The Critics of Keynesian Economics

XVII

JOSEPH STAGG LAWRENCE was born in Budapest, Austria-Hungary, in 1896. He was brought to the United States in 1903, attended high school in Buffalo, served as a private in the U. S. Army in France, was discharged as a first lieutenant, became a student at the University of Grenoble in France for a few months in 1919, and graduated from Princeton University in 1923. He taught at Princeton from 1924 to 1926, and at New York University from 1927 to 1929. When he went into business he became a director in several corporations and vice-president of the Empire Trust Company of New York.

The following originally appeared in two issues of the Empire Trust Letter (January 1 and February 1, 1950). It is one of the most hard-hitting as well as one of the least technical criticisms of Keynesian economics and policy.

LORD KEYNES AND THE FINANCIAL COMMUNITY

JOSEPH STAGG LAWRENCE

I

The New Deal, the Fair Deal, the English Labor Government, and economic liberalism throughout the world derive their philosophic inspiration from the mind and works of a single Englishman, the late Lord Keynes. The full measure of American official dependence upon Keynesian dogma is not apparent in this country today only because it still enjoys boom prosperity. Employment is still high. Public documents and the character of present leadership leave little doubt that expedients derived from the creed of this scholar will be applied at the first onset of economic decline in the United States.

The following propositions are taken directly from the works of Keynes or are clearly implicit in his thinking. They provide in the aggregate the key to American policy tomorrow. Some of this thinking has already been applied in pump-priming, deficit financing, and a currency severed from gold and managed by a group of “competent and responsible men.” These propositions constitute the matrix of high level political, labor, and liberal thought in this country at the mid-point of the twentieth century.

NEW ORDER APHORISMS

1. A wealthy community is more unstable than a poor community.

2. The thrift of the wealthy aggravates the distress of the poor.

3. The apparent victory of a free economy during the 19th and early 20th centuries was due to historic accident.

4. Digging holes and filling them again can be more useful socially than the private accumulation of wealth.

5. Building useless pryamids can be more desirable socially than building a railroad.

6. The desire for liquidity is a silly fetish and is anti-social.

7. The hoarding of money is anti-social.

8. Legitimate long term investment is so difficult “as to be scarcely practical.”

9. The long term investor who considers the public interest comes in for the most criticism from banks and investment committees.

10. “It is better to fail conventionally than to succeed unconventionally.”

11. Wall Street is a gambling casino and should be made inaccessible to the public.

12. Speculation is the black art of forecasting the psychology of the market.

13. A heavy transfer tax should be imposed on all stock market transactions to discourage trading.

14. A real investment should be “permanent and indissoluble, like marriage.”

15. Individuals should be ordered by the state to devote all their income to consumption or investment in a “specific capital-asset.”

16. Important business decisions are more often the result of “animal spirits” and “spontaneous optimism” than “careful calculation.”

17. “An act of individual saving means . . . a decision not to have dinner today.”

18. The source of all real value is labor.

19. The prices of all goods should be proportioned to the labor embodied in them.

20. The efficiency of capital is determined “by the uncontrollable and disobedient psychology of the business world.”

21. “The rate of interest is the reward for parting with liquidity for a specified period.”

22. The payment of interest serves no useful purpose and should (within a generation) be eliminated altogether.

23. The theory of negative interest, where a man pays for the privilege of spending his money in the future, is sound.

24. Full employment can be achieved provided the government spends enough money.

25. Until we have full employment, the spending of money by the government cannot lead to inflation.

26. The government should control and direct all investment.

27. Speculation, promotion, business judgment, have all been greatly overrated.

28. It is the duty of the state to reduce inequality of wealth and income.

29. The government should control the location and mobility of labor.

30. Gold is an impediment in a socially desirable currency system.

THE SUBSTANCE OF NEO-LIBERALISM

“We owe it to ourselves. No country can ever go bankrupt by operating on a deficit. Since the obligation runs to itself the size of the public debt is of no great moment.”

FISCAL SLEIGHT OF HAND

This is not the exact language, though it is the fair substance of a statement by Marriner Eccles, the present Vice Chairman of the Board of Governors of the Federal Reserve System. It was made at a recent private gathering in New York City during which a number of the solid burghers present had expressed concern over the theory of innocuous deficit financing and the continuous rise of the public debt.

