Investment Does NOT Create Jobs

[unlawflcombatnt]

INVESTMENT DOES NOT CREATE JOBS

Investment does not create jobs. Companies do not hire workers because they can "afford" them. Companies hire workers when they need them, and only when they need them.

When do companies hire workers? When consumer demand for production increases, which increases the demand for workers to provide production. What difference does investment have on demand for workers? NONE. Absolutely zero. Companies never hire workers unless they are needed to fulfill the production demand created by consumers.

Increased demand for workers increases hiring, as well as the wages of those working. Increased demand for anything raises its price. In this case, the "anything" is workers and the "price" is worker wages. So increased production demand by consumers increases wages and hiring, because it increases demand for workers.

What creates consumer demand for production? Consumer spending. What provides the money to finance this spending? Consumer income. So what determines the ultimate limit of consumer spending, as well as production demand? Consumer income.

Worker wages provide consumer income. Thus wage decline reduces consumer income and demand for production. As a result, recent "real" wage declines have reduced consumer income, spending, and demand for production. The reduced production demand reduces the demand for workers to provide that production, causing even further reductions in wages and hiring. Thus wage reductions by themselves put still further downward pressure on wages. This becomes a vicious cycle. And it's a vicious cycle we need to break out of.

unlawflcombatnt

[win_in_06]

1. What if a successful company decides to expand

in an effort to boost profits? Would that be a case of investement increasing a demand for labor?

[Selatius]

3. You mean expand like Wal-Mart has expanded?

That's more the case of shifting demand for labor from smaller competitors to bigger ones (Wal-Mart). For example, a smaller competitor is driven out of the market and lays off its workers, so the workers shift on over to the newcomer: Wal-Mart.

[gokar]

82. Which companies did MicroSoft displace when it grew from

nothing to huge with millions of stocks issued to millions of
stock holders, IOW people investing in that stock which makes the
price go up, which made it possible for MicroSoft to issue more
shares and expand.

[unlawflcombatnt]

8. Expansion

A successful company would only expand if increased consumer demand necessitated the expansion. They would hire more workers only if increased production was beneficial. And increased production would only be beneficial if consumer demand for production increased..

If consumer production demand did increase, increased investment may be helpful. But the investment didn't create the jobs. And increased hiring would increase production of goods, resulting in increased sales and company profits. However, it's the increased consumer demand for production, not the investment, that necessitated the hiring of workers. Investment is "permissive" for job creation, while demand is mandatory for job creation.

Increased consumer demand for production also increases investment opportunities, resulting in increased demand for investment. But without increased demand for production, increased investment has no benefit whatsoever.

Jobs, investment opportunities, and investment demand are all created by consumer demand. Availabilty of investment capital has nothing to do with job creation, unless consumer demand has caused an increase in labor demand. In that case, investment has a "permissive" effect on job growth.

[Nederland]

12. Wrong

A successful company would only expand if increased consumer demand necessitated the expansion.

This is wrong. A successful company expands in anticipation of consumer demand, or as the result of creating demand that didn't exist before. Ask yourself which came first in the case of telephones, automobiles, televisions, and the internet, consumer demand, or investment. The reality is that investment came first in every case.

[unlawflcombatnt]

16. You've confirmed my point about Demand creating jobs

You've simply verified my point that demand is what creates the demand for labor and the ensuing jobs. You've simply restated that it is demand for production that creates jobs, not investment. "Anticipated" demand has the same effect as current demand. It creates jobs. Investment does not.

[LoZoccolo]

17. Saying that demand creates jobs...

...is not the same as saying that investment does not create jobs. The two are not exclusive of each other.

And try meeting anticipated demand without investment.

[unlawflcombatnt]

22. Investment "permits" job creation, but it does mandate it

Again, investment creates NO jobs unless there is either anticipated demand or current demand for production. Businesses don't hire workers they don't need. And they don't hire them simply because they can afford them. They hire them only when they need them to produce goods that consumers are currently purchasing, or will be purchasing in the future.

If there is NO demand for production, either current or anticipated, investment alone creates absolutely NO jobs. Zero.

Money is invested only if there is current or anticipated consumer demand for production. Workers are hired to provide current or anticipated demand for production.

Do you know of a lot of companies that hire workers to do nothing? I don't know of any. Companies hire to produce goods or provide services. If no one wants their goods or services, they hire no workers.

Many factories sat idle during the Great Depression. The production facilities were already built. The workers were available. The factory owners had enough money to pay them, since they would work for very little.

But they didn't hire them. Why not? Because there was no demand for the goods the factories produced. Consumers didn't have enough to buy the products. Investing more money into the building of even more factories would have created absolutely NO new jobs, because there was insufficient demand for the production to keep the existing factories running. The only thing missing was consumer spending, and the production demand it created.

Without demand for production, there is no demand for labor to provide that production. More capital investment has absolutely NO ability to create jobs without consumer demand.

[unlawflcombatnt]

27. Correction: "Investment 'permits' job creation, but demand mandates it"

The title of my previous post should have read "Investment 'permits' job creation, but demand mandates it."

[unlawflcombatnt]

25. Demand and Investment

Try making money off that investment without Demand for the products of that investment.

[win_in_06]

29. I think it can be argued that investment is seen as a risk

because consumer demand is never a guarantee.

[unlawflcombatnt]

30. Yes

Yes, investment certainly is a risk. There is always risk that demand will not justify the investment, or that the demand that made the investment worthwhile will not continue.

[gokar]

83. There was ZERO demand for WIndows operating system before

it was created.

