Transcript Cape Town Power Point 10

In this class we will meet John
Maynard Keynes (1883-1946)
who will analyze a hole in the
box
Think of the box as the ethics that constitute
markets. And as the free market economics
built on following its rules.
• Think of the inner
circle as the whole
culture with all its
rules, both market
and non-market.
• Think of the outer
circle as the
physical bottom
line.
Think of the hole in the box as something
that keeps the box from working as it
should, leading to losses on the physical
bottom line.
Keynes founded macroeconomics when
he analyzed a hole in the box he called
“insufficiency of effective demand.”
• WHAT IS MACROECONOMICS ABOUT?
• HOW DID IT START?
What Macroeconomics is About
• INFLATION –and generally problems of money,
money supply and interest rates.
• UNEMPLOYMENT –and generally problems of
creating jobs at decent wages for all who need jobs.
• INEQUALITY –and generally making social
justice compatible with productivity.
• THE “BUSINESS CYCLE” – periodic crashes
• GROWTH WITH EQUITY
Where macroeconomics came
from.
• It came from Europe in the years of the Great
Depression, the 1930s.
• Classical economics was defined as the science
of optimal use of scarce resources
• It taught that free markets normally lead to full
employment and maximum welfare
• In Europe in the 1930s the real world was
characterized by idle resources, mass
unemployment, and mass poverty
In 1936 in the midst of Europe´s
misery Keynes satirized:
• “The celebrated optimism of traditional
economic theory,
• “Which has led to economists being
looked upon as Candides, who having left
this world for the cultivation of their
gardens,
• “Teach that all is for the best in this best
of all possible worlds
• “Provided we let well alone”
The hole in the box:
• The optimism of economists
• which led to their losing touch with the
real world
• “is also to be traced to their having
neglected to take account
• “of the drag on prosperity
• “which can be exercised by
• “insufficiency of effective demand.”
How macroeconomics started
• Although Keynes and several others developed
similar ideas earlier
• The birth of macroeconomics is dated from 1936
when Keynes published his General Theory of
Employment, Interest and Money
• Keynes´book attacked a basic principle of equilibrium
theory known as “Say´s Law”
• According to Say and classical economics following him
there can be no insufficiency of effective demand.
THERE IS NO HOLE IN THE BOX.
Jean-Baptiste Say
(1767-1832)
• There can be no “general glut” where more is
produced than can be sold
• There can only be errors by producers in
producing the wrong things (things people do
not want to buy) instead of the right things
(things people do want to buy)
• In equilibrium supply = demand
Say criticized the businessmen who
complained that their main problem was not
producing but selling
• Those businessmen called for increasing the money
supply to stimulate the economy
• Not much has changed in 200 years. Today there are
still people who call for low interest rates and easy
money to stimulate the economy.
• And others who call for tight money to prevent inflation.
•
•
•
(Check out the website of the
South African Reserve Bank
www.resbank.co.za)
The complaining businessmen who cannot
sell their products should concentrate on
making the right things
• They should stop asking the government to monkey with
the currency.
• There can be no insufficient demand when
everybody produces useful goods.
• Because as soon as you produce a useful good you are
automatically in the market not just as a seller but also
as a buyer.
•
•
•
(SUPPLY CREATES ITS OWN
DEMAND.)
Would you please repeat that?
• As soon as you produce a useful good you
are automatically in the market not just as
a seller but also as a buyer
• SUPPLY CREATES ITS OWN DEMAND.
Business is about trading one product for
another.
• Suppose you make a widget and I make a gadget.
• We both made the right things because you want a
gadget and I want a widget.
• Then as soon as I make a gadget I am a buyer for your
widget.
• My gadget is the value that creates a market for your
widget.
•
•
•
(SUPPLY CREATES ITS OWN
DEMAND.)
In a thriving market town all the business
people create markets for each other´s
products.
• Money plays no essential role.
• J-B Say says money is just a vehicle (a voiture in his
French) that carries the items traded from person to
person.
• The real means of payment you use to buy something is
your own product.
• When you make a product you become a buyer.
•
•
•
(SUPPLY CREATES ITS OWN
DEMAND.)
Not so, says Keynes:
• AND THAT CHANGES EVERYTHING!!
• People sell things to get money.
• And when they get money they keep some of
it. They do not spend it all.
• They have a liquidity preference.
• When you look at the macro picture
adding up the national accounts over the
whole economy.
• You find that some goods remain
unsold and some workers remain
unemployed.
In some passages Keynes suggests what
we call an unbounded approach
• “But we must not conclude that [the
inevitability of unemployment] thus
determined by `natural´ tendencies, is
determined by laws of necessity. [The
inevitability of unemployment] is a fact of
observation of the world as it is or has
been, and not a necessary principle which
cannot be changed.”
• ---General Theory p. 254
Ever since Keynes founded it in 1936
macroeconomics has been controversial
People who believe Say´s Law debate people who
don´t.
• Keynesians vs. Anti-Keynesians.
• Post Keynesians vs. Post-Neoclassicals
• “Neoclassical synthesis” purporting to incorporate
what is valid in Keynes into a classical framework.
• “Post – neoclassical synthesis”
What do you think about
macroeconomics today?
.
• Obviously the main
problems are still not
solved.
• In spite of endless
debates and infinite
quantities of data.
• What do you think?
Keynes was right. There is a hole in the box.
• Now it is time to raise
the level of the
debates.
• To the level of the
basic ethics of
the culture.
• And to the level
of the physical
bottom line.

