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Japan's Broken Windows

Article by David D’Amato.
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On Friday (April 22), Bloomberg reported that Japanese Prime Minister Naoto Kan announced plans for budget supplements targeted at rebuilding in the wake of the earthquake and tsunami.

If the economic contentions of statists hold true, then costly crises like the one that has ravaged Japan are a boon, an opportunity for the rebuilding process to stir economic activity that wouldn’t have otherwise have taken place. Instead of a expense of catastrophe, the almost $50 billion set aside by the Japanese state for reconstruction ought to be greeted, so we’re told, as an economic shot in the arm.

Economists — at least those who don’t buy it — call this the “broken window fallacy,” an allusion to nineteenth century political economist Frederic Bastiat’s famous story about the “seen” and the “unseen.” Bastiat’s vignette describes a shop owner whose storefront window is shattered by a rascally son, the result being some unexpected business for the glazier.

While that business, the contract for a new window, is the “seen,” Bastiat draws our attention to what is “unseen,” all of the productive activity that the shop owner would have engaged in but for the price of replacing his window.

Under the “devastation as stimulant” argument, whereby the destruction of valuable resources and infrastructure is (or can be) beneficial, there’s no reliable way of determining where to draw the line between economically “good” and “bad” misfortunes. If a cracked window is to be regarded favorably as a spur for productive activity, are we to regard the earthquake damage in Japan in the same way?

Or is there a point at which the damage is too extensive to be thought of as advantageous to that indeterminate thing called “the economy.” Properly understood, economic efficiency is a product of a market actor’s ability to use resources in a way that avoids waste and maximizes the productive output on her costs. Since each individual is actually an “economy” unto herself, allocating time and scarce resources to achieve particular ends, even a comparatively small harm like a broken window can’t ever result in a net gain for the community.

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