Don’t be fooled again

Is some left-wing economist trying to convince you on this April Fools Day that disasters are actually good for the economy? Watch this short video about Frédéric Bastiat’s “Broken Window” fallacy, and never be fooled again.

For more information on the Bastiat Legacy Project click here.


Steve Buckstein is Senior Policy Analyst and founder of Cascade Policy Institute, a Portland-based think tank.

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  • texasDude

    COMMENT_DELETED

    • Anonymous

      Indeed it seemed to work for the US, but again, that was capital that was put to work rebuilding rather than creating something new. Since no bombs or bullets were spent on America’s soil, Pearl Harbor notwithstanding, we were in a position to lend and sell to the rest of the world…mercantilism in it’s purest form. Wealth did not increase, it was simply shifted to our shores by the mere historical accident of where the war was fought.

  • Bob Tiernan

    Steve,

    Recall that when the Missouri and Mississippi Rivers were flooding their respective floodplains (and more) during Clinton’s first term, Treasury Secretary Lloyd Bentsen actually said that that the economy will benefit due to all of the rebuilding and clean-up work. Someone should dig up that quote. Using that logic, it would be beneficial to repeatedly destroy things and rebuild them. In the end, of course, you still wind up where you were before.

    Bob Tiernan
    Portland

    • Steve Buckstein

      Thanks Bob, I didn’t recall the Bentsen example and didn’t find it with a quick Google search, but it doesn’t surprise me. Just another example of flawed economic thinking.

      • valley p

        It depends on the context. If one means that “the economy” is about the building up of wealth over time, then a flood that destroys wealth is not good. If one means “the economy” is short term economic growth, which is how many people view it, then a destruction of wealth can and usually does lead to a rise in wealth generation (and economic growth) as people work harder and invest savings to rebuild lost capital. There are many examples of this being the case. In fact, its one reason economies tend to have high growth rates after deep recessions, which we are about to experience in the US.

        • Don Yocham

          I’m afraid that it doesn’t depend on the context. Destroyed wealth is destroyed wealth. If a $100mm building is laid flat, then it requires capital to replace it that, in the absence of said destruction, would have been put to use in some other productive manner. And yes, even if insured, it is capital that could have been used for something else. You may get economic activity in one area that would not have occured in the absence of the destruction, but you are merely shifting economic activity from one spot to another, not “creating” new activity. Overall wealth, of which the productive activity that the destroyed building supported, is now reduced and we have to expend capital to get back to where we were rather than undertaking some new economic activity. Creative destruction, which involves choice, is entirely different than destructive destruction, which involves force, whether by nature or man.

          • Steve Buckstein

            Thanks for expanding on this discussion, Don. valley p just can’t resist trying to claim that the context matters, perhaps because if it doesn’t, then too many of his interventionist policies don’t work out after all.

  • Bob Tiernan

    *Steve Buckstein:*

    I didn’t recall the Bentsen example and didn’t find it with a quick Google search, but it doesn’t surprise me. Just another example of flawed economic thinking.

    *Bob T:*

    I was able to locate it by re-arranging search words until I obtained the right mix, and found this:

    On July 25, 1993, Lloyd Bentsen, President Clinton’s first Secretary of the Treasury, argued on Meet the Press that recent destructive flooding in the Midwest would stimulate the economy, because “lots of concrete will be poured… You have to look at all the jobs that will be created to repair the damage.”

    This was from:

    http://radgeek.com/gt/2005/01/02/vulture_economics/

    which also has similar quotes such as that from Paul Krugman pointing out after 9/11 that jobs will be created because we need some new office buildings.

    Bob Tiernan
    Portland

    • valley p

      Well then Bensten and Krugman were both dead right for the reasons I mentioned. Its like the “economic miracle” that took place after Germany’s economy was laid flat in WW2. Much of the “growth” was simply rebuilding destroyed capital, but it was rapid growth nonetheless.

      For the same reason, a highly capitalized, “mature” economy tends to grow much more slowly than a developing economy like China. In a mature economy, a lot of effort goes into just maintaining the capital stock as opposed to growing it. This is pretty elementary macro-economics no?

    • Steve Buckstein

      Glad you found the quote, Bob. “Lots of concrete will be poured…” is just what Bastiat was talking about.

