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Friday, September 14, 2012

Keynes Thinks That Markets Work

One often sees people contending that "Keynes thinks that markets don't work."

Reading Schelling has clarified something for me here. That "markets work" usually means "markets equilibrate." But Schelling notes that "equilibrium" is a state of affairs where things have settled down, and not a normative appraisal: I could bring you to a state of equilibrium real quick by shooting you, but most of us would not say this has positive welfare implications.

Keynes clearly thinks that markets equilibrate investment and savings. But there are two ways markets can do this if savings goes up: intended investment can go up as well, or intended investment can remain where it was, and inventories can rise. The latter process shows markets working to produce an equilibrium. It's just that it is an unpleasant equilibrium.

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