[Toots]

57. When you sell things you need buyers (consumers)

You do not expand if you have no buyers (consumers). Having more money does not guarantee you have more buyers (consumers). Without "Demand" there is never any need of expansion. That is why "Demand Side" economics has more bearing in reality than "Supply Side" economics has. That is why the rich are way richer now than before Bush* came to power but far fewer Americans are employed. For a solid economy you need to provide for the lower and middle class so there is money for consumption. The wealthy will end up with it all anyway but the less afluent will also have part of the pie. How any working person could fall for the supply side idea is just beyond me.

[unlawflcombatnt]

60. Supply-Side Mythology

I completely agree with you. Supply-side mythology revolves around doing everything possible to help producers. But it omits the whole concept that someone has to buy production to make money. Supply-siders act as if demand is unnecessary.

The late Robt. Bartley, former editor of the Wall Street Journal, apparently dismissed "demand" altogether, stating that people "have got to spend their money on something." He forgot that consumers must have some money to spend.

[Poppyseedman]

2. If I produce and sell "Z" brand widgets in the southeast

and people who buy them think they are reasonable priced and good quality and my business is slowly growing.

My largest customer just bought a chain of 250 retail stores in the southwest and want to carry my widgets in their new stores because customer service is my # 1 priority

I need to borrow 2 million dollars to expand my business capacity to meet their needs. I go to my investment bank and get the money.

I hire fifty people to make the additional widgets to meet their demand to supply their stores.

So far the consumer hasn't spent a dime on my widgets in the southwest, yet I hired fifty people.

[Selatius]

4. Demand is demand regardless if it's another firm or an individual

He narrowly defined demand, but other firms can demand your product just as well, not just individual customers. The point remains though that if that demand did not exist, you wouldn't have hired 50 new people (considered a liability), nor would you have taken on more liability by taking out a 2,000,000 loan, which you owe to the bank plus interest on top of that.

Prior to that chain wanting to carry your product, you would've probably considered 1, 2, or 5 more workers for your growing business, but not 50.

[Poppyseedman]

6. He stated

As a result, recent "real" wage declines have reduced consumer income, spending, and demand for production. The reduced production demand reduces the demand for workers to provide that production, causing even further reductions in wages and hiring.

My example shows consumer income has nothing to do with production except in overall economic trends.

Deflation in certain segments of the economy skews real income declines.

I'd like to see the recent "real" wage declines as I have not seen that reported.

[Selatius]

7. I am not entirely sure, but he might be referring to...

the decline in the real purchasing power of the minimum wage. 1968 was the year purchasing power of the minimum wage was highest. It has never been as high ever since and has lost something like 40 percent of its value.

[unlawflcombatnt]

32. Your example shows nothing whatsoever

Your example shows nothing whatsoever. Consumer income finances consumer spending, which creates consumer demand for production. You wouldn't have invested a penny if you weren't anticipating sales of your products.

Also, I am referring to aggregate consumer income, and aggregate demand for production. Aggregate consumer spending and demand are limited by consumer income. That's why I mentioned it here. The wage decline refers to "overall economic trends."

I'm surprised at your statement about being unaware of recent "real" wage declines. This information is readily available to the public. I've posted the links for this at least 10 different times on DU. You can see the "recent 'real' wage declines" at the United States Bureau of Labor Statistics at the links below.

"Real" average hourly wages are at:
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CES0500000049

"Real" weekly earnings are at:
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CES0500000051

As you can see from these charts, "real" wages have declined in both hourly wages and weekly income.

[unlawflcombatnt]

18. Anticipated Demand

You would have hired NO workers if you had not anticipated a demand for the production of those workers. It is the anticipated demand that caused you to hire the workers.

If someone gave you $1 million, you wouldn't have hired any workers, unless you anticipated a demand for their labor, and the production they provide.

[Poppyseedman]

20. What does anticipated demand have to do with income

Which was your original point, if I am not mistaken

[unlawflcombatnt]

54. Anticipated Demand & Income

Income determines the potential level of consumer spending and consumer demand for production. If income is low in the market area, the demand will be limited by that income. If the company is anticipating a future demand, there must be consumers with enough income to create sufficient demand. Consumers with no income buy no products and create no demand for production. Income limits current demand, as well as anticipated demand.

[Poppyseedman]

5. Investment Does NOT Create Jobs

is about the same thing as "sex doesn't make you pregnant" but without Mr.sperm meeting Miss egg, there is no baby.

The actual financial investment doesn't create the job, but it starts the process.

[unlawflcombatnt]

14. Consumer Demand Starts the Process, Not Investment

Consumer Demand starts the process, not investment. Jobs are never, ever created unless there is a demand for labor. And the demand for labor is created by consumer demand for production, which necessitates hiring of workers to provide the production.

Investment has absolutely no benefit, unless there is demand for production. That demand for production is created by consumer spending, not investment. And this same demand for production creates demand for labor. Investment has absolutely NOTHING to do with creation of labor demand.

[Poppyseedman]

21. Ever hear of venture capital as investment ???

[bvar22]

35. Try to get a bank to "invest" in your factory expansion...

..without an analysis of potential product demand (sales) and return on investment.

Try to "Start UP" a company and attract "Venture Capital" without market studies. The "Market Research" is the FIRST thing they want to see before they will EVEN START TALKING about your "Start Up".
You can't get through the door without comprehensive professional Market Research. No one will give you money without some reassurance that there is a valid DEMAND for your product or service.

[unlawflcombatnt]

62. Demand

Thanks for your insight. That's what I would expect. Banks aren't going to loan out start up money either, if they don't think there will be demand for the end product.

