Three Quotes from Keynes's 1931 Harris Lectures in Chicago:
John Maynard Keynes, The General Theory and After: Part I, Preparation, Collected Writings of John Maynard Keynes, vol. 13, pt. 1, Donald Moggridge, ed., (Cambridge, U.K.: Cambridge University Press.
John Maynard Keynes, “An Economic Analysis of Unemployment” (University of Chicago: 1931 Harris Foundation lectures).
Posted by DeLong at July 24, 2004 12:56 PM | TrackBack | | Other weblogs commenting on this postWhile some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history. (p. 347)
Doubtless, as was inevitable in a period of such rapid changes, the rate of growth of some individual commodities could not always be in just the appropriate relation to that of others. But, on the whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth [of different sectors]…seem to me, looking back, to have been in as good a balance as one could have expected them to be. A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied. (pp. 347–48)
“It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924–29] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.
“I do not take this view. I find the explanantion of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…” (p. 349)
OK, two questions:
1. Are there any of these "austere and puritanical souls" around today? Perhaps I missed something.
2. Were there a lot of them in 1931?
Posted by: Tom Marney on July 24, 2004 02:21 PMAl Gore sugested some Andrew Mellon type of liquidation policies in the run-up for the elections
http://www.laweekly.com/ink/00/38/featuress-meyerson2.php
Posted by: A.M.B. on July 24, 2004 04:00 PMWow, A.M.B., thanks for the link. I was unaware that Gore had ever said anything so frickin' moronic.
Still, it doesn't seem to me to carry the gloomy, self-flagellating moralistic tone that whoever Keynes was denouncing apparently possesed.
Posted by: Tom Marney on July 24, 2004 05:27 PMI know that people like this still exist, I've heard 'em...
I have some more questions:
1. Is the austere and puritanical school of economics taken seriously today by people who aren't nutty right-wingers?
2. Does it have any real justification, or is it just masochism disguised as economics?
Posted by: rps on July 24, 2004 06:35 PMI remember that Gore said that. It struck me as decidedly nuts at the time. It was one of the reasons that I knew that Bradley was a better choice--head and shoulders above.
Posted by: Abby on July 24, 2004 06:53 PMI am taken by this sentence: "A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied."
I wonder if we even think it possible or desirable to satisfy all our reasonable economic needs. It is even open to question what we would do if this happened. How would we define ourselves, what would we struggle with if this should happen. What would be the charm of life?
Posted by: masaccio on July 24, 2004 10:48 PMA good measure of moralism is surely part of it, but paraphrasing a comment in reaction to the dot-com stock bust I read a few years ago: "Don't worry, your money has not been destroyed. It is only owned by somebody else."
The bankruptcy is not universal. Whenever there is a fire sale of assets, be it stock, equipment, buildings, patents, or real property, there is always a buyer on the other side of the deal. Some people come out richer.
As is typical of most bubbles, including the railroads, the physical capital continues to exist and contribute to out economic well being.
But the people who first invested in the transforming ideas almost always lose their shirt. This time has been no different.
If you want to make an interesting comparison compare the stock market since the peak to the Japanese stock market after their peak. It is an amazingly close pattern.
The "sustere and puritanical souls" were alive and well at the IMF in 1998 and are probably still there waiting to flail any poor country that gets into trouble after growing too quickly for its own good.
Posted by: Aaron Gurwitz on July 25, 2004 07:08 AMLooking at one industry, in the 20s the railroads made tremendous investments in right-of-way, physical plant, and cars and locomotives.
They did not anticipate a new competitor,the inland waterway system, created entirely by government efforts after a period in which transportation by water was almost nonexistent.
They did not anticipate the rise of road transport on the scale that occurred.
So some of the investments were good, others were bad and properly should have been written off.
Fortunately, it appears we can go for years, or even decades, with no serious examination of what has happened. In a pinch we might even recycle the general thrust of Keynes and FDR and get through another tight spot without any basic structural changes. Maybe the best we can do.
