Friday, October 24, 2008

A Pre-Keynesian View of the Current Recession

Of course in several chapters of the General Theory (especially # 12) Keynes discussed the vagaries of financial markets and how they can crash. But in general that is not the main mechanism for macro fluctuations in Keynes. While there were predecessors to Keynes who can be seen as emphasizing broader shifts in aggregate demand, including Malthus, Sismondi, and Marx, the more common model of macro fluctuations posited by classical economists of the nineteenth century often focused on investment declines after bank failures after the crash of a speculative bubble, with the Panic of 1837 and its subsequent recession in the US an example (due to a crash of a speculative bubble in cotton lands). I shall indulge by quoting at length John Stuart Mill on speculative bubbles, who certainly saw this as the main source of macro fluctuations in the manner described above (J.S. Mill, Principles of Political Economy, Book II, Chap. 9, Section 3, 1848):

"The inclination of the mercantile public to increase their demand for commodities by making use of all or much of their credit as a purchasing power depends on their expectation of profit. When there is a general impression that the price of some commodity is likely to rise from an extra demand, a short crop, obstruction to importation, or any other cause, there is a disposition among the dealers to increase their stocks in order to profit by the expected rise. This disposition tends in itself to produce the effect that it looks forward to - a rise of price; and, if the rise is considerable and progressive, other speculators are attracted, who, as long as the price has not begun to fall, are willing to believe that it will continue rising. These by further purchases, produce a further advance, and thus a rise in price, for which there were originally some rational grounds, is often heightened by merely speculative purchases, until it greatly exceeds what the original grounds will justify. After a time this begins to be perceived, the price ceases to rise, and the holders, thinking it time to realize their gains, are anxious to sell. The the price begins to decline, the holders rush into the market to avoid a still greater loss, and, few being willing to buy in a falling market, the price falls much more suddenly than it rose. Those who have bought at a higher price than reasonable calculation justified, and who have been overtaken by the revulsion before they had realized, are losers in proportion to the greatness of the fall and to the quantity of the commodity which they hold, or have bound themselves to pay for."


Myrtle Blackwood said...

"there is a general impression that the price of some commodity is likely to rise from an extra demand, a short crop, obstruction to importation, or any other cause, there is a disposition among the dealers to increase their stocks in order to profit by the expected rise.

The 'market' in action. A predicted shortage of an item essential to life results in greater shortage through the process of hoarding. This in turn causes the high price of food to rise even further for the majority of the population to the great benefit of a tiny minority who have rather extraordinary access to other people's money. They have full social permission to play with that money as they see fit and reward themselves in extraordinary ways.

The modern day change is that ordinary folk no longer have a choice as to whether they deposit their money with these speculators. (Compulsory superannuation in Australia).

Myrtle Blackwood said...

Another contemporary example: The Australian and other southern hemisphere governments heavily subsidises the purchase of agricultural land for a handful of selected corporations.

These so-privileged businesses are currently door-knocking in Northern NSW urging landowners to sell to them at above average prices. (After all, they can now afford to do so).

Industrial monoculture tree plantations are then planted on this so-acquired prime land. The result is further scarcity of good food-growing land. The price of land rises further ---> food prices rise. Financial speculators then move into agricultural commodities anticipating further hikes in the cost of food as further expansion of tree plantations continues.

The hole in the ozone and CO2 emissions grows exponentially as the volatile organic compounds from the vastly expanded global Eucalypt base combines with the smoke from vast industrial harvesting burnoffs.

Anonymous said...

Thanks for that rather dismal view of our future. Not that you're wrong, but you've got a knack for luridly descriptive pessimism.

Myrtle Blackwood said...

Jack, it could be regarded as a diagnosis. The negative prognosis could be changed if the economic trajectory was.

Jack said...

Given the strangle hold of the financial industry on the entire economic system is such a change even likely? And this circumstance isn't something that only recently happened because of the Bush cabal. It's been going on for at least the past one hundred years. Interestingly enough the Bush family has been at the epicenter of the system for all of that time. Not that they've been the exclusive agent, but they have certainly been primary. Try this list: GH Walker & Co, WA Harriman&Co, Brown Bros&Co, Brown Bros, Harriman&Co. Between the families of Walker, Bush, Brown and Harriman and every thing that has grown out of that one gets the sense that the investment banking community is not exactly an open forum. Guess who has been a managing director and head of Lehman Bros Investment Management division? None other than George H. Walker IV, formerly of Goldman, Sachs.

The connections between the investment banks has been virtually incestuous for a very long time. Is it time for a change? Sure, but what is the likelihood of that happening?