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Volume 26, Number 3

March 2005


The Ultimate Fallacy

Christopher Westley

I didn’t think anyone would dare to apply Bastiat’s Broken Window fallacy to the human tragedy that played itself out along the rim of the Indian Ocean, but sadly, faith in economic fallacies is even more common than deadly tsunamis.

Many economists mistakenly believe taxation can be good for economic growth, that war can buck up prosperity, and that even natural disasters can spur wealth creation by causing people to spend. All of this is fallacy because it fails to consider the costs of destruction, the alternative use of resources, and the unseen effects of diverted uses of property.

But surely, the tsunami offers no silver lining. And yet, I was surprised to hear the Institute for International Economics’ C. Fred Bergsten (known affectionately as "See Fred" for his high public profile) the morning of December 29th on National Public Radio’s Morning Edition explain how this crisis would actually provide long-term benefit to that region of the world.

Bergsten said:

"Like any disaster, you get negative effects through destroying existing property and people’s health, but you do get a burst of new economic activity to replace them, and on balance, that generally turns out to be quite positive.

"Over time, properties that have been destroyed will be fully replaced, and probably by better and newer substitutes, so at the end of the reconstruction process, the countries will probably be wealthier."

To be fair, Bergsten admitted this disaster is, above all, a human tragedy, but his comments ignore other effects that will result when positive economic growth results from any disaster, whether it occurs due to a matter of policy (wars) or to unanticipated changes in the physical environment (tsunamis). These effects:

•  involve forced capital consumption, shifting capital from other uses to those necessitated by the disaster;

•  ignore the opportunity cost of capital that is being transferred to the disaster sites (costs that should be considered before assuring public radio listeners that the resulting economic activity "generally turns out to be quite positive"); 

•  encourage construction in areas that would likely be less inhabited if construction decisions were left to market forces, which is the same thing that happens when the US Federal Emergency Management Agency continuously finances reconstruction along coastal areas in the US that are regular targets of hurricanes; and  

•  legitimize the fallacies that disasters are good for economies, when in fact, while they allow governments to take credit for measured increases in gross domestic product, they reduce the quality of life to most everyone involved.

I say most everyone because some groups in the economy clearly benefit, and often this includes firms that depend on government contracts resulting from emergency funding. Firms such as Halliburton or Bechtel may do great work in the private sector, but absent government contracts, these firms would play a much less notorious role in the society because their market power would be based not on the forced conscription of capital that is taxation, but on voluntary exchanges between buyers and sellers. Politicians also benefit, if only because of the publicity they receive when disbursing other people’s money to the disaster sites.

It doesn’t have to be this way. Natural disasters are a fact of life, but the evidence is clear that they cause much less destruction than wars (and other fruits of the nation-state). For instance, as horrific as the loss of human life resulting from the December tsunamis is, it doesn’t come close to the loss of innocent human life that has resulted from US intervention in Iraq since the 2003 invasion.

According to a study reported last fall in the British medical journal The Lancet, this number is already well over 100,000. Compared to the innocent civilian deaths resulting from the wars of the 20th century, it is clear that large, bureaucratic nation-states are a greater threat to human life than occasional and inevitable natural disasters.

Indeed, wars are synthetic natural disasters, writ large. As Ludwig von Mises pointed out in Human Action: "Modern war is merciless, it does not spare pregnant women or infants; it is indiscriminate killing and destroying. It does not respect the rights of neutrals. Millions are killed, enslaved, or expelled from the dwelling places in which their ancestors lived for centuries."

He could have been describing much of what is occurring today both in Iraq and along the rim of the Indian Ocean.

It is also clear that the best protection against natural disasters is not an expansion of the public sector on an international basis, but wealth creation. It is no mistake that natural disasters, which are quite equitable in distribution between rich and poor countries, are more devastating to the poor than the rich. The establishment of a thriving private sector in Sri Lanka, India, and Indonesia is crucial for a quality of life to develop there that can withstand earthquakes and their aftermath as well as does the California coast.

But such development will not occur from state-managed, broken-window-like economic growth extolled by many mainstream economists. War and natural disasters are not good for the economy. The evolution of property rights institutions and the autonomy they engender, as well as free trade and the social cooperation it engenders, are the human race’s best long-term insurance against both. .FM


Christopher Westley teaches economics at Jacksonville State University.



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