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Calling on Bastiat: Businessweek’s Economic Illiteracy

November 2, 2012

Things that make you go hmmmm:

Whether it’s recovering from a war or cleaning up after a natural disaster, periods of severe destruction are usually followed by sharp bursts of economic activity. Money pours in from government and insurers to repair infrastructure. Homes get rebuilt, debris cleared. As a result, the overall economic growth that follows a natural disaster can often outweigh the wealth it destroyed. Economists call this the broken window effect. “To an economist, breaking a window always boosts GDP,” says Michael Englund, chief economist at Action Economics. Englund thinks that Sandy could end up boosting fourth-quarter gross domestic product by as much as two-tenths of a percentage point. “The backfill activity will probably be bigger,” he says. “By the time the rebuild is over, I think we’ll see this as a net positive [for GDP].”

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3 Comments
  1. November 2, 2012 5:54 pm

    Reblogged this on Drewt333's WordPress.com Blog and commented:
    Here’s a perfect opportunity for someone with some real book learnin’ on the subject to demonstrate the broken window fallacy. But no, it’s left to me, an unlettered nobody, to supply the punchline to this economic in-joke. Well, me and Wikipedia: http://en.wikipedia.org/wiki/Parable_of_the_broken_window

  2. MarkD06 permalink
    November 2, 2012 6:58 pm

    Indeed, to see this fallacy perpetuated on a site dedicated to promoting alternative ways of thinking is disappointing at least. Your readers are intelligent enough to understand the fundamentals of economics and quickly realize that destruction can never be positive in the long term.

  3. António Costa Amaral (AA) permalink
    November 4, 2012 11:17 am

    Careful with definitions. Don’t equate GDP with wealth-creation. Disasters are surely awful for economic prosperity. Now, GDP is an awful indicator for that. Given that disasters actually cause the depletion of capital, it is possible that GDP goes up while the country is growing poorer. Don’t get mired in rigged statistics.

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