According to The Everyday Economist, a PhD student at Wayne State University, Keynes gets a bad rap as far as his so-called General Theory is concerned. It sounds quite alluring:
Each businessman has his own subjective expectations of future profitability and other business conditions. If these expectations are pessimistic, businesses will invest less and therefore reduce the amount of securities that are issued. This decrease in the supply of securities leads to excess demand and therefore raises the price of securities and therefore lowers the natural rate of interest. As the market rate of interest begins to decline in accordance with the natural rate, bear speculators who were used to getting the higher rate of return begin to sell some of their ‘old’ securities and therefore the market rate is prevented from completely adjusting with the natural rate and the market ‘clears’ at a point of disequilibrium. The result is an excess demand for money and a corresponding excess supply of commodities.
It is at this point that we must understand Keynes’ profound insight of The General Theory. Keynes’ insight is that in the absence of perfect price flexibility, the adjustment process will come from output rather than the price level (which ran counter to the conventional wisdom of the Marshallian adjustment process). The result is therefore a recession.
Macroeconomics is well beyond my scope of knowledge. How do I know this? Because although this model seems quite seductive to the mind, a couple of things nag at me. I am not so sure those conditions generate excess demand for money. On the other hand, it makes sense to me that the adjustment process might come from output and not prices in the short-run. What do you think?
Yeah, I don’t know anything about macro either. They always talk about “the interest rate” and assets, securities, risk, equity, money, etc. etc. I usually just hear “wah waah wah wah wahh wahhh”, despite my best efforts to be intellectual and caring about it. I really disliked the first economics class I ever took, AP macro.
Anyway, so I don’t really know how much truth we know regarding macroeconomic questions. This post was interesting, but again, statements like
just don’t make much sense to me. We are talking about the behavior of aggregate quantities and it just seems like a lot of complicating factors could be glossed over. Oh well, one of these days perhaps I’ll get a clue.