Households
If there is a slump, even as the wishful thinkers would have it, a mini-slump, a recession, the problem in the economy is not a failure in the capacity to supply but a failure in the capacity to demand. It is not that the oil wells have run dry or ship makers are over extended or that General Motors can’t produce any more cars, but rather that the Joneses have decided not to take a holiday this year and the Smiths have stopped eating out. There is a shortage of cash about the person. It is not that Mr Average is losing his house but that, forced by payments made, forced by income levels the careless ésprit is lost. It is not that everyone has become a saver but everyone is seeking to balance the books.
It is important to realise that decisions to restrain consumption are not irrational. They are born from experience. The Jones went to Euroland last year and discovered how expensive everything is. They got a little into debt, but nothing too serious. Now they would like to get a little out of debt. Keynes, who made a bob or two on the Stock Exchange for King’s College, Cambridge used an unfortunate phrase to describe economic motivation: ‘animal spirits’, as if one was dealing with a mass of lemmings. Lonergan proposed rather that people’s past experience gave them grounds for some sort of rational decision. If a share has been going down for a couple of years, this might be time to get out. We read about ‘panic’ in the stock market. Fortunes have nearly halved. But actually most of the stocks being held are being held with the prospect of gain.
Again, one might imagine it is irrational for banks not to lend to each other. From lending to each other they have had bad experiences. Why not let them not lend, if that is what their experience bids? Why pump money into the system so they do lend? It will surely happen that some will see they have some money lying idle overnight, and there is a reliable way of earning a % point by 10 a.m. tomorrow.
If the basic problem in the economy is household demand, then the basic problem is that prices are too high. VAT could be eliminated across Europe. Business tax could be eliminated. People could be taught the nature of the problem: prices need to be reduced, so that households on their incomes can buy.
For Lonergan, the theoretical point is that ‘the crossovers must equal’. If money is raised somehow and pumped into the system all systems might go for a day or two or a year or two, but the disequilibrium will manifest itself again. Policy makers might be proud of their decisiveness and the immediate success of what they have done.
What is to be desired is a situation which allows recurrence. The financial flow to companies is sufficient to keep everyone working. Financial flows to the households (including the finite States) are sufficient to allow next year to be as good as this. If there has been technical progress there might even be an increase in standards.
If there is a slump, even as the wishful thinkers would have it, a mini-slump, a recession, the problem in the economy is not a failure in the capacity to supply but a failure in the capacity to demand. It is not that the oil wells have run dry or ship makers are over extended or that General Motors can’t produce any more cars, but rather that the Joneses have decided not to take a holiday this year and the Smiths have stopped eating out. There is a shortage of cash about the person. It is not that Mr Average is losing his house but that, forced by payments made, forced by income levels the careless ésprit is lost. It is not that everyone has become a saver but everyone is seeking to balance the books.
It is important to realise that decisions to restrain consumption are not irrational. They are born from experience. The Jones went to Euroland last year and discovered how expensive everything is. They got a little into debt, but nothing too serious. Now they would like to get a little out of debt. Keynes, who made a bob or two on the Stock Exchange for King’s College, Cambridge used an unfortunate phrase to describe economic motivation: ‘animal spirits’, as if one was dealing with a mass of lemmings. Lonergan proposed rather that people’s past experience gave them grounds for some sort of rational decision. If a share has been going down for a couple of years, this might be time to get out. We read about ‘panic’ in the stock market. Fortunes have nearly halved. But actually most of the stocks being held are being held with the prospect of gain.
Again, one might imagine it is irrational for banks not to lend to each other. From lending to each other they have had bad experiences. Why not let them not lend, if that is what their experience bids? Why pump money into the system so they do lend? It will surely happen that some will see they have some money lying idle overnight, and there is a reliable way of earning a % point by 10 a.m. tomorrow.
If the basic problem in the economy is household demand, then the basic problem is that prices are too high. VAT could be eliminated across Europe. Business tax could be eliminated. People could be taught the nature of the problem: prices need to be reduced, so that households on their incomes can buy.
For Lonergan, the theoretical point is that ‘the crossovers must equal’. If money is raised somehow and pumped into the system all systems might go for a day or two or a year or two, but the disequilibrium will manifest itself again. Policy makers might be proud of their decisiveness and the immediate success of what they have done.
What is to be desired is a situation which allows recurrence. The financial flow to companies is sufficient to keep everyone working. Financial flows to the households (including the finite States) are sufficient to allow next year to be as good as this. If there has been technical progress there might even be an increase in standards.
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