Friday
(0)How long Economics in One Lesson has been available to read free, online, I have no idea, but since she only just heard about this, I feel entitled to say with similar lack of shame (unless of course a fellow Samizdatista has already flagged this up and I missed it) that her posting was how I finally found out about this myself.
It has been a while since I read this book. The bit I recall with the greatest vividness concerned the broken window fallacy. This fallacy says, fallaciously, that broken windows are good for the economy because they are good for the window-mending business. What the broken window fallacy neglects to mention is that broken windows are bad for all the businesses that the window mending money might have gone to instead, but now cannot.
The most extreme statement of this fallacy is the claim that the ultimate window breaker, war, is good for the economy, because that way lots of work is "created" in all the industries that subsequently set to work to repair the destruction. When Keynesian economics was in its pomp, you did hear people actually saying this. Maybe, if those are the kind of circles you still move in, you still do.
Yet war is creative, in a back-handed way, and provided that you lose. It destroys wealth, but it can also destroy certain impediments to future wealth creation. Mancur Olsen, in his book (alas not available on line so far as I know) The Rise and Decline of Nations (lots of five stars out of five reviews here), says that, yes of course, losing a war does destroy wealth, but that it also destroys what he calls "distributional coalitions". In plainer language, losing a war breaks up politically well-connected rackets, like state-enforced cartels and trade-unions. Thus the post-WW2 economic miracles of Germany and Japan.
This is what you would call a high risk strategy for achieving economic dynamism. I mean, just for starters, be careful who you lose your war to. Pick the wrong country to surrender to and you are liable to end up with an even huger, politically even better connected racket, in the form of your rapacious conquerors. In other words, broken windows followed by more broken windows, and nobody ever mending them.
Both ideas are based on WW2 anomalies - the US did extremely well 42-45, nearly doubling GDP, since it got to mend everyone elese's windows, but - being seperated from its enemies by 2 oceans - no one broke its windows. WW2 was not so kind on the UK economically.
The counter point is based on the experience of Germany and Japan. But Germany was very prosperous before the war - so its hard to argue that the eradication of a grwoth resistant cartel was caused by its defeat.
In Japan's case, it is hard to argue that there was even a change in leadership - mitsubishi just stoped making zeros and started making washing machines.
In fact I think your anonally is really based on the dead cat bounce - countries starting from very low GDPs as a result of war are more likely to see increases than falls because, in many cases further falls are impossible.
But a refinement of your point that sometimes grwoth resistant cartels can only be overturned by war - not the IMF, WB, OECD, UN or whoever - is probably true.
Posted by Giles at April 8, 2005 06:46 PM
Not only that.
If you lose to the wrong country you could wind up extinct, occasionally genetically, but often culturally.
And even if it not quite so Apocalyptic as all that, your country can be set back decades or even centuries if your elite is utterly wiped out or dispersed, and all the accumulated human, social, financial and infrastrucure wiped out or damaged beyond easy self-repair.
e.g. pre-columbian Meso/South America ( for that matter North America), Cambodia, China...
Posted by Fred at April 8, 2005 07:16 PM
But a refinement of your point that sometimes grwoth resistant cartels can only be overturned by war - not the IMF, WB, OECD, UN or whoever - is probably true.
Surely the only truly corruption cleansing war is of the 'Civil' variety. When all the poor slobs, - having nothing left to lose, and get somewhat ticked off with the supposed 'elite'.
In the light of the post before this one - I wonder just how much more the 'herd' can really take, before finally stampedeing...
Posted by ernest young at April 8, 2005 08:11 PM
Paraguay and Bolivia are the best examples of countries that never recovered from losses - pARAGUAY was one of the most powerful before the War of the Triple alliance and Bolivia was one of the richest befor the Chaco war lost it its sea access.
Posted by Giles at April 8, 2005 09:00 PM
People are attracted to the idea that wars or natural disasters are good for the economy because they believe that the economy is fundamentally about the flow of money.
Its not. Its about making stuff. Money is just an accounting mechanism for making the trade of goods easier. The money itself doesn't produce any benefit.
Its the same concentration on money that leads people to believe that inflation or deflation will also improve the economy.
Posted by Shannon Love at April 8, 2005 11:37 PM
The money itself doesn't produce any benefit
Care to tell my bank that!!
Posted by ernest young at April 9, 2005 09:54 AM
Repairing the broken window can affect the velocity of money, making it seem as if there is more in circulation.
Posted by Chris Harper at April 9, 2005 03:29 PM
Yet war is creative, in a back-handed way, and provided that you lose.
I can think of two or three wars the US has fought and won that had "creative" impacts on the US itself.
First, of course, the Revolutionary War.
Second, WWII, which had a couple of creative effects. Service in the war alongside blacks did a lot, I believe, to undermine and break down racial bias for a lot of soldiers, even though black units were still segregated. Also, the war profoundly changed the labor market in the US, drawing in a lot of women, for example, and forcing the US economy to do something useful with the enormous mass of demobbing soldiers.
Posted by R C Dean at April 11, 2005 08:42 PM
Right on, Mr. Dean!
WWII also brought enormous social change to the country with the GI Bill, which enabled many working-class people to attend college. This led to a gradual eclipse of the old establishment.
Posted by anonymous coward at April 12, 2005 02:54 AM
