Re: investment and unemployment

[GGard97342@xxxxxx]

In a message dated 04/04/2000 00:59:00 GMT Daylight Time,
Adam.Stokes@xxxxxxxxxxx writes:

> Matt.
>  This seems to me to be right up the alley of Bill Mitchell or Allen Oakley
>  (if their still at Newcastle), and If you ask them nicely I'm sure they
will
>  enlighten/confuse you some more.
>
>  In regards to your last query:
>  >the implication in your peice seems to be that the increase in the rate of
>  interest somehow stopped (or slowed) the increase in productive skills (or
>  investment!), thereby ending the deflationary trend.
>
>  Without having visited this for a while (...a longgg while), I suspect that
>  there are a number of things happening:
>  1. Because productivity is pro-cyclical, any dampening of the business
cycle
>  through the use of interst rates will raise unit costs.
>  2. Monopoly power is unlikely to be affected in the short-medium term (and
>  probably not in the long term as new businesses/competition are unlikely to
>  evolve. The impact on union power may be different though).
>  3. Skills/capital will atrophy in an absolute and a relative sense, which
>  will cause capacity bottlenecks in the upturn (capital accumulation will be
>  affected through the marginal efficiency of capital).
>
>  One question I would ask though is what incentives are provided for firms
to
>  pursue R&D in such an environment and what impact this has on investment
and
>  labour demand?

Good thinking, Adam.

I can add an anecdote which is relevant.

In 1979 -1981 British industry was being massacred by high interest rates,
imposed in accordance with the loony monetarist doctrines about control of
inflation. (Sadly the author of this mischief, Geoffrey Howe, had been a
student contemporary of mine.) At that time I was responsible as trustee of
the majority shareholding for a steel company in Sheffield. It did heat
processing and destructive testing. The two very competent executive
directors, father and son, believed in a good layer of protective fat on the
company in the form of a stache of cash. The father said, "If there is going
to be a crunch that cash is going to be mighty handy." It was, and they
weathered the storm very well, helped by the fact that being a private
company they did not have to bother paying dividends, and were free of the
overhead that public companies tend to carry. The company remained profitable
throughout, but competitors went to the wall. When the recession ended the
directors promptly increased prices as there was now, of course, a shortage
of capacity. There was no need to raise prices, as the company was getting a
more than adequate return on capital, but if the government destroys the
opposition for you why not take advantage of the situation?

So anti-inflationary measures created the conditions for price inflation.
"Those whom the gods would destroy they first make mad."

The company could have expanded, but the directors saw no point as taxes were
taking most of the profit, and they would just create an even bigger charge
to capital taxes on the death of the father. That problem has now been
solved, but it was a typical example of how government policies in Britain
destroyed much of the bedrock of the British economy.

Geoffrey  Gardiner