A common trope of Societal Programming, particularly that of the USA, is that war is good for the economy. Examples range from the (largely false) economic prosperity during the George W. Bush Iraq War years all the way to how “World War Two got America out of the depression.”
The argument is standard Keynesian stuff; if the government forces people at gunpoint to produce more stuff, even if that stuff is bombs and tanks, then there’s more economic activity, everyone has a job, and the economy gets better! Yay!
If that were true, then why don’t America and China spend trillions of dollars, build up gigantic robot-controlled fleets of warships and drones, block off a part of the Pacific Ocean, and just have them blow the crap out of each other? If war and the mass destruction of capital are “good for the economy,” why don’t we just do that every few years? The economies of those two countries would be booming forever! Right?
Wrong.
Henry Hazlitt talks about the example of the broken window. Some people actually think that if some teenage hoodlums smash the window of the local baker, that’s “good for the economy” because now the window manufacturer and local window installer have new work; the baker has to pay them to replace the window. That’s new economic activity, so it must be good. Right?
Wrong.
The entire concept of economics is the management of finite resources. The broken window concept has the same problem as the “war is good for the economy” idea, in that the baker only has a finite amount of money. He was going to use his $1500 of spending money, now needed to fix the window, to buy a new suit. Now he can’t buy that suit; he must fix his window instead.
Compare these two scenarios:
1. The baker uses his $1500 to fix a broken window. Result: He has a non-broken window.
2. The window is never broken. The baker users his $1500 to buy a new suit. Result: He has a new suit and a non-broken window.
In the second scenario, his economic condition has increased. In the first, it has remained the same, even though it cost the same as the second scenario.
Therefore, no, it’s not good that someone smashed his window. The problem is that when you see the window installer working away, that’s all you see. You don’t see the tailor not making a new suit for the baker. The new economic activity that is prevented by some jerk smashing a window remains unseen by everyone, but the economic activity of fixing the problem is seen by all, so everyone assumes that the smashed window was a good thing, when in fact it was a bad thing.
If government spends $3 million to build a new bridge, the only thing people see is all these construction workers building a new bridge, and eventually, a new bridge. What they don’t see are the thousands upon thousands of employees and businesses that now have less money and produce less economic activity because of the $3 million taxed away from them that was used to pay for the bridge.
This doesn’t mean you should never build a bridge. If you truly need a bridge based on traffic conditions in that area, you should build one, and make sure it lasts as long as humanly possible. But once that bridge is built and it does the job, you shouldn’t immediately build a second one right next to it, and a third one right next to that because of “infrastructure!” or because it “creates jobs” or because it’s “good for the economy.” Instead, doing such a thing actually destroys jobs and is bad for the economy.
This is hard for people to understand because you rarely actually see the negative economic consequences of government spending with your own eyes. This is one of the many reasons why libertarianism is so unpopular while socialism is so widely loved. The positives of socialism are so much more immediate, simple, and visual. The benefits of small government are usually invisible and hard to grasp.
This is why it’s economically bad for someone to smash the baker’s window, and it’s economically bad whenever your country goes to war. And I haven’t even touched on how economically unfavorable it is when you get thousands of your own citizens killed during a military conflict.
I suppose one could concoct a bizarre scenario where if an entire war consists of the USA pressing a button and dropping a nuke on a distant country, immediately ending the “war” with no US losses or extra money spent, then that would be good for the economy somehow because you’re wiping out a possible competitor. Or something.
The problem is that A) that’s not how the US ever goes to war (instead, it invades with troops and drones and then sits there forever like the Roman Empire), and B) if you wipe a country or city off the map, you destroy all the economic activity of that country/city, negatively affecting all other nearby countries/cities, eventually adversely affecting the economy of the US. We live in a very small world these days; what happens internationally affects us. (That’s why I’ve always said that a full-blown WWIII is extremely unlikely; too many elites would lose money.)
War is bad for the economy.
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Hey Caleb,
So how do you feel now about north Korea and the possibility of an H-bomb, etc. I know you wrote a post about “how to deal with north Korea” a few months ago. With the current updates do you think a conflict would happen
Also, why does u.s. media CONSTANTLY talk about possible conflicts with Russia and korea everytime they lift a finger? It seems everyday they try to instill fear b/c of some “war event” going on.
We’ve seen regimes like this in history many times before. It is extremely unlikely that North Korea will actually attack anyone unless someone attacks them first. I’d almost put it under the 2% Rule.
