Saturday, May 21, 2016

Self-correcting? What do you mean by that?

Syll quotes Krugman

... we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility

In response Syll offers "what Keynes himself wrote", here shortened:
On the one side were those who believed that the existing economic system is in the long run self-adjusting ...

Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting.

The strength of the self-adjusting school ... has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now I range myself with the heretics.

Myself, I like to say that if we want to fix the economy we have to give it what it wants. People don't seem to like that for some reason. Personifying the economy maybe? Pffft.

The economy is a system. Push on it here, and it moves over there. Economics is the attempt to explain why that happens. I prefer to say: economics is the attempt to understand why it happens.

I say things like: Jobs? You think 'jobs' is the problem?? Okay. But it's our problem. A problem for people. It's not a problem for the economy. If you want jobs from the economy, you have to give the economy what it wants.

I say things like: The economy does not care about inflation or unemployment. Those are not problems for the economy. They are problems for people. For the economy, they are simply ways to correct imbalances.

I say things like: We should use policy to keep the ratio of private debt to public debt at a low level, a level where the economy constantly wants to grow vigorously.

So yes, I think the economy is self-correcting. But not in the way most people think. I think the economy self-corrects to rectify imbalances that the economy doesn't like. For example, if you put too much money in the economy, the economy doesn't like it. Prices go up until there isn't too much money any more, and then prices stop going up.

Some people say the economy is self-correcting. They mean unemployment will go down all by itself without government intervention.

Some people say the economy is not self-correcting. They mean unemployment won't go down by itself, and government intervention is needed.

Both sides use the phrase "self-correcting" to refer to things we want from the economy. To me, any discussion about whether the economy is self-correcting can only refer to problems that the economy recognizes as problems, and whether the economy can rectify those kinds of problems.

The answer is: The economy will attempt to rectify those problems. But it may be hindered by policies imposed by people who design policies to fix things that people see as problems, rather than fixing things that are problems for the economy.

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