Yeah, Keynes was a jerkin' jerkoff!
by Edward W. Younkins
Many economists and politicians think that the effective way to increase output is by means of a fiscal stimulus package (i.e., by increasing overall spending in the economy). They do not understand that there must first be a flow of real savings if producers are to fund the purchase of capital goods and other goods and services necessary to increase production. The construction of additional plant and equipment is made possible only by increased savings (i.e., a decrease in current consumption). Capital dictates the economy's ability to produce goods and services, to employ labor, and so on. This is what makes an increase in future consumption possible. This was recognized two centuries ago by classical economist Jean-Baptiste Say. Unfortunately, his insight was supplanted by the ideas of John Maynard Keynes, who thought that the economic system usually has sufficient capital or perhaps sometimes even too much capital.
Consumptionism Disproved Two Centuries Ago
According to Jean-Baptiste Say (1767-1832), the original supply-sider, wealth is created by production and not by consumption. Consumption actually uses up utility or wealth. Demand (i.e., consumption) follows from the production of wealth. People's demand is based on the wealth their production created. What a person demands is predicated upon what he supplies. Say thus recognized that all men are both producers and consumers and that if a person wants to obtain a good he must provide something in return that is desirable to another. Money is the necessary means to acquire the goods that one desires. However, in order to procure money, a person must first produce a good or service that will exchange for money. No one can legitimately demand something before first supplying a product or service of value to others.
According to Say, it was possible to have a surplus or a shortage of any specific commodity. Production can be misdirected, producing too much of some products for which there is insufficient demand. He said that gluts of production did not occur through general overproduction, but instead through overproduction of certain goods in proportion to others which were under-produced. Say thus admits that there can be short-term gluts of particular commodities. The market, left to its own devices, permits such imbalances to be corrected through adjustments of prices and costs. Any disequilibrium in the economy exists only because the internal proportions of output differ from the proportions preferred by consumers, not because production is excessive in the aggregate. It follows that Say's Law in no way implies that all products will ultimately be demanded in the market. The supply of a good does not guarantee an effective demand by the producer of that good for other goods. If inventory does not sell, prices will be cut until, and if, it does. It follows that lower prices of some goods means that people have more money to spend on other goods and services. Through the price system, supply and demand adjust and markets clear if the market system is left free to perform the balancing and proportioning functions. It is through changes in prices that today's supplies are rationed among today's demanders. Prices bring about proper proportions and price signals communicate information for future allocation and supply decisions.
Say understood human nature and the fact that people tend to be rational but are not omniscient. Overproduction of particular commodities by individual firms and producers is possible when mistakes have been made. The glut of a specific commodity can arise from its production in excessive abundance outrunning the total demand for it, or from the shortfall in the production of other commodities. A glut can only take place temporarily when too many means of production are applied to one type of product and not enough to others. This type of disequilibrium is normally quickly remedied in a free market economy as market incentives and rational self-interest lead to adjustments in production, prices, marketing strategies, and so on. People have a rational self-interest in correcting their errors.
What about savings? People do not spend all of the wealth that their production creates. The demand for current goods and services fails to match the value of what has been produced as people choose to hold some of it in monetary form. According to Say, savings is beneficial and better than consumption because it is used in the production of capital goods or in additional production. Contrariwise, consumption does not provide a stimulus to wealth. When production exceeds consumption, the difference is savings, which goes toward the production of investment goods, and investment is the basis for future growth. Such a reinvestment process is fueled by entrepreneurs. If money is stored in the form of bank-created money such as checking accounts, the held-back consumption power will be transferred to borrowers from the bank that created it. In other words, the power to consume is shifted to the borrower. There will be no deficiency in aggregate demand as long as the banking system is free to carry out the process of transforming depositors' savings into borrowers' spending. As long as savings are reinvested in productive uses in the aggregate, there need be no decreases in income, production, or consumption. Say argued that savings searching for profits goes quickly into investments for production.
Higher rates of savings bring about higher rates of subsequent growth in aggregate output. This takes place because someone else borrows the money that will produce an even greater number of goods. It follows that people need incentives for working, saving, investing, and risk-taking. Say's insight was that incomes are always totally spent on commodities satisfying current wants (i.e., consumption) or on commodities satisfying future wants (i.e., savings accumulation) and that savings are essential if the economy is to grow. Demand thus comes from supply whenever you demand it. People save in order to expand their production or to live on their savings when and as they need them. Savings buy time for people to do more than just work. It could be said that consumption is the final cause of production and that saving is the efficient cause of production. Say taught that income not devoted to consumption will be spent on investment and that the market would automatically and fairly rapidly return toward equilibrium.
