Blanchard & Krugman are trying to understand Effective Demand
Do these books include Keynes’ precious term, “Effective Demand”? ¯\_(ツ)_/¯
I watch as grand economists explain the current economy… in particular, Olivier Blanchard and Paul Krugman. They miss the eventual fight of labor to increase their share…
Olivier Blanchard wrote an article, Where danger Lurks. He mentions the Dark Corners where the economy can function badly. He centers his analysis around the financial sector as it is connected to nominal interest rates, inflation expectations and macroprudential policy. He cautions that we need to “Stay away from Dark Corners”. Sounds so mysterious. So he makes a call for more research to understand…
“Turning from policy to research, the message should be to let a hundred flowers bloom. Now that we are more aware of nonlinearities and the dangers they pose, we should explore them further theoretically and empirically—and in all sorts of models. This is happening already, and to judge from the flow of working papers since the beginning of the crisis, it is happening on a large scale.”
What are the Dark Corners that undermine the financial system? What causes governments to lose money? What causes firms to hold back on investment which creates money? What causes low inflation? What causes private and public debts to build up? What causes output and productivity to stagnate?
The answer is a plain and simple… Effective Demand. This is a term so rarely used in economic discourse. It is not understood. For me, effective demand sets a “definable” limit upon the utilization of labor and capital. So it follows that lower effective demand leads to lower investment, lower output, lower productivity, lower taxes and less ability to pay debts.
Effective demand is based upon labor’s share of a national income. In Mr. Blanchard’s article, he does not mention labor’s role in the economy. His article does not include the words labor and wage, and he only only used the word demand in relation to fiscal policy to sustain demand… Which brings me to Paul Krugman.
Paul Krugman wrote an article for the IMF, Increasing Demand. He writes…
“For the first time since the 1930s, the world appears to be suffering from a persistent lack of adequate demand;”
Doesn’t it sound like he is referring to Effective Demand which Keynes put as a central idea in his General Theory book during the 1930’s? Chapter 3 in his book was titled, The Principle of Effective Demand. Keynes said that output would fall short of full employment with insufficient effective demand. Krugman says as much here…
“First, we don’t really know how far below capacity we are operating… Nobody knows—and it would be tragic to accept low output and high unemployment as inevitable when they might be simply reflections of insufficient demand.”
As I understand effective demand, we CAN know how far below capacity we are operating. I have presented many graphs to this effect on Angry Bear before. We are actually near the effective demand limit, which means we are reaching the limit in the utilization rates of labor and capital (unemployment and capacity utilization).
Mr. Krugman writes…
“This in turn implies that sustaining adequate demand is hugely important, not just for the short run, but for the long run too.”
So what is his solution? Do we need to raise labor’s share of national production so that they can “demand” a larger percentage of total productive capacity? No, Mr. Krugman points instead to the ZLB and fiscal spending.
“On one side, central banks are constrained both by the zero lower bound—the fact that interest rates can’t go negative—and by concerns over the size of their balance sheets.”
“On the other, fiscal policy, far from helping, quickly began making things worse. It has been hobbled both by asymmetry between debtors and creditors—the former forced to cut, while the latter have no obligation to expand—and by political infighting.”
Funny how these grand economists focus on monetary & fiscal policies, while the struggle of labor seems to be off their radar. That smells of being hoity-toity from MIT (sorry guys). I know they are aware of labor’s struggle, but they should not leave out labor from these high-profile articles.
Meanwhile labor is faced with an economic reality where countries are holding down wage share in order to compete globally with the likes of Germany and China. Both countries have pushed labor share down since the turn of the century, thereby raising their national savings and inflating their trade surpluses.
Neither negative interest rates, nor increased fiscal spending would reverse the global pressure to lower labor share. Lower labor share means lower effective demand. Mr.Krugman writes…
“So inadequate demand is still a very big problem, and looks likely to remain so for a long time to come. We need to find a way to deal with this situation.”
Knowing the writing of Mr. Krugman, I assume his solutions would center around more fiscal stimulus, a higher inflation target and keeping nominal rates very low for a long time.
We must realize that the problem has to do with labor not receiving a healthy share of the income from national production. We must realize how that affects demand, investment, the ZLB, weak government spending and inflation. Then we must realize that monetary & fiscal policies are limited in their ability to increase effective demand because they do not directly increase labor share. Their influence on labor share is controlled by global market forces. and Remember, Germany and China did not push down labor share through fiscal or monetary policies. These policies will not raise it either.
What is the solution? Labor needs to rise in power globally. They need the power to demand more share of national income.
