By John Eatwell and David Pitt-Watson 

The seizure of wholesale financial markets, distress of retail borrowers and apparent immunity of the financial sector to all remedial measures has produced an air of desperation among policymakers.

Yet the problem would have been familiar to John Maynard Keynes. Insufficient attention has been paid to the core insight in Keynes’s analysis – that recession is essentially the consequence of co-ordination failure.

The textbook example is of an individual industrialist who, confronting an uncertain and potentially unprofitable future, postpones an investment. If all others do the same, aggregate investment declines and their pessimism is self-fulfilling as profits and incomes fall. A similar tale can be told of families postponing expenditure and precipitating unemployment. If only all could be persuaded to spend then all would be better off, with demand and profits sustained and jobs preserved.

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January 9, 2009 1:26am in Economists | Comment