Eccles ridiculed these fears. He did so by offering the group one of the most tenacious, plausible and mischievous sophistries in the propaganda repertoire of the welfare state.

Although his audience, consisting of businessmen and bankers, found the views of Marriner Eccles preposterous and exasperating, it must be remembered that they are not the unique aberration of Mr. Eccles. He is an intelligent public servant who agrees with and reflects theories of public finance which are expounded today in many of our universities. In fact, two of the leading research agencies of the country, the Committee for Economic Development and the Twentieth Century Fund, largely supported by the donations of the very men who find the views of Eccles so irritating, seem to approve and promote a fiscal philosophy which flies in the face of the most elementary common sense.

The notion that the debt of the state is of no consequence so long as it is owed to its own citizens is not an original discovery of the Federal Reserve Board. It was rationalized in its modern form by John Maynard Keynes, a brilliant thinker in the field of monetary theory.

A PRESCRIPTION FOR ECONOMIC SENILITY

He noted the hardening of England’s economic arteries in the early thirties and realized that the free economy theories of Adam Smith no longer suited the position and prospects of his country. After carefully examining his conscience, he decided that he was an Englishman first and an economist secondly.

Thereupon he devised an abstruse body of dogma which suited the needs of a declining England. Its central premise is economic stagnation, its conclusive remedy economic planning. Among its major features are the control of investment volume, a managed currency, and a public debt that is all horsepower and no brakes.

To argue that the state can disregard the requirement, operating on all the rest of us, to live within our financial means, calls for a repudiation of instinct and reason so violent that k can be accepted only after the most careful groundwork. The rule that we must make ends meet whether we be governments, corporations, institutions, or individuals, together with the corollary that we should save a part of our incomes, is embedded so deeply in the mores and mind of western civilization that its attempted dislodgement a generation ago would have been held fantastic. To do so would require prodigies in semantics and sophistry which did not then, in the twenties, seem possible.

THE GREAT CASUIST

Nevertheless, precisely this feat has been accomplished. To the dismay of those who believed in the old rules, whose virtues had been apparently fully attested during centuries of human experience, whose validity had been expounded by some of the ablest thinkers of the race, a body of plausible dogma has appeared which challenges the foundations of orthodox thought in the field of economics and finance. Marriner Eccles, John Snyder, and Harry Truman illustrate the force and appeal which the new doctrines exercise.

The fallacy of the proposition that a nation may prosper, that it may achieve stability, only through the continued use of red ink cannot be understood or refuted unless the sources of error are examined. The great casuist who led the assault on the ramparts of common sense is John Maynard Keynes. Until his General Theory of Employment, Interest and Money appeared statesmen nibbled cautiously at the toxic sweetmeat of inflation. Finance Ministers who could say: “No,” were still esteemed. Abandonment of a commodity money standard, the use of credit by the state to pay its bills in time of peace were still accompanied by apologies and a vow to return to fiscal virtue.

HELPED BY CIRCUMSTANCES

It is no easy matter for any polemist, however able, to engage such giants as David Ricardo, John Stuart Mill, Jeremy Bentham, and Alfred Marshall, discredit them, and sever the hold which their reasoning had on the minds of men for over a century. Yet that is precisely what Keynes has done. Of course, this has not been achieved solely through the power and plausibility of his logic. His victory was aided by two other circumstances.

Classical economic thinking assigns a passive role to the economist. It teaches that men pursuing their own interests—properly limited to protect society—will in the long run promote progress more effectively than any direction of community energies by a master intelligence, i.e., by the political sovereign.

It teaches that recurring maladjustments in the form of depression or unemployment can best be cured by leaving the individual to his own devices. The state has a moral duty to prevent extreme hardship and may provide minimum necessities for individuals while they reorient themselves preparatory to another forward move.

In the exposition of such a function for the state, the economist can hope for little authority and a minimum of influence. He is in the position of an honest physician who is compelled to admit that his patient is more likely to recover if nature takes its course than if he submits to medical treatment. This may be sound therapy but promises little income for the doctor.

Assume now that a new theory of healing is expounded which preaches active medication, the frequent use of the surgeon’s knife, and a minimum recourse to nature’s automatic healing. The doctor now becomes an important member of the community. Life, we are assured, is impossible without him. The door to wealth and influence opens. This is precisely what planning and full employment have done for the economist. He is the important technician seated at the right of the policymaker. Laws must not be passed, funds may not be appropriated, without first consulting the economist.

