The “A” Factor: The Rise of Growth as the Principal Goal of Policy

The “A” Factor: The Rise of Growth as the Principal Goal of

PolicyThe Development of Macro-

economics in an Era of Wars/Cheap Energy and Disrespect for Earth

Alternate title

Getting to a Bad Place for Good Reasons

The Economist March 2002

John Maynard Keynes(1883-1946)

http://www.wam.umd.edu/~mglondon/London/Keynes/keynes.htm

The war and the threat of depression and another war. .

Vimy Ridge: Never Again?

The Versailles Treaty

http://history.acusd.edu/gen/text/versaillestreaty/vercontents.html

Versailles’ conditions on Germany

• Excessive reparations (almost 4 times the actual damage inflicted).

• Marine merchant fleet.

• Territory with coal mines was taken away.

• Tariff concessions to luxury goods from other countries.

The Depression

A Nervous Wreck

from Literary Digest , 7/5/1919

The General theory

• Critiques of Prevailing Economics.

• Aggregate demand.

• Liquidity trap.

• Breaking out of the liquidity trap:

government intervention.

The General Theory

Critiques of Existing Economic

Theory

Jean-Baptiste Say (1776-1832)

http://www.bized.ac.uk/virtual/economy/library/economists/say.htm

1. “Supply creates its own demand.”

No idle money

2. Income is either spent on commodities

and services or is put into savings. This

portion is loaned to someone else who

invests it.

Between workers and employers

3. All unemployment is voluntary.

Problems

• Equilibrium can be reached at any level of

employment. Supply may not create

enough demand to soak up all the labor.

• Not all income is invested.

• Not all unemployment is voluntary.

The General Theory: Elements

Aggregate demand

• We have to pay attention to the total

amount of demand.

• The aggregate demand function measures the volume of sales which corresponds to each level of income and output.

Income

Liquidity Trap

People hold money for reasons that are

related to uncertainty about the future.

Liquidity Trap

Liquid Less liquid

http://www.clipartconnection.com/search/download?oid=1227821&fmt=GIF

http://www.bankofcanada.ca/en/auct.htm

Breaking out of the liquidity trap

Policy tools: Fiscal-taxing/spending and Monetary Policy-Money supply

Government intervention

• Public works (e.g., housing, schools, hospitals,

roads, parks) .

The multiplier effect on investment

Investment 1,000

National Income 2,000

Government Intervention

Income

“Even if the community puts the

unemployed to work at useless jobs,

the income from this labour will be

expended on food, clothing, shelter,

medical care, and recreation.”

$$$

Peter G. Brown $821.45

Eight Hundred and Twenty One 45/100

Peter G. Brown $947.20

Nine Hundred and Forty Seven 20/100

https://www.deluxeforms.com/next_page_action.cfm

Taxes

Monetary Policy

• The increase in the money supply to correspond to and stimulate growth.

• The extreme liberalization of the authority to create financial instruments/1980s and 1990s. An era of very cheap credit—2008-12.

Business Cycle

6

7

8

9

10

11

12

13

14

Line 1

The Goals of Macro Policy

• Growth

• Low inflation, but NOT deflation

• “Full” employment

Reasons for Growth

• Population Increase

• Productivity

• Poverty

• More consumption means more happiness

• Social and political stability

• But……………

The Triple Crisis

• The employment/population crisis: Policy tool/macro policy.

• The money crisis: there is more money than there is Earth. Policy tool/deception: if you have more money you must be richer.

• The collapse of the Earth’s life support systems. Policy tool/deny what we already know-disable the ability to learn more.