[lbo-talk] Why Markets Fail

Ted Winslow egwinslow at rogers.com
Tue Nov 11 10:29:52 PST 2008


Michael Perelman wrote:


> Markets fail for many reasons. With all the attention to the current
> financial crisis, the time has come to look at another part of
> market failure -- the reluctance to invest in long-lived plant and
> equipment. I'm not merely thinking about the deindustrialization of
> the US economy, but a more general reluctance.
>
> The commitment of funds for fixed capital entails taking a risk. In
> the words of John Hicks, one of the earliest economists to win a so-
> called Nobel Prize, pointed to the obvious problem: "an entrepreneur
> by investing in fixed capital gives hostages to the future" (Hicks
> 1932, p. 183). Unfortunately, neither Hicks nor virtually any other
> economist has explored this fear of investment.
>
> The most popular response to this reluctance to invest came from a
> very conservative Austrian economist, who once served as a socialist
> minister of finance, before landing at Harvard. Joseph Schumpeter
> was indeed one of the giants of 20th century economics. Here his
> reputation to his personal brilliance, as well as a willingness to
> learn from Karl Marx.

This ignores Keynes whose economics is founded on a particular understanding of the psychology of investment in long-lived plant and equipment as a psychopathology linked to fear and denial of death.

“It is safe to say the enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.” (General Theory, p. 162)

Though it doesn't owe much if anything to a reading of Marx, this is a treatment of capitalist motives as "passions" having much in common with Marx's (a point made by Keynes himself in associating his own idea of the "essential characteristic of capitalism" with Marx's idea of it as M-C-M').

Though Schumpeter doesn't notice the connection to Keynes's "vision" (which Schumpeter identifies with "the three fundamental psychological factors" of the General Theory), the psychology in question is psychoanalysis, a psychology for which, as I pointed out some time ago, Schumpeter had high praise. <http://mailman.lbo-talk.org/2007/2007-September/017761.html>

Ted



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