Earthquakes, Economists, And The Broken Window Fallacy

David Bernstein points to this mind-numbingly dumb comment in a Wall Street Journal article about the Japanese earthquake:

“Some economists have argued that a quake could actually lift the economy in the long run, by requiring a surge in rebuilding spending.”

We’ve seen this before, of course. Back in September, I noted that Nobel Laureate Paul Krugman has made essentially the same argument when claiming that World War II and the September 11th attacks were good for the economy:

Krugman’s true failure here, of course, is that he ignores the lesson that Frederic Bastiat taught some 160 years ago when he set forth what has come to be known as the Broken Window Fallacy:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

The only way you can assert that Japan’s tragedy will stimulate its economy is if you ignore the billions of dollars in destruction it caused, and the economic growth that would have occurred had the disaster not occurred. If you accept the contention that the Journal, and Krugman, make then we may as well, as Bernstein says, send over a few planes and bomb Tokyo. That’ll really stimulate the economy !

 

FILED UNDER: Economics and Business, Quick Takes
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Alex Knapp says:

    Did Bastiat do any kind of empirical or mathematic analysis to support his thesis? It seems intuitively correct, but intuition and reality don’t often coincide.

  2. Tlaloc says:

    David Bernstein points to this mind-numbingly dumb comment in a Wall Street Journal article about the Japanese earthquake:

    “Some economists have argued that a quake could actually lift the economy in the long run, by requiring a surge in rebuilding spending.”

    See this is typical of people who take economics seriously- they take the over simplified and frankly overly simplistic first order approximations of economic theory and pretend they are absolute truths. The fact is the broken window fallacy is nothing of the kind and such damage can indeed spur economic development.

    Seeing this is actually rather easy. The broken window fallacy depends on the idea that what you replace the window with was exactly as useful as the original window. It makes no allowance for improvements that may be incorporated. High efficiency windows may over time be vastly more cost effective and yet such infrastructure improvement is rarely done without need, there are almost always short term more acute needs to address. A broken window is an acute need but the resulting replacement may be an economic boon compared to maintaining the original inefficient pane.

    Of course none of this considers the tremendous human suffering that is certainly going on in Japan (not that economic theory really ever cares about such things), and as such it’d be monstrous to suggest the earthquake was a good thing, but it may very well lead to the creation of better infrastructure.

  3. michael reynolds says:

    Is it not the case that the six francs might have been invested in Lehman Brothers stock and thus evaporated?

    Is it not the case that the six francs might have been spent on cocaine? Or lottery tickets?

    Aren’t the buildings knocked down today likely be replaced by stronger buildings less likely to fall down in the next quake? Aren’t they also likely to be more energy efficient? A better use of land? What if the thing being destroyed is replaced by a better thing? Or what if the constant glass-breaking leads to stronger glass? What if cars built in 1950 had never rusted out and died, would we still be driving Hudsons? And would that be a good thing?

    In short, doesn’t a modern economy require a degree of breakage and destruction? Come to think of it, wasn’t Japan pretty much burned to the ground after 1945 and didn’t that (setting aside a staggering amount of human suffering for the moment) help them to create a modern industrial powerhouse? Same with Germany?

  4. michael reynolds says:

    I see Tlaloc beat me to it.

  5. Tano says:

    It doesn’t seem intuitively correct to me. The glazier will take his six francs and spend it, with some of it maybe going right back to the shopkeeper as he buys some food for his family. The shopkeeper profits from the sale of food to the glazier – a profit he would not have had if the window had gone unbroken.

    The glass manufacturer who supplies the glazier also has more money, since the glazier will need to replace in his inventory the pane he installed for the shopkeeper. And this of course will lead him to spend some of that money paying his employees to actually manufacture more glass – workers who will now have a bit more money to spend at the shopkeepers store, so the shopkeeper benefits there as well.

    Economic activity has increased – I don’t see how you can deny that. Money flows through the economy to a greater extent than if the window had not been broken. More and more people have money passing into their hands in exchange for their work, and out again as they acquire goods.

    I don’t quite follow your criticism of Krugman either. The usual argument that we all hear is that liberals claim that the New Deal made a significant contribution to curing the Depression, and that WWII finished the job. And conservative economists try to argue that the New Deal did relatively little and that WWII was the major reason the Depression ended.

