... There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. ...
— Frédéric Bastiat, 'What Is Seen and What Is Not Seen', 1850
In 1850, the French economist Frédéric Bastiat wrote an essay entitled 'That Which Is Seen, and That Which Is Not Seen', which included a little parable called 'The Broken Window' —
http://www.econlib.org/library/Bastiat/basEss1.html
http://bastiat.org/en/twisatwins.html
https://mises.org/library/broken-window
In 'The Broken Window' Bastiat explains the fallacy of the popular view that there is economic benefit to society from destruction. Whenever there is some natural disaster, for example, it is not hard to find claims in the press that large-scale destruction results in some economic gain. Here is one example, published in October 2012, after hurricane Sandy --
http://finance.yahoo.com/blogs/the-exchange/economic-impact-hurricane-sandy-not-bad-news-150458002.html
https://archive.is/ntrpl
The Economic Impact of Hurricane Sandy … Not All Bad News
By Peter Morici
Hurricane Sandy will have a devastating impact on life and property. However, gauging its ultimate impact on an economy -- still struggling to overcome the Great Recession but with substantial resources to overcome adversity -- is far more complex than merely adding up insurance payouts and uninsured losses.
The Upside
Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact. Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better-making a brighter future in the face of tragedy.
...
By Peter Morici
Hurricane Sandy will have a devastating impact on life and property. However, gauging its ultimate impact on an economy -- still struggling to overcome the Great Recession but with substantial resources to overcome adversity -- is far more complex than merely adding up insurance payouts and uninsured losses.
The Upside
Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact. Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better-making a brighter future in the face of tragedy.
...
The quote above is obviously absurd on its face — it simply begs the painfully obvious question: 'Can't smart investments be made without wide spread destruction first, and didn't things that did not need to be replaced also get destroyed in the disaster?'
And notice this estimate from the State of New Jersey, cited by the U.S. Department of Commerce, of $29.5 billion in construction costs just 'to repair and replace the damage caused by the storm'. And even while acknowledging the enormous amount of lost wealth, they pretend that the work to restore conditions prior to the storm creates new jobs, even though no new wealth is being created — ignoring that the $29.5 billion could have been spent on projects to actually raise living standards, had it not been for the damage caused by the storm. Yet again, we see Bastiat's Broken Window Fallacy --
http://www.esa.doc.gov/Reports/economic-impact-hurricane-sandy
https://archive.is/Du2vx
• The New Jersey state government estimated construction costs of $29.5 billion to repair and replace the damage caused by the storm. If this money is spent over the next four years, the state should realize a gain of $44 billion in total output and about 281,000 new jobs (full- and part-time).
Here is Lawrence Reed of FEE addressing the same kind of nonsensical thinking regarding a devastating earthquake in Kobe, Japan, back in 1995 —
http://www.fee.org/the_freeman/detail/destruction-is-no-blessing
Bastiat was addressing the same kind of absurdity back in his day, when it was suggested that rebuilding Paris would somehow make French society better off --
http://bastiat.org/en/twisatwins.html
http://www.econlib.org/library/Bastiat/basEss1.html
...
When we arrive at this unexpected conclusion: "Society loses the value of things which are uselessly destroyed;" and we must assent to a maxim which will make the hair of protectionists stand on end - To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit."
What will you say, Monsieur Industriel -- what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?
I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen. The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying — What would become of the glaziers, if nobody ever broke windows?
...
When we arrive at this unexpected conclusion: "Society loses the value of things which are uselessly destroyed;" and we must assent to a maxim which will make the hair of protectionists stand on end - To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit."
What will you say, Monsieur Industriel -- what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?
I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen. The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying — What would become of the glaziers, if nobody ever broke windows?
...
But here is a writer trying to argue that the 'Broken Window Fallacy' is not a fallacy --
http://thinkprogress.org/yglesias/2011/08/16/296903/the-denial-of-money
https://archive.is/gB1ct
'The Denial of Money'
Few myths are as persistent as the idea that Keynesian and monetarist thinkers fail to appreciate Frédéric Bastiat point about broken windows. As even a cursory examination of efforts to apply Bastiat’s ideas to the conditions of a depressed economy will show, the so-called “broken windows fallacy” is not a fallacy at all, just a special case. Here’s Daniel Mitchell:
[Krugman] committed the “broken-window” fallacy, explained more than 150 years ago by a famous French economist, Frederic Bastiat.Breaking a window at the local bakery, Bastiat explained, might generate business for the town glazier, but only at the expense of some other merchant, like a tailor, who would have benefited if the baker didn’t have to spend money on a new window.In other words, the destruction of wealth is not good for an economy. At best, it makes us poorer and then shifts how current income is allocated.
When Bastiat wrote that, “money” meant, in France, a commodity of which there was limited supply. Specifically, the so-called “Germinal Franc” contained 290.32 mg of gold. The modern economy isn’t like that. The quantity of money and credit are policy variables. If the country were afflicted with unemployed glaziers, Ben Bernanke could run around smashing bakery windows and leaving checks behind. The checks don’t need to be backed by anything, and the bakers will use the checks to hire glaziers to replace the lost windows without reducing their spending on tailors. Problem solved. This would be, admittedly, a silly way to resolve the problem. A more reasonable approach would be to cut the checks and pay the glaziers to do something useful. But it would work. Everyone understands that we don’t have a barter economy operating or a gold standard operating purely with cash-in-advance, but people often fail to see that this is important. But it makes a ton of difference. Among other things it means that if your argument about why something can’t be done turns at some key point on an alleged scarcity of money that something has gone awry.
