THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Thursday, January 29, 2009

Stimulus, Part II: An Alternative to Keynesian Economics

In the previous posting in this series we learned that a Keynesian stimulus package can only make matters worse. This is because a Keynesian program is founded on demonstrably false assumptions that contradict basic common sense, as well as on self-defeating monetary and fiscal policy that, in essence, operates on the fixed belief that you can get out of a hole by digging yourself in deeper.

The pivotal problem with Keynesian economics, however, is an article of dogmatic faith in that belief system. That is Keynes' — unproved and unprovable — opinion that it is impossible to create money through the extension of bank credit for capital formation (investment). It is, however, absolutely necessary to create money through the extension of bank credit for government and personal debt for government spending and consumption. Keynes' belief is the basis for his rejection of "Say's Law of Markets" and the "Real Bills" doctrine, both of which flatly contradict Keynes' dogmas.

Say's Law of Markets, named for a French political economist Jean-Baptiste Say (who didn't actually develop the law, but expressed it best) is based on the observation that production equals income. That is, whenever anyone produces something, whether for sale, for trade, or for personal use, that production results in an increase in wealth. The production is "income," even if the producer never makes a sale or exchange, but consumes all of his or her own produce him- or herself.

The operation of Say's Law is easier to see when people produce for exchange, thereby taking advantage of specialization, comparative advantage, and differences in individual, local, and national skills and resources. The essence of the law, however (that production equals income), remains the same, whether an individual produces only for his or her own consumption, or produces nothing for personal consumption, preferring to trade with others for whatever he or she wants or needs. As Say expressed it in a letter to Thomas Malthus (who, like Keynes, rejected Say's Law),
To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.

From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce. (Letters to Malthus, 1821, p. 2)
If, as Say explains, production equals income, and we don't really make our purchases with this thing called "money," but with what we produce, then the Keynesian belief that you can create money at will for consumption without first producing something is stark, raving economic insanity — as well as being so colossally dishonest as to defy the imagination. Assuming that we actually make our purchases with our own productions, when someone issues money for consumption without producing something, the issuer is stealing from whoever is stupid enough to be productive.

Issuing money without first producing is a way of trying to get something for nothing, of creating a claim on what others produce without having to produce anything yourself. Nobody in his or her right mind, absent some form of coercion (usually an overseer with a whip) is going to work to produce goods and services, whether by means of labor or capital, just so somebody else can take it away.