Monday, October 21, 2013

Paul Krugman and The General Theory

Paul Krugman summarized the general theory in four bullet points, they are:

  • Economies can and often do suffer from an overall lack of demand which leads to involuntary unemployment
  • The economies automatic tendency to correct shortfalls in demand if it exists that all operates slowly and painfully
  • Government policies to increased demand by contrast can reduce unemployment quickly
  • Sometimes increasing money supply won't be enough to persuade the private sector to spend more and government spending my step into the breach
I would now like to take the opportunity to countermand these ideas. First off I would argue that economies in fact do not suffer from an overall lack of demand occasionally demand decreases in areas and it can seem like there is a lack of demand overall however, I would argue that this is due to people's demand changing to other goods simply because if scarcity exists there will always be demand for a good. 
In regards to the economies automatic tendency correct shortfalls and the speed at which responds, It is true that in the very short run most goods can be very inelastic and as such any shortfalls May take some time to resolve and correct. However in most cases unless there is some regulation on prices the price will change consistent to the increase in demand or increasing supply thus returning to Market equilibrium very quickly, unless the good is inelastic in the long run. I realize that a reduction in price may cause some smaller businesses to have trouble keeping up with market equilibrium however, from an economic perspective this would simply point to the fact that because people are wanting less of that good it is having difficulty selling at the higher price, and if people don't want the good I don't believe that they should be forced to purchase a good even if the "force" is simply providing unnatural incentives for them to purchase said good
Just leave me right into my next point which is the government policies to increased demand by contrast don't work in the long run. This is because most government policies that I am aware of two increased demand rely on either increasing the money supply for providing subsidies for certain goods. I can admit that subsidies are okay when used in relation to negative externalities or trying to decrease market failures. that being said, I don't believe they should be used to "increase demand"what to try to reduce unemployment because, ultimately all the subsidies do our create a greater dependence on the government rather than market forces for A reliable, economically sound position, thereby reducing incentives for innovation and technology.
And finally increasing the money supply leads to inflation some people argue that some inflation should be allowed to help keep unemployment low.I would agree that to some extent inflation is acceptable as long as it's at a fairly low rate so that people can still have their savings be economically feasible. However, post-World War I Germany is a good example of what happens when you try to increase the money supply with no regard to inflation. Government spending often has a similar effect as increasing the money supply because it is in fact increasing the money supply. Even though government spending does not mean that they are necessarily producing more money they are putting more funds available into the economy creating the problem of inflation.

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