Whenever you hear of some destruction from natural disasters or war, you’ll always find some people (like Paul Krugman of NY Times) praising the events for stimulating economic growth. Their argument is that, because of the destruction of all these homes and buildings, people have to rebuild them, and this causes people to spend and circulate money and it creates jobs for lots of people. They tend to think that such destruction is actually good for the “economy”. This is actually a somewhat common myth, and it has been debunked already long ago by economist Frederick Bastiat in 1850. Before I summarize his argument, pause for a moment to reflect on the utter stupidity of the implications. If such destruction was a good thing, then all we would have to do to gain economic prosperity is break all of our stuff and burn down all of our houses. If we all did that, do you really think we would be better off economically? Besides this intuitive hint of stupidity, let’s get more technical.
Bastiat illustrates the concept with the story of the broken window. Consider a shop keeper. And, consider a boy that comes up and carelessly throws a rock threw the window and breaks it. Now, the upset shop keeper has to spend $100 to replace the window. This money goes to the window maker, who now gains $100. So, the window maker is better off. The destruction seems to have helped sustain a job. After all, without the breaking of windows, the window maker would have less income. Furthermore, the window maker will then spend the $100 somewhere else, again “stimulating the economy”. Fair enough. This is the part that is easily seen. But, we should also consider the unseen. If the window did NOT break, then the shop keeper would simply have spent that same $100 somewhere else, maybe to get a suit from the tailor. In this case, the tailor would be helped, and he would then spend the $100 somewhere else, again “stimulating the economy”. There really isn’t much of a difference if you’re just counting money flows. $100 flow either way. Breaking the window simply benefited the window maker at the expense of the tailor.
But, that’s not all. The net effect is not zero sum. Breaking the window didn’t just divert money flows to a different direction. The destruction of the window actually made people poorer on a net basis. In the first scenario, with the destruction, the end effect is that we still have a window (because it was replaced), but no suit. However, in the second scenario, without destruction, we would still have the original window, but we would have a suit in addition. The choice is between having only a window or having both a window and a suit. The net effect of breaking the window is to have one less suit. The “point” of the “economy” is to produce goods and services. That is wealth. When you destroy goods, you decrease wealth and the quality of life for people. Destruction is not good for the economy.
The illusion of destruction-caused stimulus is a short term positive effect with long term negative effects. Mass destruction forces us to spend the money from savings (or borrowing and going in debt) all at once instead of spread out spending over time. Any short term boost in spending now to replace destroyed items is offset by less spending later on new goods and services. The net effect is significant harm and less goods and services.