You Can Only Spend Money Once

Does GDP have a qualitative aspect?  Should it?

In 1850, French Theorist and political economist Frederic Bastiat published an essay, What Is Seen and What is Unseen, in which he created the idea of “opportunity cost.”  A century and half later, the concept is still misunderstood.

Bastiat used what has come to be known as the parable of the broken window.  His points are:

A shopkeepers careless child breaks a window.  Some might argue this is a good thing because it permits the economy to grow by the price to repair it.  (The what is seen part.)  Perhaps breaking windows in quantity would be even better.

The “What is not seen” part is that without the money used to repair the previously serviceable window, some other good or service goes unacquired.

Even beyond that Bastiat raises the question of intent.  What if the glazier hired the boy to break the window.  The economic value remains but somehow the quality becomes suspect.  Bastait argues that society condones, even promotes economic activity that is morally equivalent to the glazier who hires someone to break windows so he may repair them.

“Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end – To break, to spoil, to waste, is not to encourage national labour; or, more briefly, “destruction is not profit.” – Wikipedia

Bastiat wondered, “What be the economic value to rebuild all the houses in Paris if it were decided to burn them all to the ground.”

There would be a great deal of “seen” value in the construction but the “unseen” cost would be the same or even greater.  The unseen cost, of course, would not be measurable, but nonetheless present.

By a similar argument does the construction of every asset result in the same value to society taken as a whole.  Does a fighter jet add the same value as a number of farm tractors or an ambulances?  Should we examine only the input value and measure that and be proud of the growth, or should we value the outputs instead?  There is a cost to the fighter that is not only the easily measured money, but the much harder to measure value that could have been acquired in its place.

Bastiat was talking about the stock of wealth possessed by a society rather than the activity of a society.  More recently economists have wondered about the value of promoting special interests. How about taxation to support the special interests?  A dollar spent on tax cannot be spent any other way.

It is much harder to value output, the stock of wealth owned by society, so it is seldom done.

The questions:

  1. Do economists think about qualitative activity at all?
  2. Is the quality of our GDP falling even while its quantity is rising?
  3. Is quality necessary for a society to be successful?

What about in your own situation?  Do you ever say, “I would like a bigger home, but if I spend the money that way I may not spend some other way that could have greater utility to me and my family.”

That is a fairly adult question and ofttimes learned too late.  It is fundamental to good planning.  Give it some thought.


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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact:  

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