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October 07, 2009


tory boys never grow up

I totally agree - and this is of course what Keynesian fiscal policy is meant to do.

The other point worth noting is that the overall 10 - 13% net return on capital is considerably less than the 20-25% target that was being used as the norm by many in the financial sector. And of course what was the consequence of pursuing such impossible returns - other than a ramping up of risk. I am still not sure that the financial sector/regulators have yet done enough to address the consequences of this pursuit of the unachievable.


"arguments in favour of “Keynesian” fiscal policy are, in effect, arguments for bailing out capitalism": as the last poster noted, that is of course the point. This is why the radical left aren't Keynesians.

Luis Enrique

Presumably we could live in a world where firms made thinner margins and carried more workers in times like these, what do you think we'd have to change for that to happen?

Legislation to increase the cost of firing workers? Fiscal stimulus via tax instruments targeting job creation?

This is presuming a lower return on capital would be desirable, from a left-wing p.o.v., why might that be wrong? Consequences for investment, perhaps?

Luis Enrique

on second thoughts, I'm not at all clear what would constitute "not bailing out capitalism"



Could you explain something to me? People often criticise the likes of Eugene Fama for using accounting identities to make statements of causality



in order to disprove Keynesian insights. Fama is obviously nuts on this one. But are you not doing something similar here?

Your equation

P = (C - W) + I + (G -T) + (X - M) + O.

Could be balanced in a number of ways: if G-T fell, could not I rise, or X-M rise, or O rise, for example - all depending on matters that are invisible to that equation?

I don't doubt that you are right: higher G-T saved a whole lot of things. But does this really prove it?




@ Giles - I'm not making the Fama error. I'm merely using the identity as it should be used - as a motivation for a calculation.
Underpinning the numbers is a simple story that everyone would agree upon. Cuts in private sector spending have incipiently reduced profits (and GDP), and the budget deficit has expanded to partially offset this, partly by fiscal stabilizers and partly by policy actions. All my identity does is help quantify that.
Of course, the identity is consistent with a story in which G - T rose, which crowded out investment (more than one-for-one) and so hurt profits. But that story just isn't what happened.
In your example, a fall in G - T might lead to higher I, through crowding in. But the identity tell us nothing about whether this will happen or not.
@ Luis - a world in which capitalists accepted thinner margins but continued to invest was what we saw in the late 60s. That, though, required that capitalists had huge confidence that aggregate demand would stay high - so high sales volumes would offset low margins. Such optimism eventually proved misplaced.


This paradox is because of persistant biases in perception on left and right. The right insists on seeing the economy as a whole as being like the economy of a household or an individual firm which is a fallacy of composition. The left insists on thinking simple actions have only simple consequences. Both are basically fallacious.

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