Cafe Hayek - Latest Comments in Destruction Is Creation?

Re: Destruction Is Creation?

Michael T — Sun, 19 Oct 2008 08:33:30 -0000

Skidmore is essentially correct, though we may shudder at the implications: Pillage and plunder is profitable!

If you are a glazier and you break your neighbor's windows and he employs you to repair them it is not much different than if you'd simply stuck him up for the money and left his windows alone.

If your country destroys a neighboring country's infrastructure and that country contracts yours to rebuild it it is not much different than had your country extorted that money from them and left their infrastructure intact.

National wealth, by the only measure that can count, per capita, is a function of a country's demographics. The greater the national skill level the higher value products it can produce and the richer it will be. If a nation is increasing in skill it will get richer. If it is declining it will get poorer. Demographics is destiny. IQ is an excellent proxy for

skill.

America's IQ is declining as it imports low IQ third world immigrants who go on to outbreed the higher IQ old stock American population and as the old stock higher IQ population breeds with the lower IQ immigrants and low IQ old stock, predominantly black, population. Decline is assured. Demographics is destiny.

Wave your flags all you like; cite Mises until the cows come home; facts are facts and care not for mushy sentiment.

Re: Destruction Is Creation?

peco — Sat, 18 Oct 2008 16:27:11 -0000

A hurricane is not random destruction because it strikes a limited area, so if there is something special about that area it could make the world as a whole better off (if all the Bolsheviks were in Cuba in 1917 and there was a huge hurricane that could have helped Russia).

Re: Destruction Is Creation?

peco — Sat, 18 Oct 2008 16:24:49 -0000

Would killing all Bolsheviks in 1917 (if someone could kill anyone just by snapping their fingers) have made Russia better off? I think only random destruction is guaranteed to have negative effects.

Re: Destruction Is Creation?

Christopher_Renner — Sat, 18 Oct 2008 15:48:25 -0000

I think that what Prof. Skidmore says is both plausible and wrong in 2 ways.

First, semantically. The phrase "creative destruction" as used by (correct me if I'm wrong here) Adam Smith, refers to something that actually happens, and has a positive effect: profits and losses lead inefficient allocations of capital to be replaced by efficient allocations, companies with high production costs are replaced by companies with lower production costs, etc.

The important distinction between this and the "destruction" that Prof. Skidmore writes about is that it's not usually physical destruction of a plant or equipment. The productive asset itself does not necessarily become less useful, which means that "creative destruction" as it's classically used in economics doesn't accurately describe the effects of a natural disaster.

A second important fault with that article's assertion is the underlying assumption that a natural disaster followed by a rebuilding, would result in a net gain in efficiency over the situation prior to the disaster. I think this is unlikely for the following reasons.

Assume that "X" is the expected return from a plant upgrade. "Y" is the cost of the upgrade itself, prior to the disaster. "Z" is the damage from a disaster which strikes the plant.

If X were greater than Y, then it would make sense for the company to perform the upgrade in any case. Therefore I'll focus on the case where X is less than Y pre-disaster.

Let's suppose that the damage from the disaster and some of the resulting repairs are going to decrease the cost of the upgrade from Y to a new value, U. (This could happen if, for example, the upgrade required larger electrical cables, and the old electrical cables are now destroyed and in need of replacement.) Let's also assume that the new upgrade cost U is less than X so that the upgrade now is feasible from the company's standpoint.

For the disaster to be beneficial on net, the cost of the disaster Z would have to be less than the difference between X and U. But since Y(the original upgrade cost) is greater than X, this implies that the reduction in upgrade cost due to economies of scale would be greater than the cost of the disaster. I really don't see this as being realistic except in the case of an extraordinarily complex/difficult to physically replace piece of capital and/or a disaster that's localized to productive assets which are on the verge of obsolescence.

In short, it's right to say that the owners of capital assets may benefit from a disaster, just like someone who sets their house on fire for the insurance money might get away with it. A nation as a whole probably doesn't benefit because the insurance money has to come from somewhere.

