Personal tools
You are here: Home News Japanese Earthquake: Keynesian Economics vs. Bastiat's "Parable of the Broken Window"

Japanese Earthquake: Keynesian Economics vs. Bastiat's "Parable of the Broken Window"

by Paul Prentice: President, Pikes Peak Economics Club; Adjunct Scholar, Ludwig von Mises Institute; Senior Fellow, Independence Institute. — last modified Mar 23, 2011 09:39 AM
Mainstream Keynesian economists such as Paul Krugman and Larry Summers are on record that they believe the massive earthquake in Japan will lead to stronger economic growth, due to spending on rebuilding.

This is total nonsense. Productive assets have been destroyed in the world’s 3rd strongest economy. The quantity of physical capital is now lower than it had been. Infrastructure has been ravaged. Farmland has been rendered useless. People have been killed. Death and destruction weaken an economy, they do not strengthen it. If it did, we could declare war on ourselves and improve the economy. Nonsense -- dangerous Keynesian nonsense.

The great French economist Frederic Bastiat first exposed this fallacy in The Parable of the Broken Window (1850).

You may have noticed that there is one, and only one, response from the world’s central banks whenever there is a crisis – whether it is a natural disaster or an economic disaster – Print Money. This pernicious attempt to make something out of nothing – to try to secure a free lunch – can only come to a very sticky end.

Austrian economic theory – whether of the short run business cycle or of long run economic growth – postulates that real capital can only be formed from real savings being channeled into real investment. This, in turn, is driven by the “social rate of time preference” as captured by real interest rates. If society values the future more than the present, it will forego current consumption and save more, thus leading to low real interest rates, more investment, and greater economic growth in the future. If society values the present more than the future, it will consume more and save less, thus leading to high real interest rates, low investment, and less economic growth in the future. Real interest rates act to cordinate production and consumption over time.

The printing of fiat currency, pretending it is real capital, in an attempt to keep the market interest rate lower than the natural rate of real interest, leads to tremendous distortions in the time structure of production-consumption. It leads to a society that believes, falsely, that it can have it all now, without saving for the future. Resource allocation becomes deeply inefficient and the resulting malinvestment creates a boom that contains the seeds of its own bust.

The current economic recovery is not sustainable. It will end in hyper-inflation. There will be an eventual bust that will be worse than if the original malinvestment had been allowed to be liquidated by market forces in the first place. For an entertaining spoof of the Keynesian-Austrian theory debate, see Fear the Boom and Bust rap video (Keynes vs. Hayek; 7 min. 32 sec.).

For a more detailed rebuttal of Keynesian nonsense, see The Great Wave.
Document Actions