Steven Horwitz gave this lecture entitled "Do We Really Need a Central Bank?" at the Future of Freedom Foundation's Economic Liberty Lecture Series at George Mason University on December 2, 2009.
Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY. He is the author of two books, Microfoundations and Macroeconomics: An Austrian Perspective (Routledge, 2000) and Monetary Evolution, Free Banking, and Economic Order (Westview, 1992), and he has written extensively on Austrian economics, Hayekian political economy, monetary theory and history, and the economics and social theory of gender and the family.
His work has been published in professional journals such as History of Political Economy, Southern Economic Journal, and The Cambridge Journal of Economics. He has also done public policy research for the Mercatus Center, Heartland Institute, Citizens for a Sound Economy, and the Cato Institute. His current project is a book tentatively titled Classical Liberalism and the Evolution of the Modern Family. Horwitz currently serves as the book review editor of The Review of Austrian Economics and as an academic advisor for the Heartland Institute and a contributing editor to Critical Review and Journal des Economistes et des Etudes Humaines. A member of the Mont Pelerin Society, he completed his MA and PhD in economics at George Mason University and received his A.B. in economics and philosophy from The University of Michigan.
Steven Horwitz at FFF: "Do We Really Need a Central Bank?"
Showing posts with label Capitalism. Show all posts
Showing posts with label Capitalism. Show all posts
Friday, June 29, 2012
Friday, June 22, 2012
MUST READ! The Scam Wall Street Learned From the Mafia | Matt Taibbi
Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won't hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government's massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony "Tony Ducks" Corallo.
But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.
The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.
In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia, which has long made manipulation of public bids for things like garbage collection and construction contracts a cornerstone of its business. What's more, in the manner of old mob trials, Wall Street's secret machinations were revealed during the Carollo trial through crackling wiretap recordings and the lurid testimony of cooperating witnesses, who came into court with bowed heads, pointing fingers at their accomplices. The new-age gangsters even invented an elaborate code to hide their crimes. Like Elizabethan highway robbers who spoke in thieves' cant, or Italian mobsters who talked about "getting a button man to clip the capo," on tape after tape these Wall Street crooks coughed up phrases like "pull a nickel out" or "get to the right level" or "you're hanging out there" – all code words used to manipulate the interest rates on municipal bonds. The only thing that made this trial different from a typical mob trial was the scale of the crime.
USA v. Carollo involved classic cartel activity: not just one corrupt bank, but many, all acting in careful concert against the public interest. In the years since the economic crash of 2008, we've seen numerous hints that such orchestrated corruption exists. The collapses of Bear Stearns and Lehman Brothers, for instance, both pointed to coordinated attacks by powerful banks and hedge funds determined to speed the demise of those firms. In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – "an open-and-shut case of anti-competitive behavior," as one former regulator described it.
More recently, a major international investigation has been launched into the manipulation of Libor, the interbank lending index that is used to calculate global interest rates for products worth more than $3 trillion a year. If and when that case is presented to the public at trial – there are several major civil suits in the works here in the States – we may yet find out that the world's most powerful banks have, for years, been fixing the prices of almost every adjustable-rate vehicle on earth, from mortgages and credit cards to interest-rate swaps and even currencies.
But USA v. Carollo marks the first time we actually got incontrovertible evidence that Wall Street has moved into this cartel-type brand of criminality. It also offered a disgusting glimpse into the enabling and grossly cynical role played by politicians, who took Super Bowl tickets and bribe-stuffed envelopes to look the other way while gangsters raided the public kitty. And though the punishments that were ultimately handed down in the trial – minor convictions of three bit players – felt deeply unsatisfying, it was still a watershed moment in the ongoing story of America's gradual awakening to the realities of financial corruption. In a post-crash era where Wall Street trials almost never make it into court, and even the harshest settlements end with the evidence buried by the government and the offending banks permitted to escape with no admission of wrongdoing, this case finally dragged the whole ugly truth of American finance out into the open – and it was a hell of a show.
1. THE SCAM
This was no trial scene from popular lore, no Inherit the Wind or State of California v. Orenthal James Simpson. No gallery packed with rapt spectators, no ceiling fans set whirring to beat back the tension and the heat, no defense counsel's resting a sympathetic hand on the defendant's shoulder as opening statements commence. No, the setting for USA v. Carollo reflected the bizarre alternate universe that exists on Wall Street. Like so many court cases involving big banks, the proceeding looked more like a roomful of expensive lawyers negotiating a major corporate merger than a public search for justice.
The trial began on April 16th in a federal court in Lower Manhattan. The courtroom, an aerielike setting 23 stories up, offered a panoramic view of the city and the East River. Though the gallery was usually full throughout the three-plus weeks of testimony, the spectators were not average citizens come to witness how they had been robbed blind by America's biggest banks. Instead, there were row after row of suits – other lawyers eager to observe a long-awaited case, one that could influence the outcome in a handful of civil suits pending across the country. In fact, the defendants themselves, whom the trial would reveal as easily replaceable cogs in a much larger machine of corruption, were barely visible from the gallery, obscured by the great chattering congress of prosecution and defense attorneys.
Only the presence of the mostly nonwhite and elderly jury, which resembled the front pew of a Harlem church, served as a reminder that the case had any connection to the real world. Even reporters from most of the major news outlets didn't bother to attend. The judge in the trial, the right honorable and amusingly cantankerous Harold Baer, acknowledged that the case was not likely to set the public's pulse racing. "It is unlikely, I think, that this will generate a lot of media publicity," Baer sighed to the jury in his preliminary instructions.
Continue reading (Long read) - The Scam Wall Street Learned From the Mafia
Labor’s Paradise Lost | Robert Skidelsky | Technological Unemployment
As people in the developed world wonder how their countries will return to full employment after the global recession, it might benefit us to take a look at a visionary essay that John Maynard Keynes wrote in 1930, called Economic Possibilities for our Grandchildren.
Keynes's General Theory of Employment, Interest, and Money, published in 1936, equipped governments with the intellectual tools to counter the unemployment caused by slumps. In this earlier essay, however, Keynes distinguished between unemployment caused by temporary economic breakdowns and what he called "technological unemployment" – that is, "unemployment due to the discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour".
Keynes reckoned that we would hear much more about this kind of unemployment in the future. But its emergence, he thought, was a cause for hope, rather than despair. For it showed that the developed world, at least, was on track to solving the "economic problem" – the problem of scarcity that kept mankind tethered to a burdensome life of toil.
