Last week we saw that Keynes was faced with something of a conundrum. How, at one and the same time, do you decrease consumption to accumulate savings to finance new capital, and increase consumption to justify new capital investment? Harold Moulton gave the answer to this "economic dilemma" in his counter-Keynesian monograph, The Formation of Capital (1935), but we suspect that Keynes — while he probably read it — completely ignored it because it pointed out the fallacies of the past savings approach.
Keynes had his own solution: produce goods and services that are not marketable! Classical economics assumed as a matter of course that if someone engaged in productive activity, it was with the intent of bettering him- or herself. As Pope Leo XIII agreed,
"It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. Socialists, therefore, by endeavoring to transfer the possessions of individuals to the community at large, strike at the interests of every wage-earner, since they would deprive him of the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life." (Rerum Novarum, § 5.)
Keynes said (in essence), baloney. Screw the market. Liberty and private property? Feh. The private sector isn't in charge, anyway. The State is in charge of everything, and has been (according to Keynes) for at least 4,000 years. State save us! The purpose of production is not consumption. Neither Adam Smith nor the popes knew what they were talking about. The purpose of production is to pile up wealth to reinvest in capital to provide jobs to realize effective demand to justify the capital that produces the wealth to pile up. As Keynes pontificated,
"The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (John Maynard Keynes, The Economic Consequences of the Peace (1919), 2.iii.)
Of course, there has to be enough production of marketable goods and services to keep people sufficiently contented not to overthrow the government or start burning economists at the stake. The problem is to get sufficient effective demand into the hands of consumers to allow them to buy the marketable goods and services that keep them alive, and yet decrease consumption to provide savings.
Yes, but how?
Simple. By creating money that pays for production of non-marketable goods and services! Paying for the labor to produce non-marketable goods and services increases the effective demand that allows consumers to buy needed goods and services, but does not increase the supply of those same goods and services. Further, you can create all the money you want to do this and it won't cause inflation because the new money is only paying for goods that aren't sold! The fact that the price level rises is, according to Keynes, due to "other factors." It's not "true inflation."
That's the theory, anyway.
Okay, what sort of non-marketable goods and services did Keynes say we should produce in order to get the economy rolling again? Oh, anything, just as long as the goods are not meant for use, or were to be destroyed in some fashion after manufacture without adding to what is available in the market — pyramids, cathedrals, even war if the politicians can't think of anything sufficiently useless on which to spend money.
The massive waste of lives and resources that such a program entails is irrelevant as long as you gain your immediate end. Mounting debt, depleted resources, ruined lives — these are long run problems. We're only interested in the short term. In the long run, as Keynes claimed, we're all dead. Screw tomorrow. We Want It Now.
Of course, we could always address the Great Savings Dearth by doing something that actually helps people save instead of allowing the government to waste. We'll take a look at one possibility starting tomorrow.