Sam Pawlett wrote:
> > It looks to me like interest rates are important vis a vis the business
> >cycle witness Volker's rate hike in the early 80's which had profound
> >effects on the U.S. and world economy
Louis Proyect writes:
>I agree that this sort of action can tighten the money supply and create a
>recession. But I am referring to the opposite problem, one in which
>lowering of interest rates can not end a recession.
This fits with Marx's perspective in vol. III of CAPITAL. He sees monetary
management schemes -- his example is the English Bank legislation of 1846
-- as potentially screwing up the operation of capitalism. But he doesn't
see it as _solving_ the system's problems. It's too bad that he never
finished his argument here, though I think Marxist political economists can
do so (especially if they are willing to learn from Keynes and his followers).
>When Japan's interest
>rates are zero, this did not have any effect on the business cycle. Unless
>I am missing something about Keynsian economics, this seems to invalidate
>it ...
Keynesians such as Paul Krugman take the Japanese case in stride. He argues
that the Japanese are in what Keynesians call a "liquidity trap." The
original version was that financial investors grab up all available money
because they want to get out of bonds, stocks, etc. because they fear
capital losses. By hoarding money this way, it prevents the central bank
from pumping money into the system in order to drive interest rates down.
(This makes the LM curve horizontal.) Keynes himself didn't see the
liquidity trap as likely. The Krugman version simply is based on the fact
that nominal interest rates can't go below zero (plus the benefits of
holding liquid assets, I would add). In any event, he suggests that the
Japanese central bank simply pump a lot of money into their system, so that
inflation results (or is expected). This lowers the _real_ interest rate,
which is the one that matters, stimulating businesses to invest. Of course,
the more orthodox economists throw up their hands (or simply throw up) when
they hear this proposal.
To my mind, this only works if businesses are ready to invest, i.e., if
they're willing to build new capacity and take on new debt. If not, the IS
curve is vertical and lower real interest rates won't work. (It's possible
that the IS curve is kinky, so that increased rates would make things
worse, as Mat suggests. But why would the Bank of Japan raise rates?) Here
a falling rate of profit theory can help us understand what's going on: if
Japanese profit rates have fallen (i.e., if the Keynesian "marginal
efficiency of capital" has fallen), this would encourage pessimistic
expectations and discourage new investment. In that situation, an increased
government deficit would be needed to jump start the economy. Krugman
doesn't like this solution and there's some good reasons for this disdain.
The Japanese have build a lot of surplus infrastructure. But I suggested
that maybe they could give foreign aid (perhaps to East St. Louis,
Illinois) that's "tied," so that it must be spent on Japanese goods. This
would help the Japanese economy. (PK didn't respond to my missive.) Or
maybe they could build pyramids, as Keynes himself jokingly suggested.
What is the evidence for a falling rate of profit in Japan? I'm sure that
it fell as Japan went into its current stagnation. But did it fall simply
due to aggregate demand failure (i.e., low capacity utilization rates)? or
is it due to the US winning the battle of competition with Japan (the
Brenner thesis)? or?
Doug writes:
>Oh I think Japan is suffering a classic overinvestment problem. Despite
very low profit rates in the 1980s (negative on new investments, according
to some estimates), Japanese firms kept investing like crazy in order to
build market share. So yes I'd say that the musty old categories have
relevance to Japan. Like I said in LBO #81 ..., "Asia -- including Japan --
may also be in the throes of a classic Marxian profitability crisis, as
quaint as those seem."<
this fits with the Brenner thesis, especially the bit about "investing like
crazy in order to build market share."
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~jdevine
