Under the hegemony of Keynesian economics, the global economy must be inflationary. Why? Because . . . well, because, that’s why. Which, of course, is not an answer — but it makes more sense than the actual Keynesian answer. It all lies in how you define inflation. You see, the different schools define inflation differently, and not entirely consistently.
We accept the Monetarist or Chicago School definition of one form of inflation, which is too much money “chasing” too few goods and services resulting in a rise in the price level.
In Keynesian economics, strictly speaking, inflation is defined as a rise in price level after reaching full employment. Keynes then claimed that a rise in the price level (which is where the Monetarist School stops) prior to full employment is not true inflation but is due to “other factors.” This is a meaningless qualification, for if you define inflation as a rise in the price level, you can’t say that a rise in the price level is not a rise in the price level due to an unrelated condition or event. Recognizing this, adherents of “Modern Monetary Theory” simply define inflation as a rise in the price level and hope it has something to do with creating jobs.
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| Friedrich von Hayek |
In Austrian economics, strictly speaking, inflation is any increase in the money supply, whether the price level rises or not. Admittedly, many Austrian economists do not accept this definition, or accept it only in part, but that is the strict theory, according to Friedrich von Hayek.
Then, there are two kinds of inflation. These are known as “cost-push” and “demand-pull.” Cost-push is what you get when the price of something goes up. This is “natural” if the price goes up due to insufficiency, such as crop failure, avian flu decimating egg-laying flocks, difficulty in extracting a mineral, or not enough workers. It is “artificial” or “induced” if it is due to some kind of manipulation, such as workers or government raising wages without a corresponding increase in demand for labor or increased production due to labor, tariffs, or other taxes passed on to consumers.
Demand-pull is what you get when the money supply increases faster than production. There is more money around, which bids up the price of goods and services. Perhaps confusingly, a decreased supply or an increased demand for something that raises the price naturally without increasing the money supply is generally considered cost-push, not demand-pull inflation.
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| John Maynard Keynes |
Using Keynesian assumptions, many economists and virtually all politicians assume as a given an economy needs a certain level of demand-pull inflation to ensure there is enough money to finance economic growth. By this they mean the government must increase the money supply at a certain rate to induce artificial inflation to generate sufficient savings for new capital formation and job creation. This is why the fixed belief persists that if you want “full employment,” you must have the right amount of inflation, and if you want to lower inflation, you must accept high unemployment.
Ironically, Keynesian theory does not recognize capital is productive. Capital only creates the “environment” within which labor can be productive. Thus, the more capital you form, the more jobs you create . . . in theory.
In theory, the “productivity” of labor is output divided by the number of labor hours. If it takes a hundred labor hours to produce a hundred units of production, labor productivity is 1. If it takes fifty labor hours to produce a hundred units of production, labor productivity is 2. If it takes one second for a human being to push a button and produce a hundred units of production, labor productivity is 36,000.
In reality, capital is independently, sometimes autonomously productive. For example, trees growing in the wild producing fruits and nuts with no human input are autonomously productive. True, there is human labor involved in gathering the fruits and nuts for human consumption, and that may be counted into the accounting cost of production for economic purposes. Nevertheless, the fruits and nuts would have been produced whether human beings even existed or not — they were produced both independently by the trees, and autonomously without any human input.
Similarly, in an orchard tended by human beings, the trees will ordinarily bear more fruits and nuts, but the production itself is still independent by the tree, although not autonomously in this case. What we may call productiveness, or the relative contribution of labor and capital (capital defined here as the non-human factor of production) can be measured by comparing two trees, side by side (or miles away), one tended by human beings, the other left strictly alone — assuming that the benefits of what is done for the tended tree in no way affect the untended tree.
The untended tree produces 5 bushels of fruits or nuts, while the tended tree produces 25 bushels of fruits or nuts. We can therefore say that the productiveness of the tree (capital) is 1, while the productiveness of the human being (labor) is 4. Similarly, if a cobbler can produce one pair of shoes in an hour and a shoemaking machine operated by the same cobbler can produce a hundred and one pairs of shoes in an hour, the productiveness of labor is 1, while the productiveness of capital is 100.
Keynesian economics, however, as noted assumes all production is due to labor. In Keynesian economics,
· If you want to produce and gain income, you must have a job.
· If you want a job, you must have capital to provide the environment for the job.
· If you want to have capital to provide the environment for the job, you must have investment in new capital.
· If you want investment in new capital, you must have savings.
. . . and there’s the rub. In Keynesian economics, if you want savings, you must cut consumption and accumulate unconsumed production in the form of money; savings in Keynesian theory consists exclusively of past reductions in consumption. (This begs the question as to where the original savings came from out of which the first production came, but that is another issue.)
This means that people who provide capital and therefore create jobs must have savings. If they do not get enough savings from the profits of production, they must resort to “forced savings.” And what are “forced savings”? Forced savings — according to Keynes — is when government inflates the currency to drive up the price level. Consumers pay higher prices and get less, producers produce less and get more. This meets the Keynesian need to cut consumption to generate savings.
The savings realized through higher consumer prices are passed through to the producer, who realizes more profit for less production. The producer reinvests the additional savings in more capital, enhancing the environment for production, and creating jobs. Therefore, if you want people to have jobs, you must have inflation.
Of course, if there is another form of savings, Keynesian theory is knocked into a cocked hat, so to speak. And, as implied by the fact that production must precede consumption — and therefore all savings cannot be the result of decreased consumption! — savings does not consist solely of past decreases in consumption but necessarily includes future increases in production.
That being the case, it becomes obvious that — even if the rest of Keynesian theory is valid (which it is not) — the presumption you must have inflation to “force savings” to finance job creation is utterly and completely false and baseless. It is possible, indeed preferable, to generate savings for new capital investment by turning the present value of future increases in production into money now. This is, in fact, what commercial/mercantile banks and central banks were invented to do.
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| Pope Pius XI |
So, why do the politicians, especially those controlled by the rich or who are rich themselves, insist on having completely unnecessary inflation? Simple. It gives them control over money and credit. If the politicians can decide how much money to create, they control economic life. As Pope Pius XI noted,
In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.
This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will. (Quadragesimo Anno, §§ 105-106.)
And the ultimate goal? The socialization of the economy through strict government control for the benefit of the rich and powerful, i.e., socialism for the poor, and capitalism for the rich, a.k.a., “the Great Reset” (countered in The Greater Reset). As Keynes explained,
The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments [the allocation of scarce resources to meet human wants and needs.] and the basic rate of reward to those who own them, [the allowed rate of profit on capital] it will have accomplished all that is necessary. (John Maynard Keynes, The General Theory of Employment, Interest and Money, V.24.iii.)
Is there an alternative? Yes. Economic democracy as understood in the Just Third Way of Economic Personalism and applied in the Economic Democracy Act.
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