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.
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| 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.
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| 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.
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| 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?
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| 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)
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| 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#