[OPE-L:6793] Re: Re: Re: Re: Paul Krugman

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Thu Mar 21 2002 - 04:20:54 EST

Steve writes in 6792

>Thank you Rakesh: I am genuinely touched! I would also 
>appreciate--if you don't mind!--you putting that comment on the 
>Amazon site about the book. The more reader feedback like that, the 
>better the chances of the book having an impact. It has already sold 
>out in the USA, and is being reprinted now.

great. I'll put out a comment once I have read a bit more of the book 
from which I am sure I shall learn a great deal.

>As for your point, in Keynes's analysis the demand for investment 
>goods is a "derived demand"--investors only want to purchase capital 
>goods if they believe that there will in turn be a demand for 
>consumer goods that these capital goods will help manufacture.

 From where does the demand for investment goods derive?

You suggest that demand for consumption goods drives demand for 
investment goods.

Then it follows that brightening the prospects of mass consumption 
by, say, a redistribution of income or deficit financed expansion of 
the public sector or the social wage will induce firms to purchase 
capital goods?

Of course in order to prevent leakage of this new consumption power 
some kind of protectionist policy would be needed as well, no?

These are the kinds of high wage solutions which have been proposed 
by demagogues and adventurers in the midst of protracted slumps, 
warned John Strachey long ago.

But for Marx demand for investment goods derives from the attempt of 
each capitalist in the face of a decline in the rate of profit to 
increase the scale of his production and to put more machine power 
behind each worker in order to reduce unit costs and realize an ever 
greater mass of profit.

Whether the overall prospects for consumption are bright is 
irrelevant to the entrepreneur who intends to take market share and 
expand the market by the reduction in unit costs. Of course to the 
extent that capitalists are so proceeding, consumption itself will 
tend to increase in absolute terms as more workers are hired and real 
wages will rise too as unit values reduced.

But for Marx investment demand does not derive from demand for 
consumption goods. This is to make capitalism out to be exactly what 
it is not.

The new net demand for consumption and investment goods both derive 
from the accumulation of capital which is driven forward by the 
ability to sweat surplus value from the working class.

When as a result of a change in the composition of capital there 
develops a scarcity of surplus labor in the production process and a 
consequent decline in the rate of growth of the mass of profit, 
accumulation slows down *even if final demand had been strong enough 
to absorb the commodity output*; a scarcity of surplus labor then 
appears as an excess of commodities on the market.

The crisis appears in the market as insufficiency of final demand, 
and the solution seems to be in the bolstering of final demand.

But weren't these the very illusions that Marx attempted to dispel?

And wasn't Keynes' own understanding of investment in terms of 
derived demand the basis of Hayek's critique? I thought I would throw 
that in since you are on leading a seminar on the Hayek list...

>  If there is a decline in consumption now, capitalists can react by 
>believing that there will be less demand for consumer goods in the 
>future, and the fall in C is met by a fall in I, rather than the 
>Say's Law vision of a fall in C being met by an increase in I, thus 
>sustaining overall balance.

But isn't the decline in consumption an effect rather than a cause of 
slumps; moreover aren't slumps often exited with consumption 
recovering a result of a prior recovery in investment demand?

>As for why, it's all in line with Marx: capitalists don't want 
>investment goods for their own sake, but to make a profit. If they 
>don't perceive a profit, they won't buy them, and then investment 
>demand can collapse.

On that we are agreed.

>I go into this in much more detail in a paper I've written for a 
>book on Say's Law (where my chapter is one of the few critical 
>ones). Let me know if you'd like a copy.

I do want a copy, but not quite yet.

All the best, Rakesh

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