Keynes's Flawed Theory
John Maynard Keynes, the underconsumptionist, unlike Say, thought that production and consumption are disconnected activities. In addition, in the Keynesian system, saving and investment are not two perspectives on the same phenomenon. Instead, he saw them as two separate, unequal, and often discoordinated activities. For Keynes, the decision to save is not automatically coordinated with the amount of investment needed and desired by businessmen. He says that whether or not entrepreneurs and businessmen invest depends upon a number of subjective and irrational psychological factors instead of simply depending on the availability of savings at a low interest rate. According to Keynes, too much savings in the economy is the cause of the unemployment of resources. He contended that the Saysian system is only true in the special case when savings equals investment. He says that since this is rarely the case, economists need a general theory to explain unemployment. Keynes believed that the breakdown of Say's Law came about because of a lack of aggregate demand which results from the disequilibrium of planned savings and planned investment. For Keynes, savings can be too high or too low. Either way, he considers savings to be dangerous, self-defeating, and the source of the problem. According to Keynes, savings represent a destructive "leakage" from the economy. In the end, after a series of convoluted discourses, Keynes concludes that (1) when savings are less than investment, government action is necessary to stimulate investment, and (2) when savings are greater than investment, government action is needed to encourage consumption expenditures. In both cases, it is up to the government to step in.
Keynes's solution to unemployment is an increase in government spending. His theory thus shifts from the classical economists' concern with production to a concern with consumption. He said that when supply outstrips demand some goods will not be sold and, as a result, production and employment will be cut back. His proposed solution is to increase consumption through government spending. Keynes says that general overproduction is the problem and that men are unemployed because they have produced too much. His proposed solution is to stimulate consumption and beat down production. He says that "aggregate demand" can be too low relative to "aggregate supply" and that government spending is needed to fill the gap left by private-sector demand to ensure full employment. For Keynes, spendthrifts, rather than savers, are virtuous. He holds that both consumer spending and government spending are the means to economic growth. His spending theory has enjoyed great popularity with statists who equate government spending with economic stimulus.
Keynes's solution for stimulating the economy is to have the government spend money, thus bridging the gap between savings and investment. He advocates government schemes to pump up consumption such as printing and spending new money (which debases the currency and results in inflation), deficit spending, public works projects, higher taxes on producers, and the punitive graduated income tax which puts more money in the hands of the poor, who are said to spend a greater portion of their income.
Keynes maintains that sometimes people want to hoard money instead of saving it. When this money is withheld from investment, the result is unemployment which, in turn, causes overproduction. Unemployed people are not able to buy the previous output of products and depression results. According to Keynes, there will be an absence of savings during a depression as people withdraw money to survive. He goes on to say that (1) without savings there will be no investment; (2) without investment there will be no employment; (3) without employment there will be no spending; and (4) without spending there will be unsold goods.
Keynes explains that savings can overshoot the demand for investment in capital equipment, resulting in excess savings and the withdrawal of funds from circulation and from the necessary sufficient demand for goods. Drawing money away from the purchase of finished commodities makes them less profitable at the very same time that firms are seeking to set up additional capital resources to produce finished commodities. Keynes maintains that a deficiency of purchasing power is inevitable, resulting in an increased supply of, and a diminished demand for, products. As a result, profitable production cannot be continued and crises and depression begin. Keynes's solution for preventing or alleviating depressions is to either reduce the amount of savings or to stimulate consumption through government spending and/or the issuance of new money.
Keynes says that in a free market interest rates fail to perform the function of a market clearing price and that wage rates do not adjust. The result is underconsumption and unemployment in an unregulated economy. As a cure to bolster consumption, he proposed state management of the money market to supplement fiscal policies with respect to taxation and government spending.
Economic Recovery Requires Savings and Capital Accumulation
In a recent two-part article posted in his blog, economist George Reisman explains that the economy is not functioning correctly because it has lost capital which is accumulated on the underpinning of savings. He observes that recessions stem from the effort to build capital on a foundation of credit expansion rather than on savings. Such credit expansion causes overconsumption and the loss of capital due to bad investments.
