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, April 19, 2012

A Better Way to Save, III: Keynesian Forced Savings

Well, tomorrow is the Big Day. Not for taxes . . . that was Tuesday. If you've been following this blog, you will have seen one or two postings urging you to come and support the push for a Capital Homestead Act at a rally in front of the Federal Reserve Board of Governors building on Constitution Avenue from 11:30 am to 1:30 pm. We'll be demonstrating in favor of monetary and tax reforms to correct the problems caused by adherence to the principles of Keynesian economics and, to a lesser degree, all the schools of economics that accept the "currency principle" as a given.

We have graphic evidence in the form of the condition of the global economy that manipulating the money supply in accordance with the principles of chartalism or Modern Monetary Theory does not work. It is a variety of socialism based on redistributing existing wealth through inflation, leading inevitably to the Servile State.

We define inflation as a rise in the price level resulting from more units of currency "chasing" the same or a declining amount of production relative to the increase in the money supply. Yes — we are fully aware that Keynes defined "true" inflation as a rise in the price level only after full employment had been reached. That's nice. Ordinary people end up paying more for less whether the inflation is "true" or not.

Inflation by any name, however, is a key element in Keynesian economic policy. Taking as a given (as Keynes did) that new capital formation cannot be financed except by cutting consumption, the problem becomes how to both increase consumption to justify the new capital, and reduce consumption to pay for it? This is the past savings paradox that Harold Moulton termed "the economic dilemma" in The Formation of Capital (1935).

Keynes believed he had solved the problem with inflation, even if he refused to call it that — an example of his creative "re-editing of the dictionary." It (allegedly) works like this. A rise in the price level forces consumers to pay more for less. Since Keynes defined "saving" solely as reductions in consumption, this qualifies as "saving." Keynes called it "forced savings."

The consumers, however, do not realize the benefit of this type of "saving." Instead, the "savings" accrue to producers in the form of increased profits. (If producers realize too much profit, however, the government taxes it away to redistribute back to consumers in the form of entitlements, job subsidies, legally mandated wage and benefits packages, and welfare.) Producers then (allegedly) use the savings to finance new capital formation. This (allegedly) creates new jobs that (presumably) generate enough effective demand to keep the economy running at full employment.

The problem that even Keynes saw with this was that you cannot continue on a course of producing more and consuming less forever. It doesn't make sense, as even he acknowledged. Whether or not Keynes wanted to admit it, however, Moulton knew what he was talking about. You can't cut consumption and increase consumption at the same time. The numbers just don't add up.

Never fear. Keynes had an answer. We'll conclude this series next week — after the rally tomorrow at the Federal Reserve.