Monday, November 19, 2012

Keynesian Contradictions, I: No Distinction Between Public and Private Sector

Recently someone raised a question about our claim that Keynesian monetary and fiscal policy relies on printing money directly for consumption. As the questioner recalled, Keynes advocated governmental investment in large productive projects, not "printing money directly for consumption."

Keynes did not state explicitly that the government should print money directly for consumption. It is also true that he favored productive over non-productive expenditures by government . . . up to a point. In a past savings system such as Keynesian economics, however, creating money for government expenditures for any purpose, productive or non-productive, assumes as a given that the government has a right that we call "property" (vide Irving Fisher, The Purchasing Power of Money. New York: Macmillan, 1931, 4) to issue claims against existing wealth, i.e., is the ultimate owner of everything that exists in the economy. Keynesian economics ignores the fact that the government has no such right.

In the Keynesian system there is no real distinction between the private sector and the public sector (General Theory, VI.24.iii), any more than there is in the "chartalism" (a.k.a., "Modern Monetary Theory," or "MMT") of Georg Friedrich Knapp (The State Theory of Money. London: Macmillan and Company, 1924; cf. John Maynard Keynes, A Treatise on Money, Volume I, The Pure Theory of Money. New York: Harcourt Brace and Company, 1930, 4). Thus, Keynes could be honestly confused about the difference between asset-backed private sector money consisting of bills of exchange and mortgages, and debt-backed public sector money consisting of bills of credit.

To be specific, asset-backed private sector money consists of bills of exchange backed by the present value of future marketable goods and services, and mortgages backed by the present value of existing marketable goods and services — anything that can be accepted in settlement of a debt. Consistent with the principles of the "Currency School" — and Keynes was Currency School, despite the widespread belief that he was "Banking School" (Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1989, 60-65) — money consists solely of either specie (gold and silver) or government bills of credit backed by the present value of the government's ability to collect taxes in the future, or substitutes for currency in the form of demand deposits ("checking accounts").

Given the Keynesian understanding of money, and the failure to distinguish between the public and private sector, whether new capital is owned and controlled as private property or by the State becomes irrelevant. This is critical to understanding Keynesian monetary and fiscal policy, which can only be understood in light of the Keynesian assumptions about private property and money.


1 comment:

nail-in-the-wall said...

Michael D. Greaney (Intro): Monetary conspiracy theorists often make the claim that since we are the State, no private interest should have the power or right to create money. Only the government has the right to create money. Therefore, anything but legal tender currency issued directly by the government is not lawful money.

This is an interesting theory, and has a great deal of support not just from conspiracy theorists, but from ordinary people who don't realize how many errors are contained in that brief summary. To take a few, one, We are not the State. We are members of the State. Individually we remain persons with inherent, that is, natural or inalienable rights such as life, liberty and property. Organized, we establish a government to run the State for us. A government is a discrete "artificial person" having only such rights as we, the people, grant to it, and that we can revoke for just cause. A government has no inherent rights at all.

Two, "money" is anything that can be accepted in settlement of a debt. It is a contract, all contracts consisting of offer, acceptance, and consideration. Liberty — freedom of association/contract — is therefore the right every person has to create money by making and keeping promises, that is, entering into and honoring contracts. Unless the right has been given to the government, the government does not have the right to create money.

Three, even giving the government the right to create money does not and cannot deprive the people of the right to create money. Assuming that the right to create money is exclusively vested in the government denies that anyone else has the right to enter into contracts.

Four, even if the government has the exclusive right to create money, "the government" is not a natural person. It is an artificial person that can act only through agents, who must be natural persons or owned or controlled by natural persons. To deny that the government has the right to delegate powers and duties to private interests is to deny the government the power to act at all (McCulloch v. Maryland, 1819).

Five . . . but you see the gigantic can of worms this opens up. One small erroneous assumption leads to enormous errors — and that is where Keynes made one of his most fundamental errors, as we can see from today's blog posting.