August 30, 2005 Leave a comment
If I tell a kid that smoking is going to stunt his growth, and he smokes and keeps growing, has he proven me wrong?
(I have no idea if smoking really stunts your growth, but that’s not relevant to this point. Imagine whatever poison you need.)
With this example we all know that the kid can still grow while smoking keeps him from growing at the rate he would have or to the final height he would have. But notice, to account for cause and effect, we have to appeal to what would have happened and not just to the before and after of empirical reality. How fast and tall he would have grown is an assertion contrary to fact — thus, counterfactual.
All causal claims are counterfactual. When I say that A caused B, I’m not just saying that A preceded B; I’m saying that without A we wouldn’t have B. The “without A” is a counterfactual premise.
So when economic theory tells us that price fixing causes distortions in supply (with price ceilings causing shortages and price floors causing gluts), you can’t appeal to the before-and-after of a specific historical period as if it can disprove the causal claim. If the US Congress raises the national minimum wage (a price floor for labor) the result will be more unemployment (a labor glut) than we would have had without the change. Note: that doesn’t mean unemployment will rise! If you don’t understand that, please reread this post. If you still don’t understand, then either I’ve failed to explain counterfactuals or you’re too dim to understand cause and effect.
An example of the former is William Anderson’s “How To Create A Shortage”.
Some predictions are less uncertain than others. For instance, we can predict with an unpleasant degree of accuracy that hurricane season will be accompanied by economically illiterate editorials that destruction can be good for an economy:
“Katrina, which last week hit south Florida, was expected to cause a total of $10 billion to $26 billion in insured damages, according to hurricane modeling firms. It could be the most expensive storm to ever hit the United States. ‘There will be a lot of rebuilding that is going to need to occur. These things do spur GDP growth,’ said Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio.” (Reuters, Monday)
Right on schedule.
FEE Timely Classic
“What Is Seen and What is Not Seen: The Broken Window” by Fr�d�ric Bastiat
August 31, 2005
A Price Gouging Reader
- Price Gouging Saves Lives by David Brown.
- In a Crisis, Markets More than Ever, by Llewellyn H. Rockwell, Jr.
- Oil Prices Again, by Murray Rothbard
- Creating Economic Crimes, by William Anderson
Is this is the first spotting of the “broken window” fallacy?
Spotted just now: what might be the first story claiming that the hurricane (actually the flooding caused by bad public infrastructure) will be good for the economy. It is from the New York Times/International Herald Tribuine (dated Sept 1):
But economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding. “Longer term, in the wake of a number of hurricanes there is actually an increase in measured output that even shows up at the national level, because there is a whole bunch of rebuilding activity,” said Stephen P.A. Brown, director of energy economics at the Federal Reserve Bank of Dallas.