Machines were rapidly replacing human labour, holding out the prospect of vastly increased production at a fraction of the existing human effort. In fact, Keynes thought that by about now (the early 21st century) most people would have to work only 15 hours a week to produce all that they needed for subsistence and comfort.
Developed countries are now about as rich as Keynes thought they would be, but most of us work much longer than 15 hours a week, although we do take longer holidays, and work has become less physically demanding, so we also live longer. But, in broad terms, the prophecy of vastly increased leisure for all has not been fulfilled. Automation has been proceeding apace, but most of us who work still put in an average of 40 hours a week. In fact, working hours have not fallen since the early 1980s.
At the same time, "technological unemployment" has risen. Since the 1980s, we have never regained the full employment levels of the 1950s and 1960s. If most people still work a 40-hour week, a substantial and growing minority have had unwanted leisure thrust upon them in the form of unemployment, under-employment and forced withdrawal from the labour market. And, as we recover from the current recession, most experts expect this group to grow even larger.
What this means is that we have largely failed to convert growing technological unemployment into increased voluntary leisure. The main reason for this is that the lion's share of the productivity gains achieved over the last 30 years has been seized by the well-off.
Particularly in the United States and Britain since the 1980s, we have witnessed a return to the capitalism "red in tooth and claw" depicted by Karl Marx. The rich and very rich have become very much richer, while everyone else's incomes have stagnated. So most people are not, in fact, four or five times better off than they were in 1930. It is not surprising that they are working longer than Keynes thought they would.
But there is something else. Modern capitalism inflames, through every sense and pore, the hunger for consumption. Satisfying that hunger has become the great palliative of modern society, our counterfeit reward for working irrational hours. Advertisers proclaim a single message: your soul is to be discovered in your shopping.
Aristotle knew of insatiability only as a personal vice; he had no inkling of the collective, politically orchestrated insatiability that we call economic growth. The civilization of "always more" would have struck him as moral and political madness.
And, beyond a certain point, it is also economic madness. This is not just or mainly because we will soon enough run up against the natural limits to growth. It is because we cannot go on for much longer economising on labour faster than we can find new uses for it. That road leads to a division of society into a minority of producers, professionals, supervisors, and financial speculators on one side, and a majority of drones and unemployables on the other.
Apart from its moral implications, such a society would face a classic dilemma: how to reconcile the relentless pressure to consume with stagnant earnings. So far, the answer has been to borrow, leading to today's massive debt overhangs in advanced economies. Obviously, this is unsustainable, and thus is no answer at all, for it implies periodic collapse of the wealth-producing machine.
The truth is that we cannot go on successfully automating our production without rethinking our attitudes toward consumption, work, leisure, and the distribution of income. Without such efforts of social imagination, recovery from the current crisis will simply be a prelude to more shattering calamities in the future.
Source: Guardian - Return to capitalism 'red in tooth and claw' spells economic madness
Saturday, June 16, 2012
What Money Can't Buy - The Moral Limit of Markets | London School of Economics
Speaker: Professor Michael Sandel
Discussants: Stephanie Flanders, Professor Julian Le Grand, Rt Revd Peter Selby
Chair: Ann Pettifor
Recorded on 23 May 2012 in St Paul's Cathedral, London.
Is there something wrong with a world in which everything is for sale? If so, how can we prevent market values from reaching into spheres of life where they don't belong? What are the moral limits of markets?
Noted public philosopher and Harvard professor Michael J. Sandel will explore some of these pressing questions with responses from Stephanie Flanders, Professor Julian Le Grand and Bishop Peter Selby. St Paul's Cathedral is delighted to host a discussion on this vital topic within a sacred space in order to explore the intersection between faith, morality and markets and the power that money has in our lives. Questions and comments from the audience will be taken.
Michael J. Sandel is the Anne T. and Robert M. Bass Professor of Government at Harvard University, where he has taught political philosophy since 1980. His recent book, Justice: What's the Right Thing to Do? relates the big questions of political philosophy to the most vexing issues of our time. His new book, What Money Can't Buy: The Moral Limits of Markets, has just been published. At Harvard, Sandel's courses include Ethics, Biotechnology, and the Future of Human Nature, Ethics, Economics, and Law, and Globalization and Its Critics. His undergraduate course, Justice, has enrolled over 15,000 students, and is the first Harvard course to be made freely available online and on public television. A recipient of the Harvard-Radcliffe Phi Beta Kappa Teaching Prize, Sandel was recognised by the American Political Science Association in 2008 for a career of excellence in teaching. He has been a visiting professor at the Sorbonne (Paris), delivered the Tanner Lectures on Human Values at Oxford University, and in 2009 delivered the BBC Reith Lectures. In 2010, China Newsweek named him the "most influential foreign figure of the year" in China.
Stephanie Flanders has been a reporter at the New York Times (2001); a speech writer and senior advisor to the US Treasury Secretary (1997-2001); a Financial Times leader-writer and columnist (1993-7); and an economist at the Institute for Fiscal Studies and London Business School. She became BBC economics editor in April 2008. She has won numerous awards, including the 2010 Harold Wincott Award for online journalism. She blogs at Stephanomics.
Julian Le Grand is the Richard Titmuss Professor of Social Policy at the London School of Economics. He is an Honorary Fellow of the Faculty of Public Health Medicine, a Trustee of the Kings Fund, and a Founding Academician of the Academy of Learned Societies for the Social Sciences. He has an honorary doctorate from the University of Sussex. In 2003-5 he was seconded to No 10 Downing St as a senior policy adviser to the Prime Minister. As well as his position at No 10, he has acted as an adviser to the President of the European Commission, the World Bank, the World Health Organisation, the OECD, Her Majesty's Treasury and the UK Departments of Health and Work and Pensions.
Dr Peter Selby was Bishop of Worcester from 1997 until 2007 and in 2001 was also appointed to Bishop of Prisons, a post from which he also retired in September 2007. Dr Selby's interest in prisons is long-standing, and he is himself the son of refugees, and served for a time as the Chair of the Asylum Committee of the Refugee Council. His concern for prisons and the criminal justice system extends back to 1965 when he served as an interim chaplain at San Quentin, California, as part of his ministerial training.