[CityDem]

9. How about start up companies

If I invest money in a start up for a product that does not even exist yet (some high tech product), I will have to hire people before a single product is sold. In fact, demand may not exist and the company may fold, but people were working nonetheless.

[unlawflcombatnt]

23. Start up

Would you invest the money if you knew no one would ever buy the product? No. You at least hoped someone would buy the product, and that there would be future demand for it.

Anticipation of future demand for the company's products was the reason you invested. You didn't hire any workers that you didn't think you would need eventually. You anticipated a demand for production, regardless of whether there ever was one.

You anticipated people would eventually buy the product, even though it didn't exist yet. You anticipated a future demand.

[Nederland]

10. Dead Wrong

The key flaw is your argument is this statement:

Companies hire workers when they need them, and only when they need them.

The truth is this:

Companies hire workers when they want them, and only when they want them.

There is a huge difference between these two statements. Companies, and the people that run them, do not need to expand and become more profitable. However, they want to expand and become more profitable. Accomplishing this task almost always involves more investment and hiring more people.

[unlawflcombatnt]

24. Want vs. Need

When do companies "want" more workers? They "want" them when they are "needed" to provide more production. When do companies "want" to provide more production? When consumers "want" to buy more of their production. When consumers "want" more production, companies hire more workers to provide more products that consumers "want" to buy. Why do companies "want" to provide this increased production? Because they "want" to make more money. Companies only "want" to hire more workers if the production they provide is "wanted" by consumers. Without that consumer "want" for production, there is no hiring of workers to fulfill that "want."

[Nederland]

39. Hopeless

If you don't understand the difference between want and need I'm not sure arguing with you is worth my time. I want to win the lottery. I don't need to win the lottery.

See the difference?

[unlawflcombatnt]

43. Word Games

I understand perfectly. I'm versed in the Microeconomic concept of "want" versus "need." It has no application here. You're simply playing a word game to distract from the absence of logic behind the "investment creates jobs" fantasy.

Consumer spending is needed to create demand for production. Current or anticipated production demand is needed to create demand for workers. Workers are not hired if they are not needed to provide the production demand of consumers. Nor are they hired if they aren't wanted by employers to provide that production.

[Nederland]

46. One more time

Perhaps this is merely a semantic confusion. If you would, consider this scenario and answer one question:

In the mid 1990's I worked for an internet startup. I worked there and received a paycheck for about four years. This company received about 40 million dollars of investment money and at one point employed over 70 people. In the end, the business plan depended on creating something, that, as it turned out, nobody wanted. Naturally the company eventually folded.

Here's the question: in the above scenario, were jobs created?

[unlawflcombatnt]

63. Jobs Created

Of course jobs were created. Would any jobs have been created if the company had not anticipated demand for the final product?
Of course not. As I stated previously, companies invest money when there is a current or anticipated demand. They don't invest money just to knowingly produce goods no one will want, nor will they hire workers to produce goods there is no demand for.

Investment & hiring took place in the mistaken anticipation of future demand. This is simply a case wher investment money was wasted on a mistaken anticipation of future demand. And workers were hired under the same mistaken assumption.

Mistakes happen. This in no way disproves what I've said. Anticipated demand is what brought about those jobs. Investment only facilitated it. There would have been no investment had the investors known for sure there would be no demand for the end product. And there
would have been no jobs created had a future demand not been anticipated.

[sendero]

56. And only stupidly run..

.... companies hire workers when they will not create a profit for them.

These companies often fail. Hiring only to do layoffs in a few months is very, very expensive.

Companies that know what they are doing have already secured the demand before increasing production. If you have a consumer product out there, it is not that hard to analyze how many you could sell based on increased production/distribution.

[unlawflcombatnt]

69. Hiring & Profits

Exactly.

Hiring workers when there is no current or anticipated demand is a complete waste of money. No companies do that. Claiming that companies hire without some response to demand, simply because they have investment capital, is ridiculous.

If a company hires workers for production and never sells a product, it means they've misjudged the demand for production. They incorrectly anticipated demand for a product. The fact that no demand exists doesn't mean jobs were created without demand. It means jobs were created by a mistaken anticipation of future demand.

I'd like to give the following example. Let's pretend I'm a doctor who sees 5 patients per day. I have one nurse. That's because I only need one nurse to see those 5 patients. Let's say my new half-wit friend, George Bush, gives me $1 million. Now I have plenty of money to invest and hire more nurses. Do I hire any more nurses? Of course not. I don't need any more nurses to see those 5 patients. I don't need any more equipment. So I save the money (or buy gold with it.)

Let's change the example. Let's say my lunatic ex-friend George Bush takes that $1 million back. He then gives spreads it out and gives it to 5,000 potential patients of mine, who previously could not afford my services. Suddenly I have a lot more patients. Suddenly I need more nurses to take care of those patients. Do I hire more nurses. Absolutely. I need more nurses to see the increased number of patients. But I don't have that $1 million to pay the nurses. It doesn't matter. I hire them anyway, because I can borrow money to pay them, or I can pay them when the patients pay me.

Why did I hire more nurses? Because my demand for their services increased. Why did demand for my services increase? Because more patients could afford my services. What initiated this additional demand? The increased income of my potential patients.

So what created the extra jobs for nurses? Increased demand. The increased consumer (patient) income increased demand for my services. Did availability of investment capital have anything to do with creating those jobs? No. Nothing whatsoever.

Jobs were created exclusively as a result of increased demand for services those jobs provided.

Investment does NOT create jobs. Demand does.

