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.
Whats 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 shopkeepers loss.
When economists do this, you have to shake your head.
But its not Larry Summers whos in the wrong here. Its 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. Its measurable activity. It shows up in GDP statistics.
But thats 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, its 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 cant. 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 rescues obvious hubbub for real progress.
Catastrophe isnt really good for us.
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