Allow me to tell you a little story.
One day, there was a boy who threw a rock through a print shop's window, shattering the window completely. A crowd quickly gathered around the event, but the boy sped away and disappeared into the crowd.
At first, the crowd loudly condemned the boy's actions. Then one man spoke up, "But it sure is lucky for the window maker."
Another agreed with him. "Wow, you're right! Just think; a huge new window like that might cost $500! That's $500 the window maker never would have had before. The window maker should thank the boy, if we could ever find out who he was!"
Another chimed in, "And the window maker will spend that money, too! Why, he'll take the money and go to the grocery store and spend the money. Then the workers there, and the owner of the store, will have more money, and in turn they will spend it, and so on."
Talk went on, and pretty soon, the crowd agreed that the boy was in fact a great benefactor to society, almost a saint in fact, and that it would be of huge benefit to the whole economy if people everywhere went out and broke windows. They could create thousands of window-making jobs, and the economy would be greatly stimulated by the increased circulation of cash.
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Now if something seems off to you about this scenario, you'd be absolutely right. What did we miss along the way? What did we ignore?
We ignored the print shop owner. He is the one who will have to pay for a new window, $500 out of his own pocket. This is a loss to him personally, but wasn't this a benefit to the economy as a whole, though?
No! The print shop owner would have found another use for the money. Most likely he would have spent it, perhaps on a new HDTV he'd been eyeing for a while. The owner of the electronics store then would have had an extra $500, which he would have spent on something else, and so on. We can make the same argument as made above.
So did the broken window actually stimulate the economy? Not at all. It merely diverted the money from the electronics industry to the window industry. If the crowd seriously adopted the policy of breaking windows, it wouldn't actually help the economy; it would only boost the window industry greatly, while hurting every single other industry just a bit.
But there's one step further. Breaking a window doesn't only divert the money from one industry to another; it actually makes the economy as a whole poorer by $500. How? Well with no broken window, the print shop owner would have an unbroken window, and a new HDTV. With a broken window, he now has only a new unbroken window. The new HDTV he was going to order never came into being, and that $500 is gone from the economy as a whole, never to return.
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Why do I mention all of this, and what does it have to do with liberty? After all, nobody advocates going around and breaking windows as a serious economic policy, do they?
Of course not. And yet, the same exact arguments are made about other topics. War is often seen as a great engine of economic growth. Just think; after the war is over and the buildings have been bombed, the people will have to rebuild. Think of all the construction jobs we'll provide them! We'll stimulate their economy! After the war they'll be in good shape, rebuilding all the bridges, houses, and hospitals!
There are actual economists and politicians who have made essentially these arguments in favor of the Iraq War. But of course they're wrong. Rebuilding doesn't actually expand an economy; it merely diverts a lot of resources to the construction sector of the economy, and makes all other sectors (food, clothing, education, health services) each a little poorer. Plus the original value of the homes, bridges, and hospitals is gone now.
A certain prominent Nobel-winning economist, Paul Krugman, made exactly the same argument just a few weeks ago about September 11th:
Ghastly as it may seem to say this, the terror attack (911) — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.
If people rush out to buy bottled water and canned goods, that will actually boost the economy.
First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending.
Ridiculous, right? Sure, the bottled water industry may see a slight uptick, and the skyscraper construction industry a rather larger one, but there's no actual new wealth being produced. It is, once again, merely diverted bit by bit from the industries it would have normally gone to.
The same could be said of natural disasters like the recent Hurricane Irene, or Katrina in New Orleans several years ago. Diversion, yes; new wealth, no. In fact, on the balance, less wealth overall.
* * *
Be careful when anyone in government or the news tells you that all spending is good spending and will stimulate the economy, because that's really the argument at play here. It's empirically not true, and it's a very dangerous idea to liberty to boot.
One other principle, in closing: when thinking of economics, don't think only about one group of people, or only about the first short-term effects of something. If we think only about the window makers, the broken window is a great deal; but then we ignore all the other people who could have made that money instead and now will lose out.
If you're going to advocate an economic position--any economic position--you have to first think it through, for all people and for the long term.
