Demand-side thesis great depression
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Demand-Side Economics Defined
Log out of ReadCube. Volume 31 , Issue 1. The full text of this article hosted at iucr. If you do not receive an email within 10 minutes, your email address may not be registered, and you may need to create a new Wiley Online Library account. If the address matches an existing account you will receive an email with instructions to retrieve your username. John Saville. University of Manchester. Search for more papers by this author. Tools Request permission Export citation Add to favorites Track citation. Share Give access Share full text access. Share full text access.
Please review our Terms and Conditions of Use and check box below to share full-text version of article. Get access to the full version of this article. We must remember that private sector could not have invested in these long lifecycle research projects, many with dead ends and noting that there were no immediate effects on the GDP or economy.
However, the multiplier effect is still being reaped by the rest of the world due to a productive investment the government made many years ago. The impact was very different when the government injected liquidity into the market creating Dot-Com asset bubbles and the housing related innovative financial products like the CDO Collateral Debt Obligations. We did not have to wait long enough to experience the negative effects of these malinvestments.
Every dollar spent in the financial industry returns a fraction of the investment while every dollar devoted to building scientific capital creates a positive multiplier effect.
IMF released a detailed research report that validates this premise. Basis this, Austrian Economists may have been somewhat wrong that no intervention by government automatically heals the markets. Instead, a strategic intervention by governments around the globe in building intellectual and scientific capital can have long term gains for the local and global economy.
Entrepreneurs can cash on the basic research funded by the government to generate last mile innovation. As we have highlighted here , even iPhone was a last mile innovation impact of government funded research for which Apple should thank the government. Investors and Entrepreneurs unconsciously wait for market signals to invest capital and to start productive ventures.
The secondary side effects were fame, wealth, and servitude. Entrepreneurs and investors co-exist together to help each other achieve their aims. The market is always signalling to both these segments about the prospective timing of the launch of invested ventures. Entrepreneurs play a vital role in economic development, and young firms create most of the new jobs. As Kauffman Institute research demonstrates, the net job creation is almost always catalyzed by young and dynamic ventures.
Entrepreneurs create new markets, force incumbents to remain on their toes, create new jobs and prosperity and create incremental to breakthrough innovation advancing scientific human capital. The market can, however, sometimes create distortive signals which leads to race to the top of the wealth circuit for some. Low-Interest rates and easy credit is responsible for some of these distortive signals that assist in creating asset bubbles which eventually go bust. These distortive signals also lead to an entrepreneurship frenzy where entrepreneurs acquire the motives of the investors, i.
A divorce occurs between the ethereal motives and the cerebral motives of entrepreneurs who become disruptive to the society they wanted to serve instead. Another problem is that the intrinsic value of companies in low-interest rate environments also get severely distorted. These bad innovations are creating a Utopian future for the next generations.
I am certain that no one wants to leave such a world for our future generations where bad innovation is creating different new variants of indentured slavery in our society.
My point is that government intervention driven by the Keynesian philosophy is creating poverty of the future for the masses by spurring bad innovation. Real entrepreneurs can weather the storms, and the most determined will start ventures even during gloom and doom. The scarcity of capital does not worry them and ideas of the venture concepts and its timing of the launch are not distorted by the market signals of easy liquidity. Market distortions create herd mentality which are solely responsible for the creation of asset bubbles due to FOMI Fear of Missing Out. Real entrepreneurs have created the best companies during depression and recession phases.
Causes of the Great Depression
Good Innovation does not require easy capital to sustain itself; it requires a fixation on concepts, an ethereal desire to take intuitive ideas to conscious reality. They did not need government intervention to start, sustain and grow. As a matter of fact, there are distinct advantages of starting a company during recession or depression. Companies started during the recession are more profitable than those started those slump cycles. Here are some businesses that were created during the gloom and doom days.
Lack of government action and lack of market distortion spurs real entrepreneurs into action which lead to sustainable ventures which create prosperity, new jobs and improve the quality of life of all participants. Good Innovation does not require government intervention as it is a slow process that unfolds over time. However, occasionally, the government may take actions that sustain good innovation. The United States government triggered good innovation inadvertently to prop up weapons research which led to the creation of scientific capital.
Government Intervention is triggered by a Keynesian belief that aggregate demand can be increased by lower interest rates and by increasing government deficits thereby somehow spurring economic growth. Debt grows faster than income growth and eventually has to be restructured, i. Greece, Detroit, Puerto Richo, Venezuela are just the beginning of this trend. Soon, it will be followed by larger countries like China and United States.
In spite of this, politicians and global leaders are doing everything to increase the debt Ponzi scheme. Government deficits, negative interest rates designed to spur aggregate demand will also stimulate debt spirals and asset bubbles eventually ending the party badly. The debt reckoning of the increasingly indebted world cannot be deferred indefinitely.
The Effects of an Economic Recession
The new elephant in the room is slowly waking up with the crash of the commodities and the trending slowdown. Natural Diasters are on the upward swing.
A natural disaster causes significant turbulence to the local and global economy. The cost of recovery makes a massive dent on the government revenues leading to stronger deficits, pressurising the government to intervene. As the government intervenes, it uses the old singular tactic of lower interest rates thereby driving up malinvestments. In the first depression, there were three climate events that made the depression worse. There are already indications that has been the year of most severe weather disasters. When they do, policy makers and economists will feel the itch to act.
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Act when they do, they create more long term pain than desired. The labour participation rate across the world is dropping rapidly. You may be inclined to believe the official unemployment numbers, but, they are a poor indicator of employment statistics. Note that the below statistics does not take into account the major layoffs in Some analysts are predicting that layoffs will increase to , in only in the Tech Sector.
Oil and Gas Sector have had significant layoffs due to the crash in oil prices, more tech Layoffs are coming and this is not a good sign. As less and fewer people contribute towards tax collections for the government, the government will move into negative interest rate territory. As cited in this article , Silicon Valley has more Tech workers than during dot-com time. The company valuations are finally becoming more grounded, new funding was difficult to come by and companies like Uber are finally thinking of pivoting to a business model with higher capital expenses.
The market dynamics are either forcing companies to layoff entire workforce or significantly reduce the size right size. The truth is that the average citizen of the world is becoming poorer and less employable as they move ahead in time. Thousands of computer science graduates will not be able to find jobs for years to come, once the Tech bubble fully unravels.
There are already cases where graduates with Oil and Gas degrees and even experienced geologists are unable to find minimum wage employment. The Keynesians and the Monetarists have dominated the global economic policy and academic space for many years and will continue to do what they have always done leading to side-railing of the economy. Keynesians and Monetarists think that they can somehow smoothen the boom-bust business cycle curves by taking actions that increase aggregate demand and consumption.
They believe in patchwork that works on the symptoms and not the causes.
Keynesians are suffering from a tunnel vision, where the only variable they want to intervene in are aggregate demand and consumption. They do not care about the long-term impacts of this poor vision as they will most likely will not be in their existing roles by the the damage is beyond economic repairs BER. The patch work done by injecting liquidity into the markets during the dips reminded me of an incident many years back.
I used to work in the naval dockyard in India and used to lead teams in the dry docking division for few years. Sand Blasting is the process of chipping the paint from the ships hull so that each zone can be inspected for structural integrity. We received a vessel in the dock which seemed in good operational state at the first look and had been seaworthy for the last two years.