I’ve now had three different people, all quite intelligent by most standards, try to tell me that the earthquake in Japan may end up having a net positive economic effect on Japan’s economy, because of the stimulative effect of all the rebuilding.

This is completely insane.

It is almost, by definition, an example of the broken window fallacy. You cannot create wealth by destroying things. That is not an opinion, or a political argument. It’s not even a case-closed “theory” like evolution or gravity. It’s just true.

Destruction can proportionally re-allocate the total remaining wealth, post-destruction, which can produce relative and localized wealth booms (i.e. the U.S. after WW2, when the rest of the world lay in ruins and we were largely unscathed), but it cannot increase the aggregate size of the pie; the total amount of wealth in the world inherently goes down when things are destroyed. If this were not true, we could just pay people to build houses in the morning, and then pay other people to knock them down at night.  Voila, boom time!

Yes, production in Japan is probably going to go up soon, but it will be production that replaces lost wealth at the expense of the things that would have been created new, absent the earthquake. Maddeningly, the GDP statistic in Japan will also go up, because it does not capture the negative value of capital destruction.

As David Bernstein said in response to a Wall Street Journal piece that said the earthquake may lift the economy in Japan, “Sure, and instead of sending American aid, let’s follow up the earthquake with a few bombing runs over Tokyo. That will really ‘lift the economy.’ Geez.”