Keynes's Difficult Idea part two

[koganbot]

OK, here is Keynes giving a simplified version of what Krugman calls Keynes's difficult idea:

John Maynard Keynes "The Great Slump Of 1930":

Let us take, first of all, the consumption-goods which come on to the market for sale. Upon what do the profits (or losses) of the producers of such goods depend? The total costs of production, which are the same thing as the community's total earnings looked at from another point of view, are divided in a certain proportion between the cost of consumption-goods and the cost of capital-goods. The incomes of the public, which are again the same thing as the community's total earnings, are also divided in a certain proportion between expenditure on the purchase of consumption-goods and savings. Now if the first proportion is larger than the second, producers of consumption-goods will lose money; for their sale proceeds, which are equal to the expenditure of the public on consumption-goods, will be less (as a little thought will show) than what these goods have cost them to produce. If, on the other hand, the second proportion is larger than the first, then the producers of consumption-goods will make exceptional gains. It follows that the profits of the producers of consumption goods can only be restored, either by the public spending a larger proportion of their incomes on such goods (which means saving less), or by a larger proportion of production taking the form of capital-goods (since this means a smaller proportionate output of consumption-goods).

But capital-goods will not be produced on a larger scale unless the producers of such goods are making a profit. So we come to our second question—upon what do the profits of the producers of capital-goods depend? They depend on whether the public prefer to keep their savings liquid in the shape of money or its equivalent or to use them to buy capital-goods or the equivalent. If the public are reluctant to buy the latter, then the producers of capital-goods will make a loss; consequently less capital-goods will be produced; with the result that, for the reasons given above, producers of consumption-goods will also make a loss. In other words, all classes of producers will tend to make a loss; and general unemployment will ensue. By this time a vicious circle will be set up, and, as the result of a series of actions and reactions, matters will get worse and worse until something happens to turn the tide.

This is an unduly simplified picture of a complicated phenomenon. But I believe that it contains the essential truth. Many variations and fugal embroideries and orchestrations can be superimposed; but this is the tune.

Comments

i don't trust you anymore

[speakerstress.livejournal.com]

So Keynes and Krugman's solution is Govt debt spending on the production of capital goods (which reduces costs and increases opportunities for profits) until whatever broke public trust in consumption and investment is stopped and reversed. Hypothetically I see how this should stem the liquidity crisis but it's hard to see how the spending/investment trust can fully return before investment rules reform what has shocked the system, the ridiculously unreliable transactions behind the mortgage crisis. The reason no one will invest is because no one trusts the balance sheet value of assets. Anyway, I haven't looked at any Keynes in 25 years and have to take it slow but do find it interesting. If you'd like another take on the economic mess you ought to check out Michael Lewis's (the Moneyball guy)piece "The End" (http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom). Fucking unbelievable, really. And happy birthday, although I don't want to do the math b/c I find it upsetting, okay! Best, Jack

Re: i don't trust you anymore

[koganbot]

Thanks for the birthday greetings. I'm a double nickel.

I won't pretend to understand the economics, but what I think is at issue here is that people need to trust that they'll still be employed in the near and not so near future, otherwise they'll stash too much of their money in savings. This is one reason to have the gov't do the spending rather than cutting taxes or giving rebates. In any event, if people generally trust that they'll have a job, or people who don't have jobs get jobs, then they're more likely to spend the money and thereby send it circulating through the system. The underlying mortgage problems and bad financial industry practices need to be cleaned up too, but I don't know if that will have much effect on what the average consumer spends, though it will have an effect on how much the banks are willing to loan, since at the moment financial firms who own all those derivatives still don't know how much the derivatives are worth, and other firms would be leery about dealing with firms that own derivatives.

i don't trust you anymore

[speakerstress.livejournal.com]

Right, the rules reform should restart bank loans and so job creation. I certainly don't understand how these financial products-- derivatives, asset backed securities, credit default swaps, CDOs-- work but it would appear that few did. I read somewhere recently where one of the reasons direct relief for people at risk of defaulting on their mortgage loans has proven difficult to organize is because in many cases it can't be determined which financial entity owns the loan asset.

P.S. I'll turn a Half Century this year! Yikes.

P.S.S. BTW, been sampling your year-end lists when I've had the chance. My hands-down current fave is September's "Crying for You." It's clarified for me a nagging bitch I've had ab "Blind" all year. Both evoke an early '80s Euro disco vibe I like; Bronski Beat, Dead Or Alive, etc. But "Blind" sounds like a museum relic; tasteful but dead. "Crying for You" is full, sultry, and throbbing. Love it.