Ann Pettifor is director of Policy Research in Macro-Economics (PriME), and a senior fellow of the New Economics Foundation. She is the author of The Coming First World Debt Crisis which was published in 2006
What Money Can't Buy - the moral limit of markets
Discussants: Stephanie Flanders, Professor Julian Le Grand, Rt Revd Peter Selby
Chair: Ann Pettifor
Recorded on 23 May 2012 in St Paul's Cathedral, London.
Is there something wrong with a world in which everything is for sale? If so, how can we prevent market values from reaching into spheres of life where they don't belong? What are the moral limits of markets?
Noted public philosopher and Harvard professor Michael J. Sandel will explore some of these pressing questions with responses from Stephanie Flanders, Professor Julian Le Grand and Bishop Peter Selby. St Paul's Cathedral is delighted to host a discussion on this vital topic within a sacred space in order to explore the intersection between faith, morality and markets and the power that money has in our lives. Questions and comments from the audience will be taken.
Michael J. Sandel is the Anne T. and Robert M. Bass Professor of Government at Harvard University, where he has taught political philosophy since 1980. His recent book, Justice: What's the Right Thing to Do? relates the big questions of political philosophy to the most vexing issues of our time. His new book, What Money Can't Buy: The Moral Limits of Markets, has just been published. At Harvard, Sandel's courses include Ethics, Biotechnology, and the Future of Human Nature, Ethics, Economics, and Law, and Globalization and Its Critics. His undergraduate course, Justice, has enrolled over 15,000 students, and is the first Harvard course to be made freely available online and on public television. A recipient of the Harvard-Radcliffe Phi Beta Kappa Teaching Prize, Sandel was recognised by the American Political Science Association in 2008 for a career of excellence in teaching. He has been a visiting professor at the Sorbonne (Paris), delivered the Tanner Lectures on Human Values at Oxford University, and in 2009 delivered the BBC Reith Lectures. In 2010, China Newsweek named him the "most influential foreign figure of the year" in China.
Stephanie Flanders has been a reporter at the New York Times (2001); a speech writer and senior advisor to the US Treasury Secretary (1997-2001); a Financial Times leader-writer and columnist (1993-7); and an economist at the Institute for Fiscal Studies and London Business School. She became BBC economics editor in April 2008. She has won numerous awards, including the 2010 Harold Wincott Award for online journalism. She blogs at Stephanomics.
Julian Le Grand is the Richard Titmuss Professor of Social Policy at the London School of Economics. He is an Honorary Fellow of the Faculty of Public Health Medicine, a Trustee of the Kings Fund, and a Founding Academician of the Academy of Learned Societies for the Social Sciences. He has an honorary doctorate from the University of Sussex. In 2003-5 he was seconded to No 10 Downing St as a senior policy adviser to the Prime Minister. As well as his position at No 10, he has acted as an adviser to the President of the European Commission, the World Bank, the World Health Organisation, the OECD, Her Majesty's Treasury and the UK Departments of Health and Work and Pensions.
Dr Peter Selby was Bishop of Worcester from 1997 until 2007 and in 2001 was also appointed to Bishop of Prisons, a post from which he also retired in September 2007. Dr Selby's interest in prisons is long-standing, and he is himself the son of refugees, and served for a time as the Chair of the Asylum Committee of the Refugee Council. His concern for prisons and the criminal justice system extends back to 1965 when he served as an interim chaplain at San Quentin, California, as part of his ministerial training.
Ann Pettifor is director of Policy Research in Macro-Economics (PriME), and a senior fellow of the New Economics Foundation. She is the author of The Coming First World Debt Crisis which was published in 2006
What Money Can't Buy - the moral limit of markets
Saturday, June 9, 2012
MUST READ! John Maynard Keynes: A Vision for the Future or a Ghost from the Past?
(This paper was presented as the keynote address at the Seventh Annual Moral Foundations of Capitalism Conference hosted by the Clemson Institute for the Study of Capitalism in Clemson, South Carolina, on May 30, 2012)
The current economic crisis that has engulfed the United States and much of the rest of the world over the last few years, has seen a dramatic revival in the economic ideas and policy prescriptions of the most famous British economist of the 20th century, John Maynard Keynes. This has seemed surprising to some, since it was presumed that traditional Keynesian Economics was more or less relegated (to use Karl Marx's phrase) to "the dustbin of history."
After dominating the economics profession for more than a quarter of a century following the Second World War, Keynesianism had been challenged by various "counter-revolutions" in Macroeconomics beginning in the late 1960s and 1970s. They had taken the forms of Monetarism, Supply-Side Economics, New Classical or Rational Expectations Theory, New Keynesianism, and even Austrian Economics, following the awarding of the Nobel Prize to F. A. Hayek in the 1974.
The fact is, however, that neither Keynes nor his economics have ever been gone or replaced. Keynesian Economics has continued to dominate and hold sway over the way the vast majority of economists think about and analyze the nature of economy-wide fluctuations in employment and output.
The Legacy of Keynes's "Demand Management" Economics
It is the idea that government must manage and guide monetary and fiscal policy to assure full employment, a stable price level and to foster economic growth. Some of the terms of the debate may have changed over the last half-century or so, but the belief that it is the responsibility of government to control the supply of money and aggregate spending in the economy persist-s today just as much as it did in the 1940s.
The modern conception of "demand management" is a legacy of John Maynard Keynes's 1936 book The General Theory of Employment, Interest and Money. The impact of Keynes's book and its message should not be underestimated. Its two central tenets are the claim that the market economy is inherently unstable and likely to generate prolonged periods of unemployment and underutilized productive capacity, and the argument that governments should take responsibility to counteract these periods of economic depression with the various monetary and fiscal policy tools at their disposal. This was bolstered by Keynes's belief that policy managers guided by the economic theory developed in his book could have the knowledge and ability to do so successfully.
No less important in propagating his idea of demand management economic policy was Keynes's literary ability to persuade. As Leland Yeager expressed it, "Keynes saw and provided what would gain attention − harsh polemics, sardonic passages, bits of esoteric and shocking doctrine." Keynes possessed an arrogant amount of self-confidence and belief in his ability to influence public opinion and policy.
