Do Hurricanes Bring Wealth to the Shore?

Yesterday afternoon I was watching the Bloomberg Network when I heard the anchor express an extremely ignorant sentiment. She offhandedly mentioned that there seemed to be a silver lining to the dark cloud that is Sandy. People would be forced to spend huge sums of money in repairing damages caused by the brutal storm. This increase in "aggregate spending" will be a godsend to the economy.

This idea, that destruction causes wealth, is as almost as old as it is stupid. We have all heard how the massive boost in spending for the second World War pulled us out of the Depression. Some have even posited that the devastation wreaked by the atomic bombs in Japan led to their economic renaissance because it forced them to build newer and better factories. But the idea thrived long before that. It was this same silly explanation for wealth creation that was prevalent in 19th century France when Frederic Bastiat exposed it as The Broken Window Fallacy in his brilliant essay, That Which is Seen, and That Which is Not Seen.

Bastiat related the parable of the shopkeeper who finds that a local boy has shattered his window with a brick. As he is cleaning up the mess, a neighbor encourages him to see this not as a loss, but as a gain. The shopkeeper will have to purchase a new window from the glazier, true enough. But now the glazier will have more money for bread. This enriches the baker who now has more money to buy from the shopkeeper. The prosperity flows in beautiful circle. How unfortunate it would be for glaziers, and the economy as a whole, if windows were never broken.

This is what is seen. What is unseen is how the shopkeeper would have spent that money had he not had to replace the window. Perhaps he would have purchased a suit. That would mean that the wealth gained by the glazier would only be at the expense of the tailor. Obviously, this is not an increase in general prosperity. And when we consider the plight of the shopkeeper further, we find that is actually a decrease in general prosperity. If it had not been for the young troublemaker with the brick, the shopkeeper would have had both a suit and a window when now he has only the window.

Hurricanes and wars are the breaking of windows on a massive scale. Wealth is increased when goods and services increase; Not when they are destroyed. It takes a very convoluted system of thought to obscure these simple facts. But the light of logic easily exposes these fallacies. Let's make sure to keep the light on.