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 Obamas 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 shopkeepers son had broken the glass pane of the shops 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 didnt 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 shopkeepers 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 shopkeepers wealth if his window hadnt 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 dont see that, because thats whats been precluded by the disaster.