In 1930 Keynes wrote an essay titled ‘The Great Slump of 1930′ which set out an early account of the way an economy can be trapped in a vicious spiral of depression. It’s one of the collection in his [amazon_link id=”0230249574″ target=”_blank” ]Essays in Persuasion[/amazon_link]. It bears re-reading. Unlike The General Theory, or indeed a 1931 talk for the BBC, the emphasis here is on lending and investment rather than saving and consumption. The essay starts and ends by noting that, for all the dark clouds currently looming over the economy, “The resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording everyone a high standard of life.”

The problem, he argues, is a mismatch in credit markets. Firms are cautious and therefore less willing to borrow in order to invest in capital goods. Banks require a risk premium so high as to charge interest rates the deter borrowing still more. This wedge, Keynes argues, has become wider than in a normal business cycle but can be closed by central bank intervention. He would have approved in principle of Quantitative Easing, but not with its actual effect which has been to subsidise bankers’ bonuses rather than the rates they charge to their borrowers.

But perhaps the key message of the essay is the underlying optimism. There are still amazing innovations just waiting for real capitalists – as opposed to financiers – to invest in them.

[amazon_image id=”0230249574″ link=”true” target=”_blank” size=”medium” ]Essays in Persuasion[/amazon_image]