Sunday, December 2, 2012

MPC: Adjusting the Focus

The architects of Reaganomics styled themselves Supply-Siders. They scorned the Demand-Side theories and policies they attributed to John Maynard Keynes and to his "liberal" followers...

J.M. Keynes, The General Theory, Chapter 24: Concluding Notes...:
...we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital.

It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.

In the above excerpt, we see that Keynes favors a higher propensity to consume (he wants to increase aggregate demand) but says something confusing about investment.

But in the noontime post we saw Keynes call for increased investment -- "investment sufficient to absorb the excess", the income that people want to save:

...employers would make a loss if the whole of the increased employment were to be devoted to satisfying the increased demand for immediate consumption. Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume...

Keynes favored increasing demand and increasing supply.

When you increase the propensity to consume, you reduce the propensity to save. Instead of going into savings, the money stays in the spending stream.

When you increase the inducement to invest, you make sure the money that *did* go into savings gets borrowed and put back into the spending stream.

Keynes' concern was neither the supply side nor the demand side. His concern was that too much money goes into savings, and has no reason to come out.

If there is no spending, there is no economy.

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