Still lurking in the
Keynesian woodshed is the myth that interest is a monetary phenomenon that is
artificially keeping capital scarce. Eliminate interest and presto! Capital
will become superabundant. Keynes repeated this preposterous fallacy in the Paper
of the British Experts, 8 April 1943, in which he asserted that "Credit
expansion performs the miracle . . . of turning stone into bread".
So why was
it that stone had not already been turned into bread? The answer,
according to Keynes, is that rentiers and
capitalists deliberately created scarcity in order to exploit consumers. This
is no distortion of Keynes’ views. On page 376 of The General Theory
(MacMillan St. Martin's Press, Royal Economic
Society edition, 1973) he said that "there are no intrinsic reasons for
the scarcity of capital". This is a truly amazing statement for a
so-called economist to make.
On pages 575-576 he calls
for "the euthanasia of the rentier, and, consequently, the cumulative power of the
capitalist to exploit the scarcity-value of capital". No wonder so many
Keynesians are lefties. But what about savings and investment? That, so
claimed Keynes, could be safely left in the hands of the state: meaning
omniscient bureaucrats and, as Adam Smith scathingly put it:
. . . that
insidious and crafty animal, vulgarly called a statesman or politician, whose
counsels are directed by the momentary fluctuation of affairs. (The Wealth
of Nations, LibertyClassics, Vol. I, 1978, p.
468).
Missing from The General
Theory is any genuine understanding of the nature of interest and
therefore any meaningful discussion of the dire economic consequences of
central banks manipulating interest rates. Ludwig von Mises
exposed the shallowness and dangers of Keynes' thinking when he wrote:
It regards interest as
compensation for the temporary relinquishing of money in the broader sense. A
view, indeed, of unsurpassable naiveté. Scientific critics have been
perfectly justified in treating it with contempt. (Ludwig von Mises, The Theory of Money and Credit, The
Foundation for Economic Education, Inc. 1971, p. 353).
He went on to say that such
views "are continually being propounded afresh. . . ." (Ibid . 353). And this was written 24 years before the The
General Theory was published. Keynes' response was to falsely claim that
"Professor von Mises and his disciples have got their conclusions
exactly the wrong way round" (GT. pp. 192-93). If Keynes had bothered to
study the subject properly it would have become clear that the marginal
efficiency of capital is the rate of interest. This is the natural rate
of interest and a price on the time market.
Despite claims to
originality by his disciples Keynes’ theory of interest is one of the
oldest economic fallacies around. It would have been far better for the world
if he had studied Richard Cantillon's brilliant analysis of the microeconomic
effects of expanding the money supply. (Essay on the Nature of Commerce in
General, Transaction Publishers, 2001, written about 1734 and first
published in 1752). Cantillon also nailed Keynes on interest rate
determination with the observation:
Just as the Prices of
things are fixed in the altercations of the Market by the quantity of things
offered for sale in proportion to the quantity of money offered for them, or,
what comes to the same thing, by the proportionate number of Sellers and
Buyers, so in the same way Interest of Money in a State is settled by the
proportionate number of Lenders and Borrowers (ibid. p. 82).
The rest of the chapter
makes Keynes look like a rank amateur, as the following quote from the General
Theory makes clear:
Pyramid-building,
earthquakes, even wars may serve to increase wealth, if the education of our
statesmen on the principles of classical economics stands in the way of
anything better. (p.129).
It is truly astonishing
that any man who could seriously write this rubbish could be taken as a great
economist. Nevertheless, it was enthusiastically taken on board by Paul
Samuelson who proclaimed:
There is nothing special
about government spending on jet bombers and intercontinental ballistic
missiles that leads to a larger multiplier support of the economy than would
other kinds of government expenditure. (Economics, Seventh Edition,
New York: McGraw, 1967).
Truth be told, if our
so-called statesmen had adhered to classical principles the world not only be
in a far better economic state it would not have had to bear the burden of
publishing Samuelson's text book and his outlandish claim about the mythical
multiplier.
Ideas have consequences
— specially bad ideas. Keynesian policies have
attacked savings, reduced the rate of investment, created balance-of-payments
problems, produced recurring international financial crises, given us
permanent inflation, and provided grasping ignorant politicians with the
rationale to levy heavy tax rates and continually try to raise
government spending.
Gerard
Jackson
Brookesnews.com
Gerard
Jackson is Brookesnews Economics
Editor
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