      • valley p

        Douglas Dacy and Howard Kunreuther (a Wharton School economics prof) researched and published a book called “The Economics of Natural Disasters,” which quantified economic impacts following natural catastrophes. It mostly used the aftermath of the Alaska earthquake of 1964. They concluded that the money that rushed into the Alaskan economy after the quake resulted in many Alaskans becoming better off than they had been before the damage.

        Other economists have reached similar conclusions, including Gus Faucher, director of macroeconomics at Moody’s Economy.com. He studied the aftermath of the Northridge quake and Hurricane Andrew, and says the data is quite clear on this.

        Mark Skidmore and Hideki Toya published a 2002 paper that studied disaster frequency of 89 countries against their economic growth over a 30-year period. They accounted for country size, size of government, openness to trade, and distance from the equator among other variables.

        They concluded that with respect to climatic disasters, “the more the better.” *Nations with more climatic disasters grew faster over the long run than the less disaster-prone* .

        How can this be? Because the new stuff is way better than the old stuff, thus long term productivity is enhanced. It is a case of what Joseph Schumpter called “creative destruction.”

        So once again, Bensten and Krugman are on firm ground. their conclusions are backed by research if not by intuition.

        • Steve Buckstein

          “…the money that rushed into the Alaskan economy after the quake resulted in many Alaskans becoming better off than they had been before the damage.”

          And where did that “rushing” money come from? Would it not have been put to productive use somewhere else if not directed to Alaska? Sure, some Alaskans probably ended up better off, but people in other places probably ended up worse off. Again, we can’t just look at the “seen” effects of disaster spending; we need to consider the “unseen” effects also.

          • valley p

            I don’t know that the studies above went that far afield, but given that they included whole nations I would not be surprised to find a “net plus” even if you did extrapolate Alaska nationally. How can this be since it is counter intuitive? I don’t pretend to know, but it could be that a disaster shakes otherwise poorly occupied capital loose.

            If “unseen effects” are actually unkown effects, then they simply can’t be factored in. What we do know, if the analysis I cited is correct, is that there are net positive impacts from many, but not all natural disasters.

          • Don Yocham

            Of course there is rapid growth after destruction, either from base effects (having a lower base from which to build) or through urgency, economic “activity” will increase, but that doesn’t mean that overall wealth is at a higher level than it was before or that productive activity is now improved. The area that got destroyed may itself be more productive than it was, but not necessarily the global economy.

            And where is the capital being pulled from? Either from another place or from the future. The ignorance (or arrogance) of studies such as the one you have cited is that they pretend to quantify something that is unquantifiable. All they do is measure local effects and the ones who do the measuring fall into a narrative fallacy while pronouncing post hoc ergo propter hoc. These studies give intellectual cover to conclusions that simply defy reason.

          • valley p

            Data often defies reason. People used and still use reason to believe the earth was flat, it was created 6000 years ago, we couldn’t possibly be related to chimps, and the earth is not warming despite all evidence to the contrary. I don’t know if the data says anything about the “global economy.” But frankly, people don’t live in a global economy. They live in local, regional, national, and international economies. If the global economy is growing, but all the growth is in China, Brazil, and India (like the past few years,) what good is that to Americans and Europeans if their economies have declined? Not much apparently.

            Assuming the studies I cited drew correct conclusions, the “reasonable basis” for those conclusions is that new capital stock out performs the old capital stock that got washed away. People often make do with old tools simply out of inertia. I should have replaced my skill saw blade a while ago. Once I do so it will cut faster and cleaner. But I forget to buy anew blade, or forgot where I put my special wrench, so I make do despite the lower productivity. If my saw died or was stolen and I then took money out of savings to buy a new one (or if I bought the new one and did not buy new plastic toys for my kid,) then the loss of the old tool would have prompted me to get a new one and improve my productivity. Multiply that times thousands and millions and you get the logic behind the findings.

            I can think of at least 4 logical reasons that the studies I cited might be true:
            1) New tools and capital are better and more productive than old
            2) Disasters release unproductive savings to be invested in productive capital
            3) Disasters alter spending patterns away from frivolous purchases and towards productive goods.
            4) People (labor) work harder and longer hours after a disaster to rebuild.

  • Bob Tiernan

    *valley p:*

    I don’t pretend to know, but it could be that a disaster shakes otherwise poorly occupied capital loose.

    *Bob T:*

    That assumes that those who control that capital can’t find anything in the meantime, which sounds unrealistic. The point is that if a flood wrecks a house every year and it gets rebuilt every year, after 50 years of this you still have that one house but enough money was spent to build 50. That’s not exactly growth.

