Ragbralbur
17-12-2006, 06:30
I'm trying to figure out why I am wrong.
On Consumption and Investment
Lately, I have been reading Keynes' "The General Theory of Employment, Interest and Money", hereafter just referred to as "General Theory...". Before I get into it, I want to point out that Keynes' theory is airtight once you get past the original assumption, and that this consistent nature is remarkable in its own right. That said, the original assumption, one that has been ignored, I believe, for as long as it has been in existence, gives me pause.
Keynes describes two types of private expenditures in the economy: consumption and investment. Consumption, he points out, is used for immediate gratification. The gratification of investment, he understandably maintains, is deferred to a later date. This difference, his theory seems to state, makes consumption more valuable to immediate economic growth than investment. Based on the semantics of the definitions provided, it would seem reasonable that instant gratification would have more to do with immediate economic growth. This is where things go wrong.
As I see it, how one derives value from an expenditure has absolutely nothing to do with immediate economic growth. What matters is that the expenditure takes place. You could be buying a chocolate bar for immediate consumption or investing in a faster internet connection or even depositing your money in a bank for future use. The fact is that you are putting money through the system in each of these cases. In the first case, you employ the convenience store clerk, the maker of the candy bar and other random people associated with the production. In the second, you employ people providing you with the internet service. In the third, you employ bank employees and allow more individuals to get loans with your money.
In each of these cases, how you derive value from your money is unimportant. Instead, the important factor is that your money continues going through the system. The only way the money could be removed from the system is if you were to buy bonds from the government, which would be a contractionary monetary policy on the part of the government. In all other cases, the expenditures have the exact same effect.
This, I believe, is the tragic pitfall in Keynes' work. If you assume consumption is somehow more valuable than investment, then by all means increasing consumption through government spending and the multiplier effect is a completely valid approach to increasing effective demand. However, if you accept that effective demand is indiscriminate between consumption and investment, then emphasizing one aspect over the other is merely switching money from one pocket to the other without adding any value.
Furthermore, if you assume that consumption can reduce unemployment and that investment cannot, you will draw all the same conclusions that Keynes does in "General Theory...". Once this dichotomy is established, the whole work, at least as far as I've read, is logically inpenetrable. It is this critical first step of separating the two types of private expenditures that fouls up the whole system.
Going forward, I would recommend that we do away with the concept of consumption and investment, instead focusing on whether the expenditures are public or private. Firstly, this would remove many of the uncertainties of the current definitions, such as whether buying the "General Theory..." is consumption because I read it right away, or investment because I gain knowledge from it that helps me in the future. Secondly, and more importantly, it would remove the temptation to treat different gratification times of the same expenditure as different items. After all, it is the time in which the expenditure is incurred, not the time in which its value is realized, that determines how quickly it moves through the system.
Keynes' "General Theory..." is a pretty nifty concept, and in most cases the whole theory still lines up. He created an arbitrary division in expenditures and went on to examine how this division would move through the economy through factors such as the multiplier. Had the divsion truly reflected a difference in how the money travelled in the system, it would be an immensely valuable tool. As it currently stands, one unfortunate mistake damages the whole system, and, in my opinion, nullifies its value to the modern economist.
On Consumption and Investment
Lately, I have been reading Keynes' "The General Theory of Employment, Interest and Money", hereafter just referred to as "General Theory...". Before I get into it, I want to point out that Keynes' theory is airtight once you get past the original assumption, and that this consistent nature is remarkable in its own right. That said, the original assumption, one that has been ignored, I believe, for as long as it has been in existence, gives me pause.
Keynes describes two types of private expenditures in the economy: consumption and investment. Consumption, he points out, is used for immediate gratification. The gratification of investment, he understandably maintains, is deferred to a later date. This difference, his theory seems to state, makes consumption more valuable to immediate economic growth than investment. Based on the semantics of the definitions provided, it would seem reasonable that instant gratification would have more to do with immediate economic growth. This is where things go wrong.
As I see it, how one derives value from an expenditure has absolutely nothing to do with immediate economic growth. What matters is that the expenditure takes place. You could be buying a chocolate bar for immediate consumption or investing in a faster internet connection or even depositing your money in a bank for future use. The fact is that you are putting money through the system in each of these cases. In the first case, you employ the convenience store clerk, the maker of the candy bar and other random people associated with the production. In the second, you employ people providing you with the internet service. In the third, you employ bank employees and allow more individuals to get loans with your money.
In each of these cases, how you derive value from your money is unimportant. Instead, the important factor is that your money continues going through the system. The only way the money could be removed from the system is if you were to buy bonds from the government, which would be a contractionary monetary policy on the part of the government. In all other cases, the expenditures have the exact same effect.
This, I believe, is the tragic pitfall in Keynes' work. If you assume consumption is somehow more valuable than investment, then by all means increasing consumption through government spending and the multiplier effect is a completely valid approach to increasing effective demand. However, if you accept that effective demand is indiscriminate between consumption and investment, then emphasizing one aspect over the other is merely switching money from one pocket to the other without adding any value.
Furthermore, if you assume that consumption can reduce unemployment and that investment cannot, you will draw all the same conclusions that Keynes does in "General Theory...". Once this dichotomy is established, the whole work, at least as far as I've read, is logically inpenetrable. It is this critical first step of separating the two types of private expenditures that fouls up the whole system.
Going forward, I would recommend that we do away with the concept of consumption and investment, instead focusing on whether the expenditures are public or private. Firstly, this would remove many of the uncertainties of the current definitions, such as whether buying the "General Theory..." is consumption because I read it right away, or investment because I gain knowledge from it that helps me in the future. Secondly, and more importantly, it would remove the temptation to treat different gratification times of the same expenditure as different items. After all, it is the time in which the expenditure is incurred, not the time in which its value is realized, that determines how quickly it moves through the system.
Keynes' "General Theory..." is a pretty nifty concept, and in most cases the whole theory still lines up. He created an arbitrary division in expenditures and went on to examine how this division would move through the economy through factors such as the multiplier. Had the divsion truly reflected a difference in how the money travelled in the system, it would be an immensely valuable tool. As it currently stands, one unfortunate mistake damages the whole system, and, in my opinion, nullifies its value to the modern economist.