September 11, 2017

Harvey, Irma, and Frédéric – the “Broken Window Fallacy” returns

Jon Gabriel tries to set the record straight on what a natural disaster means for the economy (hint, ignore anyone who says the GDP will rise due to the recovery efforts):

Ever since Hurricane Harvey slammed into Texas two weeks ago, we’ve seen countless images of heroic rescues, flooded interstates and damaged buildings.

As awful as the human toll was, it was not as bad as many of us feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.

The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.

The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that Harvey “could be a slight negative for U.S. growth in the third quarter, but economists say it may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area.”

Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, “reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane.”

Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.

And what about all those windows broken by the high winds? This will be the Golden Age of Texas Glaziery!

Not so fast.

All of this is based on a misunderstanding of what the GDP actually measures. It’s a statistic that often gets mentioned in the newspapers and on TV, but it is almost always used in a way that misleads people about what is happening in the economy. GDP — Gross Domestic Product — is intended to show the approximate total of goods and services produced in a national economy. Thus, when the GDP goes up, it means that the current period being measured recorded more goods and services produced than in the previous period.

When a natural disaster like a hurricane, earthquake, flood, or tornado strikes a city, state or region, all the work required to fix the damage will artificially boost the recorded GDP for that year. But the affected area isn’t that much richer than it was before, despite the GDP going up, because the GDP does not measure the losses suffered during the natural disaster.

This is where Frédéric comes in. I’m referring to the French economist and author Frédéric Bastiat, who brilliantly illustrated the GDP misunderstanding in his essay “What Is Seen and What Is Not Seen“:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

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.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

The GDP problem I identified at the start of this post is a general case of what Bastiat called the “Broken Window Fallacy”:

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.

If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.

And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.

Now let us consider James Goodfellow.

On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.

On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.

Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.

From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”

Related: Shared by Thomas Forsyth on Facebook:

December 8, 2016

QotD: The law

Filed under: Law, Liberty, Quotations — Tags: — Nicholas @ 01:00

Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.

Frédéric Bastiat, The Law, 1850.

December 4, 2016

QotD: Human nature

Filed under: Government, Liberty, Quotations — Tags: , — Nicholas @ 01:00

If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?

Frédéric Bastiat, The Law, 1850.

December 2, 2016

QotD: Socialism

Filed under: Education, Government, Politics, Quotations — Tags: , , — Nicholas @ 01:00

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.

Frédéric Bastiat, The Law, 1850.

November 26, 2016

QotD: State-run education

Filed under: Education, Government, Quotations — Tags: — Nicholas @ 01:00

You say: “There are persons who lack education” and you turn to the law. But the law is not, in itself, a torch of learning which shines its light abroad. The law extends over a society where some persons have knowledge and others do not; where some citizens need to learn, and others can teach. In this matter of education, the law has only two alternatives: It can permit this transaction of teaching-and-learning to operate freely and without the use of force, or it can force human wills in this matter by taking from some of them enough to pay the teachers who are appointed by government to instruct others, without charge. But in the second case, the law commits legal plunder by violating liberty and property.

Frédéric Bastiat, The Law, 1850.

June 11, 2016

QotD: Socialism

Filed under: Government, Liberty, Quotations — Tags: , — Nicholas @ 01:00

Socialism, like the ancient political ideology from which it emanates, confuses government with society. That is why, every time that we do not want a thing to be done by the government, the socialists conclude that we do not want that thing to be done at all. We are opposed to state education; hence, we are opposed to all education. We object to a state religion; hence, we do not want any religion at all. We are against an equality imposed by the state; hence, we are opposed to equality; etc., etc. It is as if they accused us of not wanting men to eat, because we oppose the cultivation of grain by the state.

Frédéric Bastiat, The Law, 1848.

August 20, 2015

Frédéric Bastiat

Filed under: Economics, Europe, History — Tags: , , , , — Nicholas @ 05:00

Lawrence W. Reed makes the case for Frédéric Bastiat to be awarded a Nobel Prize … if they awarded them posthumously, anyway:

If a posthumous Nobel Prize was awarded for crystal-clear writing and masterful storytelling in economics, no one would be more deserving of it than Frédéric Bastiat (June 30, 1801–December 24, 1850). He set the standard over a century and a half ago.

