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| Louis O. Kelso |
“In the second income plan, Kelso says, ‘[D]espite labor’s minor contribution, labor, including the unemployed, gets back about 78% of the income distributed [under our current system].’ But if, because of government-ordered redistribution, labor gets over 3/4 of the new wealth produced, then why have workers still been struggling to get by all these decades? Seems inconsistent. Also, this assertion seems to undermine the notion that workers can do better by owning capital, which is a sort of disconnect.”
Welcome to the wide, wonderful, wacky world of Keynesian economics.
What our reader noted is one of the flaws in Keynesian economics and the concept of “forced savings.” To finance new capital with past savings (cuts in past consumption rather than future savings consisting of increases in future production), Keynes believed you had to induce artificial inflation by pumping money backed only by government debt into the economy. This forces people without capital incomes to pay more and get less, thereby “saving.” The benefit of this Keynesian “forced savings,” however, does not flow to the “saver” (i.e., the person consuming less) but to the producer.
John Maynard Keynes
The non-capital owner thereby gets a triple whammy:
1) he or she may get more in objective units of currency, but each unit of currency is worth less,
2) any money the non-capital owner depreciates in value because it is almost always denominated in currency, which loses its value over time,
3) or in shares on the secondary market, which is only beneficial if you’re good at gambling or have a mutual fund or broker who can play the game.
The trick here is that everything requires reductions in current consumption to save. This decreases effective consumer demand, which must be made up by increased consumer credit and more government spending. This in turn creates a vicious circle of additional inflation on top of the original induced inflation.
The original intention of induced inflation was to force past savings. The second round of induced inflation is intended to make up for lack of current income caused by the higher prices as well as lack of non-forced past savings in the hands of consumers.
This is why the Federal Reserve never knows what to do. They do not seem to realize they are dealing with three different types of inflation, all at once, and each one should logically require a different remedy, when Keynesian economics recognizes only one: induced inflation. The Federal Reserve is dealing with:
1) induced demand-pull inflation to decrease consumer demand and force savings to finance increased production,
2) induced demand-pull inflation to increase consumer demand and justify increased production, and
3) “real” cost-push inflation as goods become scarce as producers produce less at higher prices and make greater profits for less production and consumers bid up prices.
And all the experts wonder why monetary policy isn’t working? It should be obvious when induced inflation is at one and the same time intended both to decrease consumer demand and increase it!
Dr. Harold G. Moulton
Incidentally, Dr. Harold Moulton solved this Keynesian “economic dilemma” in his 1935 book, The Formation of Capital. As Moulton explained it, people caught in the false assumptions of the Keynesian school of economics and others that assume only past reductions in consumption can be used to finance new capital formation are caught on the horns of a dilemma: they think you can’t form new capital and increase production unless you first reduce consumption . . . and if you reduce consumption to finance new capital formation, there’s no reason to finance new capital formation because people won’t buy it!
How did Moulton solve this problem? By pointing out that “savings” consists both of past decreases in consumption (“past savings”) and future increases in production (“future savings”) . . . and the obvious use of past savings is consumption, and the obvious use of future savings is production . . . which Keynes insisted couldn’t happen, thereby contradicting thousands of years of experience without a shred of evidence.
Now, to answer the question: workers (“labor”) may get a huge chunk of production costs, but production costs are, frankly, not the main component of price. Price must cover all costs plus a profit and (in the Keynesian universe) sufficient “forced savings” to finance the new capital that is replacing high-cost labor.
So, while the workers might be getting a big piece of the production pie to begin with, most, sometimes all of it and more, is taken away by inflation and shifted to government or back to producers . . . and “official” inflation rates don’t include things like the rising cost of education and a whole bunch of very, very expensive things that, before Keynes came along, most people either they didn’t buy at all (like college educations) or were much less expensive.
Before Keynes, most families got by on one income, now a lot of individuals can’t get by on two jobs just for themselves.
And the solution? Adopt the Economic Democracy Act.
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