The reasons were inadequate investment and oversaving

[keannu]

This is a technical question regarding economics, so you don't have to answer me if you don't have the knowledge. I'm just curious if someone knows about it. I can't understand why inadequate investment and oversaving can result in balanced supply and demand.

is52
ex)Persistent unemployment in Britain, and then the mass unemployment of the Great Depression, redirected Keynes' intellectual agenda from monetary affairs to unemployment and led to his most influential work, The General Theory of Employment, Interest and Money, published in 1936....In particular he concluded that classical economics rested on a fundamental error. It assumed, mistakenly, that the balance between supply and demand would ensure full employment. On the contraray, in Keynes' view, the economy was chronically unstable, and supply and demand could well balance out at an equilibrium that did not deliver full employment. The reasons were inadequate investment and oversaving, both rooted in the psychology of uncertainty.

 

[Barb_D]

The supply will still match the demand. Those remain in balance. However, the supply/demand created is not high enough to lead to full employment, because of inadequate investement and oversaving.

 

[keannu]

Thanks, but I meant how inadequate investment and oversaving didn't lead to full employment. That's why I said this is a technical question. Maybe the government didn't invest in social infrastructure like road-building to hire more workers, and oversaved not to share money with the unemployed. I have no idea, only some examples would help.

 

[SoothingDave]

What you are reading is the key idea that we are now seeing exploding the economies of Europe and the United States. Keynes believed that the government must step in and spend, spend, spend whenever the economists (and politicians) believed that the private sector economy was not "investing" enough.

Governments have continued to do this even though they have to borrow massive amounts of money in order to do so.

 

[Barb_D]

Your initial question was "I can't understand why inadequate investment and oversaving can result in balanced supply and demand."

I don't think that's the right question. I think the right question is "How can you have balanced supply and demand, if you also have inadequate investment and oversaving?"

Let's say I'm so uncertain about the future that I save almost everything I earn. Maybe I eat out at a restaurant once a year. My "demand" for restaurant services is very low. All the people in my town feel the same way. So one restaurant will meet the "supply" of my entire town.

However, if I am willing to spend more of what I earn, I may eat out once a month. The rest of my town feels the sam eway. So now you need 12 restaurants to supply dining services to meet the demand of the entire town. That's 12 times as many jobs for cooks, dishwashers, wait staff, etc. than in the town where we are all oversaving.

 

[SoothingDave]

Thanks, but I meant how inadequate investment and oversaving didn't lead to full employment. That's why I said this is a technical question. Maybe the government didn't invest in social infrastructure like road-building to hire more workers, and oversaved not to share money with the unemployed. I have no idea, only some examples would help.

He meant the private sector did not invest enough and "oversaved."

You see this today where the Obama administration argues that the private sector is "sitting on" cash and not investing it. Businesses are operating now in a climate of uncertainty, due to new regulations and legislation and an environment where increased taxes seem a certainty.

 

[Barb_D]

I think it's a stretch to blame the entire climate of uncertainty on the posibility of new regulations and ignore the fact that another recession is threatening globally. But lets end this part of the discussion before it becomes a politial argument.

 

[SoothingDave]

I agree there are multiple factors involved. My point (my final point) is that the flaw in Keynesian economics is that increased gov't involvement in the economy can not be a cure for uncertainty when increased gov't involvement in the economy is a source of uncertainty.

If the patient has an allergic reaction to the medicine, you don't double the dose.

 

[bhaisahab]

I have closed this thread, it has become too politically controversial.