This remarkable Frenchman was an economist in more than the traditional sense. He understood the way the economic world works, and he knew better than anybody how to explain it with an economy of words. He employed everyday language and a conversational tone, an innate clarity that flowed from his logical and orderly presentation. Nothing he wrote was stilted, artificial, or pompous. He was concise and devastatingly to the point. To this day, nobody can read Bastiat and wonder, “Now what was that all about?”

Economic writing these days can be dull and lifeless, larded with verbosity and presumptuous mathematics. Bastiat proved that economics doesn’t have to be that way: the core truths of the science can be made lively and unforgettable. In literature, we think of good storytelling as an art and stories as powerful tools for understanding. Bastiat could tell a story that stabbed you with its brilliance. If your misconceptions were his target, his stories could leave you utterly, embarrassingly disarmed.

If you aspire to be an economist or a policy maker or a teacher or just an influential communicator, take time to study at the feet of this 19th-century master.

February 12, 2014

In praise of Frédéric Bastiat

Filed under: Economics, Europe, History — Tags: , , , — Nicholas @ 08:48

Douglas Carswell wishes more people knew about nineteenth-century economist Frédéric Bastiat:

I reckon that one of the greatest Frenchman of all time is a fellow called Frédéric Bastiat (1801-1850). Not heard of him? France, I reckon, would have remained a truly global nation if more people had.

A free market, Classical liberal thinker, Bastiat grasped how wealth is created — and how parasitical elites and vested interests will seek to live off the productivity of others.

Nations rise, he could see, when various naturally parasitical interests were reined in, making production more fruitful than parasitism. Nations sunk into mediocrity, or remained there, when the parasites got their way — and other people’s wealth.

Far from being just a creature of his time, Bastiat speaks to us today. His spoof petition of the candlestick makers (they lobbied politicians to block out unfair competition from sunlight) tell us a great deal about the behaviour today of energy renewable interests and central bankers.

As a free market thinker, Bastiat was up there on a par with Adam Smith or Richard Cobden. Yet unlike Smith and Cobden, for all his brilliance, Bastiat had little impact on the French body politic. French lassies faire gave way to dirigisme. In terms of French politics, it is almost as if Bastiat might never have existed. And a once global player, presided over by a succession of enarques and corporatist cliques, sunk slowly into Hollandesque mediocrity.

My fear is that free-market thinkers on this side of the Channel could turn out to be little more than British Bastiats. Already the land of Adam Smith is run by a big, bloated state bureaucracy. The country that produced Cobden trades with the world on the basis of quota, not free competition.

June 28, 2013

QotD: In praise of Bastiat’s “What is seen and what is not seen”

For me, [Bastiat’s “What Is Seen and What Is Not Seen“] is the pinnacle of economic profundity. You can call it obvious. But when I first started learning economics at the age of 17, none of Bastiat was obvious. I was an honors student at a well-regarded California high school. Yet as far as I can remember, I had never heard any argument against the minimum wage, Social Security, or the FDA in my entire life.

Every teacher and book I ever encountered treated naive populism like the Law of Gravitation. Evil businesses aren’t paying workers enough? Raise the minimum wage; problem solved. The elderly are poor? Increase Social Security payments; problem solved. Evil businesses are selling people bad drugs? Impose more government regulation; problem solved.

If you favor these programs, you can call these arguments straw men. But I assure you: These “straw men” were never presented by opponents of these policies. On the contrary, these “straw men” were invariably presented by people who favored these policies. How is that possible? Because during my first 17 years of life, I never encountered an opponent of any of these policies! You might assume I was grew up in a weird Berkeley-esque leftist enclave, but bland Northridge, California hardly qualifies.