    *valley p:*

    If “unseen effects” are actually unkown effects, then they simply can’t be factored in.

    *Bob T:*

    Of course they can. But when you consider the millions of people involved you will not be able to specify exactly how every dollar would have been spent had it not been used to rebuild something, or to pay higher insurance premiums and taxes with which to undo the repetitive flooding or storm damage and so on. If $300 is taken from you, you might know exactly what you can no longer do with it as planned, but you cannot know what everyone else was planning on doing and is no longer going to do. But the effect is still there.

    *valley p:*

    What we do know, if the analysis I cited is correct, is that there are net positive impacts from many, but not all natural disasters.

    *Bob T:*

    Well, that’s what’s called “looking on the bright side” of something. But don’t put too much stock in this. Again, the money for the Marshall Plan could have built a lot of new stuff here instead of replacing rubble in post-war Europe, and if what you’ve been saying is so reasonable then, after every hurricane or major flood, there would be no debate regarding the wisdom of repeatedly bailing out people whose homes and businesses are under-insured for their location. New Orleans would be the wealthiest city in the country if a Katrina hits every year.

    Bob Tiernan
    Portland

    • valley p

      “That assumes that those who control that capital can’t find anything in the meantime, which sounds unrealistic. ”

      Unrealistic? Given the record of private capital allocation this past decade, It’s not hard to imagine it being put to more productive uses given an opportunity.

      “after 50 years of this you still have that one house ”

      You presumably have a better house. More energy efficient, wired for modern electronics, home office, etc… and you have the money to rebuild it circulating about. A dollar spent on something is not just 1 dollar. There are multipliers.

      “That’s not exactly growth.”

      It is if productivity and overall wealth improves. And that is what those who studied disasters concluded. Its counter-intuitive I admit. But that is why data is better than intuition.

      “Well, that’s what’s called “looking on the bright side” of something.”

      No, its called looking at the facts and conclusions of the economic studies I cited. Show me reputable studies that concluded the opposite.

      “the Marshall Plan could have built a lot of new stuff here instead of replacing rubble in post-war Europe”

      Yes, but it would not have revived a wealthy, productive market of 400 million people we could do business with. Many semi-wealthy people trump a few very wealth ones any day economically.

      “if what you’ve been saying is so reasonable then, after every hurricane or major flood, there would be no debate regarding the wisdom of repeatedly bailing out people whose homes and businesses are under-insured for their location. ”

      The debate is never about what is economically wise based on data. The debate is usually over morality and “spending”. Why help people who did not buy enough insurance? Its their fault. Its like the same debate we had when the housing market crashed. Why help those who over invested in homes? Because it keeps everyone elses investments from tanking is the answer. it has nothing to do with morality.

      “New Orleans would be the wealthiest city in the country if a Katrina hits every year. ”

      Only if the reinvestment were timely and large enough and not lost to corruption. The researchers found that New Orleans was the exception to the rule. It wasn’t the rule.

  • Bob Tiernan

    *Bob T:*

    after 50 years of this you still have that one house

    *valley p:*

    You presumably have a better house.

    *Bob T:*

    Instead of a second house. Two houses would be better than the one. After the second flood, you rebuild the house again, and still have one instead (this time) three.

    Bob Tiernan
    Portland

    • valley p

      No, 2 houses are not necessarily better than one. 2 houses, the first one being older, with old wiring, a roof needing replacement, inefficient heat, and so forth, might well be a capital drain. A throwing of good money after bad. I was once a “landlord” for an old commune in southern Oregon. There were a dozen or more shabby, half finished, dysfunctional buildings that were draining all the energy out of the place. Nothing productive was getting done as a result. A good flood or fire establishing a clean slate would have been a blessing. It would have led to proper planning, a match of buildings to productive uses, and an increase in wealth.

      Again….you are trying to argue your intuition against data. Show me the study that refutes the studies i cited.

      • Steve Buckstein

        “A good flood or fire establishing a clean slate would have been a blessing.”

        I doubt your property insurance company would agree with that statement.

        • valley p

          I think the point you are trying to make Steve, is that the money for replacement comes from somewhere, and if it is used in one place isn’t used in another, therefore this is a zero sum game. My understanding is that economics is not a zero sum game. If the flood or fire took out low performing capital and that was replaced by high preforming capital, then a net benefit to ‘the economy” is certainly possible if not probable. If is dislodged stagnant or otherwise poorly used funds then again, net benefit. That is the case the studies I cited made, and I still have not seen you or Bob offer any counter analysis beyond your intuitions.