Austrian economist Friedrich A. Hayek, who knew Keynes fairly well, referred to his "supreme confidence . . . in his power to play on public opinion as a supreme master plays his instrument." On the last occasion he saw Keynes in early 1946 (shortly before Keynes' death from a heart attack), Hayek asked him if he wasn't concerned that some of his followers were taking his ideas to extremes. Keynes replied that Hayek did not need to be worried. If it became necessary, Hayek could "rely upon him again quickly to swing round pubic opinion—and he indicated by a quick movement of his hand how rapidly that would be done. But three months later he was dead."
Even today, respected economists argue that Keynesian-style macroeconomic intervention is needed as a balancing rod against instability in the market economy. One example is Robert Skidelsky, the author of a widely acclaimed multi-volume biography of Keynes and the recently published, Keynes: The Return of the Master (2009)?.
A few years ago Professor Skidelsky argued that capitalism has at its heart an instability of financial institutions and, "This insight by Keynes into the causes and consequences of financial crises remains supremely valuable." In any significant economic downturn, government should begin "pumping money into the economy, like pumping air into a deflating balloon."
Keynes first established his reputation as a public figure in the immediate aftermath of the First World War. During war, he had worked in the British Treasury. In 1919 he served as an adviser to the British delegation in Versailles. But frustrated with the attitude of the Allied powers toward Germany in setting the terms of the peace, Keynes returned to Britain and published The Economic Consequences of the Peace, in which he severely criticized the peace settlement.
In 1923, he published A Tract on Monetary Reform, in which he called for the end of the gold standard, suggesting a national man-aged paper currency in its place. He strongly opposed Great Britain's return to the gold standard in the mid-1920s at the prewar gold parity. He argued that governments should have discretionary power over the management of a nation's monetary system to as-sure a desired target level of employment, output, and prices.
In 1930 Keynes published A Treatise on Money, a two-volume work that he hoped would establish his reputation as a leading monetary theorist of his time instead of only an influential economic policy analyst. However, over the next two years a series of critical reviews appeared, written by some of the most respected economists of the day. The majority of them demonstrated serious problems with either the premises or the reasoning with which Keynes attempted to build his theory on the relationships between savings, investment, the interest rate, and the aggregate levels of output and prices. But the most devastating criticisms were made by a young Friedrich A. Hayek in a two-part review essay that appeared in 1931-1932.
Hayek argued that Keynes seemed to understood neither the nature of a market economy in general nor the significance and role of the rate of interest in maintaining a proper balance between savings and investment for economic stability. At the most fundamental level Hayek argued that Keynes's method of aggregating the individual supplies and demands for a multitude of goods into a small number of macroeconomic "totals" distorted any real understanding of the relative price and production relationships in and between actual markets. "Mr. Keynes's aggregates conceal the most fundamental mechanisms of change," Hayek said.
Keynes devoted the next five years to reconstructing his argument, the re-sult being his most famous and influential work, The General Theory of Employment, Interest and Money, published in 1936.
Keynes argued that the Great Depression was caused by inescapable irrationalities in the market economy that not only created the conditions for the severity of the economic downturn, but necessitated activist monetary and fiscal policies by government to restore and maintain full employment and maximum utilization of resource and output capabilities. For the next half-century Keynes's ideas, as presented in The General Theory, became the cornerstone of macroeconomic theorizing and policy-making throughout the Western world, and continue to dominate public policy thinking today.
John Maynard Keynes and the "New Liberalism"
What where the wider philosophical principles and ideas behind Keynes views about a market society? In 1925, John Maynard Keynes delivered a lecture at Cambridge titled "Am I a Liberal?" He rejected any thought of considering himself a conservative because conservatism "leads nowhere; it satisfies no ideal; it conforms to no intellectual standard; it is not even safe, or calculated to preserve from spoilers that degree of civilization which we have already attained."
Keynes then asked whether he should consider joining the Labor Party. He admitted, "Superficially that is more attractive," but rejected it as well. "To begin with, it is a class party, and the class is not my class," Keynes argued. Furthermore, he doubted the intellectual ability of those controlling the Labor Party, believing that it was dominated by "those who do not know at all what they are talking about."
This led Keynes to conclude that all things considered, "the Liberal Party is still the best instrument of future progress—if only it has strong leadership and the right program." But the Liberal Party of Great Britain could serve a positive role in society only if it gave up "old-fashioned individualism and laissez-faire," which he considered "the dead-wood of the past." Instead, what was needed was a "New Liberalism" that would involve "new wisdom for a new age." What this entailed, in Keynes's view, was "the transition from economic anarchy to a regime which deliberately aims at control-ling and directing economic forces in the interests of social justice and social stability."
A year later, in 1926, Keynes delivered a lecture in Berlin, Germany on, "The End of Laissez-Faire," in which he argued, "It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no compact conferring perpetual rights on those who Have or on those who Acquire." Nor could it be presumed that private individuals pursuing their enlightened self-interest would always serve the common good.
In a world of "uncertainty and ignorance" that sometimes resulted in periods of unemployment, Keynes suggested "the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution." And he believed that "some coordinated act of intelligent judgment" by the government was required to determine the amount of savings in the society and how much of the nation's savings should be permitted to be invested in foreign markets as well as the relative distribution of that domestic savings among "the most nationally productive channels."
Finally, Keynes argued that government had to undertake a "national policy" concerning the most appropriate size of the country's population, "and having settled this policy, we must take steps to carry it into operation." Furthermore, Keynes pro-posed serious consideration of adopting a policy of eugenics: "The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members."
This agenda for an activist and planning government did not make Keynes a socialist or a communist in any strict sense of these words. Indeed, after a visit to Soviet Russia he published an essay in 1925 strongly critical of the Bolshevik regime. "For me, brought up in a free air undarkened by the horrors of religion, with nothing to be afraid of, Red Russia holds too much which is detestable . . . I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and international strife . . . It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here."
But where Soviet Russia had an advantage over the West, Keynes argued, was in its almost religious revolutionary fervor, in its romanticism of the common working man, and its condemnation of money-making. Indeed, the Soviet attempt to stamp out the "money-making mentality" was, in Keynes's mind, "a tremendous innovation." Capitalist society, too, in Keynes's view, had to find a moral foundation above self-interested "love of money."
What Keynes considered Soviet Russia's superiority over capitalist society, therefore, was its moral high ground in opposition to capitalist individualism. And he also believed that "any piece of useful economic technique" developed in Soviet Russia could easily be grafted onto a Western economy following his model of a New Liberalism "with equal or greater success" than in the Soviet Union.