We hear about how wages are rising in China. Does anyone remember the thousands upon thousands of labor strikes across China in the last 10 years. Does anyone remember the beatings of labor organizers in China just within the last 10 years? Labor in China has fought for wage gains. They received some, but still not enough.
So Mr. Blanchard & Mr. Krugman look for answers. Yet, sufficient Effective Demand depends upon labor receiving a larger share of national production than they currently receive. No one is going to just give it to them. Labor will have to fight for it.
Economists can not bring themselves to abandon tried and true techniques.
They have always rode this horse this way!
Judge Thomas Jackson during the Microsoft antitrust case: “When you discover you are riding a dead horse, the best strategy is to dismount,” he said. But lawyers have other strategies, including “buying a stronger whip, changing riders … declaring that the horse is better, faster and cheaper dead, and, finally, harnessing several dead horses together for increased speed.”
Study that quote for a few minutes and I think you will begin to see that it also applies to economists.
“In truth, then, there is nothing more to wish for than that the king, remaining alone on the island, by constantly turning a crank, might produce, through automata, all the output of England.” — Sismondi
I think it is more like “tried and false techniques”.
In my search for zero lower bound rate (ZLB). The monetarists are claiming victory as the economy has shown growth.
Yet the growth is stunted by factors beyond monetary influence.
B & K expect their economies to return to the previous full employment. Keynes said that would not happen with insufficient “effective” demand. B & K think they can overcome the stunted growth with fiscal & monetary policies. They are barking up the wrong tree because they do not understand effective demand yet.
I think where I read that was DeLong’s site and he does not seem to understand there reasoning either. That said, their the big dogs that will keep us in the wrong direction. As long as wall street can show gains, or cover up losses we are stuck.
Perhaps our only real hope is dumping the lest worse this election cycle. And the democrats might actually become protectors of our once great Nation, when they get back in office. As it seems almost a sure bet that we are about to have interventions from ME to western part of North Africa. This will keep the present market floating for the next decade.
Edward, I do agree that effective demand is the issue. But the politicians have been killing the middle class off (the goose that lays the golden eggs) for the past three plus decades and wall street is doing fine, which is the only thing that is discussed during election cycles. This in spite of the fact it only represents a fraction of the people of this Nation.
Have you seen the Quarterly Journal of Economics for February 1937?
On pages 209 to 223 there is a response from Keynes to 4 contributions relating to his “General Theory of Employment, Interest, and Money”. Those contributions had appeared in the November 1936 issue.
From title page 209:
THE GENERAL THEORY OF EMPLOYMENT
I. Comments on the four discussions in the previous issue of points in the General Theory, 209. — II. Certain definite points on which the writer diverges from previous theories, 212. — The theory of interest restated, 215. — Uncertainties and fluctuations of investment, 217. — III. Demand and Supply for output as a whole, 219. — The output of capital goods and of consumption, 221.”
A punchline from page 223:
“The orthodox theory would by now have discovered the above defect, if it had not ignored the need for a theory of the supply and demand of output as a whole. I doubt if many modem economists really accept Say’s Law that supply creates its own demand. But they have not been aware that they were tacitly assuming it. Thus the psychological law underlying the Multiplier has escaped notice.”
Very interesting. You really need to read the whole thing. It should be available from any university library.
Yes, the Keynes response is brilliant. It can be read as one of two “bookends” to the General Theory, the other being his 1934 BBC radio address, “Is the Economic System Self Adjusting?”
i am disposed to agree with you. labor must fight, but it need not shoot anyone.
on the other hand, “the rich” got along fine with a much lower GDP and much poorer workers for centuries. so they may not be as motivated to grow the economy as Krugman supposes.
my own approach would be to boycott the system. learn to live on low, low, low incomes. at some point “the rich” will notice. and then they will start a war to raise GDP. .. is that what you mean by the workers will have to fight? of course that doesn’t always work either.
From that radio address by Sandwichman…
” When the rate of interest has fallen to a very low figure and has remained there sufficiently long to show that there is no further capital construction worth doing even at that low rate, then I should agree that the facts point to the necessity of drastic social changes directed towards increasing consumption. For it would be clear that we already had as great a stock of capital as we could usefully employ.”
Here is a link to the article you mention…
(link removed by Dan…target has a virus)
“From that radio address by Sandwichman…”
Just to clarify, the quote is from the radio address by Keynes, posted by Sandwichman. I wasn’t around it 1934.
Coberly, the problems with this strategy seems to be when there is no longer a middle class, the dollar losses its reserve status. USA can no longer run a trade deficit as the population does not have money to buy manufactured goods. Our debt based currency interest payment makes it impossible for the government to stimulate or even protect new manufactures, as there is so little tax base left. All the major cities populations become slums with nowhere to go.
I am with you in spirit.
