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There is also a third possibility of your list - the crisis is so deep that no Keynesian spending, however gross, would wake the conventional economy up.

This would have nothing to do with the depth of the crisis, and everything to do with the underlying economic fundamentals of the crisis.

There are four factors of production that are required to make a modern industrial state work: Raw materials, labour, capital and financial assets. "Economic crisis" is normally taken to mean that there is unemployed labour, because unemployed labour creates real hardship for real human beings, something that unemployed raw materials, financial assets or capital typically does not.

Now, if we define an economic crisis as a surplus of labour relative to requirements, then it must mean that one of the other three factors of production forms a bottleneck.

If and only if the bottleneck is a lack of financial assets in the right places at the right times, Keynesian deficit spending can help. But if the shortage is in financial assets, as opposed to real capital or raw materials, then there is no crisis so deep that adequate Keynesian spending will not bridge the shortage of financial assets.

If, on the other hand, the shortage is in real capital or raw materials, then there is no crisis so shallow that it can be bridged by Keynesian spending, because under a shortage of raw materials or real capital, Keynesian spending would not be addressing the problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 9th, 2010 at 09:41:31 AM EST
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