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We need:

  1. a guide to macro for dummies
  2. a guide to macro for dummies in positions of authority

Kindly proceed.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Apr 8th, 2011 at 05:30:42 AM EST
[ Parent ]
  1. The little guy gets screwed.
  2. See 1.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Apr 8th, 2011 at 06:35:27 AM EST
[ Parent ]
 The short piece by Keynes THE GREAT SLUMP OF 1930, that I included in Towards an Economic Tutorial, is about as good a two page introduction to macro as one could hope to get, especially if the reader does the simple exercises in arithmetic that Keynes recommends.  Some of the links, especially Irving Fisher's The Debt-Deflation Theory of Great Depressions, the two Minsky links, and the Tobin article would make a good "Related Reading" list.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 8th, 2011 at 10:00:14 AM EST
[ Parent ]
Correct link to The Great Slump of 1930, by John Maynard Keynes.

Economics is politics by other means
by Carrie (migeru at eurotrib dot com) on Fri Apr 8th, 2011 at 10:09:53 AM EST
[ Parent ]
The Great Slump of 1930, by John Maynard Keynes

3. How can it be that prices have fallen more than costs? For costs are what a business man pays out for the production of his commodity, and prices determine what he gets back when he sells it. It is easy to understand how for an individual business or an individual commodity these can be unequal. But surely for the community as a whole the business men get back the same amount as they pay out, since what the business men pay out in the course of production constitutes the incomes of the public which they pay back to the business men in exchange for the products of the latter? For this is what we understand by the normal circle of production, exchange, and consumption.

4. No! Unfortunately this is not so; and here is the root of the trouble. It is not true that what the business men pay out as costs of production necessarily comes back to them as the sale-proceeds of what they produce. It is the characteristic of a boom that their sale-proceeds exceed their costs; and it is the characteristic of a slump that their costs exceed their sale-proceeds. Moreover, it is a delusion to suppose that they can necessarily restore equilibrium by reducing their total costs, whether it be by restricting their output or cutting rates of remuneration; for the reduction of their outgoings may, by reducing the purchasing power of the earners who are also their customers, diminish their sale-proceeds by a nearly equal amount.

5. How, then, can it be that the total costs of production for the world's business as a whole can be unequal to the total sale-proceeds? Upon what does the inequality depend? I think that I know the answer. But it is too complicated and unfamiliar for me to expound it here satisfactorily. (Elsewhere I have tried to expound it accurately.) So I must be somewhat perfunctory.

The mechanism by which this happens is credit, which is intertemporal.

In a boom, goods and services (including capital goods and services) are bought on credit, in a cycle in which the expectation that prices will grow justifies lending for purchase since what is purchased will rise in value enough to repay the loan. So, in a boom sales proceeds exceed costs because the sales are being paid not only with the money that exists today, but with money loan money which will be paid back in the future.

In a slump, debt is being repaid and no new credit is extended because decreasing prices make debt unlikely to be paid back. So, prices exceed costs.

Effectively the economic cycle consists of paying for the profits of the boom with money coming from the subsequent bust, through the intertemporal nature of cretit.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Fri Apr 8th, 2011 at 10:16:48 AM EST
[ Parent ]
I thought I had checked all three links! Thanks, Mig.

Immediately following what you quoted from Keynes' article is this:

Let us take, first of all, the consumption-goods which come on to the market for sale. Upon what do the profits (or losses) of the producers of such goods depend? The total costs of production, which are the same thing as the community's total earnings looked at from another point of view, are divided in a certain proportion between the cost of consumption-goods and the cost of capital-goods. The incomes of the public, which are again the same thing as the community's total earnings, are also divided in a certain proportion between expenditure on the purchase of consumption-goods and savings. Now if the first proportion is larger than the second, producers of consumption-goods will lose money; for their sale proceeds, which are equal to the expenditure of the public on consumption-goods, will be less (as a little thought will show) than what these goods have cost them to produce. If, on the other hand, the second proportion is larger than the first, then the producers of consumption-goods will make exceptional gains. It follows that the profits of the producers of consumption goods can only be restored, either by the public spending a larger proportion of their incomes on such goods (which means saving less), or by a larger proportion of production taking the form of capital-goods (since this means a smaller proportionate output of consumption-goods).

But capital-goods will not be produced on a larger scale unless the producers of such goods are making a profit. So we come to our second question--upon what do the profits of the producers of capital-goods depend? They depend on whether the public prefer to keep their savings liquid in the shape of money or its equivalent or to use them to buy capital-goods or the equivalent. If the public are reluctant to buy the latter, then the producers of capital-goods will make a loss; consequently less capital-goods will be produced; with the result that, for the reasons given above, producers of consumption-goods will also make a loss. In other words, all classes of producers will tend to make a loss; and general unemployment will ensue. By this time a vicious circle will be set up, and, as the result of a series of actions and reactions, matters will get worse and worse until something happens to turn the tide.

....

Why is there an insufficient output of new capital-goods in the world as a whole? It is due, in my opinion, to a conjunction of several causes. In the first instance, it was due to the attitude of lenders--for new capital-goods are produced to a large extent with borrowed money. Now it is due to the attitude of borrowers, just as much as to that of lenders.....A wide gulf, therefore, is set between the ideas of lenders and the ideas of borrowers for the purpose of genuine new capital investment; with the result that the savings of the lenders are being used up in financing business losses and distress borrowers, instead of financing new capital works.

....

Seldom in modern history has the gap between the two been so wide and so difficult to bridge. Unless we bend our wills and our intelligences, energized by a conviction that this diagnosis is right, to find a solution along these lines, then, if the diagnosis is right, the slump may pass over into a depression, accompanied by a sagging price-level, which might last for years, with untold damage to the material wealth and to the social stability of every country alike. Only if we seriously seek a solution, will the optimism of my opening sentences be confirmed--at least for the nearer future.


And, of course, the slump did pass over into a depression. Government spending on capital projects did help -- so long as it was continued -- but the real cure was the reversion to state planning needed to prepare for WWII. This brought about a return in confidence to the business class. That aspect is well described in Systemic Fear, Modern Finance, and the Future of Capitalism by Bichler and Nitzan  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 8th, 2011 at 11:55:32 AM EST
[ Parent ]
Nevertheless, according to NBBooks:
The "Arsenal Democracy" story is actually mostly myth: U.S. captains of industry had to be dragged, kicking and screaming, into industrial mobilization by some very determined and angry Army officers.


Economics is politics by other means
by Carrie (migeru at eurotrib dot com) on Fri Apr 8th, 2011 at 12:04:17 PM EST
[ Parent ]
U.S. captains of industry had to be dragged, kicking and screaming, into industrial mobilization...

Not the first or last time they had to be clubbed over the head to insure their own prosperity. Most probably didn't understand that the economics they had studied or read was intended as class based propaganda, not as a guide to practical economic success, let alone survival.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 8th, 2011 at 01:39:16 PM EST
[ Parent ]

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