What was going on? The best explanation is pretty simple: I only heard straw man arguments in favor of populist policies because virtually everyone finds these straw man arguments pleasantly convincing. Regardless of the merits of the minimum wage, Social Security, and the FDA, economic illiteracy is the reason for their popularity. If someone like Bastiat convinced people that the pleasantly convincing arguments are inane, proponents would have to fall back on arguments that are intellectually better yet rhetorically inferior.

Bryan Caplan, “Who Loves Bastiat and Who Loves Him Not”, EconLog, 2012-08-15

April 10, 2012

The 7 rules of bureaucracy

Filed under: Bureaucracy, Economics, Government, History — Tags: , , , — Nicholas @ 08:27

A long post by Loyd S. Pettegrew and Carol A. Vance at the LvMI blog explains the seven rules (and many sub-rules) of modern bureaucracy:

In order to understand the foundation of America’s morass, we must examine bureaucracy. At the root of this growing evil is the very nature of bureaucracy, especially political bureaucracy. French economist Frédéric Bastiat offered an early warning in 1850 that laws, institutions, and acts — the stuff of political bureaucracy — produce economic effects that can be seen immediately, but that other, unforeseen effects happen much later. He claimed that bad economists look only at the immediate, seeable effects and ignore effects that come later, while good economists are able to look at the immediate effects and foresee effects, both good and bad, that come later.

Both the seen and the unseen have become a necessary condition of modern bureaucracy. Max Weber, considered the father of modern bureaucracy largely in response to the Industrial Revolution, is credited with formalizing the elements of bureaucracy as a fundamental principle of organization. He was also painfully aware of the arbitrariness of bureaucratic decision processes.

[. . .]

One of the truisms of bureaucracies, be they government or private sector, is that if left to their own devices, they will grow bigger, bolder, and less manageable over time. Teasley has seen this happen over and over again and put his considerable intellect to how its apparatus works. John Baden has offered us one of the most promising, yet ignored, solutions to the bureaucratic leviathan. Baden (1993) puts the problem at the feet of politicians concentrating benefits and dispersing costs and believes “predatory bureaucracies” would allow bureaucracies to feed on themselves with the most effective and efficient bureaucracy taking money and responsibility away from those that are less efficient and effective. While a provocative theory, the problem lies in the very rules that underpin bureaucracies. Despite the concept being nearly 20 years old, it has not been attempted, let alone enacted in any meaningful or widespread way.

[. . .]

Rule #1: Maintain the problem at all costs! The problem is the basis of power, perks, privileges, and security. [. . .]

Rule #2: Use crisis and perceived crisis to increase your power and control. [. . .]

Rule 2a: Force 11th-hour decisions, threaten the loss of options and opportunities, and limit the opposition’s opportunity to review and critique. [. . .]

Rule #3: If there are not enough crises, manufacture them, even from nature, where none exist.

Bureaucracies are always on the lookout for a new crisis. In his “Guiding Principles of Politicians, Bureaucrats, and Bureaucracies,” Harry Teasley points to three examples:

  1. The Gulf of Tonkin incident, where an alleged attack took place on two US naval destroyers by a North Vietnamese torpedo boat, allowing President Johnson to deploy conventional military forces to Vietnam without congressional approval.
  2. The attribution of weapons of mass destruction (WMDs) to Saddam Hussein permitted President George Bush to invade Iraq (again, without the need of congressional approval), after which no WMDs were found.
  3. Man-made global warming. The first two resulted in loss of life and a terrible toll of people maimed and injured. We are still in the throes of discovering the effects of the third crisis.

[. . .]

Rule #4: Control the flow and release of information while feigning openness. [. . .]

Rule 4a: Deny, delay, obfuscate, spin, and lie. [. . .]

Rule #5: Maximize public-relations exposure by creating a cover story that appeals to the universal need to help people. [. . .]

Rule #6: Create vested support groups by distributing concentrated benefits and/or entitlements to these special interests, while distributing the costs broadly to one’s political opponents. [. . .]

Rule #7: Demonize the truth tellers who have the temerity to say, “The emperor has no clothes.” [. . .]

Rule 7a: Accuse the truth teller of one’s own defects, deficiencies, crimes, and misdemeanors. [. . .]

