Japan and the broken-window fallacy: Natural disasters do not stimulate the economy

In the wake of the earthquake and tsunami, our hearts and thoughts are with the people of Japan. This is a terrible tragedy that has cost thousands of lives and destroyed infrastructure, homes and businesses.

We cannot prevent natural disasters but we can put an end to economic fallacies. One of the most common and dangerous economic fallacies is the notion that destruction will boost the economy. Over two centuries ago, French economist Frederic Bastiat debunked this myth by introducing the broken-window fallacy.

Many prominent economists have claimed that the natural disaster will boost Japan’s already fragile economy. After expressing sorrow for the people of Japan, former White House economics adviser Larry Summers said, “it may lead to some temporary increments in GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.” Any economist is dead wrong to claim that there is a silver lining in a natural or man-made disaster. As it turns out, earthquakes and tsunamis are not stimuli. Destruction will not create prosperity.

As economics Professor Steven Horwitz notes, “If one really believes such disasters are good for the economy, even in the short run, then one should positively recommend burning down neighborhoods and destroying farm machinery. After all, think of the demand for construction workers and equipment, as well as the demand for manual labor on farms that would generate. Why we’d be rich as kings in no time, right?”

In Frederic Bastiat’s famous piece “That Which is Seen, and That Which is Not Seen,” he explains the elementary fallacy. Imagine that you witness a small child breaking a window by throwing a rock through the local bakery. The correct response would be to scold the child for causing harm. Bastiat notes, however, that spectators will usually comment that the broken window will provide employment for the glazier, thus boosting the economy. He writes:

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.

If the window had not been broken, the baker could have used the money he paid to repair the window on something else. Let’s say that he would have chosen to buy a suit instead, which would have created work for a tailor. The baker could have had his window and a new suit. Many of us focus on what is seen and ignore what is unseen.

It’s troubling to hear that such a terrible natural disaster may turn out to be a good thing for Japan. The Wall Street Journal reports, “Some economists have argued that a quake could actually lift the economy in the long run, by requiring a surge in rebuilding spending.” Following this flawed logic, these people believe that the more destruction, the better for the economy.