The housing bubble is a prime example of overconsumption and bad investments caused by credit expansion as many loans were made to "homebuyers" who were not worthy of the amount of credit involved. Although the houses represented capital to the homebuilders and to the financing banks, they did not represent wealth to the unworthy "purchasers" who had not contributed comparable wealth and capital to the economic system and who had no realistic possibilities of doing so. To add to the problem, many of these people borrowed using the increased market value of their homes as collateral and then spent what they had borrowed. Their consumption came at the expense of capital that had been invested by others in the economy. When the housing bubble burst and house prices fell drastically, the effect accentuated the losses experienced by lenders as people abandoned their houses, thus requiring the creditors to lose by the amount of the decreases in the prices of their houses. This loss of capital is what caused a large decrease in the amount of available credit, resulting in bankruptcies, unemployment, and decreased consumption expenditures. Lenders currently do not know which prospective borrowers to trust due to the problems of the capital markets that accompanied the bursting of the housing bubble.
Reisman explains that economic recovery requires that the economy rebuild its stock of capital, and that doing so necessitates greater savings relative to consumption. Greater savings and the accumulation of new capital are needed to make up for the losses brought about by credit expansion and the overconsumption and bad investments that stemmed from it.
Government Spending Does Not Bring Prosperity
He emphasizes that the use of stimulus packages will result in the additional loss of capital. A stimulus package begins with the consumption of already produced wealth that is a component of the capital of the business that owns it. The money received by the company does not come from the production of any corresponding comparable wealth on the part of the government or by those to whom the government has given the money. When the good consumed by a non-producer is replaced, the result is the consumption of some of the firm's assets. In turn, the replacement production is followed by additional consumption. Each succeeding act of production is accompanied by new consumption that is equal to it. It is clear that real economic recovery requires increases in production that exceed increases in consumption. Stimulus packages only aggravate the problem of the loss of capital that is the fundamental cause of economic recession.
Government demand-management policies aimed at stimulating economic activity do not and cannot create any new wealth—economic stimulants will not succeed. Government stimulus proposals are illogical. The government cannot inject money into the economy without first removing it from the economy. The government can distribute funds only by collecting more taxes, borrowing from the private sector, or printing additional money. There can be no stimulus if the government increases the ability of some people to spend by decreasing other people's ability to spend. When a government taxes or borrows it simply transfers spending power from private owners to political spenders.
By taxing people who create real wealth, the government impairs the process of wealth-generation and diminishes the likelihood of economic recovery. In addition, people who lend money to the government preempt the private-sector uses toward which that money could have gone. Furthermore, when the government prints money the result is inflation which, in turn, leads to hesitant businessmen and entrepreneurs and continuing capital decumulation. The additional "profits" due to inflation are taxed as though they are true profits thereby impairing the ability of companies to replace their assets. All of this results in a less than zero-sum game because government handouts are likely to be less productive (or even counterproductive) and because money distributed by the government is always less than the money collected, since government employees such as tax collectors and dispensers have to be paid. On top of all of this, a stimulus plan will devalue United States currency.
Stimulus: Euphemism for Deficit Spending
A stimulus package requires the federal government to go further into debt, creating a burden on future generations. New debt has to be repaid with interest through taxation in the future. Government budget deficits cause a continuing depletion of production and output because of the stimulated detour into consumption. Every dollar spent from government securities issued to fund a deficit is a dollar that will not be invested in a private company.
Increased government spending will transfer more of the American economy to the public sector thereby raising the burden of government on America's citizens. On the other hand, if the government reduces both taxes and spending, more money will remain in the hands of private individuals who constitute the productive sector of the economy.
A recession is a time period during which businessmen need to recognize and correct their past errors. A recession comes about due to the effects of the great amount of unproductive debt that financed a multitude of unwise ventures such as loans to homebuyers who were not creditworthy. Through the Community Investment Act, the government required banks to make many such loans to accommodate local community groups. This resulting debt burden should be reduced through bankruptcy proceedings, write-offs, rescheduling, and so on.
