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.
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| 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.
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| 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.
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| 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.
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| 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.)
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| "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#