[FOUNTAIN]An economy with very specific woesJohn Maynard Keynes, one of the most celebrated economists of the 20th century, must have been a very confident man. He titled his 1936 classic “The General Theory of Employment, Interest, and Money” because it differed from other economic theories then prevalent. He specified that his theory was a general one, whereas the others depended on various conditions and applied only to specific situations. The title presumed that his theory could be generally applied to reality’s uncertainties.
Mr. Keynes differed from other economists of his time in that he emphasized the role of the government. During the Great Depression of the 1930s, the market was infused with money, but the economy was not revived. Mr. Keynes’s explanation was the “liquidity trap.” When interest rates are too low, he said, money will not circulate no matter how much cash the central bank dumps into the market, and consumption and investment will not rise. Therefore, when the economy is sluggish, it is more effective to increase government spending than to infuse the market with cash, he said. His idea became the theoretical foundation of the New Deal.
The liquidity trap was again in the spotlight during Japan’s prolonged economic slump of the 1990s. Interest rates were near zero, but consumption and investment were not revived. Japan had to endure what is now referred to as the “lost decade.”
To boost the economy, the Bank of Korea lowered the interest rate a few days ago. But critics are concerned that the rate cut might lead the Korean economy into a liquidity trap. Some even claim that the economy has already fallen into one ―not one created by low interest rates, but a psychological liquidity trap, stemming from social uncertainty.
Recently, President Roh Moo-hyun said the economy was going through a specific slump aggravated by a specific circumstance. The circumstance he was referring to was the psychological liquidity trap. The uncertainty caused by ideological confrontation and the strange atmosphere that intimidates the rich and discourages them from spending are prevailing in society, and keeping money from circulating. A special circumstance that even Keynes’s general theory cannot resolve is bruising society. We might need a supplement to the general theory to diagnose this situation.
by Lee Se-jung
The writer is an editorial writer for the JoongAng Ilbo.