I’m just trying to clarify this concept. Does Higgs suggest that regime uncertainty causes an increase in time preferences (less investment/more consumption)? I’m just asking because I feel as if some people are throwing regime uncertainty around in a bit of a keynesian fashion suggesting that capital is being horded because of it.
The way I see it is as follows; imagine an economy in depression, where society’s time preference generally lowers. Thus, individuals hold off on present consumption, uncertain about their future (they prefer to hold money, in case the situation gets worse). Usually, this would increase accumulated capital, allowing businesses to enjoy relatively lower interest rates. The problem is that in times of depression it is unlikely that businesses will invest, because their future is also uncertain. This is especially true of there is additional “regime uncertainty”.
So yes, I think it is possible that there is a case of growing quantities of un-invested accumulated capital. I rather not think of this as disequilibrium, as I believe that there is always disequilibrium (I see the economy as a dynamic process, versus one that is constantly in equilibrium), but this is a good way to picture it.
This is also my own definition of the so-called “liquidity trap”.
Are you talking about an actual hording of capital or money? If people’s time preferences decrease due to the recession and they save more but businesses do not increase investment, wouldn’t this just result in a general deflation? Not a situation where real resources are being under-employed?
Also from what I’ve read of higgs, he tries to show that investment as a % of GDP decreases due to regime uncertaincy. Which doesn’t this just mean higher time preference?
The problem is never “hoarding” per se, or businesses holding on their cash instead of reinvesting it. The problems is always failure of prices to adjust to the current market conditions due to government policies. If prices adjusted, businesses would resume to reinvest at the lower market rates for factors of production.
The uncertainty that Higgs refers to is one of the contributing causes as to why factors of production are now valued less. If the prices of these factors cannot adjust, uncertainty remains and so will unemployment.
Are you talking about an actual hording of capital or money? If people’s time preferences decrease due to the recession and they save more but businesses do not increase investment, wouldn’t this just result in a general deflation? Not a situation where real resources are being under-employed?
Both capital and money, since money is just a widely-accepted commodity used to acquire economic goods. In any case, yes, it would lead to deflation, and I think that deflation is the “antidote” to the problem (in conjunction with the liquidiation of unhealthy assets). However, in our present crisis of interventionism, prices are not being allowed to adjust.
In any case, since the economy is not at general equilibrium, it’s important to realize that just like economic growth, adjusting the structure of production in the event of a recession (which presupposes interventionism, anyways) is a dynamic process, and so occurs over an undefined period of time.
Also from what I’ve read of higgs, he tries to show that investment as a % of GDP decreases due to regime uncertaincy. Which doesn’t this just mean higher time preference?
Not necessarily, because consumption did not necessarily rise proportionally.
Let me see if I’m interpreting this correctly. Regime uncertainty is causing businesses to undervalue factors of production which is preventing prices from adjusting to the market clearing level? Is this suggesting that prices are too low and actually need to increase? I would say prices are currently too high and need to fall, no?
No, I’ll reiterate.
I didn’t use the term “undervaluing” at all. I said that a factor of production is valued less, that is, entrepreneurs as buyers are not willing to pay the price they use to. The uncertainty could be one of the contributing factors to why those factors have lost value. Obviously prices need to adjust downward for the buyer (businessman) to regain confidence and start purchasing again.
Regime uncertainty is causing businesses to undervalue factors of production
Which is a way to say that normally a businessman might invest in the machine given the price, but then regime uncertainty enters the room and threatens to steal from anyone that puts machines to productive use… so the businessman values the machine less.
so the price of machinery falls till a new equilibrium which is optimal given the institutional environment.
businessmen can’t help but undervalue factors of production whose value is threatened by regime uncertainty. the ‘undervaluation’ is relative to a hypothetical circumstance in which there was no regime uncertainty.
Imagine if there was something worse than regime uncertainty,… certainty of complete and total theft and death by regime. businessmen would run away from their business and try to indulge in their final moments. (ok, i put some thymology in there !)
If businessmen close their factories, cancel purchase orders, fire workers given the prices of purchasing those factors and their expectations of profit (or loss) from selling the product, the only hope for markets to clear, is to have new prices reflecting the fallen value of capital goods. Artificially maintained price floors and subsidies and distribution and further regime uncertainty certainly would not help.
So to recap. Regime Uncertainty > Value Capital Goods Less (Undervaluing from what would be without fear of regime) → Changing values create downwards price pressure (as prices are too high given our values)…
I hope this helps. I’m being a bit slapdash.
Ok let me take another crack at it. The uncertainty is not the problem per se. This simply causes businessmen to value factors of production less which would in turn cause prices to fall. However, gov’t policy that prevents falling prices is responsible for unemployment etc. The regime uncertainty exacerbates the overall problem of prices remaining too high and needing to fall, increasing the severity of the recession. Correct?
I would say that’s correct.