Tuesday, December 20, 2016

“The Euthanasia of the Rentier”, II: Why?


Yesterday we looked at what Keynes really meant when he advocated “the euthanasia of the rentier.”  Today we want to look at why he would say something so obviously heartless and insensitive.
Keynes’s argument that you need excess production that is not consumed (and yet must be) in order to finance new capital formation leads to the problem of what, specifically, to do with the excess production, which must be turned into cash to generate the savings before it can be used to finance new capital formation.
"Consumption is the sole end and purpose of all production."
Keynes solved this problem by advocating that government issue all money backed by its own debt, thereby regulating demand to control the economy to ensure stability.  This gave a non-producer total power over the ability to consume, thereby undermining Adam Smith’s first principle of economics, as well as promoting unnecessary consumption.  As Pope Pius XI characterized the sort of system Keynes advocated,
In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.
This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.  (Quadragesimo Anno, §§ 105-106.)
"Concentrated power over money is bad."
Keynes resolved the key power issue of control over money and credit by an élite (whether public or private) by ignoring it.
This, then, is the context within which we must understand Keynes’s remarks about “rentiers,” that is, small investors who use the income from capital for consumption instead of reinvesting it.
So, did Keynes advocate actual murder of small investors?  No.  His program, however, is a virtual blueprint for what Hilaire Belloc termed “the Servile State,” in which capitalism and socialism merge, and everyone is utterly dependent on a wage system job for income.  People could still save out of their wage income, but would not be able to invest it: “A man would still be free to accumulate his earned income with a view to spending it at a later date.  But his accumulation would not grow.” (Ibid., IV.16.iv.)
Keynes’s system thereby undermines the sovereignty of the human person and the integrity of the family as the basic unit of society.  It is contrary to the whole idea of that thrift and common sense at the heart of the domestic economy of the household (Volkswirtschaft) that is the ultimate justification for a national economy in the first place.  As Pope Leo XIII pointed out in 1891 in his landmark encyclical, Rerum Novarum (and understanding “land” as an example of an investment, not as a restriction or limitation),
"Widely dispersed power is good."
It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. (Rerum Novarum, § 5.)
Kelso resolved the whole issue of the presumed necessity of concentrated ownership of capital — and thereby refuted the presumed necessity of “the euthanasia of the rentier” — by explaining that past savings (defined as the excess of production over consumption) are not the sole source of financing for new capital formation.  In fact, as Dr. Harold G. Moulton of the Brookings Institution pointed out in his classic refutation of the Keynesian New Deal, The Formation of Capital (1935) — there is evidence suggesting that Keynes was attempting to counter Moulton with his General Theory in 1936 — past savings are actually the worst source of financing for new capital formation.
Savings as defined by Keynes are unconsumed production.  Having the government issue debt by emitting bills of credit to clear that production when the capacity to do so already exists in the economy is the surest way to undermine the very stability of the economy that Keynes sought to reestablish.
A better source of financing for new capital formation is (as Moulton explained) to turn the future stream of income into money now by issuing private sector bills of exchange, form the capital, and repay the financing out of future profits — future savings instead of past savings.  In this way not only can production and consumption be brought back into equilibrium and the non-seasonal business cycle of boom and bust eliminated (Moulton), but ordinary people without past savings or sufficient income to permit savings can purchase the advancing technology that is lowering the value of their labor and displacing them from their wage system jobs (Kelso).
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