Thursday, October 21, 2010

Halloween Horror Special XI: The Nightmare Before Keynesmass

If you are fortunate to find Aladdin's magical lamp with the none-genuine-without-this-seal genii on board, you get three wishes (the Disney version, anyway). Of course, if you are a reader of semi-heroic if not satiric fantasy and happened at some point to come across Jack Chalker's double trilogy of the "Dancing Gods," you know that you get as many wishes as you want . . . but it's only safe to make one. Going further a-field, we find that even the full three wishes always seem to have built-in catches, such as wishing for a sausage for dinner, getting it hooked on to your nose, and then spending the last wish having it amputated. Other stories have the presumed benefactors wishing for a ton of gold and getting squished by the weight of metal, to say nothing of the inflationary effect of so much specie appearing on the market all at once.

Let's be honest. The whole wish thing, whether we're talking Aladdin and the genii, or Darby O'Gill and King Brian of the Little People, is nice to hear about. It's even amusing if you can get Robin Williams to dub a voice or two and let loose with his inimitable stream-of-consciousness patter. The problem is that it's based on the belief that you can get something for nothing, and usually end up getting nothing after heroic effort . . . just as in Keynesian economics.

By now you're thinking that I put the wrong title on this posting. Shouldn't it be, "Keynes and His Wonderful Lamp," or (my favorite, if a trifle subtle) "Keynes Addin'." You see, in Keynesian "multiplier theory" you put money into a bank and it magically expands to the reciprocal of the reserve ratio just by depositing and re-depositing checks, double, triple, and fourple counting them and never presenting them for payment through the clearinghouse. This is a sleight-of-hand that spoilsport Dr. Harold G. Moulton exposed in The Formation of Capital, and . . . never mind. We'll stick with ripping off Tim Burton's title for his holiday treat and go with "The Nightmare Before Keynesmas."

To the Pointmobile, Robbing.

If you insist. Want to hear something truly horrifying? Halloween now ranks right after Christmas as the biggest "money holiday" for retailers. People that were going into debt for Christmas until May, June, or July of the subsequent year, are now adding mountains of debt on top of that to "do" Halloween. As a result, consumers are buried permanently under a load of debt incurred to purchase paper skeletons and sexy witch costumes to wear for an hour or two, and enough candy to create lifelong job security for divisions of dentists. It sounds as if Halloween is a total waste of time and money.

Stop and think for a moment, however. Halloween is the perfect Keynesian holiday. It celebrates nothing. The decorations rarely last past the day itself and aren't often reused — what, after all, would you use them for? In fact, the sight of smashed pumpkins the day after October 31 is now as traditional as a soaped window or overturned outhouse. You can't even make a decent pie with the type of pumpkin commonly used for the Jack O' Lantern: it's usually a "field pumpkin," much rougher and stringier than a sugar or squash pumpkin and originally grown for animal fodder. The candy is usually gone within a week, if not 24 hours.

There is, ultimately, practically nothing that lasts beyond the day itself, or has any significance apart from the holiday. Even the most secular Christmas celebration generally yields loot intended to keep the lid on greed and serve some useful or semi-useful purpose until the next celebration of the birth of the Savior or your own, more important, birthday intervenes.

In The Recovery Problem in America (936), the aforementioned Harold Moulton identified the two primary areas of focus in a recovery — or in a stable economy, for that matter — as employment and production . . . with production taking primacy of place. For Moulton (as he made clear in America's Capacity to Produce, 1934, and America's Capacity to Consume, 1934), as for Adam Smith in The Wealth of Nations, the purpose of production is consumption.

That is the essence of Say's Law of Markets and the real bills doctrine — we can only purchase what others produce with what we produce, and cannot consume unless we produce. "Money" is simply the means by which we exchange our productions for the productions of others, and is therefore anything that two or more parties to a transaction agree can be used to settle the debt, that is, convey a private property right to another to meet an obligation that has been incurred.

Not according to Keynes's Nightmare Economics. The purpose of production is not consumption, but to generate effective demand to clear existing production. Goods pile up unsold because advancing technology displaces labor, and people who produce only by means of their labor are no longer able to produce. In accordance with Say's Law, because they cannot produce, they have nothing to exchange for what others produce, and thus the productions of others remain unsold.

