Australia's Uncreative Destruction

It turns out that Australia's Prime Minister Kevin Rudd is going around town breaking windows by, well, demanding they be built. There are over 35,000 construction and maintenance projects planned across Australia over the next 12 months. This includes AU$49 (US$39.4) billion dedicated to "nation building infrastructure," or crudely AU$2,200 in taxes for every man, woman, and child residing in Australia.

Are such decisions financially wise during economic recessions? Let's put Keynesianism aside and instead rely on common sense. While on an individual level you might think saving would be a good idea, apparently governments just want to build stuff. "We can always figure out later what to do with it or even just employ people to knock it down and build it again" is the unspoken idea. When "full employment" is the goal almost any type of labor will do. PM Rudd's Labor party is thus aptly named; as they state, "jobs are in our DNA."

Bastiat's timeless lesson of the fallacy of the broken window, later popularized and widely applied by Henry Hazlitt, is a perfect analogy of economic ignorance and the power of the seen vis-à-vis the unseen. And PM Rudd is illustrating this analogy, going to great strides to point out the "seen" — pictures of hard hats and fluorescent yellow vests have abounded in parliamentary proceedings. Labor Minister for Employment Participation Mark Arbib also confirms that construction projects are visible:

People are going to see the construction sites all over the countryside. They are going to know people who are working on stimulus projects or who are supplying the projects.

How can the broken-window fallacy be so widespread? Henry Hazlitt explained:

[T]he broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. (Economics in One Lesson, p. 13)

Hazlitt points out many fallacies in the belief that government-mandated construction projects can create jobs. One problem is the confusion between need and demand. Because a politician may deem a project necessary for whatever reason, this in no way, despite political rhetoric, creates demand ex nihilo — government fiat rarely works. In fact, if a project is truly necessary, there will be an opportunity for entrepreneurs to meet that demand. Many entrepreneurial opportunities are thus demolished by government rewarding some industries — in this case construction — at the expense of others.

Another fallacy comes from seeing government statistics. It is easy to see the "hard data" — that there are 35,000 construction projects, X number of workers, etc., and much more difficult to understand that those resources — land, labor, and capital — are being artificially shifted from more productive uses to more destructive ones. The capital being spent on government projects is taken from individual taxpayers; jobs are at best diverted, at worst taken from others.

Regarding such projects, we may ask the fundamentally important question, "Cui bono?"

In this case we find, not surprisingly, that it's the construction industry that benefits, and in numerous ways. For example, the Australian government introduced an AU$2 billion "First Home Owners Boost" that was, in PM Rudd's own words, "to support the housing and construction industry." In addition, there are over 20,000 new "social and defense homes," and installing ceiling insulation is "free" for around 2.9 million homes. Finally, construction companies are also building at every school in the country, the "largest school modernization in Australia's history." Libraries, school halls, classrooms, community centers, parks, etc. will be involved in one way or another with construction. Unfortunately, just as in Bastiat's analogy, everyone else loses; government devises at best a zero-sum game.

Government decisions, which perhaps seem to make sense on a macro level, are disastrous on a micro level, due to the nature of knowledge. Hayek explained this knowledge problem best:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus … a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Hayek narrowed this down to one fundamental question: not if there will be planning but of who will do the planning — the central planner or the individual.

An excellent illustration of the inevitable unintended consequences that come from central government meddling is a local primary school in the area. In a recent "news bulletin" to parents they write the following:

We have now been advised that the Australian Government will be funding a new building for our school…. The old [building] … will be demolished as part of this project…. Because this is part of the government's Stimulus Package, construction must be completed by October 2010.

This is roughly the equivalent of digging holes and filling them. In fact, digging holes may be better since, in that case, only labor is wasted, for the most part, and not other natural resources. (Where are the environmentalist outcries over this destruction of resources in make-work construction projects?) Regardless, this is merely the broken-window fallacy in new clothes. The real gem, however, comes from later in the bulletin:

Council committees have met this week to consider a wide range of matters about our school. Major matters for discussion included possible uses of our new building.

In other words, the school will have a building demolished, a new one constructed, and still has little idea as to what the new building will be used for. Contrast this situation with that of the entrepreneur. The entrepreneur takes calculated risks, and typically "builds" using the carpenter's rule: measure twice, cut once. If it does not make financial sense to build, the entrepreneur will not do so. In addition, the entrepreneur would later know — through the profit-and-loss mechanism — whether such a decision was prudent or foolish.

PM Kevin Rudd and Minister Arbib believe government's construction efforts are working because they are seen. He has likened the government's massive spending program to "a war effort involving all levels of government." I think he about sums it up with that statement. War breaks windows, and sometimes, as Bastiat and Hazlitt taught, so does building them.