Saturday, March 05, 2011

Keynes's General Theory Chapter 6 Appendix on User Cost

In this chapter Keynes argues that if you idle your equipment, it still costs something to keep it up, though the equipment will, because of not being used, be more valuable than similar equipment being used over the same time period. He even has a nice little equation for it. This observation seems obvious enough, but Keynes argues that it wasn't (72). Sometimes it's the most obvious things that need to be pointed out.

The only thing that seems a bit odd in this chapter is his argument that his formula proves that idling equipment will drive up prices. It seems easier to point out that if you idle your equipment, you reduce the supply relative to demand, and that drives up price. I suppose his equations can prove a more complex relationship, but in the end it just boils down to the simple fact that if you reduce supply while demand remains the same, prices are going to go up.
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