Home > Uncategorized > Graph of the day: Keynes was wrong

Graph of the day: Keynes was wrong

A fundamental insight of Keynes was that even in the case of flexible wages and other prices a monetary economy can get stuck in a low-level equilibrium. The developments in Spain, Portugal, Greece and Ireland disprove this idea: if there only was a low-level equilibrium in those countries… The other option is of course that Keynes was basically right but that economic policies aggravated the crisis. Anyway – little could have been done to mitigate the direct consequences of the bursting of the e-nor-mous building housing bubbles in Spain and Ireland. At this moment, however, a kind of secundary crisis has set in, with more job losses in other sectors.

Keynes was wrong

  1. December 24, 2012 at 3:25 pm

    What Keynes dismissed was the significance of land markets as a distinct driver of the economic cycle and the power of rent privatization to place enormous stress on producers of goods (including housing units) and services. In the real world, access to inexpensive credit enables property (i.e., land) speculators to leverage minimal financial assets into patterns of land acquisition for purely speculative purposes. In periods of rising prices — as occurs in every property market cycle — the supply curve for land will tend to lean to the left because of speculative acquisition and holding. Neoclassical economics, which is based on the assertion that price clears all markets, fails to provide the analytical tools to determine the level at which land prices will bring on market collapse. My own analysis of residential property markets indicates that regional or local markets can collapse when land-to-total values ratios are pulled above 35-40%. These rising costs cannot be successfully passed on through the economic sectors indefinitely. Profit margins for many businesses quickly erode. Households that rent lose disposable income to rising household expenses. Homeowners on fixed or stagnant incomes find it increasingly difficult to absorb rising property taxes and utilities costs. What made the most recent crash of so many property markets worse than usual was, in part, the dramatic increase in the sub-prime and second mortgage markets, characterized as they are by high costs and outright fraud.

  2. Bruce E. Woych
    December 24, 2012 at 6:49 pm

    Real Market dynamics:
    The Bottom Line: Healthcare
    We are economists who think that the economy should serve people, the planet and the future.
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