The Parable of the Sooty Window
posted by Steven Horwitz, Guest Blogger at 11:44 AM on 04/20/10
The economic consequences of the volcanic ash cloud covering Europe have been the topic of much discussion in the last few days. The doom and gloom set has been totaling up the economic costs of disrupted travel and commerce and the media are reporting the various lengths to which people have gone to get where they need to go. I think they have missed the simple economics of it all. The ash cloud has been great for the economy. Let me swiftly explain.
Think of the stranded travelers in Europe who are now spending money on food and lodging that they would not have spent otherwise. What a boon to the hotel and restaurant industry at the airports and elsewhere! Think of the people like John Cleese who took a $5100 cab ride from Oslo to Brussels. What a glorious time for the taxicab industry! When is the last time cabbies got fares like that? Rental cars, trains, and even boats are rolling in the profits the last few days.
Now consider the layer of ash that is covering much of Iceland and northern Europe. What at first seems like a real mess is in fact a one-in-a-lifetime economic opportunity: think of all the jobs that will be created in cleaning up that ash! Given the double-digit rates of unemployment that affect much of Western Europe, the ash is something of a gift as it could conceivably create clean-up jobs for millions. Think of the new demand for brooms and vacuum cleaners and cleaning supplies that will be necessitated. Those folks will make nice profits and probably hire more workers as well. The volcano might be the best thing that ever happened to these industries.
Finally, to the extent that the ash cloud obliterates the sun and produces cooler and darker days, the electricity providers will benefit as might those who make blankets and sweaters. The economic benefits of the volcano are surely broad and deep!
So given all of this, I'm a bit confused as to why so many people think this ash cloud is so bad for the economy. It seems to me that it will cause increases in GDP in all of these areas. In fact, rather than looking for ways to prevent a recurrence, I think we should be encouraging more volcanic eruptions, earthquakes, hurricanes, urban riots, terrorist attacks, and window breaking because each and every one of them create all kinds of job and profit opportunities for different parts of the economy when we have to clean up from the mess they make.
Of course if you think that makes sense as good economics, you probably think a second stimulus package makes sense too. And you definitely need to read Bastiat.
pbs.org
Steven Horwitz
So my Bastiat-inspired volcano piece got linked by a writer for the National Association of Science Writers." She recognized that I "intended irony," but she's not so sure my argument is bad:
"At Xchange, the Nightly Business Report blog, Steven Horwitz lists economic benefits resulting from Eyjafjallajokull's antics. The big boost to the lodging industry and money spent on cleanup, for instance. He intends irony, but I wonder. It must be true that British Airways's loss is the Dorchester's gain."
I sent her a quick email noting that she had fallen for the fallacy and pointing out her error. We'll see if she responds. But it just goes to show that the work of economic education is never done, especially perhaps with science types.
Posted by Steve Horwitz on April 23, 201
coordinationproblem.org
Although to be fair, her focus on the juxtaposition of individual level costs and benefits doesn't contradict Bastiat's insight about aggregate costs and benefits. I don't think Bastiat ever argued that the glazier got screwed over by the broken window - simply that his good fortune (if we can call it that) shouldn't comfort anyone. :)
Posted by: Daniel Kuehn | April 23, 2010 at 01:09 PM
coordinationproblem.org
My brother-in-law (who has a PhD in Astrophysics) once said to me that Physics is easy, but Economics is hard. His reason was that in Physics all key quantities (energy, mass etc) are conserved, whereas in Economics nothing is really conserved. I think that this way of thinking is very firmly embedded in scientists' brains, and when they try an analyse anything they tend to do so by assuming the key quantities are conserved - I don't think its conscious, its more a habit of mind. For economic questions the scientist naturally assumes that wealth is conserved, hence "It must be true that British Airways's loss is the Dorchester's gain".
Posted by: Robert Scarth | April 23, 2010 at 04:05 PM
coordinationproblem.org
John Maynard Keynes once asked the famous physicist, Ernst Mach, if he had ever tried to study economics.
Mach replied that he had tried, but it gave it up because there were too many variables simultaneously changing and interacting.
(Keynes mentions this in his "memorial" essay for Alfred Marshall.)
This is in line with Hayek's comment that in comparison to the "complexity" of social phenomena, the natural sciences dear with far more "simple" phenomena.
It is not surprising, therefore, that following the logic of economics is often a bit difficult for both (natural) scientists and laymen.
In the "Wealth of Nations," Adam Smith referred to this as the "prejudices" of the public, who find it difficult to follow the reasoning that free trade would be more effective to improve the human condition than conscious planning by what Smith called the "man of system" (the social engineer).
Richard Ebeling
Posted by: Richard Ebeling | April 23, 2010 at 05:57 PM
coordinationproblem.org |