    Are you arguing that the New Deal alone solved the Depression, or is there some third factor which you are claiming is responsible for the better economic conditions we had in the late forties relative to the thirties?

  6. Michael says:

    What if the thing being destroyed is replaced by a better thing?

    You’re still making the same flawed argument. What if the money was going to be spent on upgrading their vehicle fleet to hybrids, or investing in new technology to streamline their business processes, or some other form of improvement? And all this not even considering the huge amount of lost opportunity while you try and get your business put back together.

    The simple fact of the matter is that when something breaks, some economic value vanishes, even if you replace it with something better. Some portion of the money you spend just goes to getting you back to where you were before, and only a small portion of the money you spend will take the form of actual improvements. Entropy’s a bitch, no amount of economic theory is going to change that.

  7. Michael says:

    Tlaloc, take your story and put actual numbers in it. There’s no way those 6 francs result in > 6 francs in the end, without you adding in more francs from some outside source.

  8. Michael says:

    To put this whole thing into perspective, the only reason the broken glass causes money to flow is because it creates a “hole” in the economy, and money moves to fill it. However, the hole was only created by removing some amount of value from the total economy. Sure it makes money move, but that’s still less money that there was before it was moving.

    Unless there is something in the system actually creating more value than it consumes, rather than just moving it around, you still have a net loss.

  9. michael reynolds says:

    The simple fact of the matter is that when something breaks, some economic value vanishes, even if you replace it with something better.

    I think that’s wrong. Break abacus, replace with laptop. Is that a loss to the economy?

    In fact, isn’t that the definition of economic progress? That things are broken and replaced with better things? If entropy is in effect for economic systems, then how have we managed to break so much and still have better things?

  10. Murray says:

    Following that line of reasoning we could get rid of the current unemployment rate using decimation, familiar in the Roman Legion, on the American workforce . (One of the dirty facts of WWII is that 400,000 young American men disappeared from the job market.)

  11. […] David Korten posted about this interesting story. Here is a small section of the postDavid Bernstein points to this mind-numbingly dumb comment in a Wall Street Journal article about the Japanese earthquake: “Some economists have argued that a quake could actually lift the economy in the long run, by requiring a surge … […]

  12. Michael says:

    I think that’s wrong. Break abacus, replace with laptop. Is that a loss to the economy?

    (cost of the laptop) – (value of the abacus) == Net loss to the economy

    If entropy is in effect for economic systems, then how have we managed to break so much and still have better things?

    By either bringing in new value from outside systems, or improving the efficiencies of existing systems so that they don’t consume as much value as the previously had, giving a net increase in usable value.

  13. Michael says:

    To prove my point, which combination represents more total economic value, a laptop and a broken abacus, or a laptop and a working abacus?

  14. john personna says:

    To be brutal about it, WWII was good for our economy because it destroyed productive capacity elsewhere. Now, a west coast quake would be bad for our economy, but it might not be correct to invoke the Broken Window Fallacy now, from a US perspective.

  15. Tlaloc says:

    Tlaloc, take your story and put actual numbers in it. There’s no way those 6 francs result in > 6 francs in the end, without you adding in more francs from some outside source.

    Of course it can. The window costs 6 francs. Your heating bills are 1 franc a year. The new high efficiency windows cost 8 francs but cut heating costs to half a franc a year. After 16 years the two ways are tied. Every year after that the broken window cost you less than the unbroken window.

    Again economic theory is great at taking everything into account except reality. In the real world infrastructure is not updated unless something forces it to be. This is part of why despite being the original source of the internet the US has an absolutely terrible internet infrastructure. It’s similarly why the US had a huge leg up for the industrial revolution, a lot of our infrastructure was still being developed while the old states of Europe were having to make due with the infrastructure they had. Even today the roads in Europe tend to be insanely laid out along medieval lines instead of updated to a modern grid system that would be hugely more efficient.

  16. Tlaloc says:

    To prove my point, which combination represents more total economic value, a laptop and a broken abacus, or a laptop and a working abacus?

    A) the abacus has 0 value once you have the laptop, since it’s useless.
    B) the point you are studiously trying to ignore is that having the working abacus means you don’t buy the laptop and hence keep doing things in an inefficient way.

