As we saw in the previous posting on this subject, John Maynard Keynes established his reputation as the World’s Greatest Economist™ by employing the simple expedient of telling people what they wanted to hear, regardless how goofy it ended up being once it was examined. Take, for example, his claim that the only way to finance new capital formation is by reducing consumption and accumulating the excess production in the form of money savings.
|It's not a joke. He was serious. No, really.|
Sounds logical, doesn’t it? Except when you start to think about it. If the only way to produce goods to consume in the future is to produce goods that are not consumed in the past, then how were the first goods produced out of which savings were generated to be able to produce goods after that? After all, as Keynes clearly stated in his General Theory of Employment, Interest and Money (1936), “So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption.” (II.6.i)
Of course, having made that statement, Keynes then spent twenty pages or so ridiculing the people who do not agree that “saving means the excess of income over expenditure on consumption.” He didn’t say how they were wrong, just that he was right — or how they even exist if everyone agreed with Keynes about the meaning of saving! No, Keynes just called them stupid for not agreeing with him because everybody agrees with Keynes . . . except stupid people who don’t.
The idea that you cannot produce anything until you have produced something is the giant “chicken or the egg” conundrum at the heart of Keynesian economics that no one ever asks about. If you can’t produce without first saving, and saving is defined as consuming less than is produced . . . where did the first production come from out of which to save?
Don’t worry, however. It gets worse.
|Jean-Baptiste Say, whose "Law" Keynes misstated.|
Keynes believed that labor is the only thing that really produces. That is the only way to make sense of his rejection of Say’s Law of Markets that he misstated and then ridiculed. As he said,
In the previous chapter we have given a definition of full employment in terms of the behaviour of labour. An alternative, though equivalent, criterion is that at which we have now arrived, namely a situation, in which aggregate employment is inelastic in response to an increase in the effective demand for its output. Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile. (I.3.i)
In economics, “income” and “demand” are the same thing, and assuming there is no artificial manipulation of demand and everything else being equal, production equals income. Thus, by insisting that only labor generates “effective demand,” Keynes was effectively saying that only labor is productive, at least for general purposes . . . and immediately got himself into a trap.
|Adam Smith, whose first principle Keynes ignored.|
Keynes’s restatement of Say’s Law — which assumes that production is the result of labor, land, and capital* and thus aggregate demand (income) is equal to aggregate supply (production) — took for granted that labor alone is responsible for aggregate demand, and thus aggregate supply. This, of course, meant that since Keynes failed to take into account the fact that capital is productive as well as labor, there is production that labor can’t account for, and thus (as Keynes himself pointed out) aggregate supply and aggregate demand are not equal! It did not occur to him that income from/production by capital is the equal in every way as income/production by labor.
*In binary economics, land and capital are grouped together as the non-human factors of production under “capital.”
This led Keynes to what seems objectively to contradict common sense, and to violate Adam Smith’s first principle of economics as stated in The Wealth of Nations: “Consumption is the sole end and purpose of all production.” No, to Keynes, the purpose of production is 1) to provide people with consumption goods, and 2) to accumulate savings to finance new capital.
This led to another conclusion, that income from labor is for consumption, while income from capital is for investment. With capital producing more and more, and labor producing less and less, however, yet another difficulty occurred: if labor cannot produce enough, or if there is unemployment, how do people who own no capital get enough income to meet consumption needs?
|The Keynesian Economic Program in essence.|
Keynes’s answer: create artificial demand by issuing counterfeit money backed by government debt, using the money to create jobs so that people will have income.
. . . . which creates another problem! Capital is already producing far more than people can consume, and creating jobs means that even more will be produced. Keynes’s answer? Create useless goods that nobody wants or needs! As he said,
When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how “wasteful” loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. (III.10.vi)
|The Keynesian Utopia is built on waste and consumerism.|
Translated into English, this means that in order to create jobs, businesses must manufacture goods that are wasteful. The rationale is that such goods are not really wasteful because they are produced by people in order to purchase other, useful goods, and besides, the fact that they are produced means that production exceeds consumption, thereby generating savings for reinvestment!
Brilliant! . . . except for one small problem. . . .
In order to have sufficient savings from excess production to finance new capital to create jobs for people to consume existing production, the excess production must be turned into cash, and the only way to do that is to get people to buy things that neither they nor anyone else wants or needs! In order for the Keynesian system to work, businesses must make things people don’t want or need, and then convince them that they do want and need them, or businesses won’t have enough savings to finance new capital formation and thus create jobs to increase demand for already existing goods that people don't want or need.
Keynesian economics therefore not only tolerates waste and consumerism, it absolutely requires them in order to function. It also requires manipulation of the currency through “legal” (?????) counterfeiting in order to drive up prices so that people spend more and get less ("forced savings" by the poor to benefit the rich) to increase corporate profits so that the rich have enough savings to reinvest in more capital.
Is there an economics more attuned to reality than Keynes’s weird fantasies? That is what we’ll look at in the next posting on this subject.#30#