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Thursday, June 14, 2012

Economics in One Lesson by Henry Hazlitt

The Blessings of Destruction

The war, in short, changed the postwar direction of effort; it changed the balance of industries; it changed the structure of industry.

Since World War II ended in Europe, there has been rapid and even spectacular “economic growth” both in countries that were ravaged by war and those that were not. Some of the countries in which there was greatest destruction, such as Germany, have advanced more rapidly than others, such as France, in which there was much less. In part this was because West Germany followed sounder economic policies. In part it was because the desperate need to get back to normal housing and other living conditions stimulated increased efforts. But this does not mean that property destruction is an advantage to the person whose property has been destroyed. No man burns down his own house on the theory that the need to rebuild it will stimulate his energies.

After a war there is normally a stimulation of energies for a time. At the beginning of the famous third chapter of his History of England,Macaulay pointed out that:
No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant progress of physical knowledge and the constant effort of every man to better himself will do to make a nation prosperous. It has often been found that profuse expenditure, heavy taxation, absurd commercial restriction, corrupt tribunals, disastrous wars, seditions, persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the exertions of private citizens have been able to create it.
No man would want to have his own property destroyed either in war or in peace. What is harmful or disastrous to an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.
Many of the most frequent fallacies in economic reasoning come from the propensity, especially marked today, to think in terms of an abstraction—the collectivity, the “nation”—and to forget or ignore the individuals who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed.
Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.
This fundamental fact, it is true, is obscured for most people (including some reputedly brilliant economists) through such complications as wage payments and the indirect form in which virtually all modern exchanges are made through the medium of money. John Stuart Mill and other classical writers, though they sometimes failed to take sufficient account of the complex consequences resulting from the use of money, at least saw through “the monetary veil” to the underlying realities. To that extent they were in advance of many of their present-day critics, who are befuddled by money rather than instructed by it. Mere inflation—that is, the mere issuance of more money, with the consequence of higher wages and prices may look like the creation of more demand. But in terms of the actual production and exchange of real things it is not.
It should be obvious that real buying power is wiped out to the same extent as productive power is wiped out. We should not let ourselves be deceived or confused on this point by the effects of monetary inflation in raising prices or “national income” in monetary terms.
It is sometimes said that the Germans or the Japanese had a postwar advantage over the Americans because their old plants, having been destroyed completely by bombs during the war, they could replace them with the most modern plants and equipment and thus produce more efficiently and at lower costs than the Americans with their older and half-obsolete plants and equipment. But if this were really a clear net advantage, Americans could easily offset it by immediately wrecking their old plants, junking all the old equipment. In fact, all manufacturers in all countries could scrap all their old plants and equipment every year and erect new plants and install new equipment.
The simple truth is that there is an optimum rate of replacement, a best time for replacement. It would be an advantage for a manufacturer to have his factory and equipment destroyed by bombs only if the time had arrived when, through deterioration and obsolescence, his plant and equipment had already acquired a null or a negative value and the bombs fell just when he should have called in a wrecking crew or ordered new equipment anyway.
It is true that previous depreciation and obsolescence, if not adequately reflected in his books, may make the destruction of his property less of a disaster, on net balance, than it seems. It is also true that the existence of new plants and equipment speeds up the obsolescence of older plants and equipment. If the owners of the older plant and equipment try to keep using it longer than the period for which it would maximize their profit, then the manufacturers whose plants and equipment were destroyed (if we assume that they had both the will and capital to replace them with new plants and equipment) will reap a comparative advantage or, to speak more accurately, will reduce their comparative loss.
We are brought, in brief, to the conclusion that it is never an advantage to have one’s plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence.
In all this discussion, moreover, we have so far omitted a central consideration. Plants and equipment cannot be replaced by an individual (or a socialist government) unless he or it has acquired or can acquire the savings, the capital accumulation, to make the replacement. But war destroys accumulated capital.
There may be, it is true, offsetting factors. Technological discoveries and advances during a war may, for example, increase individual or national productivity at this point or that, and there may eventually be a net increase in overall productivity. Postwar demand will never reproduce the precise pattern of prewar demand. But such complications should not divert us from recognizing the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.

Economics in One Lesson

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