Friday, February 22, 2013

Capitalism has Two Fundamental Sectors

Those sectors are as follows:
(1) markets for newly produced goods and services, further divided into:
(1.1) markets for final goods and services (consumption goods), and,

(1.2) markets for factor inputs, whether durable or non-durable capital goods (circulating capital) or labour;
(2) markets for second hand goods and assets, as follows:
(2.1) markets for financial assets* and instruments on secondary financial asset markets. Financial assets in general have a relatively low or zero elasticity of production;

(2.2) markets for real assets as second hand goods, further divided into:
(2.2.1) second-hand real assets with a relatively low or zero elasticity of production, often bought as an investment or as a “resting place” for savings (though sometimes for consumption);

(2.2.2) second-hand real goods with a moderate to high elasticity of production, bought for consumption (though sometimes for investment purposes), e.g., second hand book stores, used cars, etc.
* Sometimes financial assets are called “capital assets,” but I find this very confusing, as that latter term is better left for real capital goods considered as assets.
Goods and services in (1) are normally reproducible, which means that demand for such goods and services induces more employment and output in a market economy.

Assets in (2.1) and (2.2.1) are generally non-reproducible: that is, businesses do not hire a significant number of workers or factor inputs when demand for these assets rises.

Asset bubbles normally occur in asset classes (2.1) and (2.2.1), but housing seems to be an important exception. Asset class (2.2.1) includes things like gold, antiques, or famous works of art.

Financial assets on secondary financial asset markets (2.1) have a low elasticity of production. When demand rises for stocks and shares, businesses do not employ workers to make more stocks and shares: demand changes frequently and significantly for these assets, but the supply is more or less fixed (hence the price volatility).

The question of real estate and houses is a curious one: one could think of real estate as having a low or moderate elasticity of production, depending on the economy, time and place. For example, one could probably argue that urban real estate in Japan during the bubble of the 1980s to early 1990s had a relatively low elasticity of production. But in a nation or region where there is a substantial amount of land (private or public) land that can be subdivided, developed and sold off (involving some degree of increase in employment), one might (possibly) say that real estate has a moderate elasticity of production.

Housing, I suspect, can be said to have a high elasticity of production. Occasionally, of course, you can have other asset bubbles in (2.2.2): think of the Dutch Tulipmania (1636–1637).

A further crucial idea is this: a good could have a zero (or near zero) elasticity of production, but an elastic supply: e.g., fiat money and private credit money.

Further Reading

“Keynes on the Special Properties of Money,” May 8, 2011.

“Gold as Commodity Money and its Elasticity of Production,” November 18, 2011.

“More on the Gross Substitution Axiom,” July 28, 2011.



    Richard Werner has an interesting talk there, which goes into a similar discussion.

    He proposes to split the (bank) money supply into that created through loans for financial asset transfers and to those for capital investment.

    His claim is that this clarifies the causes of bubbles, crashes, and inflation, and also, the way to resolve a deep recession

  2. If there is still living Keynsian policy in Europe,it seems to be France today!Infact leading french economist of the highest dignity is now actually pushing an Keynsian policy check this links out!
    A fresh breeze we other have to learn from!

    Manifesto from the French Les Économistes Atterrés (The upset economists)


    First signatories : Philippe Askenazy (CNRS) ; Thomas Coutrot (scientific council of ATTAC) ; André Orléan (CNRS, EHESS, president of the French Association for Political Economy) ; Henri Sterdyniak (OFCE). English translation: Gilles Raveaud (Paris 8) and Dany Lang (Paris 13),

  3. "When demand rises for stocks and shares, businesses do not employ workers to make more stocks and shares"

    Obviously not, as employing more workers will not increase the supply of stocks and shares. What the company might do is raise more capital by issuing stocks or shares in the market to take advantage of the high price of its securities. Or maybe just a scrip issue of shares to increase liquidity.