  17. Michael says:

    Of course it can. The window costs 6 francs. Your heating bills are 1 franc a year. The new high efficiency windows cost 8 francs but cut heating costs to half a franc a year. After 16 years the two ways are tied. Every year after that the broken window cost you less than the unbroken window.

    And if the window hadn’t broken, but you replaced it with more efficient ones anyway, then your total saving after 16 years is that plus one extra unbroken pane of glass.

  18. Alex Knapp says:

    (cost of the laptop) – (value of the abacus) == Net loss to the economy

    What about the increase in productivity from using a laptop instead of an abacus?

  19. Michael says:

    A) the abacus has 0 value once you have the laptop, since it’s useless.

    It has 0 value to you, but that doesn’t mean it has 0 value to someone without a laptop. I’d note that even in 2011, you can still buy an abacus, they’re not giving them away.

    B) the point you are studiously trying to ignore is that having the working abacus means you don’t buy the laptop and hence keep doing things in an inefficient way.

    So your theory is that disaster causes people to make more rational decisions than they did prior? If you didn’t buy a laptop prior to the abacus breaking, even though you knew the investment would pay off, either you weren’t rational or you were investing your money in something that had a better pay off than the laptop. If the first is true, I’m not sold on the idea that a disaster will suddenly make you more rational. If the second, then not only are you out the value of an abacus, but you’re also out the difference in pay off by having to invest in something with a worse return.

  20. Michael says:

    What about the increase in productivity from using a laptop instead of an abacus?

    That increase exists whether you abacus is broken or not. See my response above, either you were previously irrational, or you were previously investing in something better.

  21. john personna says:

    A laptop used to replace an abacus has no increased productivity.

    It’s a poor argument to suggest that excess investment is always used. How many of have cordless electric tools you rarely use? Do you really recover excess cost? Was rewinding an extension cord really that bad?

  22. Michael says:

    Everybody in here who is making the “increased efficiency” has something they own that they can replace with something that will be less expensive in the long run, a car, appliance or as already specified, windows. Now ask yourself: why you aren’t spending your money upgrading those? Either you’re irrational with your money, or you are currently spending it on something that provides you a better return than upgrading those things.

  23. john personna says:

    I agree Michael.

    FWIW, I think the Broken Window Fallacy in microcosm (one guy’s window) holds up pretty well. If there is a difference at the national disaster level, it could be that it changes the velocity of money, for a time. A massive rebuilding effort is different than replacing a window.

    Even so, concentrating on the winners, you might miss the losers. It’s easy to see the construction crew, harder to see the young couple that moved home to live with mom.

  24. michael reynolds says:

    Either you’re irrational with your money . . .

    Thank you. I’ve been waiting for this. Exactly why economic forecasting is bullshit: it is based on rational man, a creature that exists in numbers too small to matter.

    In 1939 Germany could have begun systematically tearing down its older, less-efficient infrastructure and factories and replacing them with newer, more efficient ones.

    What they chose to do instead was attempt to take over the world, carry out a genocide, base their economy on slave labor, which resulted in the rest of the world burning their factories down for them.

    At which point they built new factories and became rich.

    People aren’t numbers. If they were, then economics would make sense.

    So the abacus/laptop equation you offer fails for this reason: real people won’t keep an abacus once they have a laptop. And no one else will use an abacus if his buddy has a laptop. So the abacus ends up taking up space in the garage or in the landfill. It actually has a negative value. It’s trash taking up space.

  25. Michael says:

    So the abacus ends up taking up space in the garage or in the landfill. It actually has a negative value.

    http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Daps&field-keywords=abacus&x=0&y=0 says it still has a value.

  26. PD Shaw says:

    I could buy the idea that Gaia destroying a house towards the end of it’s life cycle could create some economic benefit to the extent that it saves demolition costs. Otherwise I agree it’s the broken window fallacy.

    I also agree with john personna, war is not exclusively destruction; it’s a political and economic organization that over short periods could theoretically be good for the economy, particularly for the winning side. (See the North, Civil War) But it also depends on how much value is placed on human life.

  27. michael reynolds says:

    In reality people are extravagantly irrational with their money. Women buy shoes they can’t actually wear, men buy tool they will never use, we buy cars that go 160 mph so we can drive at 35 in rush hour, we spend 5 grand on a first class ticket to avoid 6 hours of discomfort, we pay for quack medicines and movies we’ve already seen and houses with rooms we don’t need but have to fill with furniture we’ll never use.