Well, there is nothing new here, given that people have been trying to pretend that money printing is helpful since long before Bastiat.
But notice that the statements quoted above regarding 'The Broken Window' are both a straw man and red herring fallacy.
Bastiat described costs in francs in 'The Broken Window' as a way of illustration, but his argument has nothing to do with the supply of money as the writer stated in the quote above, but rather the opportunity cost of production — Bastiat was simply making the obvious point that the economic activity that results from replacing something that was destroyed does not add wealth — 'an alleged scarcity of money', to quote the writer above again, has nothing to do with Bastiat's argument (straw man).
Even if, as this writer described, a Federal Reserve chairman paid for the broken window with printed money, so that the shopkeeper's spending were not reduced as a result of replacing the broken window, the actual labor and resource cost of the replaced window are still lost — printing money does not replace the lost wealth, which is the utility of the window that was destroyed, and the labor and resources consumed to produce it in the first place.
And arguing that it is helpful to pay individuals to do things that have no market demand — given that they are not already being purchased — as the writer described above, is simply a distraction from Bastiat's point, and is not relevant — even if it were true that it is useful (red herring).
It is especially ironic that a writer would begin by stating it is a myth that Keynesian and monetarist thinkers do not appreciate the point of 'The Broken Window', but then go on to completely miss the point.
The writer helps to prove the claim that he is supposedly attempting to debunk.
Money, in any form (whether it is cigarettes or gold coins), is only a tool — a medium of exchange to facilitate trade, and a store of value. The only legitimate spending is the result of production, or loaned production — a person trading the thing they have made or grown (or borrowed (debt)) with others.
Wealth is produced goods and services — not money. Trade based solely on money printing is no different than counterfeiting — it makes everyone poorer, because it supports consumption without the prerequisite production. It just makes the medium of exchange worth less. This is the only possible outcome of simply distributing money, since the supply of available goods is not magically increased as money is printed — as that additional money is spent, prices must rise.
Counterfeiting (printing money on your own) is illegal for good reason — in essence, it is theft. Why? Because it allows the counterfeiter to receive and consume goods and services without offering anything of value in exchange. The only difference between counterfeiting and governments printing money, is the hope that governments will be responsible and will not steal too much, in debasing the value of their currency.
And note that the writer does not give any indication that he is aware of the obvious inefficiencies, in paying someone with printed money to perform work not required by normal market demand — not only has the medium of exchange been debased, but any resources that were consumed were more than likely put to a less effective use, potentially forever (it does not get more costly than that).
Of course, a government can always print its currency, and distribute funds to everyone, thereby giving them as much money as they want to spend. But what would happen then?
Is not this, in essence, what happened during the U.S. mortgage crisis from 2007 to 2009? Most people who applied for a loan, were given that loan, at very low cost, and this fueled wild speculation on assets that were worth much less than people were paying for them.
Many would be quick to respond here that a loan is different than simply printing money for people to spend, since the borrower is obligated to pay the money back — well, of course — that makes the mortgage crisis more useful as an example for demonstrating the folly of money printing, not less.
The mortgage crisis functions as a more illustrative example, and demonstrates the folly of money printing even more clearly, since even the obligation to pay the money back, could not prevent wild speculation and a massive waste of resources.
In short, printing money in an attempt to recover from recessions marked by a large misallocation of resources, is an attempt to use a disease as a cure.
The essential point is that legitimate trade is the result of production — not the possession of money.
Simply giving everyone more money does nothing to increase the available goods or services that have been produced (or that even can be produced) — it can only increase scarcity by giving people the ability to purchase goods and services when they have not produced anything valuable to exchange for those goods or services — in essence, it is manufacturing counterfeiters.
Here is a nice short video explanation of the nature of money, and the inevitable result of money printing --
http://www.learnliberty.org/videos/why-not-print-more-money/
...
Printing more money will simply spread the value of the existing goods and services around a larger number of dollars. This is inflation. Ultimately, doubling the number of dollars doubles prices. If everyone has twice as much money but everything costs twice as much as before, people aren’t better off. Having the government print money will not increase wealth.
Here is another article that explains the obvious point that the only way money printing will not cause inflation is if the money is not spent (i.e. it creates no new demand) —
http://economics.about.com/cs/money/a/print_money.htm
https://archive.is/5enBd
There is a long list of countries that created inflation catastrophes by taking this absurd logic regarding eliminating a supposed 'scarcity of money' to its extreme —
http://en.wikipedia.org/wiki/Hyperinflation
http://en.wikipedia.org/wiki/File:German_Hyperinflation.jpg
Supposedly, this is not what Keynes had in mind, but he helped legitimize the idea that government spending can create economic growth, even though it is often wasteful and ultimately results in taxation, so he paved the way for asinine arguments like the one the writer made above in 'The Denial of Money'.
People just love trying to pretend there is a free lunch. If it were possible to create prosperity by printing money, there would not be any poverty in the world.
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