An earthquake hits the Eastern seaboard, and Hurricane Irene is taking aim at the same region. Invariably we will start hearing, assuming there is damage, how the earthquake and hurricane will stimulate the local economy.
For those who don’t remember, this is the broken windows theory of economic activity – the thesis being that damages from natural disasters will stimulate economic activity and help depressed areas. The theory goes like this:
A shopkeeper’s son breaks a pane of glass and a crowd gathers. Well-meaning pedestrians find a silver lining to the accident: “Everybody must live,” they say, “and what would become of the glaziers if panes of glass were never broken?” Bastiat cautions that if “you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, ‘Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.’” The six francs the man must spend to repair the glass are now gone. Had the glass not been broken, the shopkeeper could have enjoyed an intact window, plus a new pair of shoes, or perhaps a book.
Reason Magazine has an excellent analysis of this theory. I strongly encourage you to read it before the mainstream media starts hyping all of the good that might come out of this potential natural disaster.