He would hardly be human if he failed to respond warmly to a doctrine which seemed to prove the absolute need for state intervention, in which the economist must determine where, and how, the intervention shall take place. Obviously, he will give such a doctrine the benefit of every doubt.

It is little wonder that the executive departments of the government and the faculties of our universities are filled with men who worship at the feet of Keynes. Scholars and bureaucrats also have vested interests.

A BOON TO STATESMEN

Enthusiastic as was the welcome which his professional colleagues gave to Keynes, it hardly matched the ardor with which he was embraced by statesmen. Here was blessing on an august plane for practices which had always in the past been considered reprehensible. Good deeds could now be underwritten by drafts on the Treasury. The harsh precepts of finance no longer governed the practices of the exchequer. That loose lady of the Fisc, the budget deficit, was touched with the wand of a refreshing philosophy and made respectable.

Keynes was elevated to the nobility. He was accorded honors that formerly went to other great heroes of England—to a Nelson, a Marlborough. He had rationalized the decadence of Great Britain in flattering terms and devised a creed which was no less useful in Downing Street than it proved to be in the White House. That his revolutionary concepts in the field of economic thought imposed a great strain on Keynes himself is indicated by his remark at the outset of his General Theory that it was “a long struggle of escape—a struggle of escape from habitual modes of thought and expression.”

A SELF-EVIDENT AXIOM

Keynes starts by challenging one of the most self-evident premises of classical economics, i.e., that every act of production creates the means for the purchase of the product. This is best illustrated by the simplified income statement of the X company which, in a given period, produces a thousand cars sold at the plant for a thousand dollars each. The statement for the period looks as follows:

PROFIT AND LOSS STATEMENT

Income		Expenses
Production	$1,000,000	Raw material	$   300,000
		Labor	500,000
		Depreciation	100,000
		Overhead	50,000
		Profit	50,000
	_________		_________
Total	$1,000,000	Total	$1,000,000

Every item on the outgo side of this statement represents buying power to the recipient and the items in the aggregate equal precisely the value of the product to be sold. Mathematically there cannot be any failure of buying power. This applies not alone to the X company but to the economy as a whole.

In fact Keynes admits the foregoing. He quotes Marshall.

The whole of a man’s income is expended in the purchase of services and of commodities . . . it is a familiar economic axiom that a man purchases labour and commodities with that portion of his income which he saves just as much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labour and commodies which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.

Keynes states that the proposition inherent in this observation by Marshall “is indubitable, namely, that the income derived in the aggregate by all the elements in the community concerned in a productive activity necessarily has a value exactly equal to the value of the output.”

A KEYNESIAN DISTINCTION

This seems sufficiently obvious to dispose of the contention that buying power in a community fails because wage payments are not high enough, or that consuming power in the aggregate is too low to absorb the products of industry, or that the state must intervene with pump-priming injections into the economic stream to sustain buying power and full employment.

Keynes says the fallacy in this apparent axiom lies in timing. The items of depreciation and profit in the statement of the X company may or may not be spent in the period in which the finished cars are offered for sale. The aggregate of these two items, namely $150,000, may be deposited in a bank account.

To be sure, he recognizes the complex osmosis by which this $150,000, even when deposited in an inactive bank account, may become available for investment. But, argues Keynes, the act of saving and the act of investment are two entirely different and unrelated activities. The mere fact that one man saves a thousand dollars does not mean that another man will invest a thousand dollars at the same time.

Those who think so “are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former.”

WEALTH AND THRIFT TAKE A BEATING

It is this preoccupation with the failure of effective demand in a capitalistic community which gives rise to some of the most startling deductions applicable to practical government policy.

The first, of course, is the need of the state to compensate for the failure of investment to match savings. This is the basic justification of deficit financing and the concept of a cyclically balanced rather than an annually balanced budget. Out of it grows full employment as the test of effective budgetary policy since full employment is the putative real test of effective demand.

There are other startling corollaries. Accepting the Keynesian premise that cyclical instability is due to a lack of coordination between savings and investment, it is an easy step to the proposition that investment should be directed actively by the government and that the entire savings functions should pass from individuals to the state. Nationalized savings may make social security practicable.

A TEXT FOR THE DEMAGOGUE

The stark bias against wealth and material success present in the soap box exhortations of every rabble-rouser finds in Keynes a wholly detached support.

