Commentary on Political Economy

Wednesday 14 September 2011

Krugman and How the Liquidity Trap Can Become A "Trap" for Him!

In terms of policy, we on this site agree with just about everything Krugman is screaming about these days - and we appreciate his highly commendable efforts in this regard. So we are certain he will forgive us of we point out how his "theoretical" approach falls short of the mark in many respects. Specifically, the Keynesian "liquidity trap", derided repeatedly by us on these pages, has become a veritable "trap" for economists like Krugman who actually have fallen into it - pardon! who actually believe in it!

Here is Krugman's most recent blog on the subject:

Notice how he rightly points out that the liquidity trap occurs when investors will not invest their "money" (read: capital) even if it is available "cheaply" (low interest or negative real interest rates) because of too low "demand". Krugman notes also that this can happen only in a "money" economy.

What he fails to point out - the most important point of all! - is that the reason why "consumers" do not consume is because their incomes are insufficient to support current production. But "investors" (read: capitalists) do not invest - NOT because there is "insufficient demand", because we already said that there is insufficient demad because investment is insufficient - so this is a vicious circle!

The real reason - which Krugman does not mention BECAUSE HIS THEORY DOES NOT TAKE PROFITS INTO ACCOUNT!! - is that investors do not invest even though they have plenty of "liquidity" BECAUSE IT IS NOT "PROFITABLE" for them to do so!!

In other words, Krugman has to face the music and admit that "the liquidity trap" (Keynes's idea) simply cannot explain why investor "animal spirits" are down! The reason is that "capital" has become a barrier to the further and full utilisation of social resources!! That investment is now in opposition to the use of our social resources because the capitalists who own them cannot do so "profitably" so that they can use the "profits" to command more living labour than before.... without "inflationary" consequences!

The UPSHOT of all this is that it is not "the economy" that needs to be changed: it is the political control over the use of social resources that needs to change!!

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