I had written: Krugman [suffers] an astonishing logical lapse here.
He assumes rather than proves that current investment is determined by either current or expected consumption. Marx refers to this as the stupid dogma that the aim of capitalist production is consumption. ok but as consumer demand then gives and final sales suffer, couldn't firms be forced to scrap old technologies and excess capacity and invest in those processes that lower costs faster than prices are falling? Moreover, for those investment projects that are meant to meet a long term trend couldn't a drop in immediate consumption be favorable as firms may decide that it's favorable to build on the trend and thus take advantage of lower depression prices in materials, wages and possibly interest rates? In short, Krugman does not show clearly why the drop off in final sales will compound rather than have little effect or even possibly ease the fundamental problem of weak investment demand. Michael responded; >Andrew Carnegie used to follow Rakesh's strategy. It worked for him, but then >the long term trend for steel was very strong. Fiber optic cable ??? The theoretical point here is--to use Hayek's metaphor--that the continuous flow of the river of investment can vary independently of the level of the tide (sales of final goods) at the mouth. The upper reaches of the volume of water is affected by the immediate flow of the tributaries to the maintstream (variations in new and replacement technology). In any given period there is no obvious correspondence bttween changes in the upper reaches and the sale of final goods; nor between the sale of final goods and employment. Moreover, as Marx first and Hayek later recognized, it is generally the case that in a slump the revival of final demand is an effect rather than a cause of revival in the upper reaches of the stream of production. Even in the absence of a high tide at the mouth of the river, the recession could be exited on the basis of replacement investments (in which new technology would be embodied) or new supplemental investments in, say, the completion of high speed connectivity (assuming the overcoming of regulatory hurdles). Intel's investment surge seems predicated on the belief in just this possibility. I am not saying any of this will come to pass. My point here is to challenge the dogma implicit in Krugman's analysis that the aim and driving force of capitalist production is consumption. There is also the question of the possible overlap in the Perelman-Brenner critique of Keynesianism and the Hayekian one! Rakesh
