Paul Jacob

Earthquake. Tsunami. Horror.

As the Japanese work to bring the injured to safety and to recover the bodies of the dead — and as the world watches in sadness, and shivers — someone, somewhere will throw a touch of absurdity on the whole event.

Enter Larry Summers.

According to one report, entitled “Tsunami an economic disaster? Not necessarily,” the “former director of President Obama’s economic council and a former head of the World Bank, said rebuilding could temporarily boost the Japanese economy.”

Every disaster we hear this old chestnut. Last year, Nancy Pelosi cheerfully noted that the Haiti earthquake had a bright side. This form of gallows cheer is known, in the literature of economics, as “The Broken Window Fallacy,” in honor of the brilliant, classic analysis by Frédéric Bastiat.

Bastiat was a French politician and economist. He starts his famous 1850 essay, “That Which Is Seen, and That Which Is Not Seen,” with a short lesson on causation, and then proceeds to tell the tale of a village confronting a minor tragedy: the shopkeeper’s son had broken the glass pane of the shop’s window.

The lesson is that for every cause (event, act, policy, etc.) there are many effects, a series of them. Bad economics only takes note of a small subset of effects. Good economics takes note of the whole series. Indeed, great economists look for hidden and even obscure results.

In the story, the villagers commiserate. But they quickly find a silver lining. If windows didn’t break, what would glaziers do? The broken pane of glass, they suggest, would provide a boon to the local economy. A boomlet, if not a boom.

They trace the effects of what happens to the shopkeeper’s money, after he hires the glazier to fix the window. The glazier buys donuts or something, helping the baker. And . . . and . . . and . . .

But Bastiat calls to our attention an unseen effect: What would have happened to the shopkeeper’s wealth if his window hadn’t broken. He would have spent the money — at least eventually — elsewhere. And a similar pattern of spending and economic activity would unfold, if along a different path. You just don’t see that, because that’s what’s been precluded by the disaster.


Paul Jacob

Paul Jacob is President of Citizens in Charge Foundation and Citizens in Charge. His daily Common Sense commentary appears on the Web and via e-mail.
 

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