    The modern economy is a gigantic pile of irrationality. If it were suddenly to become rational we’d be plunged into an economic depression the likes of which we’ve never seen. The destruction isn’t always accomplished by literally breaking something, but every year “fashion” destroys utterly billions of dollars worth of stuff. And we buy new stuff to replace it.

    How that works, damned if I know. But it’s how things play out in the real as opposed to theoretical world.

  28. michael reynolds says:

    No, Michael, because that abacus isn’t an abacus, it’s a toy or a decoration. It’s not the same abacus.

  29. john personna says:

    There is an internal contradiction in your position, michael. You are attempting a rational man argument while denigrating the same.

    I don’t really see how you can get from “people are extravagantly irrational with their money” to “net outcomes of disasters are positive.”

  30. john personna says:

    (I mean, maybe someone who just needs a abacus is going to buy a notebook computer and then spend all his time on OTB.)

  31. michael reynolds says:

    John:

    Because disasters blow shit up and people go out and replace it with stuff which, in the nature of things, tends to be somewhat improved stuff.

    If I take a hammer to my TV (a possibility) I’ll replace it with a better TV. Right?

  32. michael reynolds says:

    This is why we still need liberal arts education. People who get too far into theory have a tendency to forget what writers, artists and the rest of my ilk know about humans: they’re f**king crazy. They do crazy things for crazy reasons. They won’t always do the crazy thing, sometimes they’ll do the rational thing.

    But how can you imagine that a country which is at this very moment in possession of at least 3 billion pounds of excess belly fat is rational? Go to the mall. Look at people. Tell me you’re seeing rational actors.

  33. john personna says:

    “Because disasters blow shit up and people go out and replace it with stuff which, in the nature of things, tends to be somewhat improved stuff.”

    Where does that magic money come from? Does it impact future spending by the same people?

    Geez …

    “This is why we still need liberal arts education.”

    Yeah, and let’s make sure they don’t take math while we’re at it.

  34. PD Shaw says:

    You destroy the abacus, and a laptop appears? The laptop costs money. The money comes from somewhere. The money spent on the laptop can no longer be spent on anything else. It’s counts as a lost opportunity. The money is taken out of box a and put in box b. You can’t just count the value of box b without accounting for the loss of box a.

  35. Tlaloc says:

    And if the window hadn’t broken, but you replaced it with more efficient ones anyway, then your total saving after 16 years is that plus one extra unbroken pane of glass.

    Right, at this point I have to conclude your either too stupid to understand the whole point (i.e. that without the broken window you’d never replace it with a better one) or you’re just be deliberately dense. Either way, no point in continuing to try and help you.

  36. Tlaloc says:

    You destroy the abacus, and a laptop appears? The laptop costs money. The money comes from somewhere. The money spent on the laptop can no longer be spent on anything else. It’s counts as a lost opportunity. The money is taken out of box a and put in box b. You can’t just count the value of box b without accounting for the loss of box a.

    Well, duh. But you have to allow for the very real possibility that what that money would have been used for would have been useless. The point was never that every disaster leads to economic improvement only that it is possible to do so while the broken window fallacy says it is impossible to do so (and is therefore wrong).

    Again- economic theory is an infantile study and as such it can only deal with the most basic assumptions, like an introductory physics class where every kinetics problem involves neglecting wind resistance. In real life things are much more complicted and nuanced than in economic theory. In a hundred years economics may be a mature field of study. If so then the broken window fallacy will be one of those things you teach in intro to economics and which to teach is actually wrong in later courses (again look at physics in early classes you;re told that mass and momentum are conserved, neither of which is strictly true, but the real situation is a bit harder to grasp).

    It’s entirely possible for a person to always make rational economic decisions but it’s extremely unlikely. It’s much more likely that a person will make bad economic choices, and as soon as you acknowledge that the broken window fallacy goes right out the (broken) window.

  37. michael reynolds says:

    PD and John:

    Every purchase is a lost opportunity to purchase something else. Just as every decision is a decision not to do something else.

    Which I guess is why we still live in caves and hunt the mighty mastodon. Because there’s really no way to just, you know, replace old stuff with new stuff and somehow come out ahead.

    How do you think Germany and Japan went from being smoldering rubble heaps to being economic titans? I mean, all their abacuses had been destroyed.

