Tim Taylor talks about Keynes’ view on secular stagnation, investment and the government’s role in managing aggregate demand:
Keynes begins by stating: “It seems to be agreed to-day that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure … The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the saving which may be expected to emerge ….”
Writing in 1943, Keynes then predicted “three phases” that would appear after the end of World War II. In the first phase after the war, there would be an investment boom, which in his view the government should act to tamp down:
The government should also handle phases two and three as well.
Final exam question to any and all Eco 101 students: what is entirely missing from this analysis of how to “manage” or “balance” the supply and demand of savings and investment funds? It’s almost too shocking to realize it.
What is the “optimum figure”?