Wednesday 20 November 2013

Full circle

Economists of my generation, who had been more pessimistic about the end-of-war outlook, within six months after mid-1945 mostly realised that they had better cut their losses and work the other side of the street of high employment. 
Keynesianism as a tool of analysis superseded Keynesianism as a depression ideology. The old King is dead; long live the new King of the "neoclassical synthesis!" 
P.A. Samuelson 1988

I wish we will continue to circle and that Say's law will hold at least in the long run. (If you have not, read Krugman, Wolf on Summers intervention last week, might need subscriptions). There is something disturbing in the long term data. Here are the US (click to enlarge):

To understand how to connect the figures I will refer to the usual brilliant suspect. J.M. Keynes, who else? (here). We might need more clear thinking in connecting Long Run and Short Run saving glut varieties to identify the right set of policies.  

I plot the implicit rate of depreciation on fixed assets (an old acquaintance I might say), to distinguish net and replacement investment. You can also connect it to Keynes period of production. Yes, you can also interpret it as technological embodied progress. But most of it, is due to a composition effect.

By the way, my Phd thesis (2004) was (maybe) connected to the decrease in the depreciation rate you observe during the last recession. I had postulated that replacement investment had become an important margin of adjustment during cyclical fluctuations and studied some of the consequences on the aggregate economy (basically a more elastic aggregate supply).

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