LET´S SEE HOW RAISING THE LEVEL OF THE
DEBATES PLAYS OUT ON THE ISSUE OF
INFLATION
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In the next class we look at macroeconomics in
general
In its social
And ecological
context
In 1976 the anti-Keynesian Milton Friedman
won the Nobel Memorial Prize in Economics



He devoted his acceptance speech to the
topic of inflation.
He said that governments do not deliberately
cause inflation.
Inflation is an unintended consequence of
the efforts of governments to achieve full
employment and to expand the welfare state.
Do you agree with Friedman?
.
Inflation has been defined as “too
much money chasing too few goods”
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
In this case I do agree with Friedman.
Full employment leads to higher wages
which often leads to higher prices.
More welfare benefits may cause
government spending to exceed
government revenue.
Deficits tend to tempt the government to
“print money,” which also leads to higher
prices
I think I understand …
 So to avoid higher wages leading to
higher prices you have to produce
more goods, so that more goods will
balance consumers having more
money to spend.
 And to avoid government spending
leading to inflation there has to be
more government revenue.
 Is that what you are saying?
Yes, but that is easier said than done. Inside
the box the only way to increase production
is to make it profitable to do so.
 OK, but you could
also import more
cheap goods made
by low-paid foreign
labour.
 But there is a
third alternative:
think outside the
box.
I think you are saying that there
there are other ways
 Of putting people to work, of producing
useful goods, of doing both in eco-friendly
ways
 And of increasing government revenue to
balance spending with revenue
 And of increasing the welfare of the people
 Those other ways are underestimated as
long as our thinking is confined within the
box.
Those other “unbounded”
ways to get things done

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
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Might offer some relief from the eternal
dilemmas
Of having to keep wages low to fight inflation
And having to cut back government social
programs to fight inflation
And of having to sacrifice all other goals to
profit-making, because nothing gets
produced without profits.
• I think I sort of see that in the box the
government does not dare raise revenue much
because higher taxes would cut sales and
therefore profits; and that if the only way to
produce more is to make producing more
profitable then it double does not dare to raise
taxes much, and in the abstract I sort of see how
thinking outside the box might help but COULD
YOU PLEASE GIVE ME A CONCRETE
EXAMPLE?
To consider just one of any number of
concrete cases, let´s take today´s
Argentina.
• Inflation was touched off by the
government making steep increases in the
public pensions paid to the elderly
• Which as it turned out it could only pay for
by having the Central Bank issue more
currency.
• It was an “inorganic” increase in the
money supply. Therefore: too much much
much money chasing too few goods
goods.
As an exercise imagine that
Argentina had a different culture
• Somewhat like the old ubuntu culture, where all of
society made it a great point to take care of the elderly
who were about to join the ancestors.
• And suppose the super-profits (or Ricardian rents) that
Argentine farmers were making selling soy beans to
China could be transferred to social programs without
any tendency to reduce production because more than
enough profit to motivate production was still left.
• And suppose that in a culture of social responsibility
nobody would take advantage of an inflationary
atmosphere to raise prices for the sake of making
super profits, but would only raise prices when
higher costs required it.
So then in our imaginary exercise
• The Argentine government would feel less
pressure to save the elderly from misery by
giving them more cash
• The government would have a more solid
revenue base and less temptation to “print
money”
• And fewer opportunists would take advantage of
the mass psychology of inflationary expectations
for private pecuniary gain.
This example shows how paying attention to
the culture as a whole with all its rules, both
market and non-market.
• Enables ethics to
make the economy
work a little bit better.
• And to improve
performance on
the physical
bottom line.
Basically the same points can be made
regarding the other problems of
macroeconomics
Basically the same points can be made
regarding the other problems of
macroeconomics