June 27, 2011

Stephen Gordon: The “broken window” fallacy of “green” jobs

It’s always nice to see a reference to Frédéric Bastiat in a modern day setting:

But it is possible to oversell the green jobs theme. Job creation should not be a goal of environmental policy, no more than it should be a policy goal in the fields of health or national security. If, instead of hiring people, we could use magic to stop disease, crime and environmental degradation, we would. Pointing to jobs ‘created’ to fix these problems is an error that Frédéric Bastiat identified in his ‘parable of the broken window’. Broken windows generate work for glaziers, but that doesn’t mean that breaking windows will increase national income.

An often-quoted statistic goes something like this: “wind energy produces 27 per cent more jobs per kilowatt hour than coal plants and 66 per cent more jobs than natural gas plants”. This could well be true, but it is hardly a strong argument in favour of the employment opportunities that would be generated by investing in wind energy: hiring more people to produce less energy is not a strategy for prosperity. Similar gains in employment could be obtained by outlawing mechanical excavators so that all digging must be done by hand. It may make sense to encourage the development of wind power, but increased employment is most emphatically not one of the reasons for doing so.

March 6, 2011

The economics of urinal cakes

Filed under: Economics, Humour — Tags: , , — Nicholas @ 11:34

Tim Harford uses Bastiat’s “broken window fallacy” to explain the economics of urinal cakes:

Dear Massimo,
When I read the first sentence of your letter, I was wondering where you were going with this. Not to worry: your question is easily answered. The 19th century French economist and essayist Frédéric Bastiat anticipated it with his famous “broken window fallacy”. A broken window seems good for the economy because it creates work for the glazier. But Bastiat pointed out that the money that the window-owner pays to the glazier is money he can’t spent on something else. The glazier is richer, but the tailor or the restaurateur or the escort girl is poorer. The broken window hasn’t stimulated the economy at all.
In short, don’t think you’re doing anyone a favour by aiming squarely at the urinal cake in front of you. And don’t even think about aiming at the urinal cake in front of someone else.

September 10, 2010

Maxime Bernier for PM!

Filed under: Cancon, Liberty, Politics — Tags: , , , — Nicholas @ 13:12

Now that most of us have given up on any actual free market policies coming out of the PMO, perhaps it’s time to look to someone who still appears to have libertarian tendencies:

It seems the libertarian Conservative MP is offside with the rest of his Quebec caucus colleagues over the issue of funding a multi-million-dollar hockey rink. He was conspicuously absent from a photo-op this week, in which Quebec MPs donned Nordiques jerseys to show their support for the arena and the possibility of bringing an NHL team back to the provincial capital.

“It was instructive that Quebec MP Maxime Bernier, who opposes public handouts for private enterprise, was missing from the photograph and e-mailed me a curt ‘no comment’ when asked about the merits of federal support for the arena,” National Post columnist Don Martin wrote at the time.

Mr. Bernier has since taken to the local airwaves in his Beauce riding to pour cold water on the idea of the Tories showering taxpayer dollars on sports facilities while battling a $56-billion deficfit.

Corporate give-aways of millions of dollars to billionaire sports team owners shouldn’t be merely controversial: they should be anathema. It’s that much worse when the government is deeply in debt.

Update: Maxime Bernier in his own words:

The hard reality is that we have just been through a global economic crisis — which remains very preoccupying and is likely not over — and governments in both Quebec City and Ottawa are heavily indebted. Our government has just posted a huge $56-billion deficit and the priority is to get back to a balanced budget through reductions in our own programs, and avoid by all means getting involved in risky financial ventures.

I was not at all impressed by the Ernst & Young study, which concluded that the project would be “profitable” — but only on the assumption that governments provide full funding for the construction as well as the repairs and renovations that will be necessary over the next 40 years. That’s a deceptive way of putting it. The conclusion should rather be that the project is simply not profitable and will constitute a financial burden for taxpayers for decades to come, even in the best scenario. That’s why not a single private player has been found to invest in it.

