7/28/2019 John T. Harvey - Keynes´ chapter 22 - A system dynamics model http://slidepdf.com/reader/full/john-t-harvey-keynes-chapter-22-a-system-dynamics-model 1/10 Keynes' Chapter 22: A System Dynamics Model Author(s): John T. Harvey Reviewed work(s): Source: Journal of Economic Issues, Vol. 36, No. 2 (Jun., 2002), pp. 373-381 Published by: Association for Evolutionary Economics Stable URL: http://www.jstor.org/stable/4227787 . Accessed: 30/09/2012 00:56 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . Association for Evolutionary Economics is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Issues. http://www.jstor.org
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7/28/2019 John T. Harvey - Keynes´ chapter 22 - A system dynamics model
Keynes' Chapter 22: A System Dynamics ModelAuthor(s): John T. HarveyReviewed work(s):Source: Journal of Economic Issues, Vol. 36, No. 2 (Jun., 2002), pp. 373-381Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4227787 .
Accessed: 30/09/2012 00:56
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact [email protected].
.
Association for Evolutionary Economics is collaborating with JSTOR to digitize, preserve and extend access to
2. The tendencyof the rateof interest o riseovertheexpansionas the demand or
financingbegins to place pressureon supply.
3. The continuingupwardpressureon the rateof interestonce the collapsehasbegun (andagentsscrambleorliquidity).
4. The fallin the marginalpropensityo consume(MPC) hatwillaccompanyhe
decline n the valuesof portfolios assuminghe bustbringswith it a fall inasset
values).
5. The manner n which agentsform expectationsof the future.
Of these,3 and 4 make hemselves elt once theturningpointhas beenreachedand
the economy is in recession.1 and 2 cause the expansionto tend to lose strengthas it
matures.But, as we shall see, it is 5 that givesthe cycle ts characteristichape.Withoutit, the economy tends towarda situation in which investmentreachesa stable equilib-
Figure6. Keynes'BasicModelplus LiquidityPreference n
Powersim
Stock ofCapital
+eTget Stock ofCapital
Ne nvestmentDepreciation
Mar=gnalfficienc of Capital
+ Delayed\ \
+ ~~~Linqklannedt\Li~~~nv<nestment
\ \
Investment InterestRate
GDP C
Autonomious Consumption
plannedinvestmentand investment.
All this made little difference n the end, as interestratesandthe MEC once again
cameto restat apointwhere the latterwas5 percentagepointsabovethe former thisis
shownin figure7). The only difference s that now the rate of interest s not set exoge-
nouslyat 5 percentbut is determinedbyGDP andMEC(andin thiscase reachesequi-
librium at 3.69 percent).Still, no cycle is generatedwhen the specificationof MEC islinear.
It isonlywhenthe particularwayexpectationsareformed staken nto account hat
we see a real tradecycle.Agentsin Keynes'GeneralTheoryformtheir forecasts n an
environmentof uncertainty.This leads those forecasts o be (a)held with little confi-
dence and(b) based argely n the agent's mpressionsofwhat othersbelievethe market
will do (relianceon conventional wisdom in the face of individualignorance).But
agentsarealsoinherentlyoptimistic.It is thisoptimism,combinedwith investorsbeing
too busyforecastingmarket entiment(whichwouldof late havebeenbullish),and not
industryconditions, that leads to them to continue to expect positive returns wellbeyond the point that the increasing ize of the stock of capitalandrising costs of pro-
duction would suggest.Once reality ets in (asrealizedprofitsarecomparedwithprior
projections), he flimsyfoundation of the expectationsmeans that the re-evaluations
"suddenand even catastrophic"Keynes1964, 316).
7/28/2019 John T. Harvey - Keynes´ chapter 22 - A system dynamics model