The last chapter explained the Broken Window Fallacy. Chapter 3 initiates the discussion on one of the most pervasive applications of the said fallacy: the idea that destruction is good for the economy because it stimulates demand.
Though some would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. (pg 25)
The idea that fundamental principles become irrelevant on an aggregate level puzzles me. I’m guessing it puzzled Mr. Hazlitt, as well. His remark points to the unfortunte habit among economists to dismiss what is obvious on a small scale when analyzing aggregates. If someone burnt your house to the ground, then economists would not be praising this tragedy because it means you have to buy another (some might, actually). It is a bona fide tragedy – a set back – because you have lost wealth and capital and have to use up resources just to get back to the previous level of wealth before the destruction.
The connection to the Broken Window parable could not be more clear; the community has a net loss with this destruction.
This obious truth is no different on a national level. When countries are leveled, there is no hidden economic benefit. Some point to the rise in productivity, when the rebuilding is occuring, as a benefit to society and the economy. But to suggest this is nonsense. I will give an example why: Say you are working on a project at work and it takes a lot of time to figure out how to proceed or move forward with your analysis. At this point, your productivity rate might not be so high – it may take a lot of time thinking and strategizing how to move forward. But then someone accidentally erases your all your work on your computer – a tragedy, no doubt. An economist walks in the door and tells you, “Cheer up! You are going to be so much more productive while you re-work everything that you lost!”
Without thinking too much about it, anyone can see that the economist is a dunce. The worker experiences high productivity because he knows how to do what he already did. It is no wonder economies experience high rates of productivity after destruction, then. If there is available capital for labor to use, they will just be reconstructing the economy the way it was prior to being destroyed. Houses will be rebuilt. Businesses will buy the capital they lost and will work to arrive at the point they were at pre-destruction. People will be working long and hard to obtain the purchasing power they need to rebuild there homes and feed their families.
Without destruction, homes would still be there and the citizens of that nation would work to purchase things they want not things they need. There is a tremendous difference.
Today, I think the only way our economy can really accelerate forward is if the policy-makers rid themselves of the fetish of aggregate spending. Spending is the result of production and any loss to production is never an economic gain because purchasing power is destroyed.