hard heads soft hearts

a scratch pad for half-formed thoughts by a liberal political junkie who's nobody special. ''Hard Heads, Soft Hearts'' is the title of a book by Princeton economist Alan Blinder, and tends to be a favorite motto of neoliberals, especially liberal economists.

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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),

An act of individual saving means - so to speak - a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, - it is a net diminution of such demand ... If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specific order for future consumption, the effect might indeed be different. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption would be turned over to preparing for the future consumption. The trouble arises, therefore, because the act of saving implies, not a substitution for present consumption of some specific additional consumption which requires for its preparation just as much immediate economic activity as would have been required by present consumption equal in value to the sum saved, but a desire for “wealth” as such, that is for a potentiality of consuming an unspecified article at an unspecified time.

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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