True Wealth Creation
Economic recovery requires that the stock of capital be rebuilt in the economic system. Markets will need the freedom to adjust to slow conditions through price and wage rate reductions. In addition, unsound investments should be sold off. There should be no bailouts and the assets of the mortgage giants should be liquidated. Allowing some businesses to fail and others to begin would provide an incentive to redirect capital into more productive and profitable uses. True entrepreneurs do not request nor obtain government assistance. When a failed or faltering business is rescued by a government handout, it is no longer a business. Likewise, when a businessman obtains his results by receiving special privileges such as subsidies granted by the government, he forfeits his status as a businessman.
Government intervention prevents the efficient functioning of the market. Increasing government involvement makes the investment climate riskier and reduces the motivation of entrepreneurs to innovate. Because of the integration of all individual markets into one functioning system, the reality is that government does not have to be concerned with artificially stimulating demand. Markets clear if not interfered with.
Government efforts to stimulate the economy via direct spending and efforts to stimulate consumer spending are counterproductive. When the government spends, it must expropriate money from businesses to do so, thus ensuring a misallocation of resources. Government should get out of the way by reducing taxation, spending, regulations, and government control of money and the interest rate.
Thursday, April 30, 2009
I won't keep you in suspense for long -- the answer is an emphatic, unequivocal no! Vaccinations will not kill you. Vaccinations will not give your kid autism. Vaccinations are not harmful. It's hard because parents want what's best for their children, this is commendable. But don't listen to Alex Jones or Jenny McCarthy they're not going to raise your kids. Hell, don't even listen to me. Pay attention to the literature and listen to those who really know what's going on.
First of all there's no statistical link between the number of vaccinated children and the percentage of children who contract autism. 77% of kindergartners have been vaccinated while a mere 1% of that age group have autism. Also, one of the big concerns is the mercury content. This fear is completely unfounded. The mercury levels inside vaccinations are lower than your average plate of salmon or a cup of cold, refreshing water direct from the tap. What do you think about that Ms. McCarthy?
If you're wondering what makes this stuff poisonous, it's not the individual element which determines toxicity but the dosage. Quantity, folks, it is all about quantity. A good way of putting it is -- complaining that vaccines have polyethylene glycol in them is like complaining that "salt has chlorine in it." (source)
Unlike other conspiracy theories like the Moon landing hoax and 9-11 "Truthers" this isn't just annoying it is dangerous. How many frightened parents avoided vaccinating their children only to have it end tragically? The "research" to come out on the anti-vaccinations side is as unscientific as it comes. Show me a controlled, double blind, peer reviewed study or two and then we can talk.
This is just the beginning. For much, much more check out this episode of QuackCast: Let's kill the children or a defense of vaccines And if you have anymore time after that have a listen to the latest episode of the Conspiracy Skeptic: The Vaccine Conspiracy
Wednesday, April 29, 2009
Freedomain Radio: If you are at all interested in anything vaguely cerebral then Stefan Molyneaux is your man. An anarcho-capitalist, philosopher, ex-software entrepreneur and orator, Stef is positively encyclopedic in his knowledge and doggedly pursues empirical truth. Covering everything from dream analysis to free will, Freedomain Radio is a miraculous resource for anybody who is starting their journey into the raw wilderness of Anarchist thought and self-knowledge. This podcast seriously changed my life and it will do the same for you too.http://www.freedomainradio.com/
I Love Movies: Doug Benson the drowsy-eyed star of "Super High Me" and a regular of VH1's "Best Week Ever" hosts a round table of comedians discussing, what else, movies! With guests ranging from Bob Odenkirk and Dana Gould to actor Jerry O'Connell, Doug Benson has a surprisingly entertaining, by-the-seat-of-his-pants biweekly free-for-all. It's often best when the panel devolves into unadulterated silliness which usually culminates with the "Leonard Maltin game" that ends every episode. The Leonard Maltin game is a challenge where both guests try to guess a movie only by three clues: how film critic Leonard Maltin reviewed it, the year of release and a list of the cast presented from least known to best. This podcast is great for a few good belly laughs and will not disappoint.http://handheldcomedy.com/index.php?task=ms&id=8&referred=TRUE&mature_pass=TRUEHarcore History: Up until college history, for me, was just a bunch of vapid, dead white guys I had to memorize to pass a class. But thanks to Professor Aldrete history became a story curling out from the jungle and into my lap. A tale filled with the most improbable twists of destiny, grotesque carnage and immortal love. If you're like me and can't get enough history then this podcast is for you. And if you couldn't give two shits about history then this podcast is for you as well. Because all it takes is a terrific teacher to kindle that spark and host Dan Carlin is just dramatic enough for the novice, apolitical enough for the casual observer and exhaustive enough for the expert.
