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Schumpeter and aggregate demand

Did low interest rates contribute to the growth of tourism and tehrewith to higher aggregate demand? Yes. but not like the models predict. Lower rates on existing debts (instead of on new loans) fired the animal spirits of consumers (instead of producers).

tourism

In normal times, Italy would have been hailed, by EU officials, as a beacon and an example of succesful development of one of its main sectors, tourism. Nowadays, the growth of employment in Italian tourism (+10% in three years, which really is out of the old ordinary) is, in the new ordinary, only mediocre. In many countries, tourism is booming, even to the extent that the economy of entire countries, like Iceland, Estonia, Croatia, and Ireland, are bailed out, even in spite of austerity policies (Denmark is an example which shows that even extra-ordinary sectoral growth in one sector does not necessarily pull a country out of the economic mire: macro policies have to come to the rescue, too. Iceland, which has the lowest unemployment of the entire north Atlantic, is a fine example of this. It did not try to pull an austerity ‘Münchhausen‘ but enabled success by draining the bog, i.e. by writing down silly debt. But there sure also is an animal spirits, Schumpeterian side to this. Overlooked by orthodox and many heterodox economists is the fact that higher aggregate demand always and necessarily also means: a different composition of aggregate demand. In this case: less finance and more tourism.

Graph 3. Source.

number_of_tourists_in_iceland_and_population-svg

Which brings us to aggregate demand: is there something connected to aggregate demand policies which enables all these baby boomers to take a cruise to the ‘Blue Lagoon’ (Bláa Lónið, a quite large artificial hot lake) on Iceland? Yes, there is.

Graph 3.

eurozone

Low rate policies have caused a decline of interest rate on existing debts which of course leads to lower debt service for families. Which is a very good thing. But which is not encompassed by the kind of macro models used by many economists and which only take the influence of low rate on investments into account (and even, wrongly, assume that fixed investment only consists of produced items and not of ‘land’ and other unproduced inputs…). But I have to admit: some fixed investment is produced… We can have doubts about sustainability of this all (just when you thought these baby-boomers would finally quiet down…) but maybe these  boats are quite energy-efficient compared with their cars. And Bláa Lónið of course uses geothermal energy… But that’s just kidding. Sustainable living requires a lot of staying at home, eating largely vegetarian meals and walking (but not with a meat guzzling dog). And a large scale redistribution of jobs.

cruise.png

  1. jlegge
    September 11, 2016 at 1:51 pm

    Is this about aggregate demand or sustainability? And isn’t “animal spirits” a term introduced by Keynes? A change in demand composition certainly creates entrepreneurial opportunities, which I suppose it where Schumpeter joins the plot.

    • merijntknibbe
      September 11, 2016 at 3:46 pm

      You got it!

    • merijntknibbe
      September 11, 2016 at 5:58 pm

      On second thoughts: you are clearly confused about my writing – and I’m not. I consider this piece to be conceptually coherent. Why this difference? I’m basically using a (mental, informal, ecostyle Harrod-Domar) input-output model. More demand will lead to more input (labour) and economic output (tourist services, income) but also to more output in the shape of waste,i.e. mainly CO2. In both cases, this will hit a brick wall, eventually. Unemployment in Iceland is about 2,8% now, i.e. low. Which means that the limits of Icelandic production capacity are reached unless they increase productivity (do not know about that) or use migrant labour which, according to some family members born in the fourties, is what happens (Polish students, among others). But there is also the sustainability brick wall (which we have breached a long time ago, in fact). The nasty aspect about this is that ‘eventually’ is quite some time away (between now and 150 years, say). But the point here: an increase in demand which contributes to an increase in aggregate demand will, whatever the source, lead to more wanted as well as unwanted outputs as long as the production brick wall has not been reached. That’s the conceptual coherence of this blogpost.

    • Piwu
      September 12, 2016 at 4:35 am

      though it may seem so, marginal ratio to productivity to labor is never an expectation to yielding results or outcomes unless its in rattional world.

  2. Peter T
    September 12, 2016 at 7:42 am

    Between now and 150 years is remarkably optimistic, given that you acknowledge that we have already breached the sustainability wall. Between now and 50 years would seem more realistic.

    • merijntknibbe
      September 12, 2016 at 8:05 am

      Yep.

  3. Blissex
    September 12, 2016 at 8:08 pm

    Iceland is a very special example because it has natural resources in overabundance, as in a large surplus of energy, plus the famous fisheries — plus a very special landscape. Amazing though that they boosted their tourism sector so much.

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