Rolf Englund IntCom internetional
Keynes put asset prices at the centre of employment determination in his 1936 General Theory.
Keynes had no sure cure for slumps
Keynes put asset prices at the centre of employment determination in his 1936 General Theory. If a change in sentiment causes steep declines in valuations of business assets (along with share prices and house prices), business investing is cut back and employment contracts – unemployment rises – mostly in capital goods industries.
Unfortunately nothing went well after that.
The recent collapse of speculation on houses, however, is a non-monetary phenomenon:
Keynes always felt that consumer demand too drives employment. An increase in demand encourages companies to raise production and hire more workers – at first.
But in an open economy with its own currency, the stimulus would mostly go abroad. In the global economy, increased consumer demand would ultimately do little more than raise interest rates, thus setting off declines in real asset prices, investment and real wages.
Comment by Rolf Englund: