Tuesday, March 1, 2011

Albert Einstein--a physicist--understood economics better than any economist of his generation, except for Keynes!




"As I see it, this crisis differs in character from past crises in that it is based on an entirely new set of conditions, due to rapid progress in methods of production. Only a fraction of the human labour in the world is needed for the production of the total amount of consumption-goods necessary to life. Under a completely free economic system this fact is bound to lead to unemployment. For reasons which I do not propose to analyse here, the majority of people are compelled to work for a minimum wage on which life can be supported. If two factories produce the same sort of goods, other things being equal, that one will be able to produce them more cheaply that employs less workmen – i.e., makes the individual worker work as long and as hard as human nature permits. From this it follows inevitably that, with methods of production what they are today, only a portion of the available labour can be used. While unreasonable demands are made on this portion, the remainder is automatically excluded from the process of production. This leads to a fall in sales and profits. Businesses go smash, which further increases unemployment and diminishes confidence in industrial concerns and therewith public participation in mediating banks; finally the banks become insolvent through sudden withdrawal of deposits and the wheels of industry therewith come to a complete standstill." -Albert Einstein

Sixty years later these same thoughts were echoed by Nobel Laureate Economist, William Vickrey...

"Trends in technology, demand patterns, and demographics have created a gap between the amounts for which the private sector can find profitable investment in productive facilities and the increasingly large amounts individuals will attempt to accumulate for retirement and other purposes. This gap has become far too large for monetary or capital market adjustments to close."

There is no one in mainstream economics (or physics :)) who possesses such clarity today.

3 comments:

Anti said...

Also, Einstein said this about a gold standard:

“The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly.”

Read more: http://www.businessinsider.com/einstein-on-the-inherent-flaws-in-the-gold-standard-2011-1#ixzz1FPwDqf1n

Ralph Musgrave said...

Einstein makes two mistakes here. First, the 1930s “crisis” had nothing specifically to do with improved technology and increased output per head. These improvements had been taking place for 200 years before the 1930s.

Second, he falls for the old Luddite argument that improved technology causes unemployment. The reality is that if an employer installs improved technology which cuts costs and prices, that leaves spending power in consumers’ pockets. Consumers (unless their desire for consumption declines) will simply spend their expanded stock of dollars on other or new items, which will create as much employment as the above new technology destroyed.

William Vickrey makes a slightly different point, namely that the desire for savings can exceed employers’ the need for investment funds. Bernanke made a similar point when he referred to the “global savings glut”.

googleheim said...

China and OPEC's dollar reserves could be used as stimulus and maybe are.

Japan and UK dollar reserves could be used as stimulus too.

I wonder where quiet Punjab India is at with their dollar reserves ?

InfoTech of the mid 90's worked very well to consolidate and strengthen expanding industries in the 90's