Thursday, May 11, 2017

4. The Emancipation of Future Savings


In the early sixties, Louis O. Kelso and Mortimer J. Adler co-authored a book, The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (New York: Random House, 1961).  Drawing largely on the work of Dr. Harold G. Moulton in The Formation of Capital (1935), Kelso and Adler presented Moulton’s answer to the “economic dilemma” we noted in yesterday’s posting.
Keynes: Wealth must be concentrated if the world is to advance.
To summarize, the “economic dilemma” is that, given a reliance on past savings for new capital formation, reducing consumption in order to save to finance new capital means that the consumer demand that justifies new capital formation no longer exists.  On the other hand, if people increase consumption instead of saving, there is a demand for new capital, but no savings with which to finance the capital.
From within the past savings framework, Keynes thought he had the answer: forced or involuntary savings.  That is, the government issues debt to back new money that is used to stimulate consumption to clear unsold goods, inventories of which inhibit or prevent producers from investing in new capital formation and creating jobs.  By defining “savings” as the excess of production (income) over consumption and manipulating the currency by induced inflation, consumers pay more for less, with the purchasing power transferred to producers, who convert the greater profits into savings and use them to finance new capital formation.
Inflation also transfers massive amounts of value from consumers to producers, resulting over time in a situation in which the rich producers get richer the more the inflation continues, while the consumers get poorer.  This increasing wealth and income gap becomes a serious problem the government tries to solve by additional induced inflation, making the situation even worse.
Jean-Baptiste Say
Moulton solved the economic dilemma a different way.  Understanding money and credit in a way Keynes did not, Moulton knew that, consistent with Say’s Law of Markets, production and consumption should be in balance in a just economy.  Overproduction just to accumulate savings in order to finance new capital in ways that made the rich richer and the poor poorer was utter nonsense to Moulton.  Production is for consumption, not non-consumption.
The solution?  Shift from past savings to future savings as the source of financing for new capital formation.  That is, instead of financing new capital by curtailing past consumption in order to accumulate money savings (and then trying to clear the excess production by inducing inflation), finance new capital by increasing production in the future.
Keynes, of course, said that such a thing could not be done.  Why?  Because Keynes failed to distinguish between actual individual human beings, and the abstraction of the collective, the aggregate.  Friedrich von Hayek noted the tendency to collectivism in Keynes in his critique of Keynes’s Treatise on Money (1931), but von Hayek was also stuck in the past savings paradigm, and did not realize the full import of his or Keynes’s blindness in this regard.
Come again?
Keynes claimed that “future savings” could not work because the resources to form new capital had to exist somewhere.  Such resources were, for Keynes, unconsumed production; they existed, therefore they had been produced but not consumed, and were therefore savings.
The Keynesian money multiplier works only by stage magic.
Keynes made a similar error in his “multiplier theory,” especially with money.  In order to make the system work solely on past savings, the Keynesian money multiplier relies on counting the same unit of currency multiple times . . . not realizing that commercial banks create money legitimately, not by magic (which we will address at the end).
Keynes did not realize that the “banking principle” relies on two key things that he either ignored or simply didn’t understand: the law of contracts, and private property.  He also failed to distinguish the individual from the collective at key points in his argument.
Arguing that the resources had to come from somewhere, Keynes declared that the only way someone (an individual or a company) could finance “new” capital was for the capital, or what it took to form the capital, already to exist.  “Savings” in this sense means “everything that exists,” as opposed to “money savings,” i.e., cash accumulations.
No binary economist has ever denied the principle of economic scarcity, i.e., that at any point in time a fixed amount of anything exists.  What binary economics rejects is the tendency automatically to equate economic scarcity with insufficiency — two very different things.  That is why binary economics is called (somewhat misleadingly) a “post scarcity” paradigm.  It is really a “post insufficiency” paradigm.
Keynesian sleight-of-hand: there is something up his sleeve.
Now, Keynes was right in one sense, and terribly, terribly wrong in another.  He was correct that you can’t make something out of nothing; resources must exist somewhere in the aggregate.  He was wrong in thinking that an individual starting from zero cannot finance new capital formation without somebody first saving.
Keynes performed his sleight-of-hand this way.  In order to finance new capital (so he said), someone must first curtail consumption and accumulate the excess in the form of money savings, or persuade someone who has done so to lend him the accumulated savings.
This, of course, means that only those people who can curtail consumption are going to be able to finance new capital.  As capital grows increasingly expensive, that means you need a small class of very rich people, or no new capital will be financed.
Keynes then cheated.  He claimed that if the individual who wanted to finance new capital had neither money savings nor was able to borrow money from a saver, no new capital could be formed.  Keynes’s “cheat” involved a limited definition of money, and using “savings” to mean both money savings and unconsumed production at the same time — a “fallacy of equivocation,” using the same word to mean two different things in the same context.
Thus, Keynes’s argument for past savings was twofold:
·      One, nothing comes from nothing, there must therefore be “savings” in the form of existing resources.  (True.)
·      Two, given that there must be existing-resource-savings, there must therefore also be savings in the form of money.  (False.)
"Keynesian economics" is just the old shell game relabeled.
By confusing existing-resource-savings and money savings, Keynes was able to make his theories plausible, but only at the cost of changing the definitions of money and private property, and changing from individual to aggregate analysis willy-nilly.  “Money” is anything that can be accepted in settlement of a debt; all money is a contract, just as all contracts are money.  The concept of money derives from private property, for a contract conveys a private property interest.
Moulton pointed out that if someone does not have money savings accumulated or the ability to borrow existing savings (e.g., insufficient existing savings) to purchase resource savings (and there are reasons why curtailing consumption in order to accumulate money savings is financially and economically unsound on a system-wide basis), it is still possible to finance new capital.  It is only necessary for a “creditworthy” individual to enter into a contract with the owner of the resource savings to take possession of the resource savings now, and redeem or fulfill the contract once the new capital is formed and it becomes profitable.  In this way past savings can be replaced with future savings.
Commercial banks were invented to facilitate this process.  It does, after all, become somewhat cumbersome for a borrower to go to each person from whom he wants to buy something to form new capital.  It is much easier to go to a bank and trade an individual’s contract that few people may accept, for the bank’s contract that everyone accepts.
This solves the problem of past savings, but Moulton left out an important point.  That is what we will look at on Monday.
#30#

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