The Business Cycle: Mises vs Keynes

GDP = private consumption + gross investment + government spending + (exports − imports). People produce goods or services and are recompensed or their labor by money. They then have two choices. They can consume something that theoretically gives them more utility, or they can choose to put off consumption until the future(savings). Before financial intermediaries came into existance, savings typically did not translate into investment. As financial intermediaries became more popular, more people began depositing their savings into banks. Banks would then take those funds and either loan them out to individuals or invest them in companies. The increase in loanable funds would lower the yield curve making borrowing more attractive for individuals and cheapening credit. Additionally, the money invested into companies would allow the companies to invest more money into machines for increased future production. However as the interest rate falls, it should decrease savings and increase consumption due to incentives. However, due to the income effect (people spend money when they have more money), people due not change their savings habits despite the incentive. The increased investment planned for a higher future consumption fails due to people continuing their increased savings. This decreases investment to match the lower consumption. Workers are fired due to sticky wages and a recessionary period is entered. What happens then is just what is not needed and that is more savings rather than consumption. When people are losing their jobs or are afraid of losing their jobs, they tend to save more and don't take out loans despite the interest rate being low. This increased savings means decreased consumption which only furthers the problem of a glut of savings when consumption is most needed. With future demand uncertain and jobs uncertain people become very hesitant to take out loans even with interest rates falling to near zero. Evidence for increased savings in recessionary periods despite low interest rates:Only when the economy has seen high inflation have the savings rates been lower in recessionary periods. Current Recession. http://static.seekingalpha.com....Com Recession. http://www.finfacts.ie...Action is needed to stop the downward spiral of the economy. Government must step in and stop the cycle through active monetary and fiscal policy (if needed). Evidence:Savings evidence above, as well as the evidence of moderate inflation with shorter recessionary periods since the theory has been in practice. The explanation of sticky wages and the recognization of the importance of slightly higher inflation during periods of stagflation cement the theory as the cornerstone of modern economics. As with any theory that is actually being used, the theory has been adjusted in serveral instances to reflect the data with advents like the New Keynesian Phillips curve which accurately incorporate sticky wages and the true relationship between inflation and long term unemployment. To find the merits of this theory, one need only compare the great depression with the great recession of today and observe the time period of each. The time for do-nothing economics has long since passed as economics has involved to use real data and math rather than theories that are merely based off of verbal logic without any real substinance. Sources:. http://mitpress.mit.edu...http://web.uconn.edu...The next round will be for refutations and critiques of the theories as stated in LaissezFaires's R1. I look forward to his critiques and submitting my own. Thanks for a great debate.