Sunday, February 15, 2009

Keynesian Thinking

What can we learn from current economics?

Given all the attention paid to the stimulus bill and John Maynard Keynes, I thought I'd brush up on economics by reading Worldly Philosophers by Robert Heilbroner.

It seems that before Keynes the thinking was that the economy would continually grow through a cycle of savings and capital investment. Too much savings 'caused' interest rates to drop fueling capital expansion because of cheap money. Growing businesses created more total income, and thus more savings and the spiral continued. The problem seems to be that the connection between savings and capital isn't direct or necessarily rational. If people don't have confidence they don't buy, period. If people don't want to buy, businesses won't expand no matter if the money is free. In fact, if firms are very nervous they will contract. If businesses produce less there must be less savings because total income has fallen. This downward spiral is depressing, in fact it is a depression - the stalemate of unemployment and stagnant businesses with neither side able to pull both parties out of the abyss.

Keynes argued for temporary and unnatural intervention by the government.

Since it appears to be the emotional aspects of needs and wants that fuel an economy a stimulus package that doesn't fundamentally affect people's feel good factor won't do much good. The previous $600 per household stimulus didn't do much since it didn't really change anyone's mind. People paid down debt, saved it, or used it for normal stuff. In the end, they pretty much felt exactly the same way. The TARP may have been worse since people felt betrayed and possibly worse off.

I have no idea what the right number is - probably nobody does - but the focus should be on bolstering individual confidence. Since people trust others like them - if they perceive their network as confident they too will be more assured of the future. So the money should be spent on things that are visible to individuals and something worth telling others about in a positive light. Delighted customers are a business' best friend. Same for an economy.

Confidence turns wants into demand and that you can take to the bank.

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