That Keynes had great confidence in an a state-managed system of "useful economic technique" was clearly seen in the following comparison he made, also in the mid-1920s, between a regulated wage system in the name of "fairness" between social classes and market-determined wages, which he condemned as "the economic juggernaut." Said Keynes:
"The truth is that we stand mid-way between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is "fair" and "reasonable" as between classes. The other theory – the theory of the economic juggernaut – is that wages should be settled by economic pressure, otherwise called "hard facts," and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the change in consequences of the journey to individual groups."
With the coming of the Great Depression, however, Keynes once again rejected the idea of a free market solution to the rising unemployment and idled industry that intensified following the crash of 1929. In his writings of the 1920s and early 1930s, advocating a "New Liberalism" and a deficit-spending government to "solve" the Great Depression, were the premises for the Keynesian Revolution that would be officially inaugurated with the publication of The General Theory of Employment, Interest and Money. With those ideas, Keynes produced one of the greatest challenges to the free market economy in the twentieth century.
Keynes and Keynesian Economics
The General Theory of Employment, Interest and Money was published on February 4, 1936. The essence of Keynes's theory was to show that a market economy, when left to its own devices, possessed no inherent self-correcting mechanism to return to "full employment" once the economic system has fallen into a depression.
At the heart of his approach was the belief that he had demonstrated an error in Say's Law. Named after the nineteenth-century French economist Jean-Baptiste Say, the fundamental idea is that individuals produce so they can consume. An individual produces either to consume what he has manufactured himself or to sell it on the market to acquire the means to purchase what others have for sale.
Or as the classical economist David Ricardo expressed it, "By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person . . . Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected."
Keynes argued that there was no certainty that those who had sold goods or their labor services on the market will necessarily turn around and spend the full amount that they had earned on the goods and services offered by others. Hence, total expenditures on goods could be less than total income previously earned in the manufacture of those goods. This, in turn, meant that the total receipts received by firms selling goods in the market could be less than the expenses incurred in bringing those goods to market. With total sales receipts being less than total business expenses, businessmen would have no recourse other than to cut back on both output and the number of workers employed to minimize losses during this period of "bad business."
But, Keynes argued, this would merely intensify the problem of unemployment and falling output. As workers were laid off, their incomes would necessarily go down. With less income to spend, the unemployed would cut back on their consumption expenditures. This would result in an additional falling off of demand for goods and services offered on the market, widening the circle of businesses that find their sales receipts declining relative to their costs of production. And this would set off a new round of cuts in output and employment, setting in motion a cumulative contraction in production and jobs.
Why wouldn't workers accept lower money wages to make themselves more attractive to rehire when market demand falls? Because, Keynes said, workers suffer from "money illusion." If prices for goods and services decrease because consumer demand is falling off, then workers could accept a lower money wage and be no worse off in real buying terms (that is, if the cut in wages was on average no greater than the decrease in the average level of prices). But workers, Keynes argued, generally think only in terms of money wages, not real wages (that is, what their money income represents in real purchasing power on the market). Thus, workers often would rather accept unemployment than a cut in their money wage.
If consumers demand fewer final goods and services on the market, this necessarily means that they are saving more. Why wouldn't this unconsumed income merely be spent hiring labor and purchasing resources in a different way, in the form of greater investment, as savers have more to lend to potential borrowers at a lower rate of interest? Keynes's response was to insist that the motives of savers and investors were not the same. Income-earners might very well desire to consume a smaller fraction of their income, save more, and offer it out to borrowers at interest. But there was no certainty, he insisted, that businessmen would be willing to borrow that greater savings and use it to hire labor to make goods for sale in the future.
Since the future is uncertain and tomorrow can be radically different from today, Keynes stated, businessmen easily fall under the spell of unpredictable waves of optimism and pessimism that raise and lower their interest and willingness to borrow and invest. A decrease in the demand to consume today by income-earners may be motivated by a desire to increase their consumption in the future out of their savings. But businessmen cannot know when in the future those income-earners will want to increase their consumption, nor what particular goods will be in greater demand when that day comes. As a result, the decrease in consumer demand for present production merely serves to decrease the business-man's current incentives for investment activity today as well.
If for some reason there were to be a wave of business pessimism resulting in a decrease in the demand for investment borrowing, this should result in a decrease in the rate of interest. Such a decrease because of a fall in investment demand should make savings less attractive, since less interest income is now to be earned by lending a part of one's income. As a result, consumer spending should rise as savings goes down. Thus, while investment spending may be slackening off, greater consumer spending should make up the difference to assure a "full employment" demand for society's labor and resources.
But Keynes doesn't allow this to happen because of what he calls the "fundamental psychological law" of the "propensity to consume." As income rises, he says, consumption spending out of income also tends to rise, but less than the increase in income. Over time, therefore, as incomes rise a larger and larger percentage is saved.
In The General Theory, Keynes listed a variety of what he called the "objective" and "subjective" factors that he thought influenced people's decisions to consume out of income. On the "objective" side: a windfall profit; a change in the rate of interest; a change in expectations about future income. On the "subjective" side, he listed "Enjoyment, Shortsightedness, Generosity, Miscalculation, Ostentation and Extravagance." He merely asserts that the "objective" factors have little influence on how much to consume out of a given amount of income—including a change in the rate of interest. And the "subjective" factors are basically invariant, being "habits formed by race, education, convention, religion and current morals . . . and the established standards of life."
Indeed, Keynes reaches the peculiar conclusion that because men's wants are basically determined and fixed by their social and cultural environment and only change very slowly, "The greater . . . the consumption for which we have provided in advance, the more difficult it is to find something further to provide for in advance." That is, men run out of wants for which they would wish investment to be undertaken; the resources in the society − including labor − are threatening to become greater than the demand for their employment.
Keynes, in other words, turns the most fundamental concept in economics on its head. Instead of our wants and desires always tending to exceed the means at our disposal to satisfy them, man is confronting a "post-scarcity" world in which the means at our disposal are becoming greater than the ends for which they could be applied. The crisis of society is a crisis of abundance! The richer we become, the less work we have for people to do because, in Keynes's vision, man's capacity and desire for imagining new and different ways to improve his life is finite. The economic problem is that we are too well-off.
