Long run: We’re all dead

​Recently, ex governor of RBI, ex finance minister and ex prime minister, Dr Manmohan Singh became the butt of all jokes when the renowned economist quoted the very great, Sir John Maynard Keynes:

In the long run, we’re all dead.
But I would like to take his case forward because as an economics student, I somewhere believe the man has got a point!

Source: localpress.in

In economics, short run, medium run and long run are/can be never properly defined. A short run for a policy can be 6 months in one country and 60 years in another country.
For example, Japan after atomic attacks wanted to grow industrially by increasing production. So companies like Daikin, Toyota etc came up and despite poor agricultural endowments; they were able to spur growth. The economic theory says that when production is increased to improve growth rate then consumption levels initially are compromised of the public in the short run (due to increased investments in production) but in the long run as profits start coming; incomes increase and expenditure/consumption rises too. And medium run always means the equilibrium. So here, medium run would be investment = consumption. 

Japan adopted this policy in 1950s and here we are in 2017, and yet the short run of Japan hasn’t ended. Currently, they’re having 0% lending rates yet none are taking up loans or consuming a substantial part of their income. This downfall in expenditure/domestic demand is what’s restraining japan from competing with China, us etc. It’s not the lack of technology there but the lack of young population (who generally demand the highest goods and services) 
Most of their population is ageing.
Compare it to India where I think 65% are below 25 and hence, demand is an all time high affair. And this brings inflation, currency depreciation, fiscal deficit etc in India.
So the thing is:
1. Long run can be as long as eternity
2. Till the time long run comes, external factors begin affecting the policy’s objective. Here, that externality being age group of population. Other common ones are political scenario, central banks efficiency etc
3. Long run NEVER comes. Like I said, medium run is equilibrium and in economics, equilibrium is a mirage. We can/should aim for it but in the foresight, its good to know that we’ll never reach there. However, in pursuit of coming closer to it we can grow.. That’s it.
Since there’s no medium run, there ought to be no long run.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s