          • Steve Buckstein

            No Dean, it’s worse than a zero sum game. It’s a net loss. If your house burns down and you use all your money to replace it, you now have one house and no money. Before the fire you had one house and the money to build another one or do anything else you wish.

            Whether the new house is “better” than the old one is not the issue. You always have a choice to upgrade your house by spending some money, or the choice to tear it down and build a better new one. The fire gives you no such choice; you simply have a net loss of economic value. No studies needed to prove this; just simple arithmetic should suffice.

          • valey p

            Your answer (and Bobs) seems to be about consumption, not production. House as consumer product versus capital as a productive facility. If economics worked the way you describe, a company would never write down a loss from an unproductive capital asset. They would keep it going no matter what simply because it was already there, and would seldom build anything new or better.

          • Don Yocham

            Valley P,

            It is not a matter of consumption versus production; it is a matter of utility versus replacement value. If a capital asset is indeed low performing, that presumes that it can be replaced for less than it takes to maintain it. Stated differently, if the present value of expected cash flows, netting out maintenance costs, is confidently projected to be greater for a new capital asset, there is hardly a business man on the planet that would not choose to replace their old capital if they can. To the extent that a business men does not make that choice, they will ultimately be destroyed anyway and their assets will either be put to better use or cease to exist. But that is a function of the market, not a tornado. Destruction does not create opportunities that did not already exist, it can merely shift it from one place to another. If something that had no value is destroyed, then nothing was really destroyed from an economic perspective. If it destroyed something that did have utility, then capital is constrained from some other use as it is now tied up through the act of replacement.

            Also, just because an asset is marked to zero doesn’t mean it is not productive. With “Cash for Clunkers”, cars that still had plenty of utility (getting from point A to point B), were destroyed and replaced with cars that did no better at getting people from point A to point B. And this was destruction by choice! (though incentives were subsidized). You will point to reports that claim that energy efficiency was improved, but those studies all ignore the energy required to build the cars in the first place. Even if floods, fires, hurricanes, tornadoes, earthquakes, bombs and meteors managed to only find ratty looking buildings and old equipment, your conclusion is still based on the premise that the activity that replaces said destruction could not have occurred at some other place or some other time…or both! You’re thinking contemporally versus the range of temporal considerations. Your view is only local rather than comprehensive.

            You continue to hang your hat on the studies you cite, but that study cannot take into consideration where the capital ultimately came from and to what other use it would have been put to work. To conclude that it was put to good use simply because the result seemed positive is considered a narrative fallacy that follows the Keynesian outline of post hoc ergo propter hoc – this happened and then that happened, therefore this caused that! Conclusions contingent upon studies such as this ignore the knowledge problem – an epistemic trap.

            Yes, the productive capacity of whatever region the study you reference probably improved. If you steer a tornado through a trailer park, then build a semi-conductor factory on the rubble, the productivity of that area will have improved. However, that presumes three things: 1) That only underperforming assets get destroyed, 2) that the only place the factory could have been built was where the trailer park once was, 3) that a new trailer park magically popped up somewhere else from some other unknown dimension where constraints do not exist.

            So, I’ll see your “post hoc ergo propter hoc” and raise you a counterfactual. You may be happy to see a nice new fish processing plant at the harbor, but that capital may well have funded my inexpensive anti-gravity machine! Again, destruction constrains capital. There is no way of knowing the ultimate better or worse use of the capital in question, so instead, to support your convictions, you have to rely on local effects, which is an error of isolation.

            Such are the limits of human knowledge and such is the arrogance of those ignorant of those limits. “It’s not what we don’t know that harms us, it’s what we think we know but don’t that does.” The reason we cannot submit a study that refutes your conclusions is that such a study could not be performed without suffering from the same error of isolation that we condemn. There’s no need to perform a hypocritical study when reason will suffice.

  • Don Yocham

    Let’s look at a couple of extreme examples to highlight that destroying an economic asset does not create value, but merely pulls opportunity from one place to another.