As a consequence, unspent income can pile up as unused and uninvested savings; and what investment is undertaken can erratically fluctuate due to what Keynes called the "animal spirits" of businessmen's irrational psychology concerning an uncertain future. The free market economy, therefore, is plagued with the constant danger of waves of booms and busts, with prolonged periods of high unemployment and idle factories. The society's problem stems from the fact that people consume too little and save too much to assure jobs for all who desire to work at the money wages that have come to prevail in the market, and which workers refuse to adjust downward in the face of any decline in the demand for their services.
Only one institution can step in and serve as the stabilizing mechanism to maintain full employment and steady production: the government, through various activist monetary and fiscal policies.
In Keynes's mind the only remedy was for government to step in and put those unused savings to work through deficit spending to stimulate investment activity. How the government spent those borrowed funds did not matter. Even "public works of doubtful utility," Keynes said, were useful: "Pyramid-building, earthquakes, even wars may serve to increase wealth," as long as they create employment. "It would, indeed, be more sensible to build houses and the like," said Keynes, "but if there are political or practical difficulties in the way of this, the above would be better than nothing."
Nor could the private sector be trusted to maintain any reasonable level of investment activity to provide employment. The uncertainties of the future, as we saw, created "animal spirits" among businessmen that produced unpredictable waves of optimism and pessimism that generated fluctuations in the level of production and employment. Luckily, government could fill the gap. Furthermore, while businessmen were emotional and shortsighted, the State had the ability to calmly calculate the long run, true value and worth of investment opportunities "on the basis of the general social advantage."
Indeed, Keynes expected the government would "take on ever greater responsibility for directly organizing investment." In the future, said Keynes, "I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment." As the profitability of private investment dried up over time, society would see "the euthanasia of the rentier" and "the euthanasia of the cumulative oppressive power of the capitalist" to exploit for his own benefit the scarcity of capital. This "assisted suicide" of the interest-earning and capitalist groups would not require any revolutionary upheaval. No, "the necessary measures of socialization can be introduced gradually and without a break in the general traditions of the society."
This is the essence of Keynes' economics.
Continue reading (Long Read) - John Maynard Keynes: A Vision for the Future or a Ghost from the Past?
The current economic crisis that has engulfed the United States and much of the rest of the world over the last few years, has seen a dramatic revival in the economic ideas and policy prescriptions of the most famous British economist of the 20th century, John Maynard Keynes. This has seemed surprising to some, since it was presumed that traditional Keynesian Economics was more or less relegated (to use Karl Marx's phrase) to "the dustbin of history."
After dominating the economics profession for more than a quarter of a century following the Second World War, Keynesianism had been challenged by various "counter-revolutions" in Macroeconomics beginning in the late 1960s and 1970s. They had taken the forms of Monetarism, Supply-Side Economics, New Classical or Rational Expectations Theory, New Keynesianism, and even Austrian Economics, following the awarding of the Nobel Prize to F. A. Hayek in the 1974.
The fact is, however, that neither Keynes nor his economics have ever been gone or replaced. Keynesian Economics has continued to dominate and hold sway over the way the vast majority of economists think about and analyze the nature of economy-wide fluctuations in employment and output.
The Legacy of Keynes's "Demand Management" Economics
It is the idea that government must manage and guide monetary and fiscal policy to assure full employment, a stable price level and to foster economic growth. Some of the terms of the debate may have changed over the last half-century or so, but the belief that it is the responsibility of government to control the supply of money and aggregate spending in the economy persist-s today just as much as it did in the 1940s.
The modern conception of "demand management" is a legacy of John Maynard Keynes's 1936 book The General Theory of Employment, Interest and Money. The impact of Keynes's book and its message should not be underestimated. Its two central tenets are the claim that the market economy is inherently unstable and likely to generate prolonged periods of unemployment and underutilized productive capacity, and the argument that governments should take responsibility to counteract these periods of economic depression with the various monetary and fiscal policy tools at their disposal. This was bolstered by Keynes's belief that policy managers guided by the economic theory developed in his book could have the knowledge and ability to do so successfully.
No less important in propagating his idea of demand management economic policy was Keynes's literary ability to persuade. As Leland Yeager expressed it, "Keynes saw and provided what would gain attention − harsh polemics, sardonic passages, bits of esoteric and shocking doctrine." Keynes possessed an arrogant amount of self-confidence and belief in his ability to influence public opinion and policy.
Austrian economist Friedrich A. Hayek, who knew Keynes fairly well, referred to his "supreme confidence . . . in his power to play on public opinion as a supreme master plays his instrument." On the last occasion he saw Keynes in early 1946 (shortly before Keynes' death from a heart attack), Hayek asked him if he wasn't concerned that some of his followers were taking his ideas to extremes. Keynes replied that Hayek did not need to be worried. If it became necessary, Hayek could "rely upon him again quickly to swing round pubic opinion—and he indicated by a quick movement of his hand how rapidly that would be done. But three months later he was dead."
Even today, respected economists argue that Keynesian-style macroeconomic intervention is needed as a balancing rod against instability in the market economy. One example is Robert Skidelsky, the author of a widely acclaimed multi-volume biography of Keynes and the recently published, Keynes: The Return of the Master (2009)?.
A few years ago Professor Skidelsky argued that capitalism has at its heart an instability of financial institutions and, "This insight by Keynes into the causes and consequences of financial crises remains supremely valuable." In any significant economic downturn, government should begin "pumping money into the economy, like pumping air into a deflating balloon."
Keynes first established his reputation as a public figure in the immediate aftermath of the First World War. During war, he had worked in the British Treasury. In 1919 he served as an adviser to the British delegation in Versailles. But frustrated with the attitude of the Allied powers toward Germany in setting the terms of the peace, Keynes returned to Britain and published The Economic Consequences of the Peace, in which he severely criticized the peace settlement.
In 1923, he published A Tract on Monetary Reform, in which he called for the end of the gold standard, suggesting a national man-aged paper currency in its place. He strongly opposed Great Britain's return to the gold standard in the mid-1920s at the prewar gold parity. He argued that governments should have discretionary power over the management of a nation's monetary system to as-sure a desired target level of employment, output, and prices.
In 1930 Keynes published A Treatise on Money, a two-volume work that he hoped would establish his reputation as a leading monetary theorist of his time instead of only an influential economic policy analyst. However, over the next two years a series of critical reviews appeared, written by some of the most respected economists of the day. The majority of them demonstrated serious problems with either the premises or the reasoning with which Keynes attempted to build his theory on the relationships between savings, investment, the interest rate, and the aggregate levels of output and prices. But the most devastating criticisms were made by a young Friedrich A. Hayek in a two-part review essay that appeared in 1931-1932.
