| This question <104|104> overall <110|112> RemyClaudette: <557|478>. |
| Question 239: In what respects is, according to Keynes, individual behavior irrational? |
| [111] RemyClaudette: spinning like a toy top. I thought this question though simply asked was one of the most interesting. The class is about Marx but the question bridges the theories of one other giants of economics. Keynes is not classical, he is his own school of thought just like Marx. Just like Marx built a school of thought reacting to the de-humanizing aspects of Capitalism, Keynes spun an entire school of thought centering around the apparent breakdown of Capitalism- The Great Depression. |
| Both Marx and Keynes did not see Capitalism at its best. Marx saw wage slaves and children dying in the streets. He reacted with compassionate anger. At times when reading Capital one can almost hear his voice booming louder and louder in righteous indignation. He saw the only solution as eventual revolution. Marx believed that no rational individual once one really understood Capitalism could subscribe to it. |
| Keynes saw breadlines and starvation as well. His reaction, however, seems more subdued. Though he would revolutionize economics, Keynes was not seeking a revolution as a solution. Keynes was looking for a defribullator, to shock the system back into functionality. |
| In admitting the system was broken Keynes opened the door to challenge one of classical economics principle assumptions. One of the supports of classical dichotomy is that people act rationally. Rational meaning reasonably or with decent judgment. I do not flush my money down the toilet and expect it to come flying back at me. Rational, unfortunately, does not always mean logically or in my best interest. It is at this point the system breaks. |
| Most economist regardless of their school of thought can acknowledge our economy functions in a circular fashion. My spending becomes your earnings and in turn your earnings become my spending. The system spins round and round like a toy top. For reasons we do not always understand the top occasionally loses momentum slows to stop and falls on the floor. Usually the top does not just crash to the floor, we can feel it losing speed. To carry the metaphor as the top loses speed one is earning less and less and rational individuals as they earn less and less hoard more and more to carry themselves through the lean times. |
| Sadly this is a Chinese-finger trap. The more one saves, the less one spends, the less everyone else earns the more they save and they cycle continues like water washing down a drain until there is nothing left and the system stagnates. Saving, which all respects appears to be a rational choice is not in mine or societies best interest. Liquidity is the grease that keeps the system moving. Even though saving is rational my rational choice helps breaks the system which is not in my best interest. |
| Keynes also carries this idea over into his theory of “price stickiness”. We have to remember that Keynes lived through the Great Depression. The concepts of inflation and deflation were ever present. Keynes sensibly reasoned that it is easier for prices to go up, to inflate than in it is to go down or deflate. None of us complains when our wages increases, each of us wants to see a higher bottom line. However none or very few us want to see our paychecks shrink. We will resist deflation even it means a return to market equilibrium and the same or a higher purchasing power. It is rational to want a higher number on our paychecks, it is not always in our best interest. |
| A society cannot function in a hyper inflation economy it is too volatile. There is a chain of producers and suppliers in our country. There are people who produce cotton to sell to the fabric factory which sells shirts to the retail clothing outlet ( a gross over simplification I understand but one gets the idea). Said retail clothing outlet has competitors. When prices start to run-away and escalate out of control, no one wants to be the first to cut prices. Every part of the chain has another part of the chain to pay, if one cuts prices profit diminishes or disappears. |
| We live in a profit seeking society, no one wants to realize diminishing profits or disappearing it is not rational. Even given that price cutting would lead to others cutting their prices and an eventual downward price adjustment which is in my best interest no one wants to be the first. Losing money is not rational. It is another scenario where behaving rationally is not in my best interest. |
| Keynes is splitting hairs in a sense but he is saying that even though we behave rationally or rationality is not always in our best interests. Basically our behaving rationally is not rational. He is opening the door for challenging a basic tenant of classical economics. Admitting that the system can break and allowing that classical assumptions do not always hold true is a large step. And it is one step closer to Marx. |
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