Just about any business would be “profitable” if they never had to pay rent for their business premises or buy, build, and maintain their own buildings. That isn’t the way ordinary businesses operate, and professional sports teams shouldn’t be any different. We don’t elect governments to be the primary supporters of sports team owners . . . no matter how many “complimentary” premium seats at the stadium may be offered to individual politicians.

As the great French economic Frédéric Bastiat wrote, “Government is the great fiction through which everybody endeavours to live at the expense of everybody else.” When such large amounts are in play, it is impossible to calculate exactly who has received how much. We would need to go beyond a single file and take into account all public spending items, going as far back as possible.

That’s what Quebec separatists like to do. They keep telling us that Quebec has been on the losing side of the financial equation and that Ottawa has systematically been favouring Ontario for more than a century. Meanwhile, people in the rest of the country believe that Quebec is the spoiled child of the federation. Each region can point towards many examples to nurture its frustrations. It is a pointless debate which can only divide our country.

Oh, swoon!

February 5, 2010

Objectivists should not read this

Filed under: Books, Liberty, Media — Tags: , , , — Nicholas @ 17:08

Theodore Dalrymple, in his mundane disguise, looks at the founding deity of Objectivism:

Rand’s virtues were as follows: she was highly intelligent; she was brave and uncompromising in defense of her ideas; she had a kind of iron integrity; and, though a fierce defender of capitalism, she was by no means avid for money herself. The propagation of truth as she saw it was far more important to her than her own material ease. Her vices, of course, were the mirror-image of her virtues, but, in my opinion, the mirror was a magnifying one. Her intelligence was narrow rather than broad. Though in theory a defender of freedom of thought and action, she was dogmatic, inflexible, and intolerant, not only in opinion but in behavior, and it led her to personal cruelty. In the name of her ideas, she was prepared to be deeply unpleasant. She hardened her ideas into ideology. Her integrity led to a lack of self-criticism; she frequently wrote twenty thousand words where one would do.

Rand believed all people to be possessed of equal rights, but she found relations of equality with others insupportable. Though she could be charming, it was not something she could keep up for long. She was deeply ungrateful to those who had helped her and many of her friendships ended in acrimony. Her biographer tells us that she sometimes told jokes, but, in the absence of any supportive evidence, I treat reports of her sense of humor much as I treat reports of sightings of the Loch Ness monster: apocryphal at best.

A passionate hater of religion, Rand founded a cult around her own person, complete with rituals of excommunication; a passionate believer in rationality and logic, she was incapable of seeing the contradictions in her own work. She was a rationalist who was not entirely rational; she could not distinguish between rationalism and rationality. Of narrow aesthetic sympathies, she laid down the law in matters of artistic judgment like a panjandrum; a believer in honesty, she was adept at self-deception and special pleading. I have rarely read a biography of a writer I should have cared so little to meet.

I’ve read a fair bit of Ayn Rand’s non-fiction, but I’ve always found her fiction to be a tough slog: as Daniels says, “[h]er work properly belongs to the history of Russian, not American, literature — and nineteenth-century Russian literature at that.”

Update, 8 February: Publius always found that Frédéric Bastiat’s dictum “The worst thing that can happen to a good cause is not to be skillfully attacked, but to be ineptly defended” really was correct for Objectivism:

Having met a very large number [of Objectivists], my own anecdotal assessment is that about three-quarters are high-functioning neurotics. Highly intelligent, quite disciplined, but utter social misfits with low self-confidence. They are walking, and sadly talking, liabilities to the philosophy. Now this will seem like an admission of guilt. Wacky people adhere to wacky ideas. Hardly. Some of the most wacky ideas in history were adhered to by perfectly ordinary and decent people. Take socialism as a modern example. Some very important ideas, like representative government, were early on advocated by people who were certifiable flakes. I don’t think the wall between personal philosophy and personal psychology is an iron one. There is some overlap. Jean Jacques Rousseau, for example, was the embodiment of his beliefs. An emotional mess of a man advocating an emotional mess of a philosophy.

But new and radical philosophies tend to attract marginal people, those somehow discontented with life as it is.

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