One of the most famous thought-experiments in economics is Bastiat‘s story of the broken window, which the French economist used to argue against the common belief that destruction stimulates economic activity. In Economics in One Lesson, Henry Hazlitt uses the broken window to argue against the belief that war stimulates economic activity. What follows is Hazlitt on war. Those who want to read the background, Hazlitt on the broken window, should click MORE, below.
“…SO WE HAVE finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments’ thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio and television commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction.
“Though some of them would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They all tell us how much better off economically we all are in war than in peace. They see ‘miracles of production’ which it requires a war to achieve. And they see a world made prosperous by an enormous ‘accumulated’ or ‘backed-up’ demand. In Europe, after World War II, they joyously counted the houses, the whole cities that had been leveled to the ground and that ‘had to be replaced.’ In America they counted the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. They brought together formidable totals.
“It was merely our old friend, the broken-window fallacy, in new clothing, and grown fat beyond recognition. This time it was supported by a whole bundle of related fallacies. It confused need with demand. The more war destroys, the more it impoverishes, the greater is the postwar need. Indubitably. But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The needs of India today are incomparably greater than the needs of America. But its purchasing power, and therefore the ‘new business’ that it can stimulate, are incomparably smaller. …
“Many of the most frequent fallacies in economic reasoning come from the propensity, especially marked today, to think in terms of an abstraction – the collectivity, the ‘nation’ – and to forget or ignore the individuals who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed.
“Those who think that the destruction of war increases total ‘demand’ forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy. …
“In all this discussion, moreover, we have so far omitted a central consideration. Plants and equipment cannot be replaced by an individual (or a Socialist government) unless he or it has acquired or can acquire the savings, the capital accumulation, to make the replacement. But war destroys accumulated capital.”
Continue reading “The Blessings of Destruction”