Tuesday, 29 November 2016

‘Broken Window Fallacy’ on Radio NZ


I was heartened to discover through RNZ podcasts that Frederic Bastiat’s Broken Window Fallacy made an appearance back on the 17th. Shamabeel Eaqub was there to begin a regular appearance on the afternoon programme talking economics, and for his first visit he talked about the fallacy of disaster economics:

The idea there is an upside to natural disasters – that they are good for the economy - is ‘a figment of our imagination’, economist Shamubeel Eaqub says.
    We shouldn’t celebrate natural disasters or war or things that are destructive because ultimately what we find is the net impact is we are worse off than we would otherwise have been.
    Eaqub told Afternoons there is a tendency to think there is a net-economic gain as a result of natural disasters such as earthquakes, because they prompt lots of visible economic activity such as cleanup, construction and repairs.
    He says it's akin to digging a hole and then filling it up again.
    “It frustrates me a great deal because it is a figment of our imagination.”

Great to hear good sense and Bastiat on the local wireless.

LISTEN HERE: The fallacy of disaster economics [audio] - RNZ


  1. Except a disaster can have benefits for a particular economy in a limited sense, if the funds come from overseas insurance companies, and the standard of replacement is higher than the original asset being replaced.

    Many building owners in Chch for instance ended up with replacements that were better in terms of insulation, seismic performance, etc - and to the extent it was financed by offshore re-insurers, it wasn't money taken out from somewhere else in the NZ economy.

    1. We are a nation of importers and exporters and part of the global economy. The insurance money didn't fall from the stars. We will all pay for it through higher insurance rates and a weaker dollar. As such, any "benefit" of disasters to our economy is both transitory and illusory.

    2. Eaqub unfortunately at least partially subscribes to your second point, albeit briefly:

      "Some positive results of a natural disaster included the chance to update infrastructure, clear out marginal business to make way for more innovative firms, he says."

      It's true that there may eventually be better infrastructure and more profitable buildings housing more innovative firms. But as Henry Hazlitt points out in his 'One Lesson,' this comes at a cost which wouldn't other wise be paid. The idea that mass devastation, such as the destruction of cities by earthquake, is merely our old friend, the broken-window fallacy, in new clothing, and grown fat beyond recognition.” Did Germany and Japan really prosper after World War II because of the bombing inflicted upon them? They had new factories, built to replace those that were destroyed, while the victorious U.S. had only middle-aged and old factories. Well, if this were all it takes to achieve prosperity, says Hazlitt, we can always bomb our own industrial facilities."

      Sure, some of those buildings and infrastructure would have been replaced at the end of the economic life, but unless the earthquake happended to arrive ON THE VERY NIGHT that depreciation had brought the vcalue of EVERY ONE of them to precisely zero (less the cost of demolition) then the re-construction of all of them still represents a loss of capital that could otherwise have been spent on creating OTHER new capital goods, rather than simply replacing these ones.

      In other words, the economy is still short all those *other* capital goods.

    3. Your last paragraph shows you are misunderstanding my point Peter. Of course destruction can't result in any net benefit - I'm simply pointing out that the net loss is made up of winners and losers; and when most of the losers paying the bills are overseas (a phenomena that Hazlitt et all wouldn't have encountered in his time - and can probably only apply to small economies like NZ), combined with them not just replacing lost assets but improving them, it's conceivable the local economy could benefit in some respects - which is exactly what I've observed in Chch.

      Given the over-reaction I've received to my post, I suspect one of the reasons the broken window fallacy hasn't died (as it deserves to die), is that it hasn't been convincingly reconciled with the simple observation I've made. My observation doesn't change the fundamental truth of what Hazlitt said, but it does require this qualification. Shame everyone commenting hasn't simply accepted and acknowledged that, rather than thinking they need to preach to the converted.

  2. The MarkT fallacy has been well debunked in New Zealand. Costs of Insurance throughout New Zealand rose hugely and continue to rise after the earthquakes. MarkT check your policy.
    And if you think these policies were so good come down and talk to some people Christchurch.
    Anyway, PC should not be listening to Radio Prague he is becoming progressive enough as it is.

    1. I don't need to come down to Christchurch and talk to people Paul, because I live here and talk to people every day. I also have experienced directly the premium rises, in one case a rise from about $3,000 a year to $12,000 a year. But I also know a lot of people that have done well because of the influx of insurance money, and in my case the economic benefits of the rebuild have probably outweighed the costs. That's not everyone for sure, but it is perhaps most of the people I know in this city. I don't "think these policies were so good", and I agree wholeheartedly with the broken window fallacy, I'm just acknowledging one (limited) exception to the general rule.

      Anyone confident in their views and grounded in reality should be capable of acknowledging a limited exception and still maintain their support for a general rule, without suffering cognitive dissonance - and without critics erecting a scarecrow around what you've said. In fact if you can acknowledge the exception but still conclude the general rule applies (as I do), the case for the general rule is made stronger not weaker.

    2. And I should note that Eaqub coevers off this point very nicely in his presentation:

      "People thought of the rise in economic activity as a kind of stimulus, a free hit, but this is not correct, Eaqub says.

      "The increase in insurance premiums meant money is spent there when it could have gone on other things that might have created greater growth."That meant that as a result of that event we were all a little bit worse off but, because it was distributed over so many people, it is not as visible as the big positive construction activity we see in Canterbury.

      ‘It’s never a good thing to break things, because that means that you’re going to have to replace it rather than create something new,” he says.

  3. Yep the German Blitz for example created a lot of car parking.

    "In the immediate aftermath of the war, Sayer Street was used as a car park. This was a popular use for bomb sites: indeed, the NCP car park empire began with the £200 purchase of a bomb site on Red Lion Square."


    All thanks to Adolf and Ze Germans.

  4. Was in Christchurch about a year after the big one. Was checking out from the motel we were staying in when an aftershock of about m4 hit. We were shit scared- the Motel Owners were unconcerned- they barely noticed it. The there was a barrage of foul language from the owner-The aftershock had wreck the concrete driveway that had only been repaired the week before. The cost to fix it again would be about $10k, his Insurance Premiums had quote 'gone through the roof'. He couldn't raise room prices as he was 65% down on the same time before the big quake- The aftershocks were driving him out of business.


  5. Its true as MarkT says, that there were cases of extreme benefit to some individuals.
    It was a bizarre lottery of good and bad. But the general idea of things in the "Broken Window" was the overall economic effect, not the windows repairers benefit.
    I have a cheque at home from EQC which represents maybe 600 hours of repair work to back section from a silt surge of about 40 cu metres and the drop in levels of about 70cms. It is for $320 and people recommend I buy a Villa on Auckland's north Shore with it.
    Then there are the costs which eventuated in the health field. For instance my now shagged back takes me to North Thailand each year to buy 'Tramadol' which is scarcer than high grade amphetamine now.


1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.