Often Keynes's analysis the business cycle-where there are booms borne of 'overconfidence' followed by slumps of a collapse in confidence. I'm getting close to the end of the General Theory now. It's like the third time I've read it-at least.
His analysis of booms and slumps might seem that he at least agrees with Austrian Business Cycle Theory (ABCT) that the trouble is over-investment during booms which lead to under-investment during slumps. This is a misreading of him however.
He doesn't hold that the way to avoid slumps is to avoid 'over-investment' which is held to be the characteristic of booms. He certainly wouldn't agree with the idea that the Great Recession was due to Greenspan failing to raise interest rates enough and fast enough-or that the fault for the 90s Internet bubble popping was Greenspan failing to raise interest rates fast enough then.
Here is the man himself on the subject of 'over-investment.' I think what these quotes will establish is that he's skeptical that there is such a thing-though it seems possible that he believes there could be 'misallocation' of investment. However, even if he agrees with this he clearly doesn't see the solution in sharply jamming on the monetary brake:
"The preceding analysis may make it appear to be in conformity with the view of those who hold that over-investment is the characteristic of the boom, that the avoidance of this over-investment is the only possible remedy for the ensuing slump, and that, whilst for the reasons given above the slump cannot be prevented by a low rate of interest, nevertheless the boom can be avoided by a high rate of interest. There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest is against a slump."
This view he's referring to certainly applies to Hayek and the Austrians. However, the inference that one should use a high rate of interest against a boom is certainly not what he has in mind:
"To infer these conclusions from the above would, however, misinterpret my analysis; and would, according to my way of thinking, involve serious error. For the term over-investment is ambiguous. It may refer to investments which are destined to disappoint the expectations which prompted them or for which there is no use in conditions of severe unemployment, or it may indicate a state of affairs where very kind of capital goods is so abundant there is no new investment which is expected, even in conditions of full employment. It is only the latter state of affairs which is one of over-investment, strictly speaking, in the sense that any further investment would be a sheer waste of resources. Moreover, even if over-investment in this sense was a normal characteristic of the boom, the remedy would not like in clapping on a high rate of interest which would probably deter some useful investments and might further diminish the propensity to consume, but in taking, drastic steps by redistribution, incomes or otherwise, to stimulate the propensity to consume."
I have this book on Amazon's online Kindle, which unfortunately doesn't let you cut and paste so I had to write this out word for word. Kindle also doesn't have pages exactly-it just shows you what percentage of the book you have read. So I can't give you the exact page for this as I can't find my own paper version of the General Theory right now. The chapter is 22 "A Theory of the Trade Cycle' Part III in the chapter.
Clearly his remedy is not Austrian. He's saying that 'slamming on the brakes is never the answer.'
"Thus the remedy for the boom is not a higher rate of interest, but a lower rate of interest!" he sums up. Keynes as I suggested above, does see 'malivestment' as would seem to obviously be the case in the housing and subprime bubble.
"It may, of course, be the case-indeed, it is likely to be-that the illusions of the boom cause particular types of capital-assets to be produced in such excessive abundance that some part of the output is, on any criterion, a waste of resources: which sometimes happens, we may add, even when there is no boom. It leads, that is to say, to misdirected investment. But over and above this it is an essential characteristic of the boom that investments which will in fact yield say, 2 percent in conditions of full employment are made in the expectation of; say, 6 percent, and are valued accordingly."
However, Keynes doesn't see this as a 'corretion' where the ensuing bust gives us the real price of assets."When the disillusion comes, this expectation is replaced by a contrary 'error of pessimism' with the result that the investments, which would in fact yield 2 percent in conditions of full employment, are expected to yield less than nothing; and the resulting collapse of new investment then leads to a state of unemployment in which the investments, which would have yielded 2 percent in conditions of full employment in fact yield less than nothing."
