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Free Market Minute
Tsunami and the Broken Window

By Dr. Karen Y. Palasek

February 17, 2005

Among the many myths that persist when disaster strikes is the one that the consequences of the disaster will wind up being a blessing in disguise. Frederic Bastiat captured the essence of this idea in his 1850 essay, "That Which is Seen and That Which is Not Seen," perhaps better known as the Parable of the Broken Window, or the broken window fallacy.

The essence of Bastiat's analysis is that all choices have opportunity costs, or alternative choices that we could not make instead. In the case of the tsunami in Indonesia, some analysts have stated that in the aftermath of destruction, the rebuilding process will leave the affected areas better off than before—a blessing in disguise.

Besides its ghoulish aspects, the idea that economic benefits ripple outward from disasters in a multiplier effect is completely false. Here is how the broken window fallacy "works": the destruction of one's property is said to generate "good" for the economy because jobs are created in the process of replacing the property that was lost. We don't even have to go so far as total destruction, since damages and repairs will create similar demands for new employment. So destruction is an economic blessing, right? If this is so, we should be thankful for events like tsunamis, the destruction of the World Trade Center, and other major disasters. Many people find new employment cleaning up the mess and replacing the lost and damaged goods after these tragedies. Henry Hazlitt debunked this broken window myth in "The Blessings of Destruction," an essay based upon the Bastiat tale.

All destruction of life and property is a net loss. Without the disaster, we would still have the lives and property that were lost in Indonesia, and the value of the services those people and resources could offer. We may consider much of the capital and resources "substandard" in retrospect, but the fact is that many lives were lost precisely because thousands of tourists viewed Indonesian locations as ideal vacation spots.

To rebuild better and safer at this point, tsunami-hit areas require a massive wealth transfer from other parts of the world. This is an odd way of saying that the tsunami has been a blessing in disguise, for it has surely reduced the alternative uses of the wealth they once had, and reduced the alternative uses of the wealth that was gifted to them in compassionate relief. Even if it results in faster economic growth due to rebuilding, valuable resources as well as lives are gone forever.

If this is not convincing, consider a hypothetical situation in Indonesia without a tsunami. Suppose other regions of the world had decided, out of generosity or any other motivation, to infuse Indonesia with brand new capital, resources, and supplies, and to remove the old, less efficient capital from productive employment. This could conceivably lead to faster future economic growth for the region, but at what cost?

The cost of upgrading Indonesia's capital base with gifts from abroad is the sacrifice of alternative opportunities for those resources elsewhere. The saving and investment that allowed those resources to be created, and thus shipped to Indonesia, will not be used to add to existing capital and productive capacity worldwide. Instead, it will eliminate one source of production and replace it with another. Granted, the capital imported into Indonesia may be more efficient than the old stuff, but that doesn't negate the loss of productive capacity from the previously existing capital, since we could have had both.

Indonesia's tragedy has, without a doubt, struck a blow to prosperity locally as well as worldwide. The Indonesian recovery is expected to be quite rapid, given the level of devastation. But destruction is never a route to economic growth, unless you discount the losses of life and property and focus only on the rate of new economic growth and recovery, something a responsible economist cannot do.

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