Louis Kelso's solution to this problem is, in hindsight, obvious. If technology is the predominant factor of production, then people must become owners of production. Say's Law is indifferent to whether someone produces by means of labor, land, or capital — what matters is that someone can produce, and therefore be able to consume whatever he or she produces directly, or — through "money" as the medium of exchange — trade surplus production of one's own for that of others.

No, said Keynes (okay, he developed his theories before Kelso was born, but this is the gist of it). Production is not a problem. Don't worry about it. Advanced technology has the capacity to produce everything we need. The difficulty is how to get the results of production (income) into the hands of people who will use it for consumption (effective demand) without, at the same time, harming the ability of producers to finance new capital formation (savings, which only equals unconsumed production in Keynes's universe).

And there's the rub. As far as Keynes was concerned, and in common with all other "Currency School" based economics, "money" is not the symbol of the present value of existing and future marketable goods and services in which the issuer of the money has a private property right. On the contrary, "money" is a special creation of the State by means of which the State redistributes wealth by creating purchasing power and distributing it according to whatever expedient occurs to the politicians. Money, to Keynes and all other Currency Schoolers, is a State-generated claim on the present value only of existing marketable goods and services in an economy. Really? Yes. Keynes said exactly that on page 4 of Volume I of his Treatise on Money: The Pure Theory of Money. (New York: Harcourt, Brace and Company, 1930.)

Check it out if you don't believe me. Copies are a little scarce, though. Keynes kind of swept his almost-magnum opus under the rug after Friedrich von Hayek pointed out a few weaknesses in it, but Keynes never repudiated it. In fact, he referenced it in what became the Keynesian "bible," his General Theory of Employment, Interest, and Money (1936). He didn't improve the analysis or the performance, however. The effect of Keynes's analysis is to abolish private property in the means of production, deny freedom of association by asserting total State control over the right to enter into contracts, and redefine what it means for something to be "money."

The bottom line? If money represents only the present value of existing marketable goods and services, then existing accumulations of money savings are the only source of financing for new capital formation. If true — and Keynes held this as a virtual religious dogma — then only people who already own capital have the capacity to own capital, unless the State, either by direct confiscation or by manipulation of money and credit, performs some kind of redistribution or takes over direct control of the economy. (General Theory, VI.24.iii)

As a result, vast quantities of goods pile up unsold because no one has the effective demand — income — with which to purchase them. The Keynesian solution is to increase production of goods and services for which no market exists, and which do not compete with the genuinely useful marketable goods and services that remain unsold. Producing non-marketable goods and services, either directly, or through subsidized "job creation" creates sufficient effective demand to clear the marketable goods and services at the newly inflated prices resulting from increasing the money supply.

Tremendous waste is built into the system, but that's okay as long as enough other, more useful goods and services are produced to take care of people's needs. (Wants are another matter in the Keynesian universe, for — contrary to the theory of marginal utility and plain common sense — it is impossible for anybody ever to be satisfied with anything. Humans are insatiable consumption machines, not moral beings.) If things are out of sync, then the government can fix things by diddling around with the currency, as in Georg Friedrich Knapp's socialist program called "Chartalism."

Thus, Halloween is the perfect solution to the problem of generating effective demand. It produces nothing of lasting use, it celebrates nothing, and it is incredibly wasteful. It's even better than war, which Keynes said could be used if the politicians couldn't think of anything better, because the body count is much lower. Usually. Maybe we should rename October 31 "Keynesoween" or "Keynesmakah" ("Chrismakahkeynesamadan"?) in honor of its increasing importance as a bottomless pit into which we can toss otherwise useless goods and services in order to stimulate effective demand.

On the other hand, we could start to act reasonably, and give serious consideration to the claims of the Just Third Way as applied in the Capital Homesteading proposal. There's a scary thought . . . for academic economists and others who have staked their lives, semi-sacred honor, and our fortunes on the vagaries and contradictions found in the nightmare of Keynesian economics.

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