Many of the patterns of Nature we can discover only
after they have been constructed by our mind.
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1. Warum Theorien und Modelle?
Grau, teurer Freund, ist jede Theorie und Gold des Lebens güldner Baum.
Theorien sind Vorstellungen, wie die
Realität funktioniert. Wissenschaften bauen auf Theorien auf.
Seit es "die Wirtschaft" gibt, hat
man versucht, Regeln zu finden, nach denen sie funktioniert. Die Lehrbücher
sind voll davon.
In the classical era of the late 1700s, Adam Smith believed that an 'invisible hand' kept production and consumption together. Human labor provided both the production as well as monetary value necessary for consuming the output of others in the village. This 'labor theory' of value as described by Smith and later by David Ricardo, simply stated that the number of hours of human labor involved in the production of an article largely determined its market price.
Sixty years later Karl Marx, using this same labor theory of value, claimed that capitalism was inherently incapable of providing enough total buying power to keep production recycling into consumption:
[Marx] took over the analytic framework of classical political economy
[Smith and Ricardo]
Marx believed that not enough monetary value was being transferred to the working class to maintain the long-term balance between production and consumption. He believed that production would ultimately so outstrip consumption that the resulting instability would lead to a revolution by the working class in the advanced industrial countries.
Writing during the 1930s, British economist John Maynard Keynes believed that 'overinvestment' could lead to excessive productive capacity and that the national inventory could get ahead of total consumption power. The whole economy could almost stop, as was the case during the Great Depression. However, Keynes believed that the solution for such a period of stagnation was for the federal government to run deficits, stimulate consumption and restart production.
The seeming contradictions between Smith, Marx and Keynes can be resolved however by reference to another less well known idea, the 'long wave' theory associated with Nicholai Kondratieff.lishing his theories. These forty to fifty year 'long waves' represented the rise and fall of the overall capitalist system. Kondratieff was somewhat unclear as to the exact cause of the long waves.
Kondratieff believed that starting around
1790 capitalism had had two complete 'waves' of economic growth and decline,
with a third wave rising in the early 1900s. Schumpeter believed that each
of these waves had been associated with a substantially new labor-based
innovation, which had in turn increased employment. Here are the innovations
and approximate starting dates of the first three long waves as defined by
Each of these long waves created very wealthy families. Thus the railroad and steel families included the Astors and the Carnegies. Thus the oil and automobile dynasties included the Rockefellers and the Fords.
Later during the 1930s, Joseph A. Schumpeter revised Kondratieff's theory and claimed that the capitalist entrepreneur was responsible for particular labor-based innovations, which then precipitated the long waves. The version of long wave theory presented here is a conflation of Kondratieff and Schumpeter. This version suggests that periodic severe depressions in capitalism have been relieved by new labor-based innovations, less than through the wringing out of bad debt through debt-deflation as claimed by conventional economics. 6 The long wave collapses have occurred in the way that Marx described. However, so long as new labor-based innovations have developed, capitalism has rebuilt itself each time from each collapse.
The development of a long wave theory or a business cycle theory could not have occurred prior to the existence of more than one such long wave or cycle and the development of sufficiently strong databases to supply the evidence for such a theory. The economic data which has existed for much of the twentieth century and which formed the basis for the long wave theory of Kondratieff, did not exist during either Smith's or Marx's era. Thus Adam Smith could scarcely have imagined any type of cyclical theory, based in modern economics. 7 Thus Marx lived and wrote during the long wave down turn of cotton-based manufacturing and the upturn of the steel-based railroad long wave. Yet, an economic database to explain either long wave did not exist. All
5. Production Consumption Balance and the Long Waves
Adam Smith wrote the first major description of village-level capitalism in 1776, The Wealth of Nations, the same year as the start of the American Revolution. In it, Smith described how an 'invisible hand' seemed to balance out the productive capacity of the village with its consumptive needs. The clear implication was that production and consumption would by and large stay in balance, again with guidance of the 'invisible hand'. His interpretation of economics was colored by the fact that modern capitalism had just begun, and the 'invisible hand' did indeed function at least somewhat as he described it. However, the firswave crash. 9 There seems to be an implicit acceptance of Marx's analysis of the internal workings of capitalism, but a revision of Marx concerning periodic new labor-based innovations and upwards swings in the economy. Kondratieff did not set forth a theory for the long wave, although he did note that innovations developed during the down side of one long wave were often later used the next upswing.10 After the collapse of the third long wave into the Great Depression in 1929,
Stalin imprisoned Kondratieff and he probably did not live to see the resuscitation of capitalism through a war financed with massive fiscal debt, as hypothesized by John Maynard Keynes.