  38. john personna says:

    That is actually a different issue, michael. It’s about how hard you work, and at what renumeration. Germany, Japan, Taiwan, Korea, China, Vietnam … they climbed back on top with “slave wages” and “intolerable working conditions.”

    You can create a lot when you work 6-7 days a week, long hours, no holidays.

    Normally when countries get rich they try to enjoy that, start taking trips to Hawaii, and don’t just blow up all their shit to set themselves back into the grind.

    … do you have a nostalgia for other people working that hard? That’s kind of sick.

  39. john personna says:

    Tlaloc, you seem to be taking refuge in complete confusion.

  40. Dave Schuler says:

    In the particular case of Japan, the country has not suffered from a lack of infrastructure spending. Quite the contrary. And the public debt is simply enormous relative to GDP. Under the circumstances it’s pretty hard for me to think of this disaster as anything but what it is: a disaster.

    The original title of Bastiat’s parable is “That Which Is Seen and Unseen”. Based on what’s being bantered about here I don’t think that either side of the argument understands the point.

  41. john personna says:

    (Michael, you could give me all your stuff, and then work real hard to earn it back. Do you really think that would be a net win for you?)

  42. michael reynolds says:

    John:

    But we do blow up all our shit.

    Every six months Steve Jobs comes out on stage and blows up the stuff he sold us six months earlier. Every year the fashion designers come out and blow up the clothes they sold us last season. The CD blew up the vinyl and was in turn blown up by the download. The car that gets 29 mpg blows up the one that got 28. The hip new club blows up the club that was hip and new last month. The stainless steel refrigerator blows up the enamel refrigerator.

    We destroy perfectly usable stuff in a regular cycle of destruction and replacement or improvement. And we don’t do it for rational reasons alone, we do it for fun or because we think it’s cool. And we make money on the whole thing.

    I’m not advising war or earthquakes as solutions. I’m saying that destruction — physical and metaphorical — has long been essential to our economic growth. Don’t think entropy, think evolution. The old dies off and is replaced by the new.

    The 160 year old economist is just wrong.

  43. john personna says:

    Get over yourself Dave, we are recasting Bastiat’s own words. He writes:

    “It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.”

    I ask “Where does that magic money come from?”

  44. michael reynolds says:

    You can create a lot when you work 6-7 days a week, long hours, no holidays.

    Which is why single moms working three jobs live in penthouses.

  45. john personna says:

    Are you trying the confusion defense too michael?

    First of all … actually I don’t need more than one … fan boys who line up at Apple stores are “fashion victims.” They are not exemplars of considered economic planning.

    You’ve heard the marshmallow test, right?

    http://en.wikipedia.org/wiki/Deferred_gratification

    Are fanboys just unable to defer gratification? I’d love to know the average retirement balance for Mac vs PC owners.

  46. michael reynolds says:

    I ask “Where does that magic money come from?”

    You got me. Where do you suppose any wealth come from?

    By your lights we started out with a box of money. And all our decisions since then have just shuffled the same money around inside the box.

  47. john personna says:

    “Which is why single moms working three jobs live in penthouses.”

    Which is why China has a growth rate approaching 10%

  48. michael reynolds says:

    Wait a minute, so Apple doesn’t make money? Because this is going to come as sad news to stockholders.

  49. john personna says:

    “By your lights we started out with a box of money. And all our decisions since then have just shuffled the same money around inside the box.”

    You really are trying the confusion defense.

    FWIW, you start out with a box of time (and hopefully a box of health). A broken window affects your box of money, which is a storage medium, filled in turn from your box of time.

    I can’t believe you are playing so dumb. A hurricane knocks down your house, you crack open your 401K to rebuild, and then you take another job to refill the 401K. You then have less time in your life.

  50. john personna says:

    “Wait a minute, so Apple doesn’t make money? Because this is going to come as sad news to stockholders.”

    As I say, confusion defense. Pointless twists and turns.

    Apple makes a lot of money off foolish fanboys. Some of it goes to me! That doesn’t mean that foolish fanboys are optimally advancing the nation or economy.

  51. michael reynolds says:

    JP:

    I used to work 80 plus hours a week.

    I now typically work 20-25 hours a week.

    The present day Michael could buy the past-tense MIchael with the money under my sofa cushions. Not seeing how working like a dog equals making lots of money.

