, known as "The Broken Window Fallacy"; the full text version is available here: http://mises.org/daily/3804. There is also a great short clip on youtube that explains it: http://www.youtube.com/watch?v=gG3AKoL0vEs
Basically, people that claim there is a benefit to be had in destruction, say that because so much has to be spent on rebuilding, there will be a boom in economic activity due to all this spending. What these people completely ignore, is the fact that the money that will be spent on rebuilding would have been spent on something else if the destruction had not occurred. What is the benefit to the construction industry will be the loss to some other industries who will now have less revenue.
An analogy would be a builder who owns his own house and goes to work every day in construction. One day he comes home to see that his house has been flattened and then shouts hurray because of the extra economic activity coming his way. Yes, he will be very busy rebuilding the house, but he will not be able to do his regular job meaning no net increase in economic activity. And all he will end up with is expended time and resources in order to have something he already had in the first place, i.e. his house. But media would have us believe that the builders' situation is full of opportunity and benefit.
If war and natural disasters provided such great economic stimulus, then why not have an international war without victims? Why don't Europe and North America pledge to build the biggest navies ever seen, meet in the middle of the Atlantic, vacate the ships and then collectively blow them all up. By Keynesian theory, such war economic activity is great, but of course the above example shows how nonsensical this idea is. Wars and natural disasters are wealth destroyers and do not provide any environment for an improved economy or wealth creation.
Will some companies benefit from the disaster? Yes, some certainly will, but only at the expense of less revenue to other companies where the money would otherwise have been spent. There is no overall benefit to the economy as a whole.
So what makes me say that it is fallacious or even idiotic to believe that a natural disaster proves beneficial to the economy? It all goes back to a brilliant parable written by French economist Frederic Bastiat in 1850, known as "The Broken Window Fallacy"; the full text version is available here: http://mises.org/daily/3804. There is also a great short clip on youtube that explains it: http://www.youtube.com/watch?v=gG3AKoL0vEs
Basically, people that claim there is a benefit to be had in destruction, say that because so much has to be spent on rebuilding, there will be a boom in economic activity due to all this spending. What these people completely ignore, is the fact that the money that will be spent on rebuilding would have been spent on something else if the destruction had not occurred. What is the benefit to the construction industry will be the loss to some other industries who will now have less revenue.
An analogy would be a builder who owns his own house and goes to work every day in construction. One day he comes home to see that his house has been flattened and then shouts hurray because of the extra economic activity coming his way. Yes, he will be very busy rebuilding the house, but he will not be able to do his regular job meaning no net increase in economic activity. And all he will end up with is expended time and resources in order to have something he already had in the first place, i.e. his house. But media would have us believe that the builders' situation is full of opportunity and benefit.
If war and natural disasters provided such great economic stimulus, then why not have an international war without victims? Why don't Europe and North America pledge to build the biggest navies ever seen, meet in the middle of the Atlantic, vacate the ships and then collectively blow them all up. By Keynesian theory, such war economic activity is great, but of course the above example shows how nonsensical this idea is. Wars and natural disasters are wealth destroyers and do not provide any environment for an improved economy or wealth creation.
Will some companies benefit from the disaster? Yes, some certainly will, but only at the expense of less revenue to other companies where the money would otherwise have been spent. There is no overall benefit to the economy as a whole.