The cleavage that counts

13 April, 2015 at 12:55 | Posted in Economics | 3 Comments

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

John Maynard KeynesThose on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?

The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power … It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might … For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …

John Maynard Keynes (1934)

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  1. Considering the state of the world economy over the last decade or so , I think this is the Keynes quote that counts ( in the full piece at the link provided above ) :

    “When the rate of interest has fallen to a very low figure and has remained there sufficiently long to show that there is no further capital construction worth doing even at that low rate, then I should agree that the facts point to the necessity of drastic social changes directed towards increasing consumption. For it would be clear that we already had as great a stock of capital as we could usefully employ.”

    In those two sentences , 80 years ago , Keynes provided both the diagnostic and the cure for our ills , which we have studiously ignored , across the globe. Why ?

    The rate of interest has clearly fallen to a very low level for a sufficiently long time in countries which , together , make up the vast bulk of the world economy. Other signs of poor conditions for investment have been present as well , e.g. , the long-running and high rates of return of profits to shareholders ( via dividends , buybacks , etc ) in lieu of capital investment. Also , survey results from company CEOs and CFOs , going back to at least 2000 , that regularly report their primary concern as to the source of ongoing ” consumer demand “.

    I would add that the high and rising levels of household debt/income ratios in many of these countries serves as a confirming “second opinion” to Keynes’ interest rate diagnostic , as do events like the adverse reaction of Japan’s economy to the attempt to raise the VAT.

    The diagnosis being confirmed – long ago – what happened to the cure ? Where’s the ” drastic social changes directed towards increasing consumption ” , as prescribed by Keynes ?

    I’ll tell you where the cure is – locked in the medicine cabinet , where it shall remain , unless taken by force by an angry mob. The oligarchs of the world have seen what this “cure” looks like – the post- Depression / WWII social compact that resulted in the Golden Age for the masses – and they’re not about to suffer that indignity again.

    So , instead of following Keynes , we’re instead treated to endless and meaningless diversionary debates – like the Bernanke / Summers pissing contest – as the global economy treads water ( ” treads GDP ? ” ).

  2. I have always known which cleavage that counts…


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