«Here's the problem:
As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle»
Paul Krugman
Friday, August 27, 2004
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2 comments:
because:
1) replacing investment with consumption or speculation reduces the capital stock because capital depreciates with time
2) Reduced capital stock = reduced output
3) Reduced output = falling incomes (or unemployment with sticky wages)
@Troy
In that case, why does consumption fall *immediately* during a recession?
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