    The Japanese didn’t work hard for slave wages, they worked smart. They built an export economy on the back of education and innovation. Yes, hard work, too. But a Sudanese camel jockey works hard, too.

  52. john personna says:

    (I own some mutual funds which in turn own Apple. I have no direct holdings.)

  53. Michael says:

    Women buy shoes they can’t actually wear, men buy tool they will never use, we buy cars that go 160 mph so we can drive at 35 in rush hour…

    …people spend 2 days a week and as much as 16 hours a day not earning money. Money has value, but that doesn’t mean everything of value is money. People buy those things because it makes them happier than money does, it gives them more value than money does, the return on the investment is greater than what they would get buying more efficient windows. You only consider them irrational because you don’t value those things as much as they do.

    No, Michael, because that abacus isn’t an abacus, it’s a toy or a decoration. It’s not the same abacus.

    How can you get so close, and still be so far? The value in the abacus was never it’s ability to computer numbers.

    If I take a hammer to my TV (a possibility) I’ll replace it with a better TV. Right?

    If you really thought that was true, you’d do it. But you won’t. Why? Because while the new TV might be better it won’t be that much better:
    (value of new tv) – (value of old tv) < (cost of new tv)

  54. john personna says:

    OK you’ve convinced me michael, it would be better for everyone if you gave me all your shit.

  55. Michael says:

    Right, at this point I have to conclude your either too stupid to understand the whole point (i.e. that without the broken window you’d never replace it with a better one) or you’re just be deliberately dense.

    I understand your point, what I’m saying is that there is a reason you didn’t replace it with a better one before it was broken, other than stupidity and laziness.

  56. john personna says:

    “People buy those things because it makes them happier than money does, it gives them more value than money does, the return on the investment is greater than what they would get buying more efficient windows.”

    I’ll partially disagree with this. Traditional economics thought that a purchase increased “utility.” Modern behavior economics that people buy things because they think they will make them happier.

    Actually, the fanboy with the iPhone 4 will, within 60 days, be just as happy as he was with is iPhone 3.

  57. michael reynolds says:

    A hurricane knocks down your house, you crack open your 401K to rebuild, and then you take another job to refill the 401K. You then have less time in your life.

    Or I think of a different way to work. Maybe I think of a more efficient way to work. Maybe I change my job altogether.

    Maybe I move from, let’s say, a semi-feudal system with wild dreams of empire to a system of exports. Maybe I could export cars. (I could call them Toyotas.) What with having lost my colonies and having had my weapons factories all burned down by incendiaries and atom bombs.

  58. Michael says:

    Every six months Steve Jobs comes out on stage and blows up the stuff he sold us six months earlier.

    They’re not blown up,they’re on ebay and craigslist because, gues what? they still have value. Someone who buys an iPhone 4 doesn’t throw their iPhone 3 away, and they’d probably be upset if you came and along and took your hammer to their iPhone 3. Why? Because it still has value. How do you not get this?

  59. john personna says:

    “Or I think of a different way to work. Maybe I think of a more efficient way to work. Maybe I change my job altogether.”

    So why don’t you do it?

  60. michael reynolds says:

    You only consider them irrational because you don’t value those things as much as they do.

    No, they’re irrational because happiness itself isn’t rational, it’s an emotion. In pursuit of happiness people do all sorts of interesting things. Like smoke meth. The pursuit of happiness is a right, but it’s not rational. Check with Mr. Spock.

  61. Michael says:

    Or I think of a different way to work. Maybe I think of a more efficient way to work. Maybe I change my job altogether.

    All of which could be done without depleting your 401k, which means you’re still out more than you would have been without your house being knocked down.

  62. john personna says:

    “They’re not blown up,they’re on ebay and craigslist because, gues what?”

    Well, kind of. There is an amazing array of perfectly good consumer electronics that is “worthless” now, while still being entirely functional. Try selling a CRT monitor. It works, could give a decade of use, but has about zero value.

    The previous model iPhone is on the curve down to that. Unless someone finds creative reuse, it will disappear as soon as the “free with contract” phone exceeds its capability.

  63. Michael says:

    Try selling a CRT monitor. It works, could give a decade of use, but has about zero value.

    Which is why I didn’t mix utility with value.

