The broken window: fallacy or fact - a Kaleckian-Post Keynesian approach

Chaiechi, Taha

Abstract

The "broken window" of Bastiat (1850) can be extended to any amount of destruction and can be extensively spotted in the works of mainstream economists, particularly those of Joseph Schumpeter who derived the term "creative destruction". While natural disasters are different from other economic events; the research concerns that the impact on macroeconomic performance from disasters is increasing substantially. Consequently, one may consider disasters similar to economic frustration (Okuyama, 2003) such as a recession phase in a business cycle, while some research findings show natural disasters can bring about some long-term economic "benefits", which potentially may lead to Schumpeterian gale of "creative destruction". Motivated by this, the paper utilises a Post-Keynesian framework and uses historical data Structural VAR model, and impulse response analysis to explore the relationship between natural disasters, productivity and investment within a two-simultaneous equation system, then it attempts to examine if findings lead to creative destruction (or broken window). The finding allows to conclude that occurrence of major natural disasters in the state of QLD do appear to have resulted in improved "innovation", indicating the technology is improving, as a result of the natural disaster, this can be due to increase in the speed at which new innovations are brought to market.

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Economic Modelling

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1873-6122

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Elsevier

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DOI

10.1016/j.econmod.2014.02.025