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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 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” 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 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