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The Henry Hazlitt Series: The Blessings of Destruction

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The Hazlitt Series  

This week’s post is a continuation of our monthly exploration and modern application of the economic writer  Henry Hazlitt, and his seminal work, Economics in One Lesson. This work draws heavily upon the insights of the great French economist Frederic Bastiat.  His key insight was to look at that which is not seen.  So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy.  Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the economy as a whole.  Hazlitt then applies this lesson to a variety of topics.  Each installment will pay homage to this most clear economic thinker and writer by applying each of his applications to our world today.

The Blessings of Destruction

This installment of the Hazlitt Series is “The Blessings of Destruction”.  In reality it is the “Broken Windows” fallacy enlarged.  The fallacy claims that war is economically beneficial.  The claim is that it stimulates demand, and the reconstruction benefits the economy.

Hazlitt points out that this fallacy is supported by three additional fallacies.  First, the confusion of need with demand.  The idea being that war impoverishes its victims, thereby creating greater need.

The second subsidiary fallacy is that purchasing power = money.  That money can be created, so purchasing power can be increased by monetary creation.  The third related fallacy is that war creates “backed-up” demand, that will be satisfied through economic growth.

Dangerous Zombie Ideas

This, like last month’s Hazlitt Series post contains a zombie idea.  Yet, this one is worse, because it lessens the revulsion that all rational humans should have toward war.  It puts in the back of the mind, the hideous notion “well, at least the war will spur economic growth”.  The main fallacy here is easily dispensed with, much like the Broken Window Fallacy.  War could not possibly bring about economic prosperity.  Yes, the reconstruction will generate economic activity.  Yet, that activity is simply rebuilding what was destroyed, not building additional wealth.  Just like with the broken window, society could have had that which was destroyed, as well as what was added.  However, in the aftermath of a war, all that you have is that which was rebuilt.  This marks a clear loss for the productive capacity of society. This is not to minimize the human cost, we are simply discussing the economic aspects of this.

Amazingly there are still those who adhere to this hoary idea.  It is still an article of faith among Keynesian economists that WWII raised the US out of the Great Depression.  This government source for “educational” material makes the case explicitly.  The US State Department (that bastion of economic literacy) makes the same claim.  Our old Keynesian friend Paul Krugman still maintains that WWII got the US out of the depression, giving some academic cover to the government propaganda just cited.

Moreover, the basic assumption is that the post-WWII rebuilding created much sustained economic growth.  Most economists and historians credit the Marshall Plan with a crucial part of this reconstruction.  The underlying assumption to mainstream histories of post-WWII economics is that the war had created an opportunity to rev up economic growth.

The base fallacy is easily dispensed with, for the same reasons as the broken window fallacy.  To wantonly destroy a built-up stock of capital is to erase a massive amount of productive capacity.  To then rebuild it and call it prosperity is lunacy.  Would you want your home destroyed by a bomb, just so a builder could experience a burst of new business?  Yes, some sectors of the economy would be busy, but the entire society would experience a deadweight loss.  As for the specific argument that WWII brought prosperity, how is it prosperity to dig resources out of the ground, fashion them into steel, bend them into tanks and planes, then send them overseas to be blown up?  Not to mention the labor market was not very healthy for the 458K US casualties.  As for the Marshall Plan’s role in the reconstruction of Europe, it served only to act as a subsidy to politically connected US businesses.  US capital was clearly going to flow toward Europe, and did not need any encouragement.  Additionally, one should look at the role that liberalized markets played in Europe’s recovery, as this article on the German “economic miracle” shows.

The subsidiary fallacies are also easily dealt with.  Regarding the confusion of need with demand, one simply needs to realize that the impoverishment of war does create greater need.  Yet, need does not equal purchasing power (demand).  Only the production of goods and services produces such purchasing power (demand).  The destruction of productive capacity is what created the need in the first place, so obviously that capacity must be rebuilt.  Yet, it is clear that not having destroyed this capacity in the first place would have made everyone better off.

The second ancillary fallacy is one that is with us since the dawn of money, the notion that money = demand.  The creation of money does nothing to increase the capacity to produce more goods and services.  Increasing the money supply only makes each unit of money worth less.  In reality, increasing the money supply distorts the productive capacity and results in lower production than would otherwise be the case.  Think of it this way, if you have a house, you have a real economic asset.  You do not get 10 times that asset by printing up ten additional titles to that house.  Yet, that is what this fallacy would have you believe, and sees its implementation during wartime as part and parcel of wartime “prosperity”.

The third fallacy of backed up demand is also easily defeated.  War will mean extra business for some industries, and yes some postponed purchases will bring post war demand for those products.  Yet the reality is that this “backed up” and “replacement” demand is just a diversion of demand to these particular industries.  After the pent-up demand is met, production will shift to other areas and industries.

As Hazlitt points out, demand will not only be diverted but reduced in total because war will shrink the capacity to produce goods and services.  The adage is that supply creates its own demand, which simply put means that you must have a product in hand to exchange in the marketplace.  Production comes first, and war destroys production, as well as destroying already finished products.  Postwar demand will shrink because postwar supply has shrunk. This is clearly so basic a piece of logic that lay people can understand it easily.  In fact, only a professional economist would argue otherwise.

The Modern Application

The public square is full of adherents to this fallacy.  We see it most acutely with regard to the war in Ukraine.  This “analysis” began even before the Russian invasion of Ukraine.  Certainly the defense industry has benefited.  There are already companies lining up to profit from this reconstruction.  This can be seen here, here, and here.  This is just to give a sample of those likely to profit from this.  Set aside that much of this money will be dispensed from taxpayers, and just focus on the underlying economics.  Would Ukraine not have been better off with its farms and factories in place, rather than needing to be rebuilt?  Would the world not have been better off with Ukrainian production still going to market, rather than lying in ruins?  Yes, business will be diverted to those lined up companies, but the society as a whole would have been better off without the war’s destruction.  Make no mistake about it either, analysis confirms that the bill for the rebuilding of Ukraine will be enormous.

We have also seen the ancillary fallacies in play recently as well.  All the “newly created” demand is simply displaced demand, that will be reduced by the amount of Ukrainian supply destroyed.  Also, since much of the war effort in the West is being funded via inflation, on top of all the inflationary Covid stimulus, and the Biden stimulus agenda, we have seen that all this additional money supply has only set off a rising general price level that has done real damage to real wages and incomes.

The Prudent Response

In the end, there is no such thing as a blessing from destruction.  War destroys the productive capacity of a society, diverts production to some industries (usually the supporters of the war), and diminishes the ability of those affected to wield real economic demand.  In short, it impoverishes society economically.  Understanding this is just good stewardship.

Praise Be to God

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