Wednesday, December 06, 2017

Dan Hannan MEP on the costs of the unseen

Interesting point by Dan Hannan MEP about the similarity between the economic impacts of Hurricanes and Socialism.

He argues in the clip below that the same flaw in the argument that Hurricanes which smash lots of things can benefit an economy because the construction industry gets a lot of repair work to do, is the flaw in the arguments for socialism and for a large public sector.

What the people who argue that a catastrophe can benefit an economy are usually missing is that the money which has to be spent on the repair work would otherwise have been spent on something more useful (unless there is a massive amount of slack in the economy, which in Britain today there isn't.)

Similarly the people who argue for the economic benefits of socialism and government expenditure usually miss, as the shadow chancellor did on the Marr show the other day, that the allocation of resources to these state activities usually crowds out other spending or activities (again, unless there is a lot of slack in the economy - same point applies.)

I would not go quite as far as Dan does in the video - I don't agree that being a socialist is like paying little boys to smash windows - but he's dead right that people who think a hurricane or natural disaster makes you richer and people who think socialism makes you richer are usually making the same mistake, which is ignoring what economists call the "opportunity cost" of the money being spent, e.g. the other opportunities represented by that money, what other things would have been done with it.

6 comments:

Jim said...

Not really from Hannan that one, its from an essay by Frédéric Bastiat from 1848, He referred to it as "Seen and Unseen costs"

Jim said...

Hannan uses "paying people to smash windows" as that is exactly the example that Bastiat used. A baker gets his window smashed and the people after the initial shock start to talk about how much good it will do for the economy getting it fixed, of course the baker corrects them as he can no longer use the money he had saved up to buy the new suit he wanted, which would have payed the tayor, and the cotton producers etc....

Jim said...

Bastiat concludes his essay with the simple fact that regardless of the different people who were passed money, on the whole, the Economy is down by exactly 1 window

Chris Whiteside said...

To be fair to Dan he does credit Bastiat.

He gives more modern examples which are equally relevant.

Jim said...

People make the same mistake in other contexts too. One classic one is that German car manufacturers had an unfair advantage after world war 2. You see the German car plants had been bombed to bits, so the Germans were "able" to build newer more modern plants, thus giving them the edge over other nations.

Chris Whiteside said...

Yes, you make a good point.

There is a slight difference in that case because the Germans did get a lot of help from the USA in the form of Marshall Plan Aid, so the money which was doing the rebuilding was not coming out of their own pockets and they did not pay the opportunity costs for the Marshall Plan.

However, you are still right because it was the Marshall plan, not the bombing, which provided the benefit, and also because many other European countries also had their economies damaged by the war and received Marshall Plan aid to rebuild, and they had the same opportunity to use the same aid to build equally modern plants.