A Blog of the Global Justice Movement

Wednesday, November 21, 2012

Keynesian Contradictions, III: Production Becomes Irrelevant

Given the expedient nature of pump priming, Keynes claimed that it would be better if such government expenditures were productive, but this is not essential. Any expenditure will do the job. This is because the job creation that results from the initial pump priming operation is incidental to the increase in effective demand — increase in consumption.

The goal of pump priming is not the temporary job creation that results from the initial stimulus. Rather, the goal is the permanent job creation that presumably results from new capital formation:

"Unless the psychological propensities of the public are different from what we are supposing, we have here established the law that increased employment for investment must necessarily stimulate the industries producing for consumption and thus lead to a total increase of employment which is a multiple of the primary employment required by the investment itself." (General Theory, III.10.ii.)

In other words, new capital investment will always increase employment. Always. There is no recognition of the fact that one of the primary incentives ("psychological propensities") for new capital investment is to decrease employment! As Jean-Baptiste Say explained, "Whenever a new machine, or a new and more expeditious process is substituted in the place of human labor previously in activity, part of the industrious human agents, whose service is thus ingeniously dispensed with, must needs be thrown out of employ." (Jean-Baptiste Say, A Treatise on Political Economy, I.vii.)

Keynes's assertion that employment increases as new capital is formed is another can of worms known as the "Labor Theory of Value." It presumes the only source of consumption income is private sector wages and public sector welfare. Be that as it may, however, in the Keynesian view, new capital formation (and thus the presumably automatic job creation that is the real goal) can only come about if there is a simultaneous increase in both demand by consumers and saving by producers.

A simultaneous increase in both demand and saving, however, can only take place in the past savings paradigm if you inflate the currency by printing money intended to redistribute wealth and raise prices. Keynes resolves the paradox of the economic dilemma by ignoring all the effective demand (consumption) and financing (saving) that results from private sector bills of exchange — future savings — and by assuming that the whole of the money supply consists solely of M2.

It is thus perfectly proper to say that Keynesian monetary and fiscal policy in situations of less than full employment is to print money directly for consumption. As long as whoever gets the new money spends it on consumption (or gets it into the hands of someone who will spend it on consumption), whether the money is spent productively on new investment before it is warranted, or somehow distributed for meaningless work is irrelevant. As Keynes asserted,

"When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how 'wasteful' loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. . . .

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." (General Theory, III.10.vi.)

Setting aside for the sake of the argument Keynes's astounding claim that something can "become a good deal greater than it actually is" (in other words, both "be" and "not be"), it is clear from this passage (or as clear as Keynes could make anything so contradictory) that as long as money is created and spent, it is irrelevant what it is spent on — as long as it increases consumption.

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