"Re:One way I have always characterized Keynes's response to Say's Law (which I think is the right response) is that he pointed out that even if the economy is in equilibrium, there is no particular reason to expect that that equilibrium is a full employment equilibrium. Unemployment as we measure it in the CPS and labor surplus are not the same things, after all. We care about Say being wrong because Say's fallacy is how we understand the emergence of general gluts in a monetary economy. It's why monetary shocks have such broad effects. Are there Cantillon effects associated with these things? Ya, sure, and those are very interesting to think about - but that's chump change compared to Matlhus's general glut.
Second, if the problem is that people don’t have enough cash--well, then, find some organization, a Bank of England, a Federal Reserve--and have it print cash until people no longer think they should spend less than their income to build up their cash. Flood the economy with money until people no longer want to hoard more cash than they currently have.
That's a pretty crass response to a crisis, it is just the usual "pump up asset prices" one from the likes of Greenspan and Summers.
What about addressing the REASON why "people" think they don't have enough cash?
Most people (other than the speculation oriented millionaires who sponsor Summers and other economists) are heavily invested in their JOBS, think that their job is an income-producing asset, and save more in safer assets if they think that their jobs have become less safe assets. Sure a bit more liquidity going round the real economy may make some jobs safer assets, but the main effect is boosting asset prices.
Just pumping up asset prices with massive "liquidity" injections does not anything to make their JOBS safer. Especially if the job-asset is accordingly devalued with respect to the other assets whose price is booming."
But I don't think that's completely satisfying if you care about full employment. Let's say we have a general glut because everybody demands money or money-like assets and reduces their demand for goods and services. As the commenter says, you can satisfy that demand and then the general glut will go away and everything will be in general equilibrium again. But will we have full employment? Maybe, maybe not. If people still cling to liquidity and safety then quite possibly we're going to have equilibrium below full employment.
Now monetary authorities have more tricks up their sleeves than just keeping people liquid that want to be liquid. If we had an interest rate channel to work on that would help to increase demand. In the absence of that we can create inflation or expectations of expansion in the future. And of course, we can directly put people to work through the fiscal authority. But whatever the course of action, the story didn't end with Malthus. It probably didn't end with Keynes either, but you need at least Keynes to understand that an excess demand for money isn't the only problem we could be facing.
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I look forward to Sumner's response to the "speculation oriented millionaires" jibe !
ReplyDeleteDeLong's point about workers viewing their jobs as an asset with a future income stream, and when they see that future income stream threatened they cut back on current spending, is a good one.
I don't get his point about increasing the money supply affecting mainly asset prices though. The holders of these kinds of assets - just like the holders of "job assets" - will see them as a stream of future income and will only be prepared to buy them at increased prices if they see the stream of future incoming also increasing. And surely this will only happen if the they have greater optimism about the "real" economy. This increased optimism will likely mean that workers will in turn increase their valuation of their "job assets" and cause them to stop saving so much - which will have a further positive feedback effect on the recovery process.
In other words increasing asset prices both "job assets" and other assets is needed for recovery, and is not as De Long suggests a sign of a dysfunctional policy.
"One way I have always characterized Keynes's response to Say's Law (which I think is the right response) is that he pointed out that even if the economy is in equilibrium, there is no particular reason to expect that that equilibrium is a full employment equilibrium."
ReplyDeleteExactly. If you read the GT carefully, you can get inferences that Keynes is essentially referring to a theory where the macroeconomy can be has multiple states of equilibrium, and the special case that policy-makers and people would like to be in is in a full employment equilibrium. No one wants the macroeconomy to be in an unemployment equilibrium, as that is a state where sub-optimal growth and mass unemployment reigns.
"What about addressing the REASON why "people" think they don't have enough cash?"
ReplyDeleteIs that DeLong? It strikes me as overly intellectual.
If we can describe our current depression as a suboptimal equilibrium, or as a sluggish disequilibrium (in which equilibrating forces are weak and slow acting), then they answer lies in action, not in thought.
Thus Keynes's joke about digging holes, which is a spoof of the gold standard.