Saturday, June 9, 2012

Broken windows and Japanese economic growth

Professor Paul Krugman recently wrote a blog post entitled "Spending and Growth" pointed out that the Japanese economy grew robustly for the first quarter of 2012, while some countries which have committed themselves to austerity, notably Great Britain and Italy, contracted. While a data point is not a trend, I think this has a very sound explanation in economics, specifically Keynesian economics.  Its origin is the "Broken Window Fallacy" first illustrated by Frédéric Bastiat in the essay "That Which is Seen and That Which is not Seen".  The following is an excerpt:

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.

Mr. Bastiat brought this to a point about opportunity costs. If the shopkeeper had not replaced the window, he would have found it preferable to get a different good or service with that money. Thus breaking a window is, in economic jargon, pareto-inefficient. We can also take it to mean that society is not made richer by the destruction of property. But if the property is destroyed already, then society may be made richer by replacing what was destroyed.

This is basically what is occurring in Japan. The earthquake and the associated tsunami and nuclear disaster have damaged the productive capacity of Japanese society by destroying considerable capital (buildings and equipment). Rebuilding means that the pace of economic growth has to be faster or Japanese society will not be able to regain what it had lost.  One can only hope that restoring Japanese capital will help bring Japan's more than a decade-long slump to an end.

1 comment:

  1. I came to the same conclusion. Well done, Julian.