A Blog of the Global Justice Movement

Wednesday, November 28, 2012

The Turning Point, I: The Circular Keynes

We had an interesting discussion earlier this week about how much of the economy the government could control before we reach the point of no return — within the present system, at least. Believe it or not, once we free the economy from the bad assumptions of the past, even the mess we're in today becomes manageable, even soluble.

The fact is, however, that the Keynesian system — and those systems set up in opposition to the Keynesian system — all share an assumption as pervasive as it is false, and that is based on a logical fallacy . . . several of them, in fact, but we're interested in only one at this point. That is, the only way to finance new capital is to cut consumption and save. As Keynes pontificated, "So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption." (General Theory, II.6.ii.) and that savings always equals investment. (Ibid.) (By the way, we agree that savings always equals investment, but without having to add the prevarications and definition changes Keynes added to make it "true" within his system.)

That's fine . . . except that less than twenty pages later, in II.7.v, Keynes went on at great length in a confused and contradictory passage explaining how what appears to be investment without prior saving to many people really isn't.

Wait a moment. Didn't Keynes just say that he didn't know of anyone who defined savings in terms other than cutting consumption prior to investment, which necessarily equals savings? Why, then, is it necessary to explain how all the people who believe that you can somehow save without first cutting consumption by the expansion of commercial bank credit need to be refuted? He just said they don't exist!

The Keynesian system being built on such contradictions, Keynes was equal to the task. He explained that they are not talking about genuine saving! (Ibid., II.7.v.) They may call it "saving," it may look like "saving," and it may walk, swim, and quack like "saving," but it's not really saving unless they define it the way Keynes did.

Ah. Now we understand. Just as a rise in the price level due to government money creation isn't true inflation until after full employment is reached (ibid., III.10.ii; V.21.v), saving achieved by monetizing the present value of future increases in production to finance the increase isn't genuine saving unless it results from an excess of income over consumption! You just think it is saving because you're one of those stupid people who don't go along with Keynes's re-editing of the dictionary! (A Treatise on Money, Volume I, The Pure Theory of Money. New York: Harcourt Brace and Company, 1930, 4.)

This is what is known as the "circular argument fallacy" — a restatement of the premise as "proof" of the "argument." How do we know that "saving" only consists of reductions in consumption? Because it does, that's why. Anything else isn't genuine saving, ergo, it is impossible to finance new capital formation except by cutting consumption and accumulating money savings. Case closed. All the empirical data collected by Harold G. Moulton proving that the rapid capital formation during the latter half of the nineteenth century was financed by expansion of bank credit without past savings? (The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 77-84.) It's all lies. Pay no attention to that insignificant man behind the curtain; it's an "optical illusion"! (General Theory, II.7.v.)

Unfortunately, locking yourself — or the economy — into a circular argument is probably not the best way to come up with a solution to any problem, much less one of the magnitude we face today. By starting with a predetermined result of the argument and tailoring everything to fit your agreed-upon conclusion, you have guaranteed failure.

What, however, is the result of accepting this Keynesian "logic" for the economy?

That's what we'll look at tomorrow.

#30#

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