[On the Road]

11. Investment Does Create Jobs

If a manufacturer builds a new plant, it creates jobs for the construction firm, the providers of building supplies and raw materials, as well as the employees of the new plant. As long as the new plant stays in business, there is a permanent element to the gain.

However, to be permanent, the whole economy has to be expanding. Investing while the economy is declining can ruin the investment, drive the parent into bankruptcy, and result in fewer jobs. That's what accounts for business cycles.

Supply-side economics is a crock because it ignores consumer demand and business confidence. But demand-centered economics ignores investment and expectations. Wherever those factors are ignored, consumer demand remains potential and does not necessarily create jobs.

[Nederland]

13. Well said (nt)

[unlawflcombatnt]

26. Anticipated Demand created the Demand for construction of that new plant

The anticipated consumer demand for that plant's production created the Demand for construction of the new plant. The plant was built in anticipation of demand for the goods it produces. The construction workers were employed as a direct result of the plant owner's anticipation of a future demand for the goods produced by that plant.

The new plant would never have been built without the consumer production demand anticipated by the plant's owner.

And if there is never any demand for that plant's production, there will never be any demand for workers to run the plant. As such, job creation at that plant is entirely dependent on consumer demand for the plant's production.

[On the Road]

37. You're Conflating "Demand" with "Anticipated Demand"

I agree with you that demand is undervalued, and that economic discussion nowdays is way too supply-oriented. It's just that supply and demand are two sides of the same coin -- they always go together.

It's perfectly true that all economic activity arises from demand. It's just as true that it all arises from supply. If the supply isn't there, no amount of demand will stimulate the economy. Desperately poor countries all over the world are bursting with demand and it does them no good without the business infrastructure (investment) needed for a robust economy.

To put it another way, consumer need only becomes demand when the consumer has purchasing power. And that money generally comes from being employed by an business or other investor.

[unlawflcombatnt]

44. Demand Undervalued

We agree that demand is undervalued. We also agree that all economic activity arises from demand. I think we also agree that supply and demand should match. That's what I meant in my signature by saying "there must be balance between the 'means of consumption' and the 'means of production.'"

I wholeheartedly agree with your statement about consumer "need" only becoming "demand" when the consumer has purchasing power. That's an excellent statement connecting demand and purchasing power. I'd add that consumer spending is the dollar-value of consumer demand. Aggregate consumer income limits the dollar-value of that demand. It is that same limit that limits demand for production, and demand for workers to provide that production. Investment has little to do with this interaction. It simply assists workers in fulfilling the demand for production created by consumer spending.

However, I don't completely agree that demand will not stimulate the economy without supply. If there is sufficient demand for a product, someone will invest the money and effort to produce it. So investment is useful in this case. But the investment would have never taken place if there hadn't been demand for a product or service. This demand for production also created demand for investment. Again, it's the demand that started the process, not the investment.

In many cases, however, production facilities are already in place. In these cases, it is demand alone that limits production. The U.S. is currently operating at a 79% industrial capacity utilization rate. There is ample room for increased production without investing to increase industrial capacity. In othere words, little investment is necessary to increase production. In contrast, any increase in consumer production demand will increase production at present. And a large increase in demand will cause a large increase in production, and requires little new capital investment. In addition, the increased production demand will increase the hiring of workers to provide the production.

Here again, investment will not create jobs. Consumer production demand will. This is the major point I'm making. Investment creates no jobs. It simply facilitates their creation if demand for production necessitates their creation.

[On the Road]

50. We're Not on Opposite Sides

I just believe that all economy activities are a confluence of supply and demand, and that focusing only on either component is misleading. (I would take the same approach with a purely supply-side argument.)

Demand is potentially unlimited -- everyone wants to be a millionaire. The limit comes from expanding the economy to fulfill that demand. From the US experience, it may seem that supply will always increase to meet potential demand. But for most of the world, unfilled consumer demand has existed for centuries, sometimes for the most fundamental needs. If investment does not flock to an area, the demand will remain unfulfilled.

[LoZoccolo]

15. And they can afford them because people invest?

You've obviously never worked for a startup in the beginning stages. What you're talking about is the operational part of a company, when the scaling is driven by demand. No I'm not advocating supply-side economics, but I do acknowledge that the innovative side of a company that does more than, say, manufacture an already-developed product requires you to pour money into a venture which possibly might not see any customers.

[SharonAnn]

19. Abraham Lincoln on Labor vs Capital

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." Lincoln

[PsycheCC]

28. Thanks for more clarity in the foggy world of economics!

As always, you make great sense. Looks like tax cuts for the rich are yet another example of Bush administration waste. I'm sure this will never occur to them, as they're too busy lining the pockets of their buddies with corporate welfare so they can retire to cushy, high paying jobs after they've finished wrecking the country and killing its young.

Very clear, concise, and logical. Recommended for best page.

[bvar22]

36. How many NEW workers did Rush Limbaugh hire

with his Million Dollar Tax Break?

[win_in_06]

31. Corporate Welfare is based on the premise that

investment does indeed create jobs. Municipalities are willing to grant tax breaks to get big companies to relocate within their city limits. They want the jobs and the tax base created by them.

[unlawflcombatnt]

33. Demand Creates the Jobs, not the investment

No jobs would be created by that corporate welfare, if there was not already demand for production. Furthermore, local corporate handouts aren't creating any more jobs overall, they're just relocating them to that area. There is no net increase in jobs nationwide. There is simply an increase in jobs locally, with an offsetting loss of jobs in the area where the company would have otherwise set up operations.

