Re: Self-correcting economic systems

[Basil Moore <bjm@xxxxxxxxxxxxxxxx>]

John

I liked they way you have just put our problem, "Will unwanted economic
conditions change themselves with minimum changes in the law?"

May I add a few words to your post?

In my view at the essence of the Post Keynesian vision is the recognition
of the pervasive insufficiency of AD in all market economies. Labor and
capital are unnecessarily and involuntarily unemployed. Alternatively
expressed, capitalist economies are demand-constrained and not
supply-constrained. In the face of extreme poverty, human resources are
wasted, due to ignorance, but also in order to keep labor politically weak
and inflation in check.

PK's now understand that the CB sets the level of short term interest rates
exogenously, as its key policy instrument to attain its macro-economic
goals. I believe the PK policy recommendation should focus primarily and
centrally on persuading governments and CB's to lower interest rates, i.e.
to move towards a "cheap money" policy.

 Lower interest rates stimulate AD in three conceptually distinct ways:
1. Reduce the required return on investment projects, and so increase
investment expenditure.
2. Raise the market value of all marketable assets, and so the economy's
net wealth, net utility, and net expenditure on both C and I.
3. Reduce the cost of past borrowing, and so raise the net spendable income
of all debtor units, particularly  G.

The third is a wealth redistribution effect, between debtors and creditors.
Debtor units by definition have a higher propensity to spend, which
explains why such a redistribution will increase AD.

Creditor units, the property classes, will initially be opposed to lower
rates, in their own perceived self-interest, since it reduces their income.
As they are the owners of most of the wealth, they will oppose cheap money
policy, on the pretext that it is inflationary. (Keynes' "euthanasia of the
rentiers".)

But since lower rates also raise wealth values, creditors are made better
off by lower rates. In fact they are the prime beneficiaries in absolute
amount. A cheap money policy provides a very gentle "euthanasia" for the
lending classes.

There however one major administrative problem with the above: Whenever
real interest rates are reduced by CB's below the real rate of growth of
the economy, the value of long--lived assets like land and equities rise to
indefinitely high levels, vide the recent experience on the Nasdaq, or
Japan. Very high asset prices (bubbles) historically have had negative
longer term effects on AD, since when they fall they reduce assetholder net
worth, and result in the bankruptcy of exposed and fragile financial
institutions, with lasting effects for the economy.

But surely the proper policy message is to administer lower rates flexibly,
deliberately and carefully, so as to manage asset bubbles, rather than keep
rates at punishing levels in order to to keep labor in its place.

Basil Moore
At 09:02 PM 3/7/01 -0800, you wrote:
>     In my view questions on uncertainty, prediction,
>     inevitablity, and faith in models we have come to
>     own as part of who we are, are not the key
>     questions that bear on laissez-faire, intervention
>     in political economy through law, and totalitarian
>     command economy.  The key question is: Will
>     unwanted economic conditions cure themselves
>     with minimum change in the law over time?
>
>     In a democracy, the political economy can be
>     observed to be, to some degree, self-correcting
>     over time -- via changes in the law:
>                 As things go from bad to worse,
>     governments change and some bad trends seem
>     to reverse direction and get better.
>
>     (You could say this process even works for
>     totalitarian command economies:
>                 As things go from bad to worse, war from
>     within or without or strong internal discontent seems
>     to destroy much of a dictatorial system and fascism,
>     (red or black,) seems to slowly adopt some
>     democratic ways.
>                 Of course there remain several red fascist
>     regimes where the process is really bogged down,
>     and nothing changes much for the better as we
>     speak today.
>
>     If the information revolution will eventually wire
>     every human being (by wireless) to report his
>     economic condition as every second passes,
>     we will have a better handle on just how much
>     improvement can fairly be claimed for all the
>     economic effort expended by homo sapiens
>     daily here on earth.  Until then, all we can do
>     is take sample data and comment on it.
>
>     Two American firms comment on the substance
>     of the problem every day on TV:
>                 Cisco Systems tells us "some day, training
>     for every job on earth will be available free on the
>     internet";
>                 Archer Daniels Midland tells us "there is
>     now enough food for everyone on earth to eat and
>     never go hungry -- the reason hunger persists is
>     political, and not on account of inevitable scarcity."
>
>     So if John Legge, Paul Davidson, and Kazuhiro
>     Kurose must teach their students how to manage
>     political economy or otherwise make a living they
>     can point them to first things first:
>                 Not the axioms for a philosophy of history.
>                 Nor the cure for chaos in determinsitic.
>     non-determinsitic systems,
>                 Not a profound reconciliation of future
>     uncertainty and effective planning
>
>     Rather, our colleagues can teach them how to
>     hurry the day (a) training for every job on earth
>     will be free on the interent, (b) food will be there
>     as you train first and later do your job, and
>     (c) this hurry-up demands that we do not wait
>     for self-correcting potentials to end misery
>     slowly in real time, because the real truth is that
>     changes in the law are waiting for all of us to
>     make them.
>
>             John Gelles