My approach would be to severely discourage consumer credit, one way or another.
1. Eliminate all tax deductions for interest paid.
2. Change the bankruptcy laws to forbid any recovery other than the collateral on the loan. (No other recourse allowed.)
3. Enact a federal usury law since the US Supreme Court has effectively eliminated state usury laws.
GDP would fall, and producers would come to see that increasing wages was imperative to maintain our consumer society.
Do those now and we would proceed to a faster recovery from our current Great Recession.
We can’t stop at knowing that labor needs to receive the rewards of their productivity in proportion to the rise of productivity (1:1) but to also change the economy’s stage such that rent seeking is returned to it’s proper roll in an economy.
That roll is not as a primary money creator in competition with the labor economy (that is money created out of the transfer of energy such that something more than an accounting entry results) but in service to the labor economy. The reality is, banks (including Wall St.) and all which they due being referred to as finance are not necessary but they do serve to accelerate and/or time shift a future economy to the present. When done properly this results in a society living with less of life’s risks.
Thus, the changing of the standard of judgement of success also and ultimately has to change with the change of income shifting more to labor. Economics must denounce Miltion’s simplistic thinking that all that is important is to mind the money and all (as in society) will follow appropriately as societies morals desire.
i don’t know enough and have no faith in “economics,” so i just point out from a layman’s perspective that “debt” has been with us for thousands of years and seems to be followed by “peonage” except where limited by laws… and morals… against usury.
we gave all that up in America (morals and laws against usury) a few decades ago. And the natural bent of “free enterprise” is peonage.
We might recover what I think we had in the forties and fifies.. a kind of “mixed economy”.. capitalism with government regulation and even a sense of morality. But after giving away the store to the criminal enterprisers, it may be hard to get it back… until it collapses from mismanagement.
I don’t believe “class war” is a very effective political strategy… for one thing, the “lower” classes don’t appear to be on your side. For another, all I can see from the progressives is a demand that “the poor” ape “the rich”.
I think we could do more to reduce “inequity” (not quite the same as inequality) by addressing the actual pernicious behavior that is going on. Even “the rich” don’t like to be robbed….by the criminal class.
Did not say anything about class war nor imply it with my answer. I was talking about the basic premises that are held currently with in the discussion of economics and what to do about our inequality.
The masses are not going to change the discussion. As Ed and others note, it is the elite (used in a good way) within the profession of economic that have the bull horns that need to lead the change in the premises.
With that, the results of the post depression policy was to put banking/wall street back in service to the creation of money such that it could no longer create money on it own as it was doing prior to the depression and since Reagan.
With that, I have no problem calling what we are living what it is: Class War. Some will fight it physically, (I remember the riots) few will fight it where their counter part is: intellectually. This is because the majority on both sides are being instructed to fight emotionally.
Thanks for the link. I am beginning to wonder if you are posting under a nom de plume. LOL
That web site is a jewel. References to twitters in Spanish and Portuguese, and the Buddha quotation. And that virtual library which gives us a ‘must read’ 1996 article by Paul Krugman (A Country is Not a Company) with this little jewel:
“Moreover, beyond this indisputable point of arithmetic lies the question of what limits the overall number of jobs available. Is it simply a matter of insufficient demand for goods? Surely not, except in the very short run. It is, after all, easy to increase demand. The Federal Reserve can print as much money as it likes, and it has repeatedly demonstrated its ability to create an economic boom when it wants to.”
We must still be in “the very short run”. But I suppose the only way to keep from leaving some mistake in writing is never to write anything. And ‘continuing education’ is forced on us all.
Coberly, I just summarize what I have learned from others on this site and NC and the URL’s posted by others. Like this quote from Keynes “If we know the whole truth already, we shall not succeed indefinitely in avoiding a clash of human passions seeking an escape from the intolerable. But I have a better hope.” To me this quote represents that the elites need to be aware of revolution and retribution.
By the way Lampert has a great article on redefining work over on NC today title Labor Day: Human Labor, Human Rental, and Human Gift that would seem a great solution to our loss of employment and inequity.
Coberly, this is what I fear the most “until it collapses from mismanagement” Coberly. Which with a Derivatives market that some say is in the neighborhood of sixty plus trillion dollars seems likely.
i still think i am more or less on your side. But I am troubled by a style of reply that i have noticed more frequently lately on AB
“I did not say….”X””
No, perhaps, but everything you said was in the context of “X”… which you immediately admit in your next comment, so invoking “X” is not an “off topic” or even “off point” reply.
Perhaps you, certainly one other person here, seems to believe that however he has organized the world in his head, any reply to that is required to begin by assuming that organization. No wonder no one ever gets anywhere.