On Usury and Other Dishonest Profit, Part XXXI

One of the basic problems with Keynesian economics is that it takes concentrated ownership not only as a given, but as a necessity if society is to grow and advance economically: "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (The Economic Consequences of the Peace, 1919, 2.III)

What does this mean, given Keynes' distorted and insufficient understanding of employment, interest, and money? Keynes assumed that most people could only gain income from wages, thus demonstrating that he did not understand that, in a well-structured economy based on basic natural law, wages are an anomaly. Keynes' reliance on wages as the primary, if not sole source of income for most people was in turn based on his belief that financing for capital formation could only come out of existing accumulations of savings. That meant that, because savings equals investment, income from capital must be used to finance more capital, and not used for consumption. Finally, Keynes believed that money was only a means of transferring effective demand, and had no necessary connection with production.

Unfortunately, Keynes' paradigm meant that marketable goods and services would pile up unsold. This is because income from capital was not used to clear inventories of marketable goods and services that were produced by capital, but diverted to invest in yet more capital. This in turn meant that, because production equals income, the production representing the income diverted to reinvestment remained unsold. In a vicious circle, increasing amounts of goods would pile up unsold, and ownership would become more and more concentrated. This would mean that capital would become increasingly financially unfeasible at the same time that more and more capital was required in order to provide jobs and effective demand so that people who lived by wages alone could afford to purchase the increasing mountain of unsold goods and services.

Keynes' solution to market gluts (which is what he termed the piles of unsold marketable goods and services) was threefold. First, if projects could be found that produced unmarketable or useless goods and services, or goods and services marked for destruction (as in a war), jobs would be created and effective demand generated that could be diverted away from the useless or unmarketable goods and services that would not be purchased, and used to clear the unsold accumulations of marketable goods and services.

Second, the government would tax the rich to redistribute some of their purchasing power, being careful not to tax too much so as not to discourage the rich from investing in yet more capital and concentrating ownership of the means of production even further.

Third, the government could print money and, through the magic of inflation, transfer wealth from the holders of wealth to the recipients of State largesse via the hidden tax that inflation necessarily embodies.

Thus, the Keynesian paradigm is necessarily based on theft and waste, fostering greed and envy, and catering to the worst in human nature. Keynes managed to combine the worst in both capitalism and socialism, instead of taking whatever good there is in either system, and using it within an ethical framework — a stopgap, but at least an acceptable one that can operate in the short term.

In contrast, binary economics relies on using our institutions, especially private property, money and credit, in a manner consistent both with the wants and needs of individual people and society, and with reality. Binary economics thus respects human dignity instead of setting itself in opposition to it.

Binary economics regards private property as important for several reasons, but for the purposes of this discussion, its importance relates to the fact that it gives the owner the right to receive the income generated from capital, and to spend it in any way he or she wishes, taking into consideration his or her wants and needs and the demands of the common good. "Spending" does not include reinvestment, because using capital income for reinvestment instead of consumption distorts the economic equation expressed in Say's Law of Markets, the observation that production equals income, and therefore supply generates its own demand, and demand its own supply.

If income generated by capital is spent on consumption instead of reinvested to form more capital, however, where does the money come from to finance capital formation? From the commercial banking system in accordance with the "Real Bills" doctrine. By creating money out of the inherent financial feasibility of the economy, that is, out of specific projects that have a reasonable expectation of paying for themselves out of future earnings of the capital formed, as much money as is needed for financing is created at will, without decreasing effective demand, or requiring that the wealthy sacrifice their own wants and needs or have their wealth taxed or inflated away in order to finance capital formation so that others can have jobs.

The only remaining question is how are people who currently own little or nothing in the way of capital supposed to come up with collateral in order to reassure the commercial banks that the proposed investments are as sound as possible? That is the question we will examine in the next posting in this series.