[win_in_06]

38. MLB decided to move the Montreal Franchise to DC

The Expos were drawing only a few thousand per game. The Nats are bringing 30K per game. Someone is selling hot dogs, pennants, t-shirts, tickets, parking cars, etc.

Right now they are taking bids from ownership groups that will pay millions for the right to franchise merchandise, sell tickets, tv rights.

If they invest in quality players and coaches they will sell more tickets, win more games and sell more hot dogs.

Owners willing to spend more can make more. Dan Snyder has made more from the Redskins than any previous owner. The demand stayed constant but the profits skyrocketed based on his investment strategies.

[unlawflcombatnt]

71. Demand Transfer Only

You've simply increased local demand by improving the product for local consumers. However, you're just tranferring it from one locality to another. You didn't increase jobs any. You simply moved them from one city to another.

This has absolutely NO effect on aggregate consumer demand, or the aggregate demand for workers to provide goods or services. The loss of those good players from one team caused an equal loss in demand for "baseball-watching" in another area. And if baseball "consumers" experience a loss in income, they will do less baseball-watching.

The poor and homeless aren't going to pay for baseball tickets, regardless of how good the product is. In contrast, if the homeless and poor suddenly received a large income infusion, they would watch more baseball games. Their baseball-related "consumption" would increase, due to their income. There would be more aggregate demand, because there would be more consumer income to spend. This would increase demand for any baseball-related products. It would increase the demand for workers to provide those baseball-related products.

Unlike the "investment" in players, which simply transferred demand from one locality to another, the increased consumer income would increase the aggregate, or total demand for baseball watching.

[robcon]

34. This issue was settled in 1936

John Maynard Keynes showed that investment, which is far more erratic than consumption, is the primary cause of booms and busts in the economy.

Investment is not tied to demand or consumption, but to 'anticipated' demand and consumption. More than 70% of new companies fail, but their continued investment is a key linchpin of the economy: investment depends on technology, optimism/pessimism (Keynes called it 'animal spirits'), cost of capital and degree of risk taking/uncertainty.

Keynes theory explained 'equilibrium' unemployment, which was impossible in classical economics, where supply and demand for labor would create a 'market-clearing' wage.

The major cause of the boom and bust cycles of capitalism is that private savings and private investment (and ultimately government spending and taxation) are not tightly linked, either in theory or in statistics, whereas he believed private consumption and aggregate private income are tightly linked (the easy current availability of credit in the U.S. would debunk even the tight link between aggregate income and aggregate consumption.) Keynes prescription - that deficit spending by the government can offset weak private investment during recessions, is one of the key principles of economics.

The ups and downs of private investment is the key variable that explains the business cycle of advanced economies.

edit:spell

[unlawflcombatnt]

42. You Couldn't Be More Wrong

You've gotta be kidding.

You completely missed the point about Keynesian theory. Yours is the most backwards interpretation of Keynesian theory that I've seen.

Keynes was a major advocate of aggregate demand. Keynes is essentially the father of Aggregate Demand, or at least the 1st person to realize its importance. He believed (correctly) that aggregate demand drives the economy. He believed the 1936 economy could best be assisted by increasing aggregate demand, not investment. He maintained that the Great Depression was a direct result of reduced aggregate demand.

Keynes believed that weak consumer spending and weak consumer demand could be offset by government spending. This government spending was designed to increase aggregate demand.

Keynes lamented the fact that functional factories lay idle, and that workers to operate the factories sat idle outside. His conclusion was that AGGREGATE DEMAND for production was the missing element. How could increased investment possibly put unemployed workers back to work in fully functional factories, if no one had the money to buy production? It couldn't. That's why Keynes advocated the real solution to the problem. Increase aggregate consumer spending and demand.

Public works projects and government spending increased demand for labor. This, in turn, increased labor/consumer income, spending, and demand. The only "investment" involved was that needed to put money in worker/consumer pockets, in order to increase consumer spending and demand for production.

[leanin_green]

45. Aggregate demand is the loose thread in the tapestry.

That's why I have said, if you want a bloodless revolution against Corporate Democracy(that's funny)remove the demand by becoming more self-reliant and regional. Refuse to increase the capital of the capitalists. Live simply and buy locally. Let how you control your capital be your power against those entities that appear unjust and socially irresponsible. Once again my refrain, "What if they had a sale and nobody came?"

[unlawflcombatnt]

52. Outstanding Idea

We could definitely reduce corporate power by refusing to buy things from companies we don't like. I strongly recommend that.

I've also recommended that people invest in gold, instead of stocks or real estate. Gold won't crash, like stocks or real estate. And you can buy it and hold it without the government even knowing that you have it.

And you can also put your entire IRA contribution into solid gold. You probably won't get rich this way. But gold prices have increased far more than stocks under Bush's "economic reign of terror." Gold was $280/oz. when Bush took office. It's $436/oz today. That's over a 50% increase in price. The Dow Jones was around $10,700 when Bush took office in 2001. Today it's 10,463. How much of an increase is that?

[robcon]

47. edit dupe post

[robcon]

49. You should read Keynes.

Keynes construction of Aggregate Demand...

D=C+I+G

Demand = Private Consumption + Private Investment + Government Consumption/Investment

Keynes argued that private consumption is a dependent variable: a fairly passive percent of Income, and not the critical variable determining the state of the economy.

He argued that investment is an independent variable, and that it results not from Consumer Demand, but from idiosyncratic estimates of future demand, and such things as the state of technology and 'animal spirits.' Investment is the most important variable for determining the business cycle, since it is exogenous to the model, i.e. not dependent on other variables. Much, probably most, of private investment, as you must know, is not in anticipation of new or increased demand, but is to develop cost-saving/labor saving techniques of production or delivery of services, leading to increased productivity, the surest way to economic growth.