Re: Destruction Is Creation?

vidyohs — Fri, 17 Oct 2008 16:48:00 -0000

Posted by: flix | Oct 17, 2008 6:41:38 AM

flix,

Not challenging your info but I'd like to know your source so I can read the particulars.

Re: Destruction Is Creation?

Superheater — Fri, 17 Oct 2008 11:56:43 -0000

Isn't he just embroiled in the "fallacy of glazier"?

Re: Destruction Is Creation?

Bike Bubba — Fri, 17 Oct 2008 09:06:39 -0000

Yes, East Germany wasn't quite the basket case that the rest of the Warsaw Pact was, but it was yet a basket case.

And reparations? Well, it didn't always have that name after WWII as it certainly did after WWI, but reality is that after WWII, the USSR moved Poland into Prussia and stole a lot of Germany's industrial infrastructure. Due to great engineers and a lot of hard work, they came back a bit, but nobody would ever confuse the Alex with the Ku-damm before the wall fell.

Re: Destruction Is Creation?

Sam Grove — Fri, 17 Oct 2008 07:41:55 -0000

building a new infrastructure more dependent on more stable renewable resources such as solar and wind power

Petro energy would be much more stable if there weren't so many political factors involved.

It is unfortunate that centralized power generation became the norm.

Consider the rural electrification program which subsidized the delivery of power to rural areas. This led to the virtual abandonment of what used to be common in farm and ranch country, windmills.

Who knows what technology may have developed sans this distortion of the market.

Re: Destruction Is Creation?

Lee Jamison — Fri, 17 Oct 2008 05:49:38 -0000

Skidmore merely makes the mistake of putting the cart before the horse. He says disasters help. Well, as long as capital is of no importance to you, they are wonderful.

However, putting the horse in front of the cart, one realizes destruction is inherent in economic advance. We have, for example, a great deal invested in an infrastructure heavily dependent on a highly volatile fossil fuel market. It could be reasonably argued that, while destruction of much of this infrastructure would cause tremendous pain in the short run, building a new infrastructure more dependent on more stable renewable resources such as solar and wind power America has in abundance could create an economy less beset by "crises". A more stable energy foundation helps the rebuilt economy to be more predictable, making the markets' job of weeding out inefficiencies easier.

A good analogy can be found in fetal development, wherein cellular death is a key component in making way for the growth of a viable organism.

This is not to say Skidmore's take is right. It is something akin to saying "Extinction is good for life". Being a mammal I can appreciate not having to compete with dinosaurs in the economy of nature, but I am uncomfortable with committing myself to extinction out of an adherance to a theoretical common good.

Re: Destruction Is Creation?

flix — Fri, 17 Oct 2008 02:41:38 -0000

vidyohs,

yes after WW2 Germany paid reparations for more than 50 years to France. Only the called it "CAP"... but it involved more money than WW1 Reparations.

Good marketing is essential to avoid resentment.

Re: Destruction Is Creation?

vidyohs — Fri, 17 Oct 2008 02:08:01 -0000

reparations & bike bubba,

Germany (East or West) had to pay reparations after WWII? I guess I was lost the day that information was published.

I wasn't aware that any nation was tasked with paying reparations after WWII.

I believe you guys were thinking of WWI.

Re: Destruction Is Creation?

sethstorm — Thu, 16 Oct 2008 17:40:20 -0000

I offer to test Prof. Skidmore's thesis by wrecking his car and burning down his house. If he's correct, he'll surely want to reward me with a handsome payment.

How about finding out how to send his job to a third-world country? Do so in a way that makes it nearly impossible for him to regain it.

Re: Destruction Is Creation?

Oil Shock — Thu, 16 Oct 2008 13:33:38 -0000

Crusader,

Yes Skidmore is full of strawman "logic". I was just using that strawman argument in the context that you were describing.

Re: Destruction Is Creation?

