Wednesday, April 11, 2012

The Keynesian Cargo Cult, III: Rot Bilong Keynes

Reading yesterday's posting, someone unfamiliar with the intricacies of Keynesian economics might have felt his lip curl a bit with contempt or have experienced a surge of condescension for such benighted beings as Cargo Cultists. After all, it seems the height of naiveté, if not absurdity to believe that prosperity can be restored by means of unthinking adherence to a set of incomprehensible ritual acts and chanting meaningless words. On reflection, however, we might suddenly realize just how closely Cargo Cultism — Rot Bilong Kako (the Way of Cargo) — and its arguments resemble the Keynesian economic analysis, the Way of Keynes.

Every Cargo Cultist can point to a specific time — the Second World War — when cargo flowed into their land in endless streams, and everyone enjoyed a virtual golden age. Even Europeans and Americans admit that cargo was shipped in massive quantities. Cultists conclude that it is only the selfishness of the whites that prevents them from learning the secret rituals of Cargo to be able to summon the unlimited wealth that flows from God's Cargo Workshops.

Cargo Cultists reject the arguments of non-believers because clearly those who profess to debunk the Way of Cargo have an interested motive and want to keep all the riches for themselves. If the Cultist is steadfast and his faith is unwavering, however, he will one day discover just the right formula to recite and the right structures to build to lure the ships and planes to land again and disgorge their wealth.

Similarly, adherents of Keynesian economics can point to a specific time — coincidentally that same Second World War — during which the economy was restored and universal prosperity was established through full employment. Earlier efforts to achieve full employment during the (second) Great Depression had been balked by the refusal of FDR and other leaders to perform the proper rituals and establish the necessary institutions, as Keynes complained in his famous open letter published in the New York Times on December 31, 1933.

Once the war was over, the Keynesian rituals to maintain full employment were continued, and seemed to work for a while. Cracks soon appeared, however, necessitating the development of new rituals. The strain of paying for both the Vietnam War and the Great Society increased the national debt enormously. Given the right formula, however, economists and politicians were confident that full employment (the developed nations' version of cargo), could be permanently restored.

Since the 1970s (when even Milton Friedman declared, "We are all Keynesians now"), much effort and tremendous resources have been expended to duplicate the outward forms of a prosperous society. Just as the Cargo Cultists build bamboo airplanes and warehouses, Keynesians create the usual accompaniments to full employment, e.g., plenty of money, high paying wage system jobs, the creation of gigantic corporations, welfare, entitlements, a well-educated citizenry, and so on.


Like adherents of the Way of Cargo, however, Keynesians fail to realize (for example) that education doesn't generate wealth. Wealth pays for education. The myth that has burdened millions of students with unrepayable debt is that education brings prosperity, rather than that prosperity allows people to become educated.

The problem is, the Cargo Cultists' airplanes, conning towers and docks only copy the outward form of the American military presence in World War II. They assume that these simulations will magically bring the cargo back. Similarly, Keynesians fail to focus on producing the marketable goods and services that bring about full employment naturally. Further, Cargo Cultists limit "cargo" to finished consumer products. Not only do they ignore the necessity of having engines in their bamboo airplanes, Cultists fail to realize that importing technology would enable them to fulfill their material wants and needs through their own efforts.

For their part, Keynesians limit "full employment" to full employment of labor, ignoring the capital ownership that would enable people to meet their own wants and needs without direct government assistance. Increasing government control of the economy presumably takes up the slack for the failure of the system. Keynesians attempt to impose desired results by performing new (and increasingly expensive) rituals that divert efforts and resources away from truly productive activity.

Clearly, what happened in America (and the rest of the developed world) is that, just as John From Jesus Christ became John From America, John From America became John From the Government. John From the Government now decrees what things will be. Mandating the trappings of prosperity and passing many laws will create full employment.

Like the Cargo Cultist who builds an airstrip or a dock, today's economist and politician is confident that if he or she gets a law passed mandating a desired end, or enough "money" (always understood as a State-issued or authorized general claim on the total wealth of society, not as a promise/contract that must be honored) is spent, the desired end will necessarily come to pass. If it doesn't, it's because the proper rituals have not been followed — excuse me! Enough laws have not been passed — there has been insufficient effort (money) put into the program, or a hidden conspiracy (the rich, the capitalists, the socialists, the neo-cons, the Jews, the Muslims, the Catholics, etc., etc., etc.) is preventing the program from working in order to keep all the wealth for themselves.

Pointing out that things like full employment, adequate wages, benefits, education and social welfare are not the causes of prosperity but the results earns the pointer-outer the pity and condescension of the economic and political establishment at best, its contempt and anger at worst. It is useless to explain that paying people for nothing, or increasing the amount of money before increasing the present value of existing and future marketable goods and services (current and future production) only debauches the currency and redistributes existing wealth without creating any new wealth. Noting that neglecting to establish widespread ownership of capital to replace disappearing wage system jobs as technology takes over the burden of production incites rage at such heresy.

All good Keynesians know that all production comes from human labor. Consistent with Holy Writ (Keynes's Old Testament or Treatise on Money (1930), and New Testament, The General Theory (1936)), it is only necessary to create jobs for production to appear. Chapter and verse can be cited to prove that government creates money that causes effective demand, and inflation transfers the savings that result from reduced consumption to producers so they can create more jobs. Anyone pointing out that, per Say's Law of Markets, you cannot purchase what others produce unless you produce something yourself to offer in exchange is considered insane. Keynesians know that government creates all money, or "the banks" do so illegally by usurping John From the Government's power. Consequently, viewing money as a mere symbol of existing or future wealth in which the issuer has a private property stake, as is the case in binary economics, is heresy. Rising prices on the stock market are not an indication of speculative fear or fever, but — again — the cause of prosperity and full employment.

As for the real bills doctrine (an application of Say's Law of Markets and the understanding of money as anything that can be accepted in payment of a debt), any Cargo Cultist could have developed the Keynesian money multiplier that allegedly refutes the doctrine. Instead of realizing that the money supply is increased by commercial banks accepting bills of exchange representing the present value of existing and future marketable goods and services, the government creates some money. The money is deposited, creating "excess reserves." The excess is loaned out, redeposited, loaned out again (less the required reserves), and so on, multiplying the amount of money in the system.

Keynesians ignore the obvious fact that, as explained, there is no actual increase in the money supply through the alleged operation of the money multiplier. There is only a transfer of existing money as checks are deposited, are presented for payment, and clear. The Keynesian money multiplier explains nothing. It is only useful in explaining away the operation of the ridiculed real bills doctrine. Reversing cause and effect and ignoring all evidence to the contrary, the unquestioned dogma is that increasing the money supply brings full employment. Keynesians and others deride the possibility that money is a result of creating a means to convey a claim on the present value of existing and future production — the real bills doctrine, a result of wealth creation, not its cause.

No, Keynesians remain firmly convinced that prosperity can only result if John From the Government establishes full employment (cargo) and the outward signs of prosperity by law, that is, by force. Then wealth production will presumably follow automatically, creating abundance for all. They fail to realize that if the tremendous effort and vast resources that have already been used to try and make Keynesianism work and get something for nothing had been put to productive use, the world economy would not be in the mess it is in today.

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