1. Fear is the lifeblood of the media.
2. The media is always for big government, and war is the health of the state.
So Caleb,
Which schools of economic thought do you support believe in?
By the way, for some reason this system never saves the edits I do on my comments. You might wanna look into it Caleb.
Another possibility (of many): The baker doesn’t have the money to fix the window. To pay for the window, he may have to innovate new baked goods to pay for the window. Maybe a sticky bread trap to catch window breakers haha.
Nonetheless, good points and a thought-provoking article. An ounce of prevention is worth a pound of cure, but like peace, who’s buying?
What many of the “WW2 help the US become a superpower” forget is the only reason America became a superpower after the war was because America was one of the only places in the world that could produce things due to the worldwide destruction of factories.
Austrian. (Though not absolutely 100%)
I’ve been aware of the problem for a while. I’ll get around to fixing it soon. I’ve got a hire a guy to do that.
Haha. Or worse, he has to go into debt to fix the window.
Correct. And the fact that America’s economy was already turning around in 1940, before the Japanese ever bombed Pearl Harbor. And the fact America was separated from most of the war by huge oceans. And so on.
What a coincidence. I’m reading Economics In One Lesson right now. And last month I’ve been on a flag theory seminar in Vienna. It was in the “Scholarium” which is one of the very few places where you can study Austrian School. What a pity that the mainstream has almost forgotten about this school.
Great article. You summed up the point perfectly: You can have no window broken, no need to spend the money to make up for destroyed capital, so you can invest your money in something new, putting your capital to work. Socialists are always thinking growth comes from nowhere (they can’t accept it’s capital) and believe consumption is the locomotive of the economy, while it’s just the caboose. Inverted causality, the Western world’s doom.
…And the fact that America’s economy was already turning around in 1940, before the Japanese ever bombed Pearl Harbor….
But the war had already been going on for almost 2 years by that time and before that the war in Spain. To say that the US wasn’t making money off those conflicts is not accurate in my opinion. War is very good for an economy if your nation is the one selling goods to the ones fighting in it.
I think the popular opinion that all the New Deal programs turned things around is absolute nonsense but i think the war(s) did help turn things around. If you don’t share that opinion what is your take on what ended the great depression
The US was largely giving support to the Allies during that time, or loaning it to them. They were not selling these things and making money (at that time), as the European powers could not afford them. They were too busy trying to survive Hitler.
Yeah but that scenario isn’t want I’m talking about. If you’re selling stuff to countries at war but not at war yourself, you’re not at war. I’m talking about if your country goes to war.
That’s a complicated question and there were several factors, but based on my research it was:
1. The fact that America was already turning around economically in the early 40’s (and no, it wasn’t because we were getting rich selling Europe stuff) and that recovery’s continued momentum.
2. The end of the war created a sustainable prosperity because of the sudden reduction in spending, taxes, and regulations. Detail here.
3. Some reflationary policies and more “real” interest rates being allowed to float back up organically in the 40’s instead of being locked down by FDR as they were in the 30’s. (I realize that’s an oversimplification though.)
Hey Caleb,
Speaking of the economy,
How do you personally research the status of a country’s long term economics?
Like what aspects of a nation’s economic system do you observe (GDP)?
And which blogs/ websites/ resources do you mostly rely on?
Just a lot of Google searching, Wikipedia, reading stuff written by economists and financial guys, etc. Nothing fancy.
Lots of things. GDP, debt, taxes, cost of living, history, trade, etc.
I don’t “rely” on any one or few blogs / sites because they’re all biased. All of them. So instead I consume both sides (or three sides if there is) and draw conclusions from there. For example, for US economics, I’ll listen to mainstream media sources (Bloomberg, CNBC) for one side, then listen to someone like Peter Schiff for the other side, then do my own research based on what they both said, then draw my own conclusions.
I list a few guys I listen to for foreign stuff here though.
That is – the “broken window” idea ignores the concept of wealth. Ecomomic activity that does not increase the total wealth of a society is bullshit.
War can be beneficial if you do it to take resources (assuming he other ways are more expensive). That’s why the Roman Empire went to war: lots of gold to prey.
(Since I can’t edite my previous post)
Also, war can induce an advancement in science and technology.
A question: yes, the baker must pay for the window so he will not have money for something else, but does this really translate into something negative? There are many variables. The loss for the baker might be beneficial to the economy.
Anyway, I’m not an expert and I view economy as… meh, I don’t know exactly what term to use (maybe useless), so this doesn’t help