PerryEidelbus — Thu, 16 Oct 2008 12:53:09 -0000

Doesn't anyone remember that Henry Hazlitt wrote in "Economics In One Lesson" about Americans who complained that Germans and Japanese were getting brand-new factories? Of course, they weren't willing to have their own cities bombed and rebuilt -- showing the true value of the "upgrade."

Tom: the American Revolution was a political development, not an economic one. The economic "net positive" was only because the colonies had to use force to free themselves from British mercantilist policies.

Martin: as someone else pointed out, that's not the "broken window" fallacy. But the one economic fact you can determine from it is that even the neighbors collectively value the house as worth more to stand there, as opposed to spending money to clear it. That is, that's how they presently value it.

Now, it may be that someday a neighbor will go around and successfully persuade everyone to contribute to a fund that will demolish the house and clear the lot. This person would be a Kirznerian type of entrepreneur for "discovering" the opportunity to align supply with demand.

Rudy: yes, Krugman said after 9/11 that "Ghastly as it may seem," the destruction could spur economic growth in downtown NYC. Walter Williams has called him on that a few times.

Re: Destruction Is Creation?

Crusader — Thu, 16 Oct 2008 11:58:35 -0000

Oil - that is more straw man-ish type "logic". I'd refrain if I were you. I came to Cafe Hayek for spirited, logical debate.

Re: Destruction Is Creation?

Oil Shock — Thu, 16 Oct 2008 11:40:56 -0000

Crusader,

Shouldn't wider conflagration bring on even more prosperity? At least according to Skidmore

Re: Destruction Is Creation?

Crusader — Thu, 16 Oct 2008 11:15:57 -0000

Sam - torching a house could lead to a wider conflagration. Why not just demolish it?

Re: Destruction Is Creation?

Gamut — Thu, 16 Oct 2008 11:15:28 -0000

Gee, I wonder to which particular economist that last sentence in the post is referring... a P and a K come to mind.

Re: Destruction Is Creation?

Crusader — Thu, 16 Oct 2008 11:14:54 -0000

Some people are missing another point. After a disaster, it's good to just survive for another generation. Let the next generation prosper.

Re: Destruction Is Creation?

Sam Grove — Thu, 16 Oct 2008 10:41:48 -0000

So if someone were to torch this house in your neighborhood, there will be a net benefit over letting it stand or demolishing it?

Re: Destruction Is Creation?

Marcus — Thu, 16 Oct 2008 10:25:11 -0000

I think you're ignoring the opportunity costs of those investments.

Re: Destruction Is Creation?

Martin Brock — Thu, 16 Oct 2008 10:16:46 -0000

Even if we accepted that point, is the nation better off?

Skidmore's point is that we can't assume that the net effect is negative simply because the catastrophe was destructive, or if the net effect is negative, we can't calculate the cost simply from the value of assets destroyed, because replacement assets can be more valuable. I don't expect catastrophes typically to be so beneficial, and I certainly don't expect war typically to be so beneficial, but a specific catastrophe could be beneficial, particularly if assets suffering the most damage tend to be least valuable compared with potential replacements. Redistribution then adding exogenous value could be beneficial. No law of economics prevents this outcome.

Re: Destruction Is Creation?

Rudy — Thu, 16 Oct 2008 10:12:50 -0000

Wasn't Krugman, the recent Nobel prize winner, a believer in the "broken window" theory too?

Re: Destruction Is Creation?

Reparations — Thu, 16 Oct 2008 10:07:47 -0000

@Bike Bubba: Well, I want to be cautious but as far as I know especially France took a good deal of reparation and surely not from the east of Germany.

Of course it needs more than reparations to archive economic progress (as you mentioned eastern Germany). But with the reparations, the damages of the bombings, their will to work and the Marshall plan money Western Germany hat a good economic start in the after war period. And you might consider within the eastern Block also the GDR did not perform too badly.

Re: Destruction Is Creation?

Marcus — Thu, 16 Oct 2008 09:50:09 -0000

It just occurred to me, if Global Warming really does mean more hurricanes, wow! Think of all that potential economic growth!