. . . the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members.... This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty.

A better text for the demagogue could hardly be found. It is little wonder that the English government regards the elimination of high incomes as a duty and the confiscation of wealth by way of taxes as a salutary prelude to stabilization.

There is little room in Keynesian theory for personal incentive or private initiative.

THE MULTIPLIER

In his chapter on the “marginal propensity to consume” Keynes develops his famous concept of the multiplier. This holds, briefly, that the consuming power of a given group of workers has a stimulating effect on the economy equal to their wages at the moment of full employment. Below full employment a given total of worker incomes gives the economy a boost much greater than the aggregate of those incomes.

The manner in which this stimulant varies is calculated by a mathematical formula. Let’s use his own illustration. Ten million jobs constitutes full employment in the Keynes example. Employment has dropped to 5,200,000. At that point, according to his formula, “If . . . an additional 100,000 men are employed on public works, total employment will rise to 6,400,-000. . . . Thus public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment . . .” Here we have the genesis of leaf-raking. A hundred thousand PWA workers indirectly provide jobs for 1,100,000 other workers.

Keynes chides the conservative for trying to find some useful form of employment for the jobless during periods of unemployment, for trying to operate relief on “business principles.” He suggests seriously:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principles of laissez faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. . . .

HOLES IN THE GROUND AND PROSPERITY

The analogy between this expedient and the gold mines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold mines are of the greatest value and importance to civilization. Just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress—failing something better.

Here is the origin of the cosmic-jest interpretation of the gold standard so highly relished by the advocates of a managed currency. It also opens the door to the dynamic direction of our economy by “competent and responsible men” under which the surplus energies of the unemployed are applied to useful projects. How this sensible procedure contrasts with the silly subterfuges, such as digging holes for gold, under a laissez faire economy!

It is precisely because Ancient Egypt had an effective equivalent for modern shovel leaning that it became so wealthy and suffered so rarely from unemployment.

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.

According to Keynes we try too much to act like “prudent financiers.” We think too long and carefully about adding “to the financial burdens of posterity.” We try too hard to apply to the conduct of the state those “maxims which are best calculated to enrich an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.” Here is a dignified rationalization of the conduct of the drunken sailor and the fabled grasshopper to be applied by a government seeking full employment and cyclical stabilization.

A Low OPINION OF THE BUSINESSMAN

Lord Keynes has a low opinion of the average businessman and seems particularly incensed over the role which business confidence plays in the decisions to invest or not to invest. According to Keynes, the “positive activities” of men depend upon a “spontaneous optimism” and not on “mathematical calculation.” Thus, decisions are taken as a result of “animal spirits” and

. . . not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die. . . . This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; . . . it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.

What Keynes is saying in effect is that capital is notoriously timid. Since its owners must necessarily reach into an apaque future where the shape of things can only be guessed and rarely discerned, they may respond strongly to such irrelevant considerations as the character of the government. These owners may interpret the conduct of that government as a threat to the future safety of their accumulations and may hunt for havens instead of applying their funds boldly to new enterprises.

This means that government must so conduct itself as to win and hold the confidence of the men who have accumulated the investment funds of the community. Such subservience to pusillanimous plutocrats may hamstring the capacity of the government for good deeds. This is an intolerable brake upon progress and a sure guarantee of cyclical instability.

THE SPECULATOR—AN UNSAVORY CHARACTER

Keynes disparages the functions of security markets and the practices of professional investors. The speculator represents a low order in the human scale. It is in The General Theory that we find the rational base for much of the hostility in official quarters toward orthodox financial practices and established financial institutions.

Of the maxims of orthodox finance none, surely, is more antisocial than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of liquid securities. . . . The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.

Actually, says Keynes, the object of most investment is to beat the crowd and it is for this reason alone that liquidity is so highly esteemed.

Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. . . . There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. . . . It is rare, . . . for an American to invest, as many Englishmen still do, for income; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that . . . the American . . . is . . . a speculator.

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. (Our italics). . . . These tendencies are a scarcely avoidable outcome of our having successfully organized “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street, is, compared with Wall Street to the average American, inaccessible and very expensive.

THE CURE

Keynes has some definite ideas on how to abate the speculative faults of American security markets.

The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States. . . . The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils.

