Regular Readers of this blog may have gotten the idea that we’re not exactly enamored of Keynesian economics. If so, they have the right idea: we’re not. And there are a lot of very good reasons for it. For today, however, we’ll confine ourselves to the alleged tradeoff between inflation and employment.
Right off the bat we’re in deep water, because Keynes defined “inflation” as a rise in the price level after reaching full employment. A rise in the price level prior to reaching full employment is not real inflation, according to Keynes, but is due to “other factors.”
What “other factors”? Keynes didn’t say. He gave us his definition of inflation, and that was sufficient. As long as you don’t mind ignoring reality and can accept bare — and contradictory — assertions as the basis of your economic theory, you’ll do fine as a Keynesian.
After all, Keynes also asserted (contrary to fact) that the world prior to World War I could not possibly have advanced to the level it had if capital ownership had been broadly distributed. That this was clearly refuted by the development of the United States was something Keynes simply ignored.
And what about money? According to Keynes, the authoritarian state has the right and power to change the value of the currency any time it likes and can create money out of thin air at will. It has the power to (in Keynes’s words) “re-edit the dictionary” — i.e., change reality — at will in order to implement political policy.
That Keynesian monetary theory effectively abolishes private property was irrelevant to Keynes. He thought that small owners should be “euthanized,” by which he meant their property rights should be whittled away until they were meaningless and forced to surrender ownership of anything except consumer goods.
Keynes thought that rich owners should be controlled by the government to ensure an appropriate allocation of resources and a proper rate of return. As this would effectively abolish private property for the rich as well as the poor, he said that no further socialization of the economy would be necessary.
But to return to the subject of inflation. Post Keynes Keynesians realized that Keynes’s definition of inflation was unrealistic and not politically viable. After all, when voters can see prices going up and they’re paying more and getting less, they’re going to know something is wrong.
Therefore, the Post Keynesians came up with the trade-off theory to pacify the voters, at least until the voters caught on. That is, if you want full employment, you’re going to have to accept inflation. If you want low inflation, you’re going to have to accept unemployment.
Of course, the facts contradict trade-off theory, too, which is where we get “Modern Monetary Theory” (MMT). As far as we can tell, MMT means that Keynes’s theories are true except when they’re not, and there is a trade-off between inflation and employment, except when there isn’t.
So, what’s the real story? First, we have to understand that Keynes accepted three assertions as absolute economic gospel that don’t hold water:
· The Labor Theory of Value. Human labor is the sole factor of production. Non-human factors such as land and technology only enhance human labor and provide the environment within which human labor can be productive. They are not themselves productive in any way.
· The Currency Principle. The amount of money in the economy determines the level of economic activity.
· The Past Savings Principle. The only way to produce is to have savings, and the only way to generate savings is by consuming less than is produced.
Although Keynes ridiculed anyone who did not accept these assertions, the fact remains that virtually anyone who can think logically and is familiar with the real world can refute them easily:
· The “Smithian” Factors of Production. In the classical economics of Adam Smith, there are three factors of production: human labor, land, and capital. In binary economics there are two: human and non-human, with the non-human being subdivided into land and technology. The fact that land can produce without any direct human input, and that automated machinery can do the same disproves the labor theory of value.
· The Banking Principle. Once we understand the essence of money — that it is the means by which I exchange what I produce for what you produce — we realize instantly the fallacy of the Currency Principle. The amount of money in the economy does not determine economic activity, rather the level of economic activity determines the amount of money: the “Banking Principle.”
Henry "Real Bills" Thornton
· The “Real Bills” Doctrine. No one denies that savings can be accumulated by consuming less than is produced, by reducing consumption in the past. It is also possible, however, to do what Keynes ridiculed: to generate savings by increasing production in the future. Anticipated production can be monetized by using “real bills” (i.e., financial instruments with a present value to be redeemed in the future) to back new money through the extension of credit to be used to finance new production. When the production is realized, the credit is repaid, and the money cancelled.
Despite the ease with which Keynes’s theories can be refuted, virtually every government in the world today assumes that the Keynesian prescriptions based on these theories are valid. Astoundingly, the other two mainstream schools of economics — the Chicago/Monetarist and the Austrian — also implicitly accept Keynes’s basic assumptions, albeit in somewhat different forms, allowing adherents of both schools to claim that they in no way agree with Keynes, except when they do. Even Milton Friedman declared in an interview in Time magazine in the 1970s that everyone is Keynesian now, and a few weeks labor backpedaled by declaring that in one sense everybody is Keynesian and in another sense no one is.
Anyway, the bottom line here is that Keynes advocated inflation as a means of shifting purchasing power from wage earners to the rich. By raising prices for workers and their families, the value of their money is reduced, and handed over to the rich. The poor pay more and get less, while the rich sell less and receive more. Keynes called this “forced savings” because it is by this means that the poor are forced to save (reduce consumption) for the benefit of the rich.
The forced transfer of savings from the poor to the rich allows the rich to invest in more new capital and thereby create jobs for the poor. The problem, of course, is that if — contrary to Keynes’s assertion — capital is productive and in the same way as labor, “job creation” is a costly and inefficient way to redistribute wealth back to the poor, from whom it was taken in the first place.
Thus, the money that the poor were forced to save for the rich through higher prices resulting from government printing money backed only by its own debt ends up back in the pockets of the poor in the form of wages for unnecessary jobs. This means that more money must be created out of nothing so that the rich have enough to invest in new capital and pay wages.
This creates a vicious circle. The more money the government pours into the economy to raise wages, create jobs, and finance new capital only accelerates the rate at which the poor save for the rich through rises in the price level and the decline in real wages. The rich become ever-more wealthy at a faster and faster rate, and the economy goes into a downturn, which will be disguised as “economic growth” as the rich pour money into the stock market and report higher and higher profits.
The end comes when somebody — or a lot of somebodies — suddenly realize what is going on: that the immense amount of debt assumed by the government ostensibly for the benefit of the non-rich has ended up in the pockets of the rich. What will happen at that point is anybody’s guess, but it probably will not be the utopia Keynes promised if we just accept his theories for a century. As he declared in an essay, “Economic Possibilities for Our Grandchildren,” first published in 1930 and republished in his collection, Essays in Persuasion (1931),
For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.
In other words, for the world to work, all we have to do is ignore reality and lie our heads off to ourselves. Keynes’s statement, by the way, is pretty much the same argument that David Christy used in 1855 in his book, Cotton Is King, to justify slavery in the United States on the grounds of economic necessity . . . and you can see where that got us. And people wonder why the world is in the shape it’s in?