Thursday, 26 November 2009

It all makes work for the working man to do?

Highlights from Chapter 2 (Economics in One Lesson by Hazlitt)

Fallacy: when things break/get used up this is good for the economy

Example: a flood takes out much of the shops in some towns in Cumbria. Far from being a disaster, this is good. The shop owners pay the repair men & resuppliers of their shops, who then in turn give business to a range of other people both in their professional and private capacities. Whether this costs £20000 or £200 million...that money is providing employment and 'stimulation' to the economy in 'ever-widening' circles.

Half truth: Yes, the damage does bring business to the repair men and others. Considering it from an economic stand point alone, they will be no more unhappy to learn of the 'disaster' as an undertaker would be news of a death.

Full truth: But the shopkeepers are out by £20000 or £200 million* that they would otherwise have spent on the expansion of their business into a new town or discounts that encourage more business and bring greater quality of life to those around them, or in charitable donations or in staff wage increases or in any number of other ways personally - that new conservatory or boat!
So instead of still having their stock and nice shops and these other things, they now just have their stock and nice shops.
The community (local, national or global) is actually poorer than it was before - though there has been a lot of activity.

In short the repairman's business is gained at the expense of the shopkeeper (or the insurance company). No 'new' employment' or 'growth' in the economy has taken place.

As we see builders and goods 'flooding' Cumbria in the months ahead it will be tempting to think that this is an increase in business. And of course it will be for the builders and suppliers of those shops. But because the other 'potentials' (the expansion of business, the discounts, the purchases made) are 'invisible' - they don't happen - it is all too easy to forget them and leave them out of the equation. The things that don't happen or are not made so often don't feature in our analysis of a situation.

*Ok, they might be insured. So this is not so straightforward. Yet, still wealth has been destroyed somewhere line. And though there is a delay, the cost will be experienced in higher insurance premiums for themselves and others over time and/or that insurance company not being able to do what it would have with the money. So the 'problem' is just moved back/up a level.

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