Keynes Economics

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Many people forget that John Maynard Keynes was a brilliant mathematician (as well as an economics genius). His proposal to pump money into a sagging economy is based on sound engineering principles. It works like this. In a system that is buffeted by external forces such as a ship at sea, one shifts the ballast to keep the ship stable (within the dynamic region where it will not capsize). Once the ballast is shifted rightward (say) it must eventually be shifted leftward. The idea is to use negative feedback control to maintain a dynamic stability.

What the politicians forgot (ignored actually) is that money pumped in when the economy is sagging has to be pumped out when the economy picks up to maintain the overall balance in time. The politicians believe in only pumping in. Since real money is scarce they have resorted to monetizing the debt and pumping and pumping and pumping bogus debt and i.o.u. certificates which eventually CANNOT be repaid. The only outcome is collapse of the economy and rebuilding it from scratch. The victims of the crash will receive little relief and no compensation.

Now you are seeing it in real time. Finally, finally, finally the turkeys are coming home to roost.

ruveyn

Very true.

You're right there's a funny thing that happens when things are going well, politicians don't ever want to save money. That's the problem with the General Theory, it doesn't take into account political dynamics, it relies on men to carry out these policies.

In a normal economy who gets rewarded? The savers, the people who work hard, or the people who invent and innovate. But in our economy who gets rewarded? Bankers speculators, and government employees even though they produce little to nothing for the average person.

55 years ago the United States was the largest producer of consumer goods in the world, we flooded the world with our cheap goods and we were as a result the envy of the world.

55 years ago the U.S. was the largest creditor nation in the history of the world, we lent out more money than all other creditor nations in the world combined. Fast forward to today we are no longer the largest creditor nation in the history of the world. We are not even a creditor nation, we're a debtor nation. And we're not just a debtor nation, we are the largest debtor nation in the history of the world! Larger even than all other debtor nations in the world combined!

How did it get to be like this within a span of just 55 years?

One theory is that there was a contagion of moral hazard, because of credit expansion, and because of high cost wages provided by the government it became possible for the average american to get paid more money while doing less work. These higher wages provided by the government pushed the productive sectors of the economy overseas where they could still compete.

The problem with pumping money in is that money cannot be introduced into the economy without generating a contagion of moral hazard. Recieving money or credit without proper sacrifice is a disease that leads the economy towards mediocrity and a deleterious boom and bust cycle. They facilitate malinvestments and drive the workforce to be more unproductive.

But, labor-productivity has been going up, while wages have been falling or stagnating. Primarily as a result of substituting capital for labor. But also because of pushing workers more and more.

"If you've got time to lean, you've got time to clean" was Roy Crock's motto.

The only sense by which american laborers get a relatively high amount of money for the work done is in the sense that the dollar is quite high vs. some other currencies, which makes american goods more expensive for foreign buyers.

Real wages (wages corrected for inflation) have been stagnant or slightly falling for the last 40 years.

ruveyn

In contrast, I recall reading that Chinese wages are now rising so fast that, within the near future (maybe 10 years?) Chinese and American wages would be on par.

It's possible that government spending has reached an apex. But I highly doubt these statistics - they are often distorted by government to justify printing more money.

The value of all currencies are dependent upon their production. However supposing that the U.S. dollar is high therefore we (the United States economy) produce more is incorrect, because much of the production comes from overseas. What do you suppose would happen to the dollar if Bretton Woods were to be abolished? The value of the dollar is to a large extent supported by the dollars link to the petroleum trade - if oil producing nations were to trade in other currencies the dollar would become a fraction of its current value overnight.

On your second point about stagnant wages.

Inflationary adjustments are often made in order to confirm a preconcieved bias. I think that is the case with those studies.

I think not. Workers have gone into debt to compensate for wages that are not growing in purchasing power, but rather stagnating or shrinking. Hence the credit card boom which has flourished since 1970 or there about. The purchasing power of wages (on average) have not kept up with prices (on average).

ruveyn

You assume that the economy is analogous to engineering. John Meynard Keynes "brilliance" is subjective and as far as mathematics, there are many things which cannot be described in terms of mathematics - at least in so far as we understand human behavior it is too fickle and complex to be mathematically predicted to the degree. Also what is not addressed.

We also cannot mathematically describe subjective qualities, what economists often do when they create models to predict the economic benefit of a particular government program. What economists are doing is they are imposing their own standards on what the goals of the market should be. They impose the goal Low unemployment without making distinctions about the quality of employment.

And so with this idea - of maximizing employment - a politician could look at a power turbine and declare "What a foolish device!" "How bad this is for the economy" "Why do we have a power turbine which could easily employ a million people running on hamster wheels for the rest of their lives?"

Of course the reality is just the opposite, instead we should all declare "What a brilliant device this power turbine is, it produces all this electricity without having to have a million people running on giant hamster wheels for the rest of their lives"

[youtube]http://www.youtube.com/watch?v=GTQnarzmTOc[/youtube]

Last edited by wcoltd on 29 Jul 2011, 6:42 am, edited 1 time in total.

I think it's subjective whether or not an increase in consumer debt constitutes an increase an income, because suppose someone is able to increase their debt levels in perpetuity, wouldn't that constitute a replacement for wage income?

This kind of income replaced productive sectors of the economy as people realized (for a period) that they could earn more money speculating than they could by holding an actual productive job.

Credit expansion causes this kind of maladjustment in the labor pool. Furthermore It allows ventures that should never see the light of day the opportunity to waste valuable resources.

The only way to increase credit into the economy is by lowering lending standards.

I think you're right that "the boat has to be righted in good times" by pumping money out of the economy.

Theres a word for pumping money out of the economy. I beleive its called "taxes".

But we alternate between tax-and-spend democrats, and spend-and-spend Republicans ( who occasionally reduce taxes but never reduce spending).

After many decades of this (as Inuyusha pointed out) Clinton and Gingrich got together to make the hard choices and succeeded in balancing the budget. And the boat started to right itsself!
That might well have continued under Bush Jr.. But then came 9-11. One war in the mideast wasnt enough for him- he had to launch two.
The result the biggest deficit in history (greater than all preceding presidents combined).

Needless to say the boat went back to taking on water.
Then in the final year of Bush Jr. we had the worst recession since the great depression.

And now we have the worst of both worlds: A boat thats both listing AND sinking.

Obama wants to pump water in AND pump water out of the boat in a bid to both right it and float it. Hes opposed by the republicans who oppose any kind of pumping (spending or taxing) because they favor.. well ... either they have no solution - or their solutin is doing nothing. listening to the band play while the Titanic sinks hoping the titanic will right itsself.

Doing contradictory things vs doing nothing: that is the question that washington is deadlcoked over as we speak.

no they have a plan

tax cuts for the rich + ending welfare + magic!

Yeah, that's so unfortunate, we have two choices bad and worse.

Which is exactly what happened. The cure is cash and carry.

ruveyn