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Broken windows

Someone is bound to say that Hurricane Sandy will give a welcome boost to the US economy.  They will bemoan the loss of life and the confusion and upset, but will point out that it will mean work for clean-up gangs and builders.  This is a neo-Keynesian version of Bastiat’s broken window fallacy.

The shopkeeper spends money to repair the broken window, and the glazier uses the cash for stuff that he wants, and so it circulates through the village economy bringing benefits to many.  The fallacy comes from forgetting that the shopkeeper had a window and some cash, whereas now he only has a window.  The other things he might have used that cash for will now never happen because he had to spend it repairing the window.  The business he might have generated, the jobs sustained or created, will not happen.  The fallacy arises by not taking opportunity cost into account.

No doubt there will be repair work done in the aftermath of Hurricane Sandy, and no doubt builders and electricians will be employed to put things right.  But it will cost money, and the other uses to which that money would have been put will not happen.  The jobs it might have sustained or created will not now be there.  Natural disasters and accidents do not benefit economies; they harm them and divert resources that could have boosted growth elsewhere.

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