    Though Vally P refers to underperforming assets, let’s first look at an extreme example. If a fire rages through an abandoned industrial park, there is nothing lost because that park had no utility. Indeed, perhaps some utility is gained because people do not have to look at those nasty buildings. Also, now that the area is effectively cleared, a new business may decide to locate there because it is now marginally more profitable to build since less capital needs to be spent in tearing down old buildings. However, that business would have been established anyway, and all you’ve done is moved where the productive activity takes place. That it now can be performed marginally more profitably means that wealth is a little higher than it would have been. But, in this example, effectively nothing was destroyed from an economic perspective and that fire was, in effect, a creative act entirely due to luck. Since capital was not constrained but rather actually freed up, we can claim that destruction created value. I might also add that the government had nothing to do with this and the market reacted in the way it always does.

    That was an example of destroying something which had no, or even negative, value. Now let’s look at something that you might deem underperforming. If my mommy and daddy gave me a business which is run inefficiently on stale assets which I choose not to improve because all I want is the cash flow and I’m too lazy to do the work that comes with improvement, that is my choice. Clearly it is of some value, because someone is still buying my products and it provides me with enough cash to be the big man in a small town. Most likely, I’ll eventually be driven out of business and have to get a job at the Quick-E Mart. Whoever takes over my capital assets may ultimately destroy them and replace them with more productive assets or they may simply operate them more efficiently. But still, that is activity that would have taken place elsewhere and my bankrupt practices merely created an opportunity for someone else. This is creative destruction!

    However, if instead of failing the old fashioned way, my factory burns down. It may or may not be replaced by anything. If it is replaced, that will be something that would have happened anyway, either through pulling activity to that location or by someone else somewhere else picking up the slack. In this case, as is always the case with a productive asset, that fire didn’t create an opportunity that didn’t already exist and the capital used to replace it constrains capital that would have been put to work otherwise.

    • valley p

      Economic modeling is out of my depth. But I’ll offer one example from one of the papers I cited to illustrate my point and leave it at that.

      On page 7 of: http://www3.cepal.org.mx/iadb-eclac-project/pdf/okuyama2003.pdf the author notes that “investment decisions (regarding) capital stock are rather complex,” and that this is especially the case following a disaster. He describes the earthquake damage to the Sumimoto Rubber Factory in Japan in the 1995 earthquake. The company decided to build a new factory rather than to repair and upgrade the old one, and how this decision would not have been made absent the disaster. The company would have continued to muddle through with what they had. This is a case where they ended up with much higher productivity as an indirect result of the disaster. They were in effect kicked in the butt by the event.

      Yes, its possible that capital could have been better invested elsewhere. But we can’t know what didn’t happen. And we can’t know the effect on the farthest ripple We do know what did happen and why. And there is a plausible case made by multiple investigators that many if not most natural disasters result in increased productivity in the location of the disaster. Which after all, is what Lloyd Bensten suggested with respect to Mississippi flooding, and what Bob Tiernan and Steve ridiculed.

      • Don Yocham

        I couldn’t agree more that if we ignore the forest for the trees and only look at local effects then a disaster can, going forward, be made to look like it increased wealth by measuring the improved productivity in that particular location. If my factory burns down, insurance builds me a new one and we ignore everything but the impact a more productive factory has on my bottom line, it looks like a blessing. I guess all those guys that set fire to old businesses so that insurance will build them something new (and hope they don’t get caught) are truly business geniuses because they increase the wealth of the world every time they do it!…oh wait, the wealth of the world doesn’t matter. We’re supposed to ignore even the obvious consequences, both direct and indirect. We can safely conclude that since the above referenced arsonist is better off, the fire was a good thing and increased wealth because he has a new building that will presumably be more productive.

        Thank you for helping me change my perspective. I’m going to stop considering all the repercussions of any action and, especially, stop thinking counter-factually. Creativity and a broader mind frame are truly dangerous (I see it now!). If I narrow my focus enough, then I’ll be much happier. Isn’t that what Orwell referred to as “Crimestop”!

        I don’t believe that either Bob or Steve are ridiculing the conclusion that the productivity in a particular location following a disaster is improved. The question is whether overall wealth is improved (including beyond the region where the disaster occurred). That is the issue that “The Broken Window Fallacy” addresses. Since wealth was pulled from some other productive use, there was no total gain.

        Assume that you start out with wealth unit A and wealth unit B. A tornado destroys wealth unit B. Wealth unit A is then used to replace wealth unit B to make wealth unit C. Wealth unit C is more productive than wealth unit B. Therefore, according to your logic, you would conclude that since wealth unit C is more productive than wealth unit B, overall wealth is increased. However, you no longer have wealth unit A or B, you only have wealth unit C. For overall wealth to have improved, wealth unit C would have to be more productive than the total productivity of wealth unit A and B together. Since that is not likely the case, then wealth has been destroyed.

