In his book, The General Theory of Employment, Interest, and Money (1936), John Maynard Keynes made the somewhat startling (and rather heartless) statement that he was advocating that rentiers — small investors who live off the income from their investments — should be euthanized. Specifically,
|"Euthanize the Rentiers!"
I see . . . the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. (John Maynard Keynes, The General Theory of Employment, Interest, and Money (1936), .VI.24.ii.)
First, of course, to understand this it must clearly be understood that the binary economics of Louis O. Kelso is based on the Banking Principle, or what some call the “Smithian” school (Banking School) of classical economics. Keynes’s theories, on the other hand, are derived from the “Ricardian” school (Currency School), which is based on what became known as the Currency Principle.
|"I say, stop messing with my political arithmetick!"
Yes, there are some authorities that claim Keynes is Banking School, but that is because they do not understand the fundamental precept of the Banking School: the Banking Principle. This can most simply be stated as, “the velocity of money, the price level, and the number of transactions determines the amount of money.” In terms of the Quantity Theory of Money equation, M x V = P x Q, M is the dependent variable, and V, P, and Q are the independent variables.
In the Currency School, on the other hand, the fundamental precept (the Currency Principle) can be stated as, “the amount of money determines the velocity of money, the price level, and the number of transactions.” In terms of the Quantity Theory of Money equation, M x V = P x Q, M is the independent variable, and V, P, and Q are the dependent variables.
In Banking School economics, the first principle is (as Adam Smith stated), “Consumption is the sole end and purpose of all production.” Further, “money” is defined as “anything that can be accepted in settlement of a debt” (“all things transferred in commerce”). Finally, the factors of production are labor, land, and capital. (Kelso simplified this by grouping the factors of production into “human” and “non-human,” or “labor” and “capital,” including land under capital as a non-human factor of production.)
|"And with my labor theory of value!"
In contrast, Keynesian economics rejects Smith’s first principle in favor of three other principles derived originally from the theories of David Ricardo:
· Labor is the sole source of production. Capital at best only enhances the capacity of labor.
· Savings achieved by producing more than is consumed and accumulated in the form of money is the sole source of financing for new capital formation.
· Money is whatever the State declares it to be.
Obviously, unless these differences are understood, there can be no question of critiquing binary economics by means of a Keynesian analysis, any more than Keynesian economics can be critiqued from a Kelson perspective. The principles of one system contradict those of the other, so there is no basis for comparison. (There is also confusion in the Keynesian system between principle and application of principle — between substance and form — but that is a different discussion.)
With respect to the role of the investor, Banking School economics accepts Say’s Law of Markets, with the assumption that investors produce by means of capital, or capital and labor (if a worker-owner), instead of labor alone. In Banking School economics, investing is a different mode of production, but it is still production, and is production in the same sense as production by labor alone. This is an application of the “principle of identity,” the positive statement of the first principle of reason: “That which is true is as true, and is true in the same way, as everything else that is true.”
|"You toucha my law, I breaka you face, says I!"
Thus — consistent with Say’s Law — (and all other things being equal) if all production is carried out for the purpose of consumption, and everyone who consumes also has the means and opportunity to produce by means of both labor and capital, supply (production) will generate its own demand (income), and demand, its own supply.
The problem with Say’s Law in Keynesian economics, however, is that Keynes’s principles contradict the fundamental principle on which Say’s Law is based: that production is only for consumption. To Keynes, production is for consumption and a source of financing for new capital formation. Keynes therefore necessarily rejected Say’s Law to try and make his system work.
Further (and inserting a contradiction into Keynesian theory), labor production is for consumption, while capital production is for reinvestment. Keynes avoided resolving the contradiction that if all production is due to labor, by what right does the owner of capital receive what is due to owners of labor? The implication is that owners of capital are stealing what belongs to the real producers, or overcharging consumers for what others produce. (Karl Marx, who also rejected Say’s Law, resolved this contradiction with his theory of surplus value.)
We will ignore the contradiction for the sake of the argument. We also accept for the sake of the argument what we know to be wrong: that an excess of production over consumption is the sole source of financing for new capital formation, and that the purpose of new capital formation is to provide wage system jobs so that owners of labor can produce and therefore consume.
Given these errors, however, Keynes concluded it is essential as technology advances and becomes increasingly expensive that there be a very small class of persons so rich that they cannot possibly consume all the production churned out by their capital, and necessarily reinvest the surplus in new capital. The investor’s function, therefore, is to provide financing for new capital formation, not income for consumption. Any investor who consumes anything more than an insignificant portion of the income his or her capital generates is a “functionless investor.”#30#