#120 War Makes us all Poorer

We tend to think that war only impinges upon those directly affected, but we all pay the economic price of war.  

 

The Broken Window Fallacy

After a hurricane or tornado, you will often hear someone claim that the rebuilding investment is good for the economics of the community.  In a very narrow sense, that might be right: It’s good for the specific community that received the funds to rebuild.  But an economist would ask where that money came from, and what alternate use would it be put to?

It’s something like a gambling casino.  I’ve covered some of this in podcast #64 titled Gambling for God.  But for today, let’s just state that all money that gets lost at a gambling casino might enrich the very small community that surrounds the casino, but it hurts others from outside that very small circle, because that money would have produced more value in another enterprise.

Back to the broken window fallacy.  Oh, and one clarification: I’m not talking about the broken-window theory of policing: That idea states that if you allow small crimes, you will get larger crimes.  That theory would be used to show that Vladimir Putin was allowed to take Crimea (a small window break) during the Obama administration, so he felt empowered to break a larger window, the entire country of Ukraine. 

The economic broken window fallacy is very different.  Its author is the French economist, Frederic Bastiat.  It states that the money spent to repair a broken window came from somewhere, after all, there is no free lunch.  And, that money would have found a higher use in some other place.  In a greater sense, Bastiat says “You see what you see, but you don’t see what you don’t see.”  You see the economic impact of the rebuilding effort, but you don’t see where those resources would have been spent if the destruction had not taken place.  

You will even hear some say that the insurance company will pay.  Well, if the insurance companies paid fewer claims, – assuming it is a competitive industry – they would be forced to lower their prices, so there would be more consumer surplus.  And, if they made more profit, there would be more producer surplus, and those profits would go to the managers and owners, who would put the money to higher use than paying insurance claims. 

Destruction makes all of us poorer, because valuable resources are destroyed that have to be re-built.  Simply, applying those resources to building new value-creating efforts enriches us more than re-building destroyed resources. 

Less Production

Disruptions of supply chains and reduced production has caused the price of wheat to inflate 27%.  The world essentially lives on wheat as a food commodity.  When prices go up 27%, the poor have to pay more for bread.  The commodity increase you hear most about is oil, and as of today, it’s up 19%, and likely will be higher by the time you watch this.  All products get transported, including the bread we just talked about.  So the price of all products will inflate because of this. 

Since God created humans, our needs have never changed.  It makes no difference if you’re a believer in an earth that is 6000 or millions of years old.  Needs have never changed.  How we satisfy them changes.  In economics, we call those new needs satisfiers substitutes.  Wool and cotton prices won’t change much because of the war, but their substitutes, which are oil-based products will.  So spandex, polyester and nylon, which are substitutes for wool and cotton, will be driven up by the increase in oil prices. Ukraine is a top corn exporter, and the US has entered into this foolish idea of making it into ethanol.  So oil prices will go up even further.  Also, corn is an input for the production of beef and chicken, so you can expect those prices to increase.