Education for economics illiterates

Posted by admin on February 10th, 2009 filed in General

Which is to say, all of you at The Online Shitizen , and anyone else who likes to criticise or agree with either the government or its critics without understanding what you’re talking about:

Quadrant Online - The Dangerous Return to Keynesian Economics

Comparing public policies between the US, UK and Australia after the Great Depression:

Contrast the English and Australian experience with the United States. Roosevelt’s New Deal applied a “Keynesian” prescription before Keynes had so much as published a word. From 1933 onwards, public works, increased public spending and deficit financing were the essence of economic policy. And with what results?

None of these figures should be taken as anything more than indicative since there were no official unemployment statistics at the time. All are reconstructions based on incomplete data. But what these figures do provide is an accurate reflection of the reality experienced on the ground at the time. Although major pockets of unemployment remained, Australia and England had by the mid-1930s left the depression behind while the United States did not do so until the war finally brought recessionary conditions to an end.

The Level of Demand versus the Structure of Demand:

Recessions occur because goods and services are produced that cannot be sold for prices that cover their costs. There are reams of possible reasons why and how such mistaken production decisions occur. But when all is said and done, the causes of recession are structural. They are the consequence of structural imbalances that result from errors in production decisions, not the fall in output and demand that necessarily follows.

This cannot be emphasised enough. Modern macroeconomics is built around the notion of the level of demand, while prior to Keynes recessions were understood in terms of the structure of demand. The difference could not be more profound. To policy-makers today, the basic issue in analysing recessions is whether there is enough demand in total. To economists prior to Keynes, the central issue was to explain why markets had become unbalanced.

Think of what has caused this downturn in the first place. None of it is related to demand having suddenly evaporated for no good reason. All of the most visible causes can be brought back to distortions in decision making that led to the production of goods and services whose full costs of production cannot now be met. Look at the list:

the meltdown in the housing sector in the United States after financial institutions were encouraged to lend to borrowers who would not in normal circumstances even remotely be considered financially sound

the bundling of mortgages into financial derivatives whose value crashed with the crash in the value of housing and which has left the banking industry in a shambles

the massive American budget deficits that were allowed to continue for years on end largely because the Chinese chose to recycle the dollars received in the American money market without either allowing the value of the yuan to rise, as it most assuredly ought to have done, or using the funds received to purchase American goods and services

the phenomenal rise and subsequent fall in the price of oil which radically changed production costs in one industry after another

the instability still being created across the world’s economies over the actions that might or might not be taken to limit carbon emissions and reduce the level of greenhouse gases

the arbitrary and erratic use of monetary policy to target inflation, the results of which have been to raise interest rate settings at one moment and lower them at another depending on assessments made by central banks

the plunge in share market prices across the world, with savage effects on the value of personal savings

Hat tip to catallaxyfiles