This suggests that some educational foundation should select as a research project the personal experience of liberals hellbent on reforming the financial community. We know of at least three characters, two of them still alive, who became active reformers of the American social system after their luck in the stock market had turned on them. One of these characters had run a shoe string in the twenties up to a paper fortune exceeding a million dollars. When the market collapsed he was engaged in an attempt to add still more to the substantial fund which an unbridled acquisitive lust and speculative luck had already accumulated. In his period of postspeculative penitence he became one of the active authors of the security legislation which now governs the stock market.

HE INCLUDES A BLACKJACK

Continuing his prescription for reform, Keynes proposes:

The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him. It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment. But that would avoid the disastrous, cumulative and far-reaching repercussions of its being open to him, when thus assailed by doubts, to spend his income neither on the one nor on the other. . . . Those who have emphasized the social dangers of the hoarding of money have, of course, had something similar to the above in mind.

All of this leads to tighter markets in securities, to the deliberate discouragement of trading, to a limitation of liquidity which is likely in this country, as in others, to discover its first application to government bonds, to forced savings with the government resolving the doubts of the thrifty by compelling them to buy its own bonds.

LABOR THE SOURCE OF VALUE

Throughout The General Theory Keynes disparages the role of the promoter, the banker, the speculator, the entrepreneur, the security market and business management as factors of any consequence in economic progress. In fact it is a fair conclusion that Keynes on balance believes that all these factors combined do the community more harm than good. So far has his thinking gone in this direction that he revives the medieval theory of labor as the ultimate source of all value.

I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, aided by what used to be called art and is now called technique, by natural resources which are free or cost a rent according to their scarcity or abundance, and by the results of past labour, embodied in assets, which also command a price according to their scarcity or abundance. It is preferable to regard labour, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of technique, natural resources, capital equipment and effective demand.

Out of this philosophic nubbin we can derive the condemnation of promotional profits like those derived from the recent organization of Texas Eastern Transmission or the denial of reward for the risk that discovers a new oil field. If “everything is produced by labour” it will become difficult to justify any jackpot profits. By the same token it will become relatively easy to recapture all excess income by taxation and limit personal earnings, as the English now are doing, to ten or twelve thousand dollars a year.

NO JUSTIFICATION FOR INTEREST

This disparagement of finance, management and promotion leads Keynes, as it did the thinkers of the Middle Ages, to the proposition that there is no economic justification for interest. In the book of Keynes the interest rate often interferes with that optimum rate of investment which might insure full employment. Watch him now as he goes to work on the concept of interest and the fate of the coupon clipper. All this in a chapter entitled: “Observations On The Nature Of Capital.”

Let us assume that steps are taken to ensure that the rate of interest is consistent with the rate of investment which corresponds to full employment. Let us assume, further, that State action enters in as a balancing factor to provide that the growth of capital equipment shall be such as to approach saturation-point at a rate which does not put a disproportionate burden on the standard of life of the present generation.

On such assumptions . . . a properly run community equipped with modern technical resources . . . ought to be able to bring down the marginal efficiency of capital . . . approximately to zero within a single generation. (Our italics.)

This will create a situation in which, according to Keynes, “The products of capital” should be

. . . selling at a price proportioned to the labour . . . embodied in them on just the same principles as govern the prices of consumption-goods into which capital-charges enter in an insignificant degree. . . . This may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism.

The entire gas industry in this country is currently agitated by the attempt of the Federal Power Commission to limit the price of gas at the well to a figure which will just afford a “fair rate of return” on the cost of drilling the well and installing the facilities necessary to make this gas available to the consumer. While the power which the F. P. C. claims rests on a disputed interpretation of a Supreme Court decision, the philosophy traces directly to the Keynesian admonition that “the products of capital” should be “selling at a price proportioned to the labour . . . embodied in them . . .”

NEGATIVE INTEREST

Keynes continues with his discussion of the “rentier,” the coupon clipper, the owner of savings bonds.

For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth. A man would still be free to accumulate his earned income (our italics) with a view to spending it at a later date. But his accumulation would not grow. He would simply be in the position of Pope’s father, who, when he retired from business, carried a chest of guineas with him to his villa at Twickenham and met his household expenses from it as required.

Keynes disinters a vagrant thinker named Sylvio Gesell who flourished at the turn of the century and had considerable vogue among advanced thinkers. At one point in his career he served for a brief period in 1919 as the Minister of Finance in the Soviet cabinet of Bavaria. Gesell believed that the growth of real capital was held back by the interest charge. If this brake on capital were removed it would grow so rapidly that “a zero money-rate of interest would probably be justified . . . within a comparatively short period of time.”

