Sun, 12 Mar 2006
Brad Delong (via Calculated
Risk) has posted part of Paul Krugman's introduction
to Keynes's
General Theory of Employment, Interest and Money. Having not ready General
Theory yet, I'll have to comment on Krugman's interpretation of it.
Stripped down, the conclusions of The General Theory might be expressed as
four bullet points:
-
Economies can and often do suffer from an overall lack of demand, which
leads to involuntary unemployment
-
The economy's automatic tendency to correct shortfalls in demand, if it
exists at all, operates slowly and painfully
-
Government policies to increase demand, by contrast, can reduce
unemployment quickly
-
Sometimes increasing the money supply won't be enough to persuade the
private sector to spend more, and government spending must step into the
breach
Sorry if my comments are naive; I am but a budding student of economics.
1. How can an economy suffer from an overall lack of demand? The overall
demand in an economy is made of up of individuals' demand. Who is Keynes
to say that my demand is too high or low? The most I could demand today is
limited by my productivity since birth plus any wealth gifted to me. If I
decide for forgo consumation today for tomorrow, no one has the right to demand
that I trade with them today.
2. If there isn't enough demand for what I can supply, I must find something else
to supply. For example, if I decide that the demand for my services as a
computer consultant are not sufficient to generate the income I desire, I might
go back to school to study economics. (Yes, I know I'm probably deluding
myself to think that my services as an economist will be more valuable to
society, but at least it's fun.)
3. How can government increase demand and reduce unemployment quickly? Let's see.
They can print out some money. Of course, they have to do this sneakily. If
they were to announce, "Tommorrow, we are going to increase the money supply by
1%," everyone would increase their prices right away (except for those lenders
and employees with dollar-denominated contracts; they're screwed). Instead,
people must be caught by surprise that they now have come into more money,
thinking that it must be due to their prowess and innate brilliance, so they go
out and spend their new dollars of spinning hubcaps and macaws.
4. Or, rather than just injecting money into the economy, the government itself
can go shopping. Of course, since the government doesn't actually produce
anything, it can only spend the wealth that it confiscates from its citizens.
Now, they might not take that money from you today, but they'll get you for it
later. And to make matters worse, when the government goes out to Walmart to
spend some money, they're competing with you, and thus forcing prices up.
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