Alexandros M. Goulielmos
The paper presents the arguments of British economist Keynes in relation to the economics of crises. The paper arises from the worldwide economic slump at the end of 2008, which resembles that of 1929-1933. Keynes argued that the earlier crisis was the result of waning confidence and the marginal efficiency of capital. The latter incorporates the prospective yield over the life of capital, the rate of interest and the production cost of capital. Current yield, as well as prospective yield, falls rapidly during a crisis, and this is related to three case-studies in the shipping industry, which are presented here as illustration of Keynes’ arguments. Keynes found the source of crisis in the oversupply of capital goods. The rate of interest alone is unable to raise the marginal efficiency of capital, while there is no reason to expect the level of confidence to rise when there is falling effective demand. These relationships are discussed in this paper. Keynes showed how and when the marginal efficiency of capital can be restored. The central theme is the longevity of capital goods, as in a crisis one expects the supply of capital goods to be reduced in order to stimulate recovery. Similarly, ships have a productive life of over 30 years. This paper contributes new insights by examining how the world has changed since 1946, when Keynes died. The important lesson to be taken from Keynes is that economists can fix capitalism to prevent or cure crises. If the appropriate steps are not taken, nations will face unrests as people have formed long term expectations of a welfare state. But intervention, as prescribed by Keynes, is incompatible with the laws of the market that have prevailed since the 1970s.
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