Wednesday, July 9, 2008

What Is Seen and What Is Not Seen

Drake Bennett in the Boston Globe recently wrote an article arguing that natural disasters can help facilitate and sometimes embolden a country's drive for economic growth.

He argues,
Rebuilding efforts serve as a short-term boost by attracting resources to a
country, and the disasters themselves, by destroying old factories and old
roads, airports, and bridges, allow new and more efficient public and private
infrastructure to be built, forcing the transition to a sleeker, more productive
economy in the long term.

Aside from the often terrible after-effects of earthquakes, hurricanes, and tornados, Bennett disregards the fact that if it were not for the destruction caused by these events then the resources employed in reconstruction would instead be employed in some other pursuit. Natural disasters always result in the elimination of some resources. Bennett's view has already been proven fallacious by Frédéric Bastiat. Writing in 1848, Bastiat distinguished between What Is Seen and What Is Not Seen. In part 1, The Broken Window, he wrote that economic life is characterized by finite resources; all resources that are economic are essentially scarce, and the destruction of any of these limited resources can only make man poorer. This is true because more of the limited resources must now be used to replace what has been destroyed rather than be used to satisfy some other human need.

Bennett qualifies his view that natural disaster can be beneficial to the economy by saying that the recently eliminated resources can be replaced by more efficient and technologically superior methods, which then result in a less wasteful utilization of resources employed in any particular pursuit, ie. an older factory is leveled and replaced by a state-of-the-art factory. Although Bennett cites Schumpeter's concept of "Creative Destruction" he fails to recognize the role played by the entrepreneur in that "Creative Destruction"! Entrepreneurs determine when it is more or less profitable to replace older methods of production with newer, more techonologically up-to-date methods. Using the interest rate, they weigh the net present value of the expected earnings that would be generated from a more efficient mode of production against the net present value of the depreciating older capital stock. Once the value assigned to the former is larger than the latter, then older capital is replaced. There is a natural mechanism inherent to the capitalistic economy that determines when it is useful to replace older, less efficient modes of resource utilization with newer, more efficient modes. And this method is aligned with the demands of all consumers in the market economy (through the interest rate), rather than by the arbitrary effects of a natural disaster. Natural disasters do not result in economic growth, and any evidence to support such a claim is merely a trick of statistics.

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