Wednesday, January 30, 2013

Broken Window Fallacy: Beijing Edition

It seems like the media finds new ways to be wrong about economics every day, but really, they've been recycling the same fallacies for hundreds of years now. Bastiat's "broken window" fallacy seems an especially popular one, particularly when there's a natural disaster of some sort.

To summarize the fallacy: a punk kid throws a rock through a store-owner's window. The public disapproves, but a few "wiser" souls look on the bright side: "well, now the owner has to buy a new window, which creates business for the glazier, so it's actually good for the economy that the window was broken." Quick, someone give that kid a medal!

Of course, what this ignores is that the money which could have been spent on something else (a new suit, a nice dinner...) for the store-owner is instead spent on a new window, plus society has lost the value created by the window before it was destroyed. Destruction of useful property is just that -- destruction -- and cannot be good for the economy.

And this brings us to Beijing, where record air pollution has forced many to stay inside, grounded flights, and otherwise disrupted daily life and public health. But, as the FT is quick to point out, it has a "silver lining" for one part of the economy: companies which produce air filters.

To the FT's credit, it does not suggest that this will boost the GDP for Beijing, and the "silver lining" rhetoric is forgivable... An article titled "Beijing smog offers nothing of value, causes great inconvenience" might not inspire so many clicks. They also emphasize the adverse distributional effects:
...anger is exacerbated by the fact that China’s unelected leaders provide themselves with modern air purifiers that each cost about 1½ times the per capita annual income of Chinese urban residents.
For those who can afford the purifiers, the toxic air has sent them running to buy such machines, leaving most vendors out of stock until the end of February.
Almost sounds like a broken window corollary: when everyone's window gets broken, those with the most power and influence get theirs replaced first.

Hardly a phenomenon unique to China of course... I would guess that a thorough investigation of rebuilding after Hurricane (wait, Tropical Storm?) Sandy might find the same pattern in which buildings got the fastest response. In this respect, cynicism about political economy is the great equalizer.

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