Hayek argued that Keynes seemed to understood neither the nature of a market economy in general nor the significance and role of the rate of interest in maintaining a proper balance between savings and investment for economic stability. At the most fundamental level Hayek argued that Keynes's method of aggregating the individual supplies and demands for a multitude of goods into a small number of macroeconomic "totals" distorted any real understanding of the relative price and production relationships in and between actual markets. "Mr. Keynes's aggregates conceal the most fundamental mechanisms of change," Hayek said.
Keynes devoted the next five years to reconstructing his argument, the re-sult being his most famous and influential work, The General Theory of Employment, Interest and Money, published in 1936.
Keynes argued that the Great Depression was caused by inescapable irrationalities in the market economy that not only created the conditions for the severity of the economic downturn, but necessitated activist monetary and fiscal policies by government to restore and maintain full employment and maximum utilization of resource and output capabilities. For the next half-century Keynes's ideas, as presented in The General Theory, became the cornerstone of macroeconomic theorizing and policy-making throughout the Western world, and continue to dominate public policy thinking today.
John Maynard Keynes and the "New Liberalism"
What where the wider philosophical principles and ideas behind Keynes views about a market society? In 1925, John Maynard Keynes delivered a lecture at Cambridge titled "Am I a Liberal?" He rejected any thought of considering himself a conservative because conservatism "leads nowhere; it satisfies no ideal; it conforms to no intellectual standard; it is not even safe, or calculated to preserve from spoilers that degree of civilization which we have already attained."
Keynes then asked whether he should consider joining the Labor Party. He admitted, "Superficially that is more attractive," but rejected it as well. "To begin with, it is a class party, and the class is not my class," Keynes argued. Furthermore, he doubted the intellectual ability of those controlling the Labor Party, believing that it was dominated by "those who do not know at all what they are talking about."
This led Keynes to conclude that all things considered, "the Liberal Party is still the best instrument of future progress—if only it has strong leadership and the right program." But the Liberal Party of Great Britain could serve a positive role in society only if it gave up "old-fashioned individualism and laissez-faire," which he considered "the dead-wood of the past." Instead, what was needed was a "New Liberalism" that would involve "new wisdom for a new age." What this entailed, in Keynes's view, was "the transition from economic anarchy to a regime which deliberately aims at control-ling and directing economic forces in the interests of social justice and social stability."
A year later, in 1926, Keynes delivered a lecture in Berlin, Germany on, "The End of Laissez-Faire," in which he argued, "It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no compact conferring perpetual rights on those who Have or on those who Acquire." Nor could it be presumed that private individuals pursuing their enlightened self-interest would always serve the common good.
In a world of "uncertainty and ignorance" that sometimes resulted in periods of unemployment, Keynes suggested "the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution." And he believed that "some coordinated act of intelligent judgment" by the government was required to determine the amount of savings in the society and how much of the nation's savings should be permitted to be invested in foreign markets as well as the relative distribution of that domestic savings among "the most nationally productive channels."
Finally, Keynes argued that government had to undertake a "national policy" concerning the most appropriate size of the country's population, "and having settled this policy, we must take steps to carry it into operation." Furthermore, Keynes pro-posed serious consideration of adopting a policy of eugenics: "The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members."
This agenda for an activist and planning government did not make Keynes a socialist or a communist in any strict sense of these words. Indeed, after a visit to Soviet Russia he published an essay in 1925 strongly critical of the Bolshevik regime. "For me, brought up in a free air undarkened by the horrors of religion, with nothing to be afraid of, Red Russia holds too much which is detestable . . . I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and international strife . . . It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here."
But where Soviet Russia had an advantage over the West, Keynes argued, was in its almost religious revolutionary fervor, in its romanticism of the common working man, and its condemnation of money-making. Indeed, the Soviet attempt to stamp out the "money-making mentality" was, in Keynes's mind, "a tremendous innovation." Capitalist society, too, in Keynes's view, had to find a moral foundation above self-interested "love of money."
What Keynes considered Soviet Russia's superiority over capitalist society, therefore, was its moral high ground in opposition to capitalist individualism. And he also believed that "any piece of useful economic technique" developed in Soviet Russia could easily be grafted onto a Western economy following his model of a New Liberalism "with equal or greater success" than in the Soviet Union.
That Keynes had great confidence in an a state-managed system of "useful economic technique" was clearly seen in the following comparison he made, also in the mid-1920s, between a regulated wage system in the name of "fairness" between social classes and market-determined wages, which he condemned as "the economic juggernaut." Said Keynes:
"The truth is that we stand mid-way between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is "fair" and "reasonable" as between classes. The other theory – the theory of the economic juggernaut – is that wages should be settled by economic pressure, otherwise called "hard facts," and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the change in consequences of the journey to individual groups."
With the coming of the Great Depression, however, Keynes once again rejected the idea of a free market solution to the rising unemployment and idled industry that intensified following the crash of 1929. In his writings of the 1920s and early 1930s, advocating a "New Liberalism" and a deficit-spending government to "solve" the Great Depression, were the premises for the Keynesian Revolution that would be officially inaugurated with the publication of The General Theory of Employment, Interest and Money. With those ideas, Keynes produced one of the greatest challenges to the free market economy in the twentieth century.
Keynes and Keynesian Economics
The General Theory of Employment, Interest and Money was published on February 4, 1936. The essence of Keynes's theory was to show that a market economy, when left to its own devices, possessed no inherent self-correcting mechanism to return to "full employment" once the economic system has fallen into a depression.
At the heart of his approach was the belief that he had demonstrated an error in Say's Law. Named after the nineteenth-century French economist Jean-Baptiste Say, the fundamental idea is that individuals produce so they can consume. An individual produces either to consume what he has manufactured himself or to sell it on the market to acquire the means to purchase what others have for sale.
Or as the classical economist David Ricardo expressed it, "By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person . . . Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected."
Keynes argued that there was no certainty that those who had sold goods or their labor services on the market will necessarily turn around and spend the full amount that they had earned on the goods and services offered by others. Hence, total expenditures on goods could be less than total income previously earned in the manufacture of those goods. This, in turn, meant that the total receipts received by firms selling goods in the market could be less than the expenses incurred in bringing those goods to market. With total sales receipts being less than total business expenses, businessmen would have no recourse other than to cut back on both output and the number of workers employed to minimize losses during this period of "bad business."