Posted by: serial catowner on July 25, 2004 09:46 AMThe purpose of liquidation is that it reduces market inefficiency. Markets become inefficient when capital becomes invested in ever reduced asset value efficiencies of return on investment. liquidation only need proceed long enough to reduce structural market inefficiency and restore market efficiency to some dynamic equilibrium level where the growth is again positive. Though for structural reasons regulation may prefer to restructure the economy to have market efficiency approach ideal limits.
In thermodynamics there is the concept of the Carnot engine. The Carnot engine is the thermodynamic limit of efficiency of a four-stage engine of ideal transitions. Real engines of a similar type are compared against this ideal efficiency to see how closely they approach it.
In a similar way, all real markets have both a practical efficiency and a ideal efficiency from its inherent regulatory structure. Corrections occur in markets when the practical efficiency becomes too small to create self-sustaining liquidity in the transactions of the market to achieve the market threshold of participant-information transfer. Crashes occur in a market when the regulatory-dynamic drift of market participants lowers the ideal market efficiency by effectively shifting conditions to that of a less efficient market model/design.
Therefore crashes can be distinguished from corrections in that crashes require regulatory-dynamic shifts, either explicit legislative ones or informal and implicit ones of negotiation. Sarbanes Oxley can be seen as a formal and explicit attempt at reforming the regulatory-dynamic to increase the ideal market efficiency, and the transfer of Federal Reserve Chairmanship from Burns to Volker could be seen as one of informal and implicit negotiated change.
Sarbanes-Oxley however was insufficient to increase the ideal market efficiency to maintain self-sustaining transaction liquidity in the informal and implicit interest rate environment of credit issuance by the Federal Reserve. The underlying market dynamic has by now shifted far enough that the regulatory changes will be severe, and lacking the political will there will be probably a prolonged period of failed attempts at economic restructuring as the economy finds a new equilibrium at a lower sustainable liquidity of transactions between market participants.
Posted by: Oldman on July 25, 2004 09:50 PMKeynes: "It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924–29] should be the prelude to impoverishment and depression."
Me: It always is "extraordinary imbecility" or "irrational exuberance" that is the prelude to impoverishment and depression. The problem is that the irrational exuberance is a contagion, which eventually permeates all institutions including banking and government.
Markets (and related banking and finance) becomes a speculators market, or as Hyman Minsky calls it "Ponzi finance." Bubbles burst, and as the bubbles become more pervasive, irrational pessimism replaces irrational exuberance. The system eventually falls in on itself.
Since the productivity boom and over-investment sets a stage for too many consumables relative to sustained consumption, we have a glut of especially durable goods and the pessimism is protracted by this as well as loss of trust in institutions. Economies crash and stay down for a long time (e.g. Japan recently, the US and others post 1929). Read Galbraith's THE GREAT CRASH: 1929 and compare then and now...
Keynes: “Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it…. I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…” (p. 349)
Me: Yes, investment is necessary, but tends to be impossible when there is a glut of goods relative to people’s ability to purchase them. If the government relieves all debt burdens, and essentially gives goods away (or the money to purchase even more goods), then investors become very wary of government, which tends to prolong depression. It is all the stuff high-order social mess. And we seem once-again to be repeating past mistakes, with today’s new twists.
Posted by: dabbler dave on July 26, 2004 09:18 AMWELL, LET'S DO A MOMENTUM ANALYSIS OF THE ECONOMY LEADING UP TO THE GREAT DEPRESSION.
1 - In 1929, from a momentum management perspective, a recession was at least a year overdue. In boom times an extra year will cause all kinds of crazy economic excess just as we experienced in 2000.
2 - To fight the bust the Republicans passed the Smoot Hawley tarriff...
http://pep.typepad.com/public_enquiry_project/2004/07/the_great_prof_.html
Posted by: Adrian Spidle on July 26, 2004 11:00 AMTom M.
As to whether there were many such austere souls in Keynes' time, look one post ealier on Brad's weblog. Andrew Mellon, who said "liquidate labor, liquidate stock, liquidate the farmers, liquidate real estate..." was Treasury Secretary under Hoover.
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