Question

Can someone explain to me the broken window fallacy and what a Keynesian economist would think about it? Also, what would an opposing Keynesian economist think of the broken window theory?

Answer 1

The broken window fallacy idea states the fact that going to war is not always good for the economy. This is because it causes resources and capital to be funneled out of industries that produces goods to industries that leads to destruction of things and thus leads to increase in overall cost in the economy.Countries will be better off not fighting at all. A Keynesian economist will think that war will lead to fall in aggregate output in the economy but an intervention by the government can help in fixing this destruction by increasing aggregate demand in the economy and thus reaching its potential level of output again. An opposing economist would say that his will lead to increase in government cost and resources and increase budget deficit in the economy leading to crowding out and fall in investment demand decreasing aggregate demand demand. Thus, different schools of thought have different reasoning on this fallacy.