Whenever a natural disaster occurs, like the horrible one that has befallen Japan, the broken window fallacy is sure to be uttered. This is the sophistic claim, brilliantly refuted by Frederic Bastiat, according to which property damage actually helps the economy by generating spending on reconstruction. Keynesians, with their emphasis on demand rather than the economy’s productive capacity, are especially susceptible to this specious logic.
On cue, Larry Summers said this about Japan’s earthquake: “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.” Over at the Coordination Problem blog, Steven Horwitz alerts us to a more elaborate rendition of the broken window fallacy at the Huffington Post by Nathan Gardels.
If this broken window logic were valid, however, the Japanese stock market ought to be rallying on the news of the earthquake. Instead, it is crumbling. It was down 6.2% yesterday, and as I write this, it has dropped an additional 6.5%. That adds up to a loss of 12.7% since Monday. It’s hard to think of a more definitive empirical rejection of the broken window hypothesis.
