Thursday, October 16, 2008

Re: Destruction is Creation?

Over at Cafe Hayek, my favorite blogger writes

Adam Smith argued that the wealth of nations is enhanced by labor specialization, capital investment, and peaceful trade. Economist Mark Skidmore argues that wealth is enhanced by destroying things: "When something is destroyed you don't necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up" ("How disasters help," July 6).

I offer to test Prof. Skidmore's thesis by wrecking his car and burning down his house. If he's correct, he'll surely want to reward me with a handsome payment.

Donald J. Boudreaux
I don't think it is as easy of a slam dunk as Boudreaux is stating here, and as a result I think Skidmore is an unfair target. It is of course, absurd to think about destroying things as being beneficial, but natural disasters do have support in the empirical literature as generating economic growth. I think it is almost entirely an accident of our accounting...that the calculation of GDP does not correct for the fact that our new production is merely replacing what was destroyed, causing us to forego other opportunities (that perhaps lie in different regions). An example would be if we went around breaking all the windows in town, it would appear that economic growth would be generated because of all the new windows produced and installed despite the fact that society is no better for it.

However, unintended destruction does open the door for improving efficiency along some small margins. If the only reason you aren't demolishing your factory and rebuilding from scratch is because of all the difficulties it entails (permits, construction, TNT), then a fire that does the work for you lets you take on that new project.

To stick with Boudreaux's car example, suppose Skidmore's car and house are both in terrible shape. The car only gets 5 miles to the gallon and requires an oil change every 1,000 miles, while his house is on the verge of collapse. He'd like to buy a new car, but faces a "car disposal tax" of $10,000. He'd like to tear down and rebuild his house, but just the tear down process would cost $30,000. These things hinder his productivity by leaving him stranded on the road and spending time keeping the house from falling down, but those dispose and destroy costs are enough to disuade him from getting a new car and house. However, if he goes away to an economics conference, and returns home to find that a Tornado has removed his house and car for him free of charge, then he can get the new car and build a new house and move to a higher level of productivity.

I doubt these gains are ever going to be enough to overcome the other costs on the net, but my guess is the Boston Globe reporter asked a question in a manner that got Skidmore thinking similar to the story I just told. If someone asked me "are there any benefits to disasters," I would come up with a story like Skidmore, but if they asked me "are there any net-benefits to disasters," I would say "unlikely for the affected region, and no for society as a whole."

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