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Can Destruction Create Wealth?

Many people, especially Keynesian economists, argue that natural disasters, terrorist attacks, war, and other destructive actions are actually beneficial to the economy (for example, see “Larry Summers Claims Japanese Earthquake/Tsunami Disaster Will Boost Economy“). Consider the above two and a half minute video before deciding for yourself whether destruction can create wealth.

This video builds on the work of French political economist Frédéric Bastiat who addressed the “broken window fallacy” by showing it to be incorrect in his essay entitled “What is Seen and What is Not Seen“. In countering Larry Summers’ “broken window” view that the recent Japanese earthquake and tsunami might be good for their economy, Ryan Young writes in “Tsunamis Are Not Stimulus“:

Yes, construction will be a boom industry in the coming months. That’s why people like Summers can claim that the tsunami will create jobs and boost GDP. Better still, the workers will spend their wages and stimulate the rest of the economy, too. Japan will be better off for having endured a natural disaster.

If this were really the case, then the best possible way to boost Japan’s economy would be to level the entire country. Every building should be destroyed, brick by brick. The number of jobs that policy would create would dwarf any tsunami stimulus.

Then, in a few years, when the rebuilding is finished, workers can destroy their entire infrastructure again. Even more jobs will be created!

Taken to its logical conclusion it becomes easier to find fault with the disasters-are-good-for-the-economy line of thinking. Bastiat writes in his “broken window” analogy that, when replacing items, “society loses the value of objects unnecessarily destroyed.” When replacement items like new windows, for example, are bought instead of new shoes, spending is merely shifted away from shoes to windows. However, instead of being able to have both windows and shoes, after a disaster one must choose between one or the other. Simply put, Bastiat concludes, “destruction is not profitable.”

Special thanks to Tom. G. Palmer of the Cato Institute for pointing this video out in “Bastiat on the Japanese Tsunami” and noting that “destruction isn’t stimulative because it cannot create wealth.”


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