Sunday, October 25, 2009

keynesianism 3

The investment and saving schedules theorised by Keynes are meant to represent inflows and outflows of money to or from the real economy over a period of time. Keynes' conception of economic self-correction means the sums of money and their peridisation are not important. An imbalance, according to Keynes, will expand or contract the economy until parity is reached. If government sought to reduce interest rates and expand production permanently via public spending, it would be necessary for this spending to be constituted as a periodised flow also. Funding of this flow of spending would have to come from the ex nihil creation of money. Public works are not a necessary form of this government spending, which could just as well take the form of gratuities handed over to the richest members of the community. Keynes' considers it prudent to fund workers through public works, rather than capitalists, as they are likely to spend rather than save more of their income, and in order to avoid labour unrest. Zimbabwe owes its fabled misery to the adoption of such an expansionary monetary policy.

There remains the idea of adopting a temporary policy of public works financed from outside the supply of circulating money. Such a policy might serve to bridge a temporary slump within the business cycle, maintain output above what it otherwise would be, and by consequence save productive plant that would otherwise be destroyed. Such a policy might reasonably be funded through intertemporal taxation or private sector loans. Whether such a policy would work depends on the validity of the postulates underlying the neoclassical theory: e.g. the idea of perfect competition. Nitzan and Bichler show how firms with market power raised their prices, in relative terms, during the deflationary crisis of the Great Depression.

Keynes has caused a great deal of confusion with his ideas about investment and the investment multiplier. Keynes argues, following Richard Kahn, that a increase in investment at any level of interest will be met by a much larger expansion of production. The money taken from the non-circulating fund is supposed to cause an expansion of production, up to the point where money outflows once again equal money inflows. Ex nihil goverment spending would do the same thing, up to the point where it had to be funded from the real economy, or inflation broke down the condition of money wage rigidity. Government spending is not, however, the same thing as investment in productive plant. Keynes' theory does not seek to ascertain how much money will be spent on investment in productive plant, merely how much money from non-circulating funds will be used this way. It does show how an increase in government spending, through its influence on interest rates, could choke off investment from this second source of funds.

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