hard heads soft hearts
Thursday, August 27, 2009
decided to read James Tobin's Nobel lecture, and in the first section he quotes a Keynes passage I had never read before.
"1.3. Macro-Economics and Full General Equilibrium
. . .Were there a full set of simultaneously cleared markets for all commodities, including commodities for future and contingent delivery, there would be no macro-economic problems, no need for money, and no room for fiscal and monetary policies of stabilization. . .
. . .the departure that sets the stage for macro-economic theory and policy, is one emphasized by Keynes. It is the virtual absence of futures markets and of course contingent markets in any commodities other than money itself. As Keynes said (1936, pp. 210-212),
In short, the financial and capital markets, are at their best highly imperfect coordinators of saving and investment, an inadequacy which I suspect cannot be remedied by rational expectations. This failure of coordination is a fundamental source of macro-economic instability and of the opportunity for macroeconomic policies of stabilization. Current macro-economic theory perhaps pays too exclusive attention to labor markets, where Keynes also detected failures of competition to coordinate demand and supply. . ."
I'd guess the last sentence is a gentle criticism of the econ 101 catechism that recessions occur because prices, especially wages, are too "sticky" and refuse to fall sufficiently, and therefore the cure for recession is to enable deeper wage cuts. It always struck me as rather thin, now I guess I know why.
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