A friend just sent me the news that the message about Frederic Bastiat’s ‘broken window fallacy’ is finally getting through.
Contrary to popular perception, the Canterbury earthquakes have not had a pronounced short-term effect on New Zealand’s economy, Victoria University research shows.
This lack of macroeconomic impact to date is not entirely surprising, given that previous research on large disasters in high-income countries has reached similar conclusions,” say the researchers, Professor Ilan Noy and Ms Lisa Doyle, from Victoria’s School of Economics and Finance…
The increased economic activity is due to the need to replace assets New Zealand had before. This is not very different from the ‘broken windows fallacy’ identified two centuries ago by a French economist, Frédéric Bastiat, who pointed out that breaking a window will lead to increased production and income for the glassmakers and installers who receive their payments, but does not lead to any increase in welfare or wellbeing.
Congratulations Ms Doyle and Professor Noy. Good to hear more explicit recognition of Bastiat in the academies.
[Hat tip Callum McP]
4 comments:
Agree of course with the simple logic of the 'broken window' message - but there is one sense in which a disaster can have positive economic spinoffs for the general population. This is when the money to replace (or in most cases improve on) what was destroyed comes from outside. In the case of Chch most of the insurance money is coming for overseas re-insurers - meaning there will be definite economic spinoffs for Chch at least, if not NZ as a whole.
Mark, what about the cost of insurance and its upward adjustment thereafter. And the payout from overseas means those funds are removed from productive investment somewhere else. It is beneficial for profits to accrue anywhere. Think of Earth's balance sheet. The fewer disasters the better.
Gregster - preaching to the converted when it comes to Earth's balance sheet. Just making the point that it can accrue benefits on a more localised level - and how far that benefit can spread is now wider than it would have been in Bastiat's day.
Does the rebuild lead to economic spinoffs for engineers in Chch? Definitely. Is there a spinoff for most business in Chch that have survived? Probably. With re-insurance funds coming from overseas does it have a benefit for the NZ economy generally? No according this article, but conceivable that it could. Does it lead to a net gain for the world's economy? Certainly not.
Yeah and Bernard Dumb Hickey predicted that the earthquake would bring economic prosperity to Canterbury. Mr Hickey is a smart economist.
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