  64. Michael says:

    The previous model iPhone is on the curve down to that. Unless someone finds creative reuse, it will disappear as soon as the “free with contract” phone exceeds its capability.

    You’re going to take a hammer to it? Throw it away? Or try and sell it?

  65. Michael says:

    No, they’re irrational because happiness itself isn’t rational, it’s an emotion.

    What makes a person happy is often irrational, but they will almost always make rational decisions on the use of their money based on the perceived value of what makes them happy.

    I think it’s irrational for someone to enjoy Meth. But if someone does enjoy using Meth, but doesn’t care about their energy bills, then it wouldn’t be rational for them to replace their windows instead of buying a fix.

  66. Michael says:

    For proof of my theory in reality, pick the 10 people who you think are the most rational with their money, and I’d bet that 10 of them buy luxury items that go beyond their rational needs.

  67. michael reynolds says:

    So why don’t you do it?

    What, blow my house down? Well, first because I’m renting at the moment and I think the landlord might resent it.

    And because in other ways, I do figuratively blow my house down. I throw away stuff that still works all the time. So I can get better stuff I like more.

    An irrational choice.

    Other stuff I keep for no apparent reason. (Come by and take a look in my garage sometime.)

    Because I’m irrational.

    And I respond to all this by changing the way I work. For example, I’m doing something much riskier at the moment.

    Again, because I’m irrational. Like everyone else. It’s why I drive a gas-guzzling German car and not a Prius, John, because it goes faster than I need a car to go, and it looks kinda cool, and so I have to innovate in the way I work, work harder, work smarter, take risks.

    And here’s the cool part: because I work harder and smarter and take risks to feed my irrational fancies, I create jobs for other people who also also make irrational choices. Yay!

    Except of course when my smarter work actually eliminates some jobs. Which will force some people to make some different decisions about how they work. Also yay! I hope. (Irrationally.)

    The only person more irrational than me is you. For thinking people are rational.

  68. john personna says:

    “You’re going to take a hammer to it? Throw it away? Or try and sell it?”

    I gave my iPhone away at Christmas, does that count?

    “they will almost always make rational decisions on the use of their money based on the perceived value of what makes them happy.”

    Pretty deep in the mumble words, there. Most people would be better off slowing down on the purchases that they think will make them happy, and just trying to be happy.

  69. Michael says:

    What, blow my house down? Well, first because I’m renting at the moment and I think the landlord might resent it.

    Why would he resent it if he’ll replace it with a nicer one? You don’t even abide by your own theories.

  70. john personna says:

    “The only person more irrational than me is you. For thinking people are rational.”

    You’ve seriously misread me. I understand my irrationality, and armed with that knowledge, try to make fewer foolish attempts at “buying happiness.” That isn’t to say I make no mistakes. I overpay for some things, but I hope not as badly as I could have done.

    Rather than buy a new truck, I’m going to try backpacking. If it works it will be a personal triumph.

  71. Michael says:

    I gave my iPhone away at Christmas, does that count?

    Depends, did you give it away because it had value to the person who got it? Was it a gift or a burden to them?

  72. Michael says:

    Again, because I’m irrational. Like everyone else. It’s why I drive a gas-guzzling German car and not a Prius, John, because it goes faster than I need a car to go, and it looks kinda cool, and so I have to innovate in the way I work, work harder, work smarter, take risks.

    That’s only irrational if you don’t value your happiness.

  73. michael reynolds says:

    Michael:

    I don’t have a theory that people should blow their houses up. Or have wars or enjoy earthquakes.

    Just saying that the economy requires some destruction, and that sometimes destruction ends up being profitable even for the people on the wrong end of it.

    John:

    Backpack! Okay, now you are talking crazy. 😉

  74. john personna says:

    No, the economy does not require destruction. People can foolishly pursue the same happiness they had last year, at great expense. Traditional economists call this “enhancing utility” which is about as sick as it gets.

    I think Michael is wrong to take your word for it, that the Audi is necessary. Most research shows that people maintain a happiness setpoint, regardless what happens to them. Yeah, they may enjoy a blip with a new car, or endure a blip when they lose a limb, but in the long term they are back on track.

    Knowing that, I guess you can try to keep the blips coming … but buy carefully. Spending too much on immediate gratification may leave you without extra funds as you rebound to that setpoint.

  75. Michael says:

    sometimes destruction ends up being profitable even for the people on the wrong end of it.