In this chapter he clearly rejects both Monetarism-that the rate of interest can be lowered enough to bring back investment-and Austrianism-that there is salvation in raising the rate of interest so long as it's done 'soon enough.'
His analysis of booms and slumps might seem that he at least agrees with Austrian Business Cycle Theory (ABCT) that the trouble is over-investment during booms which lead to under-investment during slumps. This is a misreading of him however.
He doesn't hold that the way to avoid slumps is to avoid 'over-investment' which is held to be the characteristic of booms. He certainly wouldn't agree with the idea that the Great Recession was due to Greenspan failing to raise interest rates enough and fast enough-or that the fault for the 90s Internet bubble popping was Greenspan failing to raise interest rates fast enough then.
Here is the man himself on the subject of 'over-investment.' I think what these quotes will establish is that he's skeptical that there is such a thing-though it seems possible that he believes there could be 'misallocation' of investment. However, even if he agrees with this he clearly doesn't see the solution in sharply jamming on the monetary brake:
"The preceding analysis may make it appear to be in conformity with the view of those who hold that over-investment is the characteristic of the boom, that the avoidance of this over-investment is the only possible remedy for the ensuing slump, and that, whilst for the reasons given above the slump cannot be prevented by a low rate of interest, nevertheless the boom can be avoided by a high rate of interest. There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest is against a slump."
This view he's referring to certainly applies to Hayek and the Austrians. However, the inference that one should use a high rate of interest against a boom is certainly not what he has in mind:
"To infer these conclusions from the above would, however, misinterpret my analysis; and would, according to my way of thinking, involve serious error. For the term over-investment is ambiguous. It may refer to investments which are destined to disappoint the expectations which prompted them or for which there is no use in conditions of severe unemployment, or it may indicate a state of affairs where very kind of capital goods is so abundant there is no new investment which is expected, even in conditions of full employment. It is only the latter state of affairs which is one of over-investment, strictly speaking, in the sense that any further investment would be a sheer waste of resources. Moreover, even if over-investment in this sense was a normal characteristic of the boom, the remedy would not like in clapping on a high rate of interest which would probably deter some useful investments and might further diminish the propensity to consume, but in taking, drastic steps by redistribution, incomes or otherwise, to stimulate the propensity to consume."
I have this book on Amazon's online Kindle, which unfortunately doesn't let you cut and paste so I had to write this out word for word. Kindle also doesn't have pages exactly-it just shows you what percentage of the book you have read. So I can't give you the exact page for this as I can't find my own paper version of the General Theory right now. The chapter is 22 "A Theory of the Trade Cycle' Part III in the chapter.
Clearly his remedy is not Austrian. He's saying that 'slamming on the brakes is never the answer.'
"Thus the remedy for the boom is not a higher rate of interest, but a lower rate of interest!" he sums up. Keynes as I suggested above, does see 'malivestment' as would seem to obviously be the case in the housing and subprime bubble.
"It may, of course, be the case-indeed, it is likely to be-that the illusions of the boom cause particular types of capital-assets to be produced in such excessive abundance that some part of the output is, on any criterion, a waste of resources: which sometimes happens, we may add, even when there is no boom. It leads, that is to say, to misdirected investment. But over and above this it is an essential characteristic of the boom that investments which will in fact yield say, 2 percent in conditions of full employment are made in the expectation of; say, 6 percent, and are valued accordingly."
However, Keynes doesn't see this as a 'corretion' where the ensuing bust gives us the real price of assets."When the disillusion comes, this expectation is replaced by a contrary 'error of pessimism' with the result that the investments, which would in fact yield 2 percent in conditions of full employment, are expected to yield less than nothing; and the resulting collapse of new investment then leads to a state of unemployment in which the investments, which would have yielded 2 percent in conditions of full employment in fact yield less than nothing."
In this chapter he clearly rejects both Monetarism-that the rate of interest can be lowered enough to bring back investment-and Austrianism-that there is salvation in raising the rate of interest so long as it's done 'soon enough.'
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