Stimulating Sandy

Every time a natural disaster strikes, it serves as an opportunity to remind people about the “Broken Window Fallacy”. This faulty economic idea basically states that things like wars, natural disasters, and other destructive actions actually provide a boost to the economy. In his terrific book Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics (my review), Henry Hazlitt wrote that “the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics.”

We see this fallacy in action in the writing of New York Times columnist Paul Krugman (a winner of the Nobel Prize in economics), who wrote three days after the terrorist attacks of 9/11, “Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.” Similarly, he said last year that fabricating an invasion of space aliens would provide a great way to end the economic slump.

With the arrival of Super Storm Sandy, several publications (including, again, the NYT) have been quick to point out the silver lining that this will result in “increased economic activity”. But while it’s true that there will be increased economic activity that we can see, this type of thinking fails to account for the lost economic activity that we cannot see. Here’s a great video from that demonstrates why the Broken Window Fallacy is wrong:

If this whets your appetite to learn more about economics (one of my favorite subjects!), a great place to start is the aforementioned book by Henry Hazlitt. Additionally, you might check out Frederic Bastiat’s 1850 essay, “That Which Is Seen, and That Which Is Not Seen”, which is the origin of the “broken window” illustration. I also highly recommend the Economics for Everybody DVD series by R.C. Sproul, Jr.

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