John Maynard Keynes was a young man at the World War l Paris peace talks in 1919. He had written a devastating analysis of the likely results of the Treaty of V than discussions of t
What in fact Keynes was trying to remedy was the crash of the third long wave of automobiles and electricity. Unfortunately no new labor-based innovation was ready to restart employment. Moreover, something unique to capitalist development had occurred on the assembly lines during the early 1920s, a technique which permitted output to increase even with a declining number of workers.elt-driven assembly lines,
into powering a completely new point-of-production assembly line system. This new point-of-production assembly line system was the reason for the radical shift in the relationship between labor usage and power increases in the manufacturing sector. This process drove total manufacturing output well beyond total consumption power in America. Thus Keynes faced two serious problems as he began trying to restart the capitalist system during the 1930s; the lack of a new labor-using innovation and the application of an innovation which was drastically lowering the labor needed in the existing sectors. Ultimately, only massive war would begin to bring consumption and production back into balance. Here Keynes would provide the democracies with an economic idea sufficient to finance the war: massive federal deficit spending.
Keynes accepted the reality that production could greatly exceed consumption, but he believed that the federal government could rebalance such gaps. 17 Keynes believed that 'overinvestment' could lead to a situation where too much productive capacity or 'aggregate supply' would exist for the existing wage-base or 'aggregate demand' to be able to purchase it. In such a situation, as the inventory buildup gradually forced business to layoff more and more workers, the federal government could rebalance prore important to investors than their belief that a given level of investment would return a particular level of profit. Keynes emphasized effective demand in a complete system:
household demand for consumer goods
Household consumption was relatively stable, largely determined by income itself- but business investment was the weak link. Interest rates as well as profit expectations determined the rate of investment. Investors compare known interest rates with expected profit rates- to decide how much or how little to invest. 18
For Keynes, the key nd the money supply are the crucial elements for keeping production and consumption together. The idea that interest rates might drop too low to be a factor in corporate investment decisions, the 'liquidity squeeze' or 'liquidity trap', is not generally a part of the monetarist formula of economics. 19
Keynes died in 1946, not long after the end of World War ll. The British and Americans had run the war under Keynes's guidance and he died as the western allies were attempting to rebuild the economic foundations of capitalism.
After World War ll., there was a breakdown of both Keynes and Kondratieff's theories. First, the capitalist system did not return to the Great Depression after the end of wartime deficit spending, as was feared by many Keynesian eion. Had Volker remained as chair of the Federal Reserve, it is entirely possible that he would have maintained a tight money supply and kept interest rates high for too long. It had been Volker who between 1978 and 1982 had sent the American economy into deep recession, through tight Federal Reserve policies.
9. From Labor Long Waves to Debt Long Waves to Knowledge Long Waves
Again, all of this history is necessary,
because the last two hundred years of economic growth have not been
automatic. Growth has come and gone in fairly coherent forty-year waves. The
crashes of first two waves were resolved though internal innovations, the
rise of railroads in the 1850s and rise of automobiles and electricity in
the early 1900s. The third crash in 1929 was resolved about ten years after
it started and only through massive federal deficits funding a massive war.
The fourth crash or more accurately, the slow-down in western economic
growth which started around 1970; was also resolved about ten years after
its start, agaivestment stimulated first by the building of the railroad
grid starting in the 1840s, then later by the building of the highway and
electrical grids starting in the late 1890s. The crash of the third long
wave did not have an innovation, which encouraged direct private investment,
and the only stimulus was that provided by war later.
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