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Date: | Fri Mar 31 17:18:37 2006 |
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A couple issues: 1) It's true that higher savings leads to faster growth,
but only in the short run. Let's assume that the classical model is
correct, which Keynes didn't, and that equilibrium in the loanable funds
market through adjustments of real interest rates leads to investment
equal to savings. So an increase in savings will lead to an increase
in investment and spending by firms for new capital. But this will not
continue indefinitely. Capital wears out and so capital stock will adjust
itself to the point where savings equal depreciation. If savings does
excess depreciation then you will see and increase in capital stock to
the point where again savings is equal to depreciation. So in the short
run you want the level of savings equal to the level of depreciation to
be able to maximize overall well-being. Now sooner or later the economy
reaches a point where as Solow says where you have a steady state in
which capital and output become constant. To be able to change this
steady state you need to change society's ability to produce this can
only come about through technologcial change. Now technological change
can take on different forms and the most important seems to be the
efficiency or education and training of labor. Now this efficiency of
labor according to endogenous growth theory is a *by-product* of capital
stock. That is, if you bring a watermelon picker machine into the the
agricultural fields then workers need to learn how to use and run the
machine which increases labor efficiency which increases growth
tremendously, so we have change in the growth rate because of an
endogenous change. So my point is that it's not just saving that
affects economic growth. In fact, for the long run what will have
the most effect for third world countries will be their populations
on capital-labor ratios and technological change, particularly I argue,
education and job training.
2) I'll come back to this later. To understand Keynes you need to look
at investment, uncertainty and money. This whole thing about talking
of increasing consumption to increase demand, etc. This is not the Keynes
of the General Theory. Keynes spent very little time talking about
the consumption. The name of the game for him was with the investment
function and the issues of uncertainty for the entrepreneurs and the
role of money which leads to issues of credit and debt that made
the economic world go around. Unfortunately when people think of
Keynes they think of the Keynes they learned in the intermediate
macro books. Like Ackerly where you have all this talk about
the consumption and mpc, etc. The consequence if you interpret Keynes
in this light then Keynes simply becomes a mediocre classical
economists. TO UNDERSTAND KEYNES YOU NEED TO FORGET SAY'S LAW AND
THINK ABOUT INVESTMENT, UNCERTAINTY AND MONEY.
-Ric Holt
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