Flirting with fallacy

Paul Jacob

3/13/2011 12:00:52 AM - 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.

What’s certain, though, is that shopkeeper would have added to his pleasures in the unbroken window scenario. In the broken window scenario, he tries to recover as much as he can of his old position.

And the murmurs of optimism in the village, about the event? They are callous. They are unseeing.

That is, they see the advantages to those who get the advantage. They strategically forget about the advantages of the other chain of events. And they callously discount the shopkeeper’s loss.

When economists do this, you have to shake your head.

But it’s not Larry Summers who’s in the wrong here. It’s the reporter who stressed this element. Not Summers himself. He began his talk by saying that the tragedy of it all is “the most profound and important thing.” And he reiterated, in understatement, that whatever gains in GDP might appear, blipping onto the econometricians’ radar, was something “the Japanese did not need.”

He merely fleetingly noted the painfully obvious: That, after a massive and tragic disaster, people get to work to put things back as much into order as possible. It’s measurable activity. It shows up in GDP statistics.

But that’s not what is important, and Summers recognizes this. That one reporter repeated a small element in what he said, out of context, shows only the well-known journalistic preference for the “sexy” and the “shocking,” and that they find it in odd places.

Even in economic fallacy.

Still, Summers’ innocence notwithstanding, it’s perhaps worth noting one of the tragedies of modern economics: economists too often forget their real job, looking at the unseen and unmeasurable as well as the seen and measurable.

All the rush to recovery does not increase the wealth and welfare of the Japanese people. It can’t. Because too many are dead. Too many are hurting. As the Japanese brace up and endure the sad task of diverting resources from productive and “in-other-circumstances-more-valued” consumption activities to processes that alleviate horrible pain and sorrow, both economists and non-economists should have the decency not to mistake rescue’s obvious hubbub for real progress.

Catastrophe isn’t really good for us.