Returns to Scale in Broken Windows
Everyone is familiar with Bastiat's broken window fallacy: breaking a window may seem to generate economic activity through its repair, but it's actually a loss once you take the opportunity cost into account. But what if there were positive returns to scale in breaking windows? There is a fascinating subgenre of economic research which involves looking at large-scale destruction, analyzing the long-term effects, and then concluding that the disaster was Good, Actually.
We'll start with Hornbeck & Keniston's Creative Destruction: Barriers to Urban Growth and the Great Boston Fire of 1872. The titular fire destroyed 776 buildings (about 1/10th of Boston's housing stock at the time), and caused ~$13 million in damages to real estate and ~$60 million in lost personal property. Thirteen people died.
After the fire, there was a significant increase in land value in the burned area, which the paper attributes to positive externalities from investing in new buildings. Prior to the fire, negative externalities from other, low-quality, buildings prevented high-quality development; the coordination problems were too difficult to overcome. Mass destruction and rebuilding let the areas settle at a higher equilibrium. Crucially, the value gain is estimated to be larger than the value of the destroyed buildings:1