Here on Earth: Radio Without Borders: Unique among the other podcast selected for this list, Here on Earth is actually a radio show based in Madison, WI. After giving it a listen I hope a lot of the myths about us cheeseheads will be dispelled. The topics are varied but the prime directive of the broadcast is to showcase the similarities between cultures and celebrate the differences. And much to the the credit of the show's producers, writers and host, Jean Feraca, the tone is not usually a schmaltzy "We are the World" singalong, but one of a matter-of-fact jubilation and a true desire to inform. Yes, us Wisconsinites do enjoy thinking and we are interested in what lies beyond state lines, and Here on Earth delivers it to us in a way only radio can.
I am what one would term a dilettante when it comes to economics. I'm reading, watching and listening to everything I can get my hands on to become an economic autodidact.
Due to my amateurism in this field of study, it is not surprising that I've never encountered this event before. Apparently, in 1920-21 the stock market took a nosedive worse than that of the stock market in 1929. What happened and why didn't America go tits up? Well, the country had a stroke of luck, and by stroke I mean then-President Woodrow Wilson was deposed by a massive stroke and was unable to interfere with the economy. The consequences were wholly positive. As a matter of contrast, I do not agree with everything the speaker says in the video. For example, I don't think CEOs are "geniuses." Just because they got lucky with a product doesn't make them uber-intelligent, it just makes them fortunate. But the anti-government meat and potatoes of the presentation is on the mark.
John Maynard Keynes can go munch a douche!
Posted by Rich_Of_Spirit at 1:00 AM
Monday, April 27, 2009
An old anarchist lays wheezing on his death bed, and both his family and his in-laws are in the room at the foot of his bed. The dying anarchist has married into a radically religious family who, at this moment of expiration, insist upon bringing in a lawyer to finalize his last will and testament and a priest who will bless him before he passes on. Much to the shock and dismay of his family the old anarchist agrees with his in-laws and a lawyer and a priest are summoned.
As they approach the dying man first the lawyer crouches down and asks, "What are your final wishes?" The anarchist maintains his quiet and his family groans in disapproval while his in-laws glow with joy. The priest takes one step closer and whispers, "You are about to meet your maker, my son, is there anything you want to tell me before you enter the hereafter?" The anarchist's family is struck speechless and his in-laws begin dabbing the tears from their faces as the old anarchist speaks, "I want the lawyer on my right side and the priest on my left."
The two men comply with his wishes and flank the old man. With his final breath the old anarchist shouts in a voice that echoes throughout the hospital: "I am dying like Christ Jesus himself -- between two thieves!"
Sunday, April 26, 2009
That's right! After a couple months of finding myself (and a second job) I've returned to Thumb Jig. In the interim I've been fortifying my ideas and philosophies, and I think you'll be pleased and challenged by the results.
I plan on adding some semi-regular features like book, movie and podcast reviews, full feature films and online lectures along with resurrecting everybody's favorite, "Friday Flashback" segment, and, as always, I'll be posting commentary, discussions and articles on everything from Anarchism, to Psychology, Philosophy, Economics, History and any other blog-worthy happiness that rolls across my path.
Now, I know it's been awhile so allow me to re-introduce myself. I'm an Anarchist of the Mutualist/Agorist stripe (if you don't know what that means -- ask. I'll be more than happy to go into agonizing detail for you. Trust me.) I've had this blog since 2006 and if you don't have much going on in your life you could go back in the archive and see how my thought has evolved from one of your typical Social Democrats to a Collectivist Anarchist to my current incarnation of thought.
I'm always taking suggestions and submissions. And if you have some funky fresh music, film or book you think I abso-fucking-lutely need to absorb drop me a line or leave a comment. I'll be giving my opinion all the time through this blog and think it's only fair if I consider recommendations in return. As a point of reference I'm really into old reggae right now so if you have something wonderful along those lines I would be eternally grateful.
Any other questions about me ask or just look in the "About Me" section to your right. If there isn't anything else let's get started. I look forward to upturning the applecart with you.