In his book, The General Theory of Employment, Interest,
and Money (1936), John Maynard Keynes made the somewhat startling (and
rather heartless) statement that he was advocating that rentiers — small
investors who live off the income from their investments — should be
euthanized. Specifically,
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| "Euthanize the Rentiers!" |
I see . . . the rentier aspect
of capitalism as a transitional phase which will disappear when it has done its
work. And with the disappearance of its
rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of
the order of events which I am advocating, that the euthanasia of the rentier,
of the functionless investor, will be nothing sudden, merely a gradual but
prolonged continuance of what we have seen recently in Great Britain, and will
need no revolution. (John Maynard Keynes, The
General Theory of Employment, Interest, and Money (1936), .VI.24.ii.)
First, of course,
to understand this it must clearly be understood that the binary economics of
Louis O. Kelso is based on the Banking Principle, or what some call the
“Smithian” school (Banking School) of classical economics. Keynes’s theories, on the other hand, are
derived from the “Ricardian” school (Currency School), which is based on what
became known as the Currency Principle.
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| "I say, stop messing with my political arithmetick!" |
Yes, there are
some authorities that claim Keynes is Banking School, but that is because they
do not understand the fundamental precept of the Banking School: the Banking
Principle. This can most simply be
stated as, “the velocity of money, the price level, and the number of
transactions determines the amount of money.”
In terms of the Quantity Theory of Money equation, M x V = P x Q, M is
the dependent variable, and V, P, and Q are the independent variables.
In the Currency
School, on the other hand, the fundamental precept (the Currency Principle) can
be stated as, “the amount of money determines the velocity of money, the price
level, and the number of transactions.” In
terms of the Quantity Theory of Money equation, M x V = P x Q, M is the
independent variable, and V, P, and Q are the dependent variables.
In Banking School
economics, the first principle is (as Adam Smith stated), “Consumption is the
sole end and purpose of all production.”
Further, “money” is defined as “anything that can be accepted in
settlement of a debt” (“all things transferred in commerce”). Finally, the factors of production are labor,
land, and capital. (Kelso simplified
this by grouping the factors of production into “human” and “non-human,” or
“labor” and “capital,” including land under capital as a non-human factor of
production.)
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| "And with my labor theory of value!" |
In contrast,
Keynesian economics rejects Smith’s first principle in favor of three other
principles derived originally from the theories of David Ricardo:
·
Labor is the sole source of production. Capital at best only enhances the capacity of
labor.
·
Savings achieved by producing more than is
consumed and accumulated in the form of money is the sole source of financing
for new capital formation.
·
Money is whatever the State declares it to be.
Obviously, unless
these differences are understood, there can be no question of critiquing binary
economics by means of a Keynesian analysis, any more than Keynesian economics
can be critiqued from a Kelson perspective.
The principles of one system contradict those of the other, so there is
no basis for comparison. (There is also
confusion in the Keynesian system between principle and application of
principle — between substance and form — but that is a different discussion.)
With respect to
the role of the investor, Banking School economics accepts Say’s Law of
Markets, with the assumption that investors produce by means of capital, or
capital and labor (if a worker-owner), instead of labor alone. In Banking School economics, investing is a
different mode of production, but it is still production, and is production in
the same sense as production by labor alone.
This is an application of the “principle of identity,” the positive
statement of the first principle of reason: “That which is true is as true, and
is true in the same way, as everything else that is true.”
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| "You toucha my law, I breaka you face, says I!" |
Thus — consistent
with Say’s Law — (and all other things being equal) if all production is
carried out for the purpose of consumption, and everyone who consumes also has
the means and opportunity to produce by means of both labor and capital, supply
(production) will generate its own demand (income), and demand, its own supply.
The problem with
Say’s Law in Keynesian economics, however, is that Keynes’s principles
contradict the fundamental principle on which Say’s Law is based: that
production is only for consumption. To
Keynes, production is for consumption and
a source of financing for new capital formation. Keynes therefore necessarily rejected Say’s
Law to try and make his system work.
Further (and
inserting a contradiction into Keynesian theory), labor production is for
consumption, while capital production is for reinvestment. Keynes avoided resolving the contradiction
that if all production is due to labor, by what right does the owner of capital
receive what is due to owners of labor?
The implication is that owners of capital are stealing what belongs to the
real producers, or overcharging consumers for what others produce. (Karl Marx, who also rejected Say’s Law,
resolved this contradiction with his theory of surplus value.)
We will ignore
the contradiction for the sake of the argument. We also accept for the sake of the argument
what we know to be wrong: that an excess of production over consumption is the
sole source of financing for new capital formation, and that the purpose of new
capital formation is to provide wage system jobs so that owners of labor can
produce and therefore consume.
Given these
errors, however, Keynes concluded it is essential as technology advances and
becomes increasingly expensive that there be a very small class of persons so
rich that they cannot possibly consume all the production churned out by their
capital, and necessarily reinvest the surplus in new capital. The investor’s function, therefore, is to
provide financing for new capital formation, not income for consumption.
Any investor who consumes anything more than an insignificant portion of
the income his or her capital generates is a “functionless investor.”
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