Obviously, government spending in Keynes model is exogenous, and is also a strong determinant of the business cycle.

Keynes' theory is supported empirically: it is a statistical fact that investment is very erratic, and closely tied to the ups and downs of the business cycle, while consumption is dependent on income - much more smooth, with less variation during business cycles, and is a result, not a cause, of business cycles.

This is far from your label as "the most backwards interpretation of Keynesian theory that I've seen.." This is the standard Keynes model, derived from the General Theory itself.

[unlawflcombatnt]

77. You've Misinterpreted Keynes

Since I actually have Keynes's "General Theory," I'll address some of what you said directly from the book.

You stated that:
"Keynes argued that private consumption is a dependent variable: a fairly passive percent of Income, and not the critical variable determining the state of the economy."

I'm not clear what you are stating. I'll refute what I think you've said. Keynes stated clearly that consumption is dependent on aggregate income. The following passage from p 28 is noteworthy:
"consumption will depend on the level of aggregate income, and therefore on the level of employment N, except when there is some change in the propensity to consume."

Consumption is also dependent on the marginal propensity to consume. (This simply means the less affluent devote more of their income to consumption spending, than do the more affluent.) From page 31:
"for a poor community will be prone to consume a far greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment."

There is also a hint above that investment is related to consumption. Further evidence can be found from the following passages from page 135:
"When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output..."

" ...the prospective relationship between one more unit of that type of capital and the cost of producing that unit, furnishes us with the 'marginal efficiency of capital."

Combining these passages, and the text that follows, Keynes makes the point that utility of capital investment is dependent on the "returns." Those returns are the profits from the sale of goods. Keynes implies that there is a definite limit to the benefit of capital investment. And that limit is determined by the rate of return. That "return" is dependent on consumer spending. There is no "return" without consumer spending. As such, investment cannot make up for reduced consumer spending, despite the equation sited.

As I've stated previously, the benefits of investment are limited by consumer spending. This is exactly what Keynes meant in his book.

Again, investment does NOT create jobs. Only demand for production creates jobs.


unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Nederland]

40. Think of it this way

Investment money is the immediate cause of job creation.

Demand or anticipated demand is the cause of investment.

The two are related, but distinct. The key point is that if you have investment money but no real demand, jobs can still be created. Yes, they will be gone once the original investment is used up, but they will be created and exist for some period of time. However, if you have demand but no investment, no jobs will be created.

As Keynes and FDR realized 75 years ago, investment is the key.

[unlawflcombatnt]

79. We half-way agree

I agree with you, when you state that jobs can be created this way with no "real" demand. But you previously seemed to be implying that those jobs are created without any demand, whether real or anticipated. It seems now that we have come to an agreement. You have restated that jobs will not be created without investment, even if there is demand. Technically that is true, but rarely the case in practive. In contrast, jobs are absolutely never created without either an anticipated demand for production, or a current demand for production.

I stress this point because without consumer income and spending, and the demand for production is creates (or is anticipated to create), no jobs are created. And low consumer income results in low consumer production demand, and low demand for labor as a result. Thus consumer spending and income limit job growth.

No amount of investment will create *any* new jobs without an increase in demand for production, either anticipated or real. Jobs will only be created by the increased demand created by increased consumer income.

It is consumer income and demand for production that place the greatest limits on job growth, not investment. That is my major point. Investment is not the key, nor did Keynes or FDR ever make such a claim. Keynes clearly believed that aggregate demand was the key. And the biggest portion of aggregate demand comes from consumer spending. And benefits of investment were strictly limited by return on that investment. And those returns were the product of consumer spending and production demand. Consumer demand was key. Investment was not.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Sparkly]

41. Investment in lower- and middle-classes does, imho

but I agree, it's not about windfalls for corporations if there's nobody who can afford to buy their goods and services.

Investment in inner-city development, education, infrastructure, tourism, etc. etc. -- yes, and anything else that builds the economy from the bottom up. (Clinton was very good at explaining this kind of investment to people -- "For every dollar we put into this, we get $10 back...")

[berni_mccoy]

48. That's not an absolute truth

If it wasn't for investment money, I would not have been able to start a company that employed three people and paid for the services of 4 others.

The current company I am with is funded with investment money and I wouldn't be working there today if it wasn't for that.

[unlawflcombatnt]

51. Wages vs. Productivity

I found this graph of wages at the Economic Policy Institutes website. I felt it was pertinent here since at least one person has asked for "evidence" that real wages have declined. In fact, they are lower now than they were in Novermber of 2001. "In July 2005 dollars, the wage was $16.15 in November 2001 but only $16.13 last month," according to the Economic Policy Institute.

In contrast, worker productivity has increased 12% since that time. The benefits of increased productivity are not being shared with workers. Consumer spending has been maintained largely by increased borrowing, not by increased wages. The biggest source of this borrowed money is home equity loans. This information can be found at:
http://www.epi.org/content.cfm/webfeatures_snapshots_20050817


Below is a graph of real wages since 2003.

[many a good man]

53. Investment has NOT created jobs under bush*

A business is only willing to invest if it thinks it will gain from it. It will only profit if there are consumers able to buy its product. Falling wages decrease aggregate demand and therefore diminish the likelihood of making a profit. It will instead look at other ways to increase its return instead of building its business (and adding jobs).

bush* stimulated investment by cutting taxes on the "investor" class. But P/E ratios are still near record highs so equities are not a particularly desirable investment. So they profit instead by cutting costs (i.e., jobs) and shifting the money elsewhere. Now we are experiencing the weakest recovery on record in terms of employment and wages.