        The trap of modern economics is that it pretends to be a science. Economists run studies such as the one you have cited and point to their rigorous modeling and claim thoroughness. But it is precisely because we cannot know what didn’t happen — that we can’t test the counter-factual, that we cannot run a control group — that conclusions such as “disasters improve wealth” are horribly wrong. Their hypotheses are not testable. Disasters may improve economic productivity in a particular region, but that comes at the expense of some other activity that was just as productive.

        Moreover, for economic models to work (and I do know a thing or two about this), they have to assume economic actors behave like particles in a vacuum. They ignore the nature of human action. Human beings are not mean-variance optimizing members of the species homo-ecomicus, they make decisions based on their own measures of utility, and there are as many different assessments of utility as there are people on the planet and those assessments change with every second of the day.

        However, we do know this. Capital/wealth had to be pulled from somewhere else to replace something that we had before. We can’t possibly assume that that capital/wealth was less productively employed. If we do, then we have to always assume that all capital is always underemployed and only disasters “shake it loose”, as you say. Moreover, the new form that the capital that survived the disaster had to take has to be out produce what was destroyed and what eliminated as a result of transforming the capital. The capital used to replace the destroyed capital may have been created via the printing press (i.e., fiat currency), but that only means that holders of that fiat currency have now had their capital destroyed in order to benefit someone else.

        If you’re sole point is that a particular area may be more productive after a disaster than before, then you are confusing localized measures of productivity with total wealth/capital. Indeed, you’ve fallen into the very trap that “The Broken Window Fallacy” teaches us to avoid.

        • valley p

          “Since that is not likely the case, then wealth has been destroyed.”

          No. Some wealth generating capital has been damaged or destroyed, spurring its replacement or improvement by new capital that is better at wealth generating. The authors make it clear that their findings only apply to advanced economies that have a lot of capacity for renewal. Your analysis seems entirely zero sum to me. Capital as a static entity. Like gold. I view it as dynamic, with the main capital being knowledge, intelligence, and organizational skills. Human capital.

          “Disasters may improve economic productivity in a particular region, but that comes at the expense of some other activity that was just as productive.”

          We don’t know that at all. We don’t know that the capital invested in recovery was or would have been used better elsewhere. It could have been stocking up beanie babies in a warehouse. An opportunity comes along (owner of beanie babies has brother who lost factory in storm) and it gets redeployed in a more productive way. Too many individual decisions to track.

          “We can’t possibly assume that that capital/wealth was less productively employed. If we do, then we have to always assume that all capital is always underemployed and only disasters “shake it loose”, as you say. ”

          Right, and I wasn’t making that assumption. I was merely stating that we can’t really know one way or the other. And one explanation for improved productivity after the disaster is a better deployment of capital. I’m not saying this is so, I’m saying it might be so.

          “The capital used to replace the destroyed capital may have been created via the printing press (i.e., fiat currency), but that only means that holders of that fiat currency have now had their capital destroyed in order to benefit someone else.”

          You present a whole new argument. I’ll just say that there is a lot of evidence that a fair amount of new money can be simply called into existence and deployed with no negative impacts on the value of money in circulation. The 1930s, the Second World War, and today all seem to support this. So maybe you have uncovered a reason for the findings of the studies I cited. Maybe it was not redeployment of capital at all, but thin air creation of new capital by governments responding to disasters. Obviously, this approach has limits or one gets Zimbabwe or Greece. But its plausible.

          “If you’re sole point is that a particular area may be more productive after a disaster than before, then you are confusing localized measures of productivity with total wealth/capital.”

          My sole point was to offer a counter theory, backed up by real evidence, that things are not as black or white as they may seem. Economies are very complex, so it should not surprise an economist to find out that what they think ought to be true might not be true once the facts are in. Grand theories are tested in the real world, and if they are found wanting ought to be adjusted.

          • Don Yocham

            So, you feel comfortable with the assumption that the new form that the capital takes outproduces both where it came from and what it replaces? Good luck applying those assumptions in the real world.

