The True Theory of Quantitative Easing

Last week we looked at what Keynesian theory says is supposed to happen in "quantitative easing," and then — assuming that the theory holds true — what is really happening, given Keynesian assumptions. The problem is that Keynesian assumptions are not true, nor are people the automata that Keynes evidently believed them to be.

What really happens is that capital without labor or with much reduced labor produces so much that even multiple stimulus packages cannot provide the purchasing power necessary to sell existing inventories and current production. Keynesian theory assumes that labor is the sole factor of production, that capital only assists or enhances labor — capital is not, in and of itself, productive.

Since capital really does produce at a much greater rate than labor, a prudent owner of capital is not going to create jobs that aren't needed to produce marketable goods and services. Further, since labor is expensive, when more productive input is needed, an owner of capital will think twice about hiring more human workers. The capitalist will first get more work out of existing workers, and then search for or invent some technology that is cheaper than hiring more workers. Since technology advances at a tremendous rate today, it is much easier for capitalists to find or invent new technology than to hire expensive labor.

Then there's the fact that, without jobs, there won't be the consumer demand needed to sustain the stimulus. No one produces a marketable good or service unless there is a demand for it. Thus, instead of using their stimulus money and the higher profits realized from inflationary forced savings to create jobs, companies are pouring money into the stock market, inflating the prices of stocks, and giving the illusion of economic growth as unemployment rises and real economic growth continues to slow down.

We can thus look forward to more and greater stimulus packages as the government frantically tries to make a system that can't work, work. Unless, of course, they realize that labor isn't the only thing that produces marketable goods and services, and that people can own the technology that is replacing them.

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