Without increasing aggregate demand (thru wages), a business is only able to profit through productivity increases and/or increased consumer debt. Aggregate demand is presently being propped up by consumer debt: low interest rates, easy loans, and the housing bubble. Like the middle class tax cuts, these are inadequate and transitory patches to the worsening problem.

Our consumer (and government) debt is now reaching astronomical proportions.


You only have to look at the past 25 years of our nation's economic history to see the OP is 100% correct.

[unlawflcombatnt]

78. Labor Cost Reductions Ultimately REDUCE Corporate Profits

Very well put. I agree completely. Wages must increase if AGGREGATE DEMAND is to increase, unless the aggregate demand increase comes exclusively from increased borrowing.

The only way business can increase profits without increasing aggregate demand is by reducing costs. This almost always comes from reducing labor costs. However, labor cost reductions reduce labor/consumer income, which causes a decline in aggregate demand. If there's a total, nationwide reduction in wages, total product sales will also decline. This reduces profits and completely nullifies gains made from labor cost reductions.

Labor cost reductions temporarily increase individual company profits. But this is true only on a small scale. If labor cost reduction is a nationwide phenomena, the aggregate loss in labor income becomes noticeable. It reduces the total amount of money available to buy goods. Again, the reduction in aggregate labor costs is completely nullified by the reduction in total sales. There is simply NO benefit from aggregate nationwide labor cost reductions, because the loss of consumer sales equals the labor cost reduction. As a result, there is no aggregate increase in nationwide business profits. There is simply a shift in individual company profits away from companies who do not reduce labor costs to companies that do reduce labor costs. However, this effect does not remain "balanced." The nationwide (and global) decline in wages reduces aggregate consumer demand for production. This further reduces demand for labor to provide that production, causing further declines in labor income, consumer spending, and consumer production demand.

Thus, on a national or global scale, short-term profit increases from labor cost reductions cause long-term decreases in profits. This short-sighted concern with short-term profits is leading us to a long-term economic decline.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Douglas Carpenter]

55. mostly (but not entirely) agree

Investment in and of itself does not in and of itself create jobs, especially in a globalized economy. Speculation which makes up most of investment these days creates virtually no jobs whatsoever.
I live part of the year in the Philippines--a few years ago there was genuine optimism that I once shared in that a large number of jobs would be created as a result of outsourcing from wealthy economies. The result was that the vast majority of these jobs could not pay even a subsistence income. Now we see that even these sub-subsistence paying jobs cannot stay competitive against the labor pool of China and other places where lower wages are paid. This is the reality of free trade. Something that regrettably, I once believed in. (Hey President Clinton said it was good)

Obviously though, non-speculative investment specifically in labor intensive enterprises that are not likely to move, can create jobs.

[unlawflcombatnt]

61. Outsourcing and Investment

I certainly agree with you about the detrimental effects of outsourcing.

The investment you refer to is creating jobs when there is already a demand for the goods to be produced. It is the demand that started the process, not the investment.

Also, when that investment is taken to other countries (when there is already demand for production from American consumers,) it destroys American jobs. Those are jobs that could have been done by American workers, but were sent to another country to take advantage of the low-wages in a poverty-stricken country.

Americans can only become competitive with an impoverished foreign labor pool by accepting the same starvation level wages. And that has nothing to do with education or training.

[Douglas Carpenter]

65. I agree -- also I learned by living in a third world economy

Some years back a large number of computer-programmer schools had opened in virtually every town and city of the Philippines. At that time, the U.S. and other wealthy countries were importing a lot of programmers from the third world -- Most of these students had dreams of getting their green card and immigrating to the U.S. with high-paying Silicon Valley type jobs. Now most of this work is outsourced to India and a few other places were programmers work for an average of about one hundred dollars a month. Now, the vast majority of these students cannot find even local jobs--much less high-paying jobs in the Western countries. Most of those who do find jobs are mostly working in places such as phone-centers as very low salaries.

The mythology that was being preached even by many Democrats that this whole new wave of Asian capitalist would be making big incomes and buying American products made by American workers now seems like an absurd fairy tale from the past. Does anyone believe it anymore?

[unlawflcombatnt]

68. Housing Bubble Obscures Outsourcing Problem

Thanks for your input. I hadn't heard that particular story before.

I think a lot of people may have forgotten that over 300,000 people who had high tech jobs in California's Silicon Valley lost their jobs. Many of these jobs were due to outsourcing to foreign labor markets. These workers had all the "skills" necessary, but were unable to compete with foreign workers who will work for 1/5th as much. So those jobs were lost, along with the aggregate income that they provided. If those jobs paid an average of $60,000 per year, that's a loss of $18 billion of income. That's $18 billion/year less to purchase American goods. The spending that income financed, as well as the demand it created, cannot be replaced by 300,000 foreign workers making 1/5th as much. The increased corporate profits from the labor savings provide no benefit to our economy whatsoever. With loss of aggregate consumer income and spending power, and the resulting loss of consumer demand, investment demand is also decreased. There's no reason to invest more when consumer demand is less. It simply doesn't make any sense.

Profit increases from widespread reduction of labor costs (and labor income) do not help the economy. It hurts the economy. It reduces the very consumer spending and demand necessary to drive production. The short-term profit gains cannot be productively re-invested. When the demand for goods declines, so does the demand for further investment. That extra profit simply goes into increased CEO salaries & bonuses, stockholder dividends, stock market overvaluation, corporate bank accounts, advertising, Congressional lobbying, and Republican campaign contributions.

