One of the basic principles of economics, as explained by French classical liberal economist and statesman Frédéric Bastiat, is the seen and the unseen. As Bastiat explained it, the difference between a good economist and a bad economist is that the latter considers only that which is seen, while the former also considers the unseen:
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.
Breaking windows does not stimulate the economy
One of the most common mistakes that can be made in this regard is what is known as the broken window fallacy. Summed up, this parable tells the story of shop keeper whose window is broken. He is upset about having to replace the window when someone comes up and makes the observation that the shop keeper will have to pay to have another window installed, thereby enabling that worker to earn money. That is the seen. Essentially, the claim is that disaster or misfortune stimulates the economy. Of course, the shop keeper was going to spend his money on something else (or save it, enabling it to be used as capital). Perhaps he was going to take his wife out to eat. Or perhaps he was going to buy a new pair of shoes. Now he does not have the money to spend on those things. That is the unseen. Destroying things or having things lost to natural disasters does not stimulate the economy; it is a loss. The shop keeper in the parable already had a perfectly good window. Now he has to buy another window. This is a loss to him.
Unfortunately, while the broken window fallacy has been widely known to economists and laymen interested in economics for a very long time, it is often repeated by those in the US media. Just today, in her coverage of the massive storm on the eastern US coast, National Public Radio correspondent Yuki Nogushi repeated the broken window fallacy. In talking about the storm’s destruction of roads and buildings she mentioned that this would not be all bad because it would lead to economic activity – the roads and buildings would have to be repaired or rebuilt. We can’t expect journalists to be experts on everything but Nogushi has covered business for NPR for several years. It would not seem too much to ask that she made herself aware of this basic economic principle explained long ago by Bastiat.
UPDATE: Nogushi is not alone in repeating the broken window fallacy. Peter Morici outdoes Nogushi in his article for Yahoo Finance. There apparently is no end of economically-illiterate journalists ready and willing to spread nonsense to the masses.
This never ceases to amaze me. If this logic was true, then war torn countries, like Germany after WWI or II, would immediately be the wealthiest countries in the world.
The Obama drones are promising kristallnacht against conservatives and conservative business if Obama loses. Perhaps they should tout it as their new economic policy as well.