    The key isn’t whether it is profitable for them, it’s whether it is more or less profitable than not having the destruction. I content that destruction is always less profitable, because there is always a loss of total value. You can re-shuffle the value around so that it’s profitable to some, but not for all.

  76. Michael says:

    More importantly, no matter how you shuffle it, the total value was decreased, so the average value will also decrease.

  77. Tlaloc says:

    *shakes head*

    I find this over and over again. There are people who simply demand that economic theory, no matter how easily disproven be regarded as absolute fact. Oddly enough in my experience these people usually aren’t economists themselves but rather are people who’ve taken a couple economics courses or have a lay understanding of the most rudimentary principles and then regard them as a doctrinaire religion.

    Again speaking from my experience there’s nothing you can do to convince these people because they disregard any evidence that doesn’t fit their world view. Honestly if people had a lot more skepticism about economics we’d be a lot better off. Far too much of economics is basically a scam (e.g. trickle down economics).

  78. anjin-san says:

    > You can create a lot when you work 6-7 days a week, long hours, no holidays.

    Or not. There are plenty of societies where people have been working that hard for centuries and they have never gotten ahead.

  79. Michael says:

    I’d note that I’ve not made any reference to economic theory, but rather what I consider the self-evident notion that the destruction of something of value removes that value from the economy. I’ve seen several hypothesis about how value can also be created from the destruction, but as I have endeavored to show with real world evidence, those don’t hold true.

  80. Janis Gore says:

    What the hell benefits Japan from cleaning up millions of tons of debris, after they’ve pulled their dead relatives from it?

  81. Janis Gore says:

    We ain’t talking Haiti here.

  82. anjin-san says:

    > but rather what I consider the self-evident notion that the destruction of something of value removes that value from the economy.

    Well, where I live, we just gone done demolishing the transbay terminal. Basically a ratty old transportation hub that dated back from the days when Greyhound Buses were still a meaningful mode of transportation in California. Now it did have some value, but we tore it down anyway, so that it can be replaced with a modern transportation hub. And a modern office building. The need for transfers to muni for Caltrain riders headed downtown will be eliminated. About 4 billion dollars in construction costs will go into the local economy. A badly outdated eyesore near downtown will be eliminated.

    So something of value is being replaced by something of much greater value, with a number of collateral benefits. Feel free to keep outdated crap you want in the town you live in if it floats your boat.

  83. Michael says:

    So something of value is being replaced by something of much greater value, with a number of collateral benefits.

    And I’m sure part of their calculation is that the new stuff would create more value than was lost in the destruction of the old stuff.

    I’d note also that they made this rational decision without the requirement of some natural disaster destroying the old stuff first. As I have been saying, once the economics of the situation makes replacing the old stuff with new stuff a good thing, no disaster is necessary, and before that point is reached, no disaster can make it a good thing.

  84. wr says:

    Michael Reynolds — You can drive thirty five miles an hour in rush hour? I thought you lived in California…

  85. Tlaloc says:

    I’d note also that they made this rational decision without the requirement of some natural disaster destroying the old stuff first.

    But it could have been a natural disaster without changing the equation one iota. You still have one thing destroyed which makes room to replace it with something better. all resources are finite tying them up in one form necessarily precludes their use in another. Among the various other forms there will most likely be at least some that are of greater value for the same resource.

  86. Tlaloc says:

    As I have been saying, once the economics of the situation makes replacing the old stuff with new stuff a good thing, no disaster is necessary

    It’s not necessary but it usually does not get done without the disaster. This is real life. This is how things actually happen. Pretending we live in some Econ 101 Narnia where every economic decision is a rational one is useless and time wasting.

    Fine if we have to view this through an incredibly limited economics view then try this:
    demolishing a building is not cheap, it take a good amount of money to do safely. If nature comes in and does it for you then you’ve saved on some of the cost of replacing the building.

  87. Michael says:

    demolishing a building is not cheap, it take a good amount of money to do safely. If nature comes in and does it for you then you’ve saved on some of the cost of replacing the building.

    There’s a reason people pay the extra money to professionally demolish a building, rather than haphazardly tearing it down, because it’s ultimately costs less. It’ll cost more to clear out the wrecks of buildings in Japan than it would have cost in a controlled demolition. If that wasn’t true, nobody would use controlled demolition.