It was Gesell who originated the concept of stamped money under which the holder of cash would be charged according to to the length of time he held his money. In other words, he would be subject to a negative rate of interest. It was an idea picked up by Irving Fisher and became one of the many prof-erred “solutions” for the great depression. Says Keynes: “The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale.”

EUTHANASIA OF THE RENTIER

Keynes believed that investment determined the rate of savings and not the other way around as most ordinary people hold. A low rate of interest would stimulate investment and therefore saving.

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would mean that the use of capital instruments would cost almost nothing. . . . In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest to-day rewards no genuine sacrifice any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce.

If there is any “intrinsic reason” for the scarcity of capital

. . . it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

INFLUENCE OF KEYNES

The revolutionary heresies embodied in The General Theory of Keynes found a swift and sympathetic response both in this country and in England. Before this work appeared he had been consulted by our own government. Many of the startling innovations of the thirties are attributable to the personal advice of Keynes. The most notable were pump-priming and deficit financing. It was his thinking that justified the New Deal concept of limited personal income, of vast river valley development by the government, of taxation to absorb unexpended personal income, of punitive taxes upon undistributed corporate earnings.

Even before the advent of the labor government, England submitted its policies to the novel criteria evolved by Keynes. The Report on Social Insurance and Allied Services submitted by Sir William Beveridge to the government in November, 1942 rested its basic thinking on Keynesian theory. Beveridge acknowledges his intellectual debt to Keynes in Full Employment in a Free Society which appeared in 1945.

In paraphrasing the Keynesian prescription for full employment, Beveridge says:

Employment depends on spending, which is of two kinds—for consumption and for investment; what people spend on consumption gives employment. What they save, i.e., do not spend on consumption, gives employment only if it is invested, which means not the buying of bonds or shares but expenditure in adding to capital equipment, such as factories, machinery, or ships, or in increasing stocks of raw material. . . . Adequate total demand for labour in an unplanned market economy cannot be taken for granted.

Re-stating the theory that savings depend on investment, Beveridge quotes a passage from Keynes:

Thus our argument leads toward the conclusion that in contemporary conditions the growth of wealth so far from being dependent on the abstinence of the rich as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is therefore removed.

Continuing, he asserts that

for Britain and for the United States alike, the savings that tend to produce depression are the undistributed profits of companies and the large surpluses of a very limited class of owners of great wealth.

ADVICE TO ENGLISH GOVERNMENT

Beveridge leaves no doubt as to what should be done to insure full employment and who should do it. Three conditions are necessary:

1. Adequate total outlay at all times.

2. The controlled location of industry.

3. The controlled mobility of labour.

It is the recognition of these three conditions, implicit in the policy of the present Labor Government, which accounts for the determination to nationalize industry. To the extent that they have been accepted as the premises of official thinking in our own government—and we believe they have to a substantial degree—they forecast a similar urge toward nationalization when unemployment becomes an intractable problem as uneconomic wage levels and high unemployment relief are sure to make it.

The fact that “controlled” location of industry and “controlled” mobility of labour imply limitations upon personal freedom hardly compatible with democracy does not disturb Beveridge. A similar club is thinly concealed in his statement:

The central proposition of this Report is that the responsibility of ensuring at all times outlay sufficient in total to employ all the available manpower in Britain should formally be placed by the people of Britain upon the State. . . . Adoption of a national policy of full employment means a revolution in national finance—a new type of budget introduced by a Minister who, whether or not he continues to be called Chancellor of the Exchequer, is a Minister of National Finance.

DEBTS WITHOUT BURDEN

In urging that a “policy of cheap money should be regarded as an integral part of any plan for full employment,” Beveridge discusses the fallacious inhibitions of orthodox finance.

The State in matters of finance is in a different position from any private citizen . . .; it is able to control money instead of being controlled by it. . . . Spending in excess of current income and borrowing have altogether different implications for the State than for private citizens. . . . An internal national debt increases the incomes of some citizens by just as much as the taxation necessary to pay interest and sinking fund on the debt decreases the incomes of other citizens; it does not and cannot reduce the total wealth of the community.

Nor is it likely, says Beveridge, that an increase in the debