Thursday, November 1, 2012

Q: When is blowing up wealth a net good for society?

A: When it's done voluntarily.

That's just one project near me. I just want to highlight the fact that although I only think disasters can offer gross benefits and not net benefits, it's not like there's anything wrong with the idea that destroying existing wealth can provide net benefits.

The problem is hurricanes don't just target the buildings we had plans to demolish - they target everything.

Hopefully everybody should accept that we've got both a gross and net benefit here as a result of the destruction of wealth in this case. So let's please not demagogue the hurricane.

14 comments:

  1. Generally speaking, this is something that's always puzzled me. As I noted some time ago:

    "11. The broken window fallacy is always a fallacy, but creative destruction is a vital part of capitalism."

    ...is something of a double standard.

    Anyway, this debate bothers me. People really shouldn't be using a disaster like this to score 'haha my clever little story about economics is cleverer than yours' points.

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    1. What a superficial thing to say. The "destruction" involved in one competitor being displaced by a more efficient one, and the former being shunted to a better-suited role in the economy, is obviously vitally different from wanton vandalism and natural disasters.

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    2. And it's not about "clever stories". It's a vivid illustration of fundamental differences in the understanding of how the economy works.

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    3. There is no difference in understanding, Keynesians understand the BWF perfectly but there are various real world factors that complicate things and make Bastiat's story considerably less vivid.

      And my point was not necessarily about hurricanes; there may be instances when the replacement is better, as with creative destruction. It's more of a 'silver lining' point than anything.

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  2. The way I've put it to a friend is that there is an optimal schedule for the replacement of capital goods which is only rarely congruent with hurricanes, earthquakes and wars.

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    1. Supremely rarely. How many New York businesses just happened to have a major scrap project on October 30 on their calendar? And how many of those benefit from this particularly watery form of "scrapping"?

      What you say is how Hazlitt put it to, as I posted in another of Daniel's threads:

      "The simple truth is that there is an optimum rate of replacement, a best time for replacement. It would be an advantage for a manufacturer to have his factory and equipment destroyed by bombs only if the time had arrived when, through deterioration and obsolescence, his plant and equipment had already acquired a null or a negative value and the bombs fell just when he should have called in a wrecking crew or ordered new equipment anyway."

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  3. The Austrian answer is when it is human capital. Need to teach those lazy bastards a lesson and stop their thieving arrogance. It is the only way they learn.

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  4. Progressive taxation can be considered a small blowing up but the resulting redistribution can improve societal utility. One could argue taxation is voluntary at the social level though.

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  5. You practically need to turn in you economist card for this one, Daniel_Kuehn. You have failed to distinguish physical destruction from economic destruction. In economics, we only care about economic destruction, not, say, the physical "destruction" of the block of dirt needed to put up a skyscraper. Thinking you have come up with a "good" example of destruction shows your inability to properly distinguish the two.

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    1. You need to rethink this, I think.

      The whole issue here is the relationship between physical and economic destruction. There's physical destruction in the link provided here. It's also economic destruction (the structure they demolished was worth something, after all). But destroying it and building something else there was obviously worth more than not destroying it and keeping the cash you would have used to demolish and rebuild.

      When the question is "what is the relationship between this physical destruction and economic creation or destruction", then we absolutely do care about physical destruction.

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  6. It's also economic destruction (the structure they demolished was worth something, after all). But destroying it and building something else there was obviously worth more than not destroying it and keeping the cash you would have used to demolish and rebuild.

    A more standard, informed way to say that would be that it was *not* economic destruction (since the output was valued more than the forgone inputs).

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    1. How is there not economic destruction when a building with value was destroyed?

      What you mean, I think, is that there is no net economic destruction if the choice was made voluntarily. You can't just pretend that if there is a net benefit there were no opportunity costs.

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    2. And you can't pretend you've said something insightful when you distinguish economic destruction from physical destruction -- not if you're an economist anyway.

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