            With respect to money, I don’t present a whole new argument, just the necessary extension of the current one. Am I correct in understanding that you believe the purchasing power of the U.S. dollar has increased over the last 100 years? Great. Let’s do a trade. You give me some basket of goods that represent what $1,000 could buy in 1930 and I’ll give you a basket of goods that represent what $1,000 could buy today! If you want to make that basket of goods ounces of gold…even better. If you feel the examples you cited actually support your point, there is little need to continue this conversation.

            Rather than provide counter points to the original argument, you provided evidence that confuses the argument the same way that people who defend destruction and taking from others have always done. You simply made the argument that Bastiat countered with “The Broken Window Fallacy”.

            I can only hope that someone else is reading this and learning to understand the massive holes in your perspective. I need some lunch.

          • Don Yocham

            Potstickers did the trick.

            I ignored a glaring lay-up in your comment about your view of human capital as part of capital. Of course it is. That is the role of human action and human action is the only way that wealth is created. Without human action, there is no capital. However, that human capital exists as much before destruction as ever. However, as if often the case with destruction, some people are now dead! It’s hard for a rotting corpse baking in the sun to offer up creative solutions or invent something new, much less do what they were doing before.

            If, again, your assumption is that “well, the people that are left work and think harder”, that again assumes that they were not fully utilizing their capacity beforehand in some other regard. They have to be twice as productive or creative. And that assumes only lazy people die in disasters just like you assume than only crappy assets get destroyed which, in total, assumes some utility inherent in the capital or their actions that can deem them as lazy or crappy (underutilized).

          • Don Yocham

            Oops…typo. Meant to type “However, that human capital exists as much before destruction as AFTER.”

          • valley p

            “So, you feel comfortable with the assumption that the new form that the capital takes outproduces both where it came from and what it replaces? ”

            I feel comfortable with the findings of the studies I cited. I offer as one possible explanation that capital has been better deployed. I assume nothing.

            “Am I correct in understanding that you believe the purchasing power of the U.S. dollar has increased over the last 100 years?”

            Nope. You are incorrect. But the purchasing power and well being of citizens who use dollars has increased by multiple factors over that period in spite or more likely because of the government having added to the money supply. Had they stayed with a fixed medium (gold) we likely would have been much poorer, except for those with the gold.

            “If, again, your assumption is that “well, the people that are left work and think harder”

            Nope. Not my assumption. You have constructed a straw man argument.

            Let me state it one final time for you. My only assumption is that the research I cited is credible unless or until someone shows me counter research that disproves it. My attempt at explanations for why the findings are what they are, which I admit are counter intuitive, are simply that. Attempts at explanations. You dismiss the findings because (now I am assuming) they counter either your intuition or your Bastiat-based ideology. I’m a pragmatist, not an ideologue. I take Bastiat with a large grain of salt. Thus I have no trouble accepting findings that counter my intuition.

  • Don Yocham

    You feel comfortable with the findings in studies that you admit above that you don’t fully understand?

    You’re conclusion that things could not have progressed as far as they have on commodity money is simply foolish. You have no firmer grasp of the nature of money than you do of basic economic concepts. Again, you’re a constructing a narrative based on conditions without thinking counterfactually. Post hoc ergo propter hoc.

    I constructed no straw man. I simply concluded the only thing that could possibly make your argument work. That you are not aware of the assumptions you make is not uncommon. Not checking the fundamental premise upon which many axioms most people hold dear is a common affliction. If you are simply concluding things with out making assumptions, good luck with that too.

    You continue confuse income with capital which is the same as confusing productivity with wealth.

    • valley p

      “You feel comfortable with the findings in studies that you admit above that you don’t fully understand?”

      Sure. There are a lot of things I don’t fully understand but I feel comfortable with. Quantum physics. The big bang. Gravity. Electromagnetic fields. Its a long list.

      “You’re conclusion that things *could not have* progressed as far as they have on commodity money is simply foolish. ”

      Only that wasn’t my conclusion. I said it was *likely* we would have been much poorer. Every nation that abandoned the gold standard got out of the depression sooner than the ones who did not.

      “I constructed no straw man. I simply concluded the only thing that could possibly make your argument work.”

      You concluded the only thing that could make my argument work for you perhaps. But it still was not my conclusion.

      “You continue confuse income with capital which is the same as confusing productivity with wealth.”

      Wrong again. I have no such confusion. Go back and read the earlier thread. I made a clear distinction between growth and capital.

      You keep ascribing thoughts to me I don’t have. Its a bad habit.

  • Don Yocham

    Correct. I am assuming you have had more thoughts on this subject. I often do that and it is a bad habit.

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