25 July 2017

Creative destruction?

A few weeks ago, in a link round-up, I linked to this item:
.....and challenged people to spot the logical flaw.  It may seem painfully obvious, but I've found that a surprising number of people (on Tumblr, at least) actually don't understand why this isn't a valid argument.

Assume that replacing a smashed window costs $500.  The business has to spend that money, since the broken window can't be left broken.  So, yes, some window-repair company gets an extra $500 in business, and its employees derive some benefit from that.  However, the business now has $500 less to spend on something else which it would have preferred to have -- new rugs, better lighting, more frequent cleaning, employee bonuses, whatever.  So the people who would have benefited from that spending now do not.  No benefit has been created -- it has only been redistributed.  Moreover, the business is worse off than it would have been, since it has spent that $500 on merely getting back to the situation it was in before (that is, having an intact window) rather than on improving its situation.

To see the principle better, imagine if every car in the United States were somehow simultaneously destroyed.  By the "logic" suggested in the graphic, this should create a huge benefit since all those cars would have to be replaced and vast numbers of new jobs would be created in the car industry.  And that would probably happen.  For most Americans, living without a car is impractical, so they would indeed need to replace them.  But imagine what would happen if your car suddenly vanished and you needed to get a new one.  If you happened to have in the bank the several thousand dollars needed to buy a decent car, you could do it, but the money would be gone and no longer available for whatever else you were saving it for -- a trip, remodeling part of your house, security in case you lost your job, etc.  If you didn't have that much in savings, you'd need to get a loan and go into debt, so that some portion of each future paycheck would already be committed to loan payments and couldn't be spent on whatever you would have preferred to spend it on.  Multiply this by all the millions of other people in the same situation, and you'll see that the gain of jobs in the car industry would be offset by a contraction (of at least equal size) in many other industries.  Once all the cars had been replaced, the country as a whole would be much worse off than it would otherwise have been, because this huge contraction in non-car industries and incomes would have occurred merely to get back to the situation we were in before the cars were destroyed -- that is, the situation of most people having cars.  That is, there would have been a great contraction of most of the economy for no offsetting benefit.

Some individuals may benefit from destruction (this is certainly true of wars), but the net effect of destroying value is less value.  Stop making excuses for assholes who just like to smash things.


Anonymous Marc McKenzie said...

One of your best posts ever, sir!

And also...who the hell would even support what Black Bloc does? They are anarchists, and accomplish nothing except screwing up everything and making things worse for everyone.

25 July, 2017 18:21  
Anonymous NickM said...

Excellent post on the "broken windows fallacy". It is all (as I am sure you know) about opportunity costs. My wife's laptop broke recently. It needs replacing. Obviously good (in a sense) for computer merchants. But a few hundred notes could (otherwise) be spent on... Well anything. Including more productive computer systems chez here rather than replacing a machine.

26 July, 2017 02:32  
Blogger Infidel753 said...

Marc: Thanks! I know of some self-described anarchists (the more thoughtful kind) who loathe violent opportunists like the Black Bloc. People like that undermine whatever cause they attach themselves to.

Nick: Yes, as economics it's incoherent. I think this kind of idea is just a rationalization for people who enjoy violence for its own sake (or are fascinated by it).

26 July, 2017 05:29  

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