But, Keynes argued, this would merely intensify the problem of unemployment and falling output. As workers were laid off, their incomes would necessarily go down. With less income to spend, the unemployed would cut back on their consumption expenditures. This would result in an additional falling off of demand for goods and services offered on the market, widening the circle of businesses that find their sales receipts declining relative to their costs of production. And this would set off a new round of cuts in output and employment, setting in motion a cumulative contraction in production and jobs.
Why wouldn't workers accept lower money wages to make themselves more attractive to rehire when market demand falls? Because, Keynes said, workers suffer from "money illusion." If prices for goods and services decrease because consumer demand is falling off, then workers could accept a lower money wage and be no worse off in real buying terms (that is, if the cut in wages was on average no greater than the decrease in the average level of prices). But workers, Keynes argued, generally think only in terms of money wages, not real wages (that is, what their money income represents in real purchasing power on the market). Thus, workers often would rather accept unemployment than a cut in their money wage.
If consumers demand fewer final goods and services on the market, this necessarily means that they are saving more. Why wouldn't this unconsumed income merely be spent hiring labor and purchasing resources in a different way, in the form of greater investment, as savers have more to lend to potential borrowers at a lower rate of interest? Keynes's response was to insist that the motives of savers and investors were not the same. Income-earners might very well desire to consume a smaller fraction of their income, save more, and offer it out to borrowers at interest. But there was no certainty, he insisted, that businessmen would be willing to borrow that greater savings and use it to hire labor to make goods for sale in the future.
Since the future is uncertain and tomorrow can be radically different from today, Keynes stated, businessmen easily fall under the spell of unpredictable waves of optimism and pessimism that raise and lower their interest and willingness to borrow and invest. A decrease in the demand to consume today by income-earners may be motivated by a desire to increase their consumption in the future out of their savings. But businessmen cannot know when in the future those income-earners will want to increase their consumption, nor what particular goods will be in greater demand when that day comes. As a result, the decrease in consumer demand for present production merely serves to decrease the business-man's current incentives for investment activity today as well.
If for some reason there were to be a wave of business pessimism resulting in a decrease in the demand for investment borrowing, this should result in a decrease in the rate of interest. Such a decrease because of a fall in investment demand should make savings less attractive, since less interest income is now to be earned by lending a part of one's income. As a result, consumer spending should rise as savings goes down. Thus, while investment spending may be slackening off, greater consumer spending should make up the difference to assure a "full employment" demand for society's labor and resources.
But Keynes doesn't allow this to happen because of what he calls the "fundamental psychological law" of the "propensity to consume." As income rises, he says, consumption spending out of income also tends to rise, but less than the increase in income. Over time, therefore, as incomes rise a larger and larger percentage is saved.
In The General Theory, Keynes listed a variety of what he called the "objective" and "subjective" factors that he thought influenced people's decisions to consume out of income. On the "objective" side: a windfall profit; a change in the rate of interest; a change in expectations about future income. On the "subjective" side, he listed "Enjoyment, Shortsightedness, Generosity, Miscalculation, Ostentation and Extravagance." He merely asserts that the "objective" factors have little influence on how much to consume out of a given amount of income—including a change in the rate of interest. And the "subjective" factors are basically invariant, being "habits formed by race, education, convention, religion and current morals . . . and the established standards of life."
Indeed, Keynes reaches the peculiar conclusion that because men's wants are basically determined and fixed by their social and cultural environment and only change very slowly, "The greater . . . the consumption for which we have provided in advance, the more difficult it is to find something further to provide for in advance." That is, men run out of wants for which they would wish investment to be undertaken; the resources in the society − including labor − are threatening to become greater than the demand for their employment.
Keynes, in other words, turns the most fundamental concept in economics on its head. Instead of our wants and desires always tending to exceed the means at our disposal to satisfy them, man is confronting a "post-scarcity" world in which the means at our disposal are becoming greater than the ends for which they could be applied. The crisis of society is a crisis of abundance! The richer we become, the less work we have for people to do because, in Keynes's vision, man's capacity and desire for imagining new and different ways to improve his life is finite. The economic problem is that we are too well-off.
As a consequence, unspent income can pile up as unused and uninvested savings; and what investment is undertaken can erratically fluctuate due to what Keynes called the "animal spirits" of businessmen's irrational psychology concerning an uncertain future. The free market economy, therefore, is plagued with the constant danger of waves of booms and busts, with prolonged periods of high unemployment and idle factories. The society's problem stems from the fact that people consume too little and save too much to assure jobs for all who desire to work at the money wages that have come to prevail in the market, and which workers refuse to adjust downward in the face of any decline in the demand for their services.
Only one institution can step in and serve as the stabilizing mechanism to maintain full employment and steady production: the government, through various activist monetary and fiscal policies.
In Keynes's mind the only remedy was for government to step in and put those unused savings to work through deficit spending to stimulate investment activity. How the government spent those borrowed funds did not matter. Even "public works of doubtful utility," Keynes said, were useful: "Pyramid-building, earthquakes, even wars may serve to increase wealth," as long as they create employment. "It would, indeed, be more sensible to build houses and the like," said Keynes, "but if there are political or practical difficulties in the way of this, the above would be better than nothing."
Nor could the private sector be trusted to maintain any reasonable level of investment activity to provide employment. The uncertainties of the future, as we saw, created "animal spirits" among businessmen that produced unpredictable waves of optimism and pessimism that generated fluctuations in the level of production and employment. Luckily, government could fill the gap. Furthermore, while businessmen were emotional and shortsighted, the State had the ability to calmly calculate the long run, true value and worth of investment opportunities "on the basis of the general social advantage."
Indeed, Keynes expected the government would "take on ever greater responsibility for directly organizing investment." In the future, said Keynes, "I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment." As the profitability of private investment dried up over time, society would see "the euthanasia of the rentier" and "the euthanasia of the cumulative oppressive power of the capitalist" to exploit for his own benefit the scarcity of capital. This "assisted suicide" of the interest-earning and capitalist groups would not require any revolutionary upheaval. No, "the necessary measures of socialization can be introduced gradually and without a break in the general traditions of the society."
This is the essence of Keynes' economics.
Continue reading (Long Read) - John Maynard Keynes: A Vision for the Future or a Ghost from the Past?
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