However, I think the evidence suggests, in times of crises, capitalism tends toward underconsumption.
You might as well say, “in a time of crisis socialism tends towards underconsumption.” A given capital structure exists to supply a physically and temporally heterogeneous stream of consumption goods, and any shock will tend to change planned consumption and necessitate a period of adjustment to the capital structure, regardless of whether that structure was created through socialism or capitalism.
Or as Krugman wrote: "A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time." The reason appears obvious: during a slowdown, marginally employed people (those facing the next round of layoffs) will start increasing their cash reserves fearing their own layoff. This is somewhat of a self-fulfilling response. As people consume less, more people lose their jobs ... and another group of marginally employed increases their cash reserves.
It appears you are equating a tendency towards underconsumption with recessions – that is an error. There is quite a large gulf between the primary adjustments induced by a change in planned consumption patterns and a tendency towards underconsumption. Pigou quickly refuted this aspect of Keynesian economics and it is generally accepted that a spiral into depression (tendency towards underconsumption) is not at all likely from an autonomous change in cash holding preferences.
That being said, a recession can easily result from an unanticipated change in cash reserves if the capital structure cannot adjust instantaneously (which is likely). That, combined with shocks (both positive and negative) to the supply side is really the heart of most business cycle theories. However, in our post WWII economy most recessions are induced by the central bank and are not the result of autonomous changes in cash reserves. What does Krugman have to say about that? And what would you say is the remedy?
Its how we respond to this cycle that separates the Austrians from the Keynesians.
No. The differences are contained in what is assumed about the economy, such as what determines the rate of interest, heterogeneous or homogenous capital, indivisible factors of production, expectations, determinants of money demand, is monetary velocity endonegenous, etc. |