There is simply less to invest in, because aggregate consumer income and production demand decline due to outsourcing. Again, it makes no sense to invest in increased production capacity when the demand for production is declining.

As many are probably aware, the potential decline in demand has been obscured by the housing bubble. From $200-$300 billion per year is extracted from homes in the form of home equity loans. Much of this money goes into consumer spending. This amounts to 1.7-2.5% of our $12 trillion GDP.

Clearly an extra $300 billion in consumer spending money can obscure a large amount of job loss from outsourcing. If the average American worker makes $35,000/year, it would take a loss of 8.5 million jobs to cause a consumer income loss of $300 billion dollars. As a result, home equity borrowing alone can compensate for large numbers of lost jobs, as well as the aggregate income loss that results. Thus consumer spending and demand have been maintained from this borrowed money. As a result, there has not been a noticeable decline in consumer spending from jobs lost to outsourcing. So the catastrophic problems it will ultimately create are going unnoticed at present.

We can't keep losing jobs and labor income. The housing bubble will eventually deflate. It will take home equity-loan financed consumer spending along with it. Many of the newly created jobs in the housing industry will be lost as well. When this happens, the outsourcing debacle will become apparent. The income lost from outsourcing will become apparent, because the consumer spending loss it caused will surface.

In this respect, the sooner the housing bubble bursts the better. Consumer spending will decline, and Corporate America will take a hit as a result. Corporate America will be forced to take notice, because their sales and profits will decline. The sooner this happens, the sooner our government will start taking real action to reduce outsourcing.

[trogdor]

58. If Al Gore had mentioned this ONCE...

...we might not be in the mess we're in now. We'd have been toasting Al's second inaugural this past January with champagne, and telling freepers to eat shit.

Asshole Republicans have been selling this bullshit for too long.

[unlawflcombatnt]

59. Yes, indeed

Trogdor,

You're absolutely right. This is why I keep harping on this subject. The simple truth is that consumer income and demand create jobs. Increased consumer income increases consumer spending, causing an increase in the dollar-value of demand for production. This increase in production demand leads to increased hiring of workers to provide that production. It also puts upward pressure on wages. Business prospers as well, since they can sell more production when aggregate consumer income is higher.

[Joebert]

64. I had "Trickle Down" thrown in my face today

I said ok, let's pretend that works.

The theory is that you let rich people buy big stuff, that is built by other people, out of parts made by other people, etc.

Let's say it's a boat. One made out of steel.

Well, if steel is imported since it's cheaper out of the country. And it's cheaper to have it BUILT outside the country, how did it help any part of the local economy? Who did the money trickle down to?

They didn't like that.

[unlawflcombatnt]

70. Trickle Down

They certainly don't like that. That doesn't help any part of our economy. And I don't think labor/consumer income can be maintained on the production of "big stuff" alone. How would farmers and small businesses stay in business, and employ workers?

The problem with "trickle down" is that there is an implied limitless amount of demand. The error is that there is not a limitless supply of demand when measured in dollars. In fact, the dollar-value of demand is strictly limited by income and the amount of money that can be borrowed. With wages declining, and borrowing nearing its limit, we are definitely nearing the limits of the dollar-value of demand.

[texpatriot2004]

66. Obviously! With all those tax credits and refunds to the wealthiest

Americans we should be rolling in jobs by now. You are so right, investments don't create jobs.

[PsycheCC]

67. good reading!

:kick:

[unlawflcombatnt]

72. Thank you

Compliments are always appreciated

[unlawflcombatnt]

73. Employment-Population Ratio Graph

Though this does not pertain to this discussion directly, I still think the following graph is worth posting here. It refutes the idea that unemployment is actually decreasing.

Calculation of the unemployment rate is reduced when there is reduction in the labor force participation rate. In other words, this can reduce the unemployment rate, without any change in the number of those actually unemployed.

This graph shows the other end of the picture. It shows the fraction of the total population that is actually employed. It shows the employment:population ratio. This removes the labor force participation rate from the calculation. It's obvious from the graph that the percent of Americans employed has dropped sharply under the Bush administration. This also means the % of unemployed Americans has increased, despite what the statistically manipulated unemployment rate implies.

[texpatriot2004]

74. Good thing that the Wealthiest got those tax refunds so that

their investments would stimulate the economy eh? :sarcasm:

[unlawflcombatnt]

75. Tax Cuts

It sure is good they got those tax cuts. That way they could create jobs with all of that new "investment capital." Because we all now know that jobs can be created without consumer demand, don't we? And we now know that companies will hire workers regardless of whether they are needed, don't we? Because if they have enough capital, companies will hire workers to produce even more goods they can't sell, right? Because we now know that profits can be made without any product sales. All it takes is more "investment." We know all of this because corporatists, right-wingers, and DLC'rs have told us so. Surely they wouldn't lie to us about this. Would they? :sarcasm:

[unlawflcombatnt]

76. Signature Deletion

Does anyone know when DU started deleting signatures? I was completely unaware of this. From now on I'll just include my signature in all of my posts.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[MH1]

80. Because it's at level 3 limits?

Are sigs just not showing up now because of the limits they impose due to high traffic?

Also they recently added restrictions on image size and the like. Yours may have been deleted if it was outside those limits (although if what you have here is all you had, that wouldn't be it).

[unlawflcombatnt]

81. Signature

I don't know why my signature stopped appearing. It seemed like it was well within the rules relating to size. I did include a link to my blogsite. So maybe links are not allowed in signatures. That's the only reason I can think of.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."