Welding Irony, II: The Purpose of Production

Last Thursday we took a look at Representative Tom Snozzi’s proposal to restore the American Dream by creating jobs.  And how are jobs created?  By hiring people to work on massive public works projects; as infrastructure repair and maintenance has been lagging in the United States for some time, there is a great deal that needs to be done.

"And on the Eighth Day God created jobs."

. . . and no money with which to do it.  So where does the Hon. Snozzi propose to obtain the money with which to create jobs?  For some reason he is strangely silent on that point.  He probably assumes that the money will come from the usual source: an increase in government debt, what John Maynard Keynes assumed was the source of all money.

After all, in the Keynesian universe, the problem is not production, but consumption.  The world in aggregate has no trouble producing, but all kinds of trouble consuming.

Why?

The most obvious reason is that there is a great and tremendous difference between “mass production” and “mass consumption” — and it’s not just that one adds while the other subtracts.  There is a confusion between the collective and the individual in the Keynesian analysis that prevented his analysis from being anything other than a recipe for disaster.

Adam Smith saw, but not far enough.

Call it lack of respect for basic human rights or human dignity, or just a peculiar blindness that kept Keynes from seeing what Adam Smith saw instantly.  Obviously, both Keynes and Smith realized that a single individual may through his ownership of labor and capital produce far more than one person can ever consume.

Keynes, however, missed the obvious corollary, while Smith misunderstood it.  That is, while it is certainly possible for one person to produce far more than he can consume, the other side of the coin is that in order for the many to be able to consume what the one produces, the many must also produce something to trade to the one in exchange for what the one produces.

This was Keynes’s error: that mass production can be purely individual, while mass consumption can be collective.  Keynes failed to realize that mass consumption power, unlike mass production power, is necessarily — and by nature itself can only be — the aggregate of all individuals in the economy.  This is because while one individual can produce enough for many, one individual can only consume for one.

Smith knew this, of course, and built his “invisible hand” argument around it — the purpose of production is consumption, and if you want to consume, you must produce.  The "invisible hand" is not a god, but a metaphor for the system itself.  Still, as he pointed out in both The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776), it doesn’t matter one bit how greedy, selfish, or rapacious a rich man may be, his stomach can only hold so much.

Try as he might, there is a limit to the rich man’s ability to consume.  Smith’s error — understandable at the dawn of the industrial age — was to assume that the only way that a rich man could satisfy even his most inordinate desires is by hiring people to work for him or to purchase what others produce with their labor.

J.B. Say: machinery produces, but does not consume.

Thus (Smith reasoned) human labor will always serve to distribute the goods of the earth (the wealth of nations) as fairly and as evenly as if capital had been broadly owned.  But what happens when technology advances, and capital starts replacing labor as the predominant method of production?

Obviously, human labor alone necessarily becomes inadequate to generate consumption power — which Smith did not consider.

Along came Jean-Baptiste Say.  He pointed out that, as labor, land, and technology are all productive, if one factor is insufficiently productive, then people must possess either land or technology in addition to labor.  Unfortunately, this solved Smith’s error in thinking labor would always be sufficient for most people, but did not solve the problem of advancing technology displacing labor.

Keynes assumed that since Say’s theory “obviously” did not work, the answer is to do two contradictory things:

·      Ensure that there is sufficient mass consumption power in the economy by shifting purchasing power away from producers to consumers by creating jobs, the more useless, the better.  This allows wage recipients (who cannot be said truly to earn what they are paid in the Keynesian system) to consume what is produced without adding to the problem of excess production.

·      At the same time, ensure that there is sufficient mass production power in the economy by shifting purchasing power away from consumers to producers by inflating the currency.  This allows capitalists to accumulate sufficient money savings to finance the new capital that produces in abundance without a decreasing need for labor as an input to production.

Unfortunately, you can’t give with one hand and take away with the other and expect either producers or consumers to have anything.  Someone must pick up the tab.

The money has to come from somewhere . . . but where?  Try to use the tax system to raise the money from the private sector to redistribute and those with money will rebel at a certain point.

Keynes: government creates artificial demand.

Keynes’s answer?  Have the government create money!  Thus, the Keynesian program is to stimulate production artificially by creating jobs funded by increases in government debt, then stimulate demand artificially by inflating the currency by increasing government debt. 

When the government creates money backed with its own debt, it picks up the tab for both mass production power and mass consumption power in perpetuity — or so Keynes assumed.  The central bank that is intended to supply financing for private sector production is diverted into supplying funds for public sector consumption, while the tax system that is intended to supply funds for public sector consumption is manipulated to supply financing for private sector production.

As a result, the government assumes a greater and greater burden of debt that, once the tipping point is reached, will destroy the economy.  Money, after all, is a means of exchanging what one party produces for what another party produces.  If the party creating money doesn’t produce anything, however, the obligation will simply get bigger and bigger until it destroys the non-producing money creator.

So, while Representative Snozzi may be well-intentioned, he hasn’t thought his proposal through — but there is an answer.

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