[lbo-talk] Krugman

[Seth Ackerman]

bhandari at berkeley.edu wrote:

>Yes there are always periods in which capital is exported or caught up in
>frenzied speculation but these are usually short lived before capital
>finances a new upsurge in real production. That is part of the normal
>functioning of capitalism, and perhaps the drop in the dollar will chase
>out destabilizing speculative capital flows and abet US mfg capacity.
>Don't see the confidence for that at present.
>Yours, Rakesh
>  
>

I think this analysis needs closer scrutiny.

By my calculation, while the bubble was going on (1996-2006), fixed 
investment in the real economy rose by 55%. This rather robust capital 
accumulation yielded a 20% rise in output per worker and a 36% rise in 
total output. That includes a 46% increase in manufacturing production.

So the frenzied speculation did absolutely nothing to dampen real 
investment and production. Nor should it. I don't know where the idea 
comes from that speculation somehow crowds out real activity (at least 
in any direct way).

A bit of logic shows why. At any given moment, there is a finite stock 
of labor, nature and existing capital goods available to produce new 
goods or services. Therefore, at any given moment, producing more of one 
thing (e.g., iPods or restaurant meals) requires that less of another 
thing be produced (e.g., Nikes or haircuts).

But the same logic does *not* apply to speculative transactions. You can 
double, triple, quadruple the number of stock market transactions, say, 
without having to reallocate more than a negligible increment of real 
resources (labor, nature, capital goods) to the financial sector --  
that is, away from real activity. During a major bubble, there might be 
some minor increase in the share of the labor force working in finance 
but it will be nowhere near proportional to the increase in the number 
of speculative transactions. From 1996 to 2006, employment in the 
financial sector (including real estate) rose from 5.9% to a whopping 
6.1% of nonfarm employment.

So Carrol's question...

>"Why did this look like a _better_ way of making
>money than _other_ available options (ASSUMING such options were
>available)?"
>
...doesn't make sense.

Seth