Re: [lwside1] Re: Here yah go, Congress is against short

[Paul Davidson <pdavidson@xxxxxxx>]

At 06:23 PM 9/25/01 -0400, you wrote:
> Deficit spending has to be financed somehow and that is via issuance of
> bonds to the general public.  This creates a vacuum in which private savings
> are ciphoned out of the money market from where businesses typically borrow.
> Since there is less savings to be borrowed by firms, the price of money
> (i.e. the interest rate) goes up, which makes it more expensive for firms to
> finance capital expenditures.


Obviously Sean does not believe that al;an Greenspan and the Federal
Reserve has anything to do with determining (setting?) interest rates --
right Sean?  Then the Fed has not lowereed interest rates eight times in
the past year as the news media reports.  We all know that the news media
is unreliable -- right Sean??


>   When the cost of capital increases, the
> Marginal Productivity of Labor falls and it follows that the Unemployment
> rate rises (the crowding out effect), because Labor remained constant.


If one uses the neoclassical theory then like "Alice in Wonderland" things
don't seem to be what they appear to be.

I wish you would read my aricle on "Why the Marginal Product Curve is Not
the Demand Curve For Labor..." in the JPKE and learn a little about Keynes
and the Post Keynesian analysis Sean. For example read the Appendix to
chapter 14 of the GENERAL THEORY where Keynes explains why the Marginal
Productivity of Capital has nothing to do with the determining the rate of
interest.

> So,
> the notion that we can have a Zero UE rate (an ideal of the Post-Keynesians)
> and deficit spending is not coherent.

Speaking about coherence -- the classical theory is a prime example of
logical coherence but real world nonsense!

> The natural solution to this dilemma would have to be that the Government
> would make loans to these idle persons to go into business for themselves.
> My problem with that is that if the persons were not efficient enough at


This shows what obvious nonsense classical theory can lead to.
> whatever it is they do by trade to remain employed as a legitimate factor of
> production, then these loaned dollars are being wasted on inefficient
> factors of production.  It is evident that this does not behoove the nation
> in our plight of expanding the Production Frontier.
>
> If the government starts to spend itself into deficit, then we will shoot
> ourselves in the foot, because it will hinder our ability to acquire more
> resources.  The necessary outcome of deficit spending is that taxes will
> rise, consumption will necessarily fall because of the tax increase,
> aggregate efficiency will suffer, and the economy will suffer, which is
> ironic since one would assume that the Government would only be trying to
> behoove the economy.


 As Keynes once wrote of Hayek:

"The book, as it stands, seems to be one of the most frightful muddles I
have ever read, with scarcely a sound proposition in it begining with page
45, and yet it remains a book of some interest, which is likely to leave
its mark on the mind of the reader.  It is an extraordinary example of how,
starting with a mistake, a remorseless logician can end up in Bedlam. Yet
Dr. Hayek has seen a vision, and though when he woke up he has made
nonsense of his story by giving the wrong names to the objects which occur
in it, his Khubla Khan is not without inspiration and must set the reader
thinking with the germs of an idea in his head."
        J. M. Keynes, "The Pure Theory of Money. A Reply to Dr. Hayek",
Economica, November 1931. reprinted in Volume XIII, CWK, p. 252.


Paul
Paul Davidson
Editor, Journal of Post Keynesian Economics
Economics Department - 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
phone # (865) 974-4221
fax # (865) 974-1686
home phone  (865) 692-0802
http://econ.bus.utk.edu/Davidson.html