Bastiat, Krugman, Horwitz on Earthquakes

Lynne Kiesling

One quick note before I turn on my Internet-blocking software and retreat to my writing cave: yesterday’s earthquake naturally prompted a lot of snarky comment that the earthquake would at least create jobs … the absurdity of which illustrates Bastiat’s broken window fallacy (a topic of great interest to both of us at KP). Paul Krugman claims that the Google+ page with his name and this post is not his:

People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage?

Steve Horwitz explores why such a spoof is so persuasive from “the Krugman who cried stimulus“. He also expands on a conversation we were having on Facebook about how the “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

Or, as one of my physics colleagues said in a different context, don’t confuse activity with accomplishment.

4 thoughts on “Bastiat, Krugman, Horwitz on Earthquakes

  1. This is an interesting point because the difference between stocks and flows is almost never discussed in this context — personally, I’m more worried about my stock of wealth than in the quarterly percentage change of the flow of my income. Though we seem fixated on the latter measure. That Steve Horwitz is a pretty smart guy.

    What internet blocking software do you use?

  2. Bastiat’s point is not about stock vs. flows. He rightly states that, even setting aside the loss of wealth due to the quake, any activity directed to the repair of damages (“seen”) is merely taking the place of another productive activity that would have taken place absent the quake (“unseen”)

  3. David: I use SelfControl for Mac, . Works well, although sometimes some things are a bit wonky unless I restart afterward. I’ve populated it with my blacklist (Facebook, Twitter, KP, Google Reader, Gmail, my favorite blogs and time-wasters), and so far I’m happy with it.

    Olivier: I did not say that Bastiat’s point is about stocks v. flows; of course that chapter’s focus is the seen and the unseen, as I’ve commented on here before frequently (and used in my own work). The material point here is in applying Bastiat’s point in that chapter about the employment of glaziers, and extending the analysis to explain what the Keynesian argument misses about Bastiat’s larger point. Part of what the argument misses is the difference between activity (a flow) and value (a stock). By focusing on activity (a flow), which is seen, Keynesian policy overlooks the cost of the destruction of value (a stock).

    BTW, if you haven’t clicked through to Steve’s post since yesterday, there’s been a good give-and-take on exactly this point in the comments.

  4. This point applies to environmental damage as well.

    It’s legitimate to say that pollution reduces our quality of life. But, most of the damage of pollution is to stock variables — like the cleanliness of our air and water — than to flow variables.

    But, because we don’t have a widely-known estimate of national wealth, and accepted method of including something like the subjective value of clean air, we don’t have publicly “talkable” numbers about how pollution is reducing our national wealth.

    So the environmentally sensitive are correct in noting that some of our GDP reflects abuse of resources that should be netted out somewhere.

    But, they double-down on that mistake by claiming that we ought to adjust GDP downward to reflect these issues. This isn’t correct from an accounting perspective, and no investor in the private sector would buy into this sort of argument if a CEO made it about their own company.

    The environmentalist argument extends the broken window fallacy. No environmentalist would say that we should pollute so that we can reap the cost of clean-up in GDP (wait … the Obama administration has kinda’ sorta’ made that argument … but I digress). But they will say that our society does something like this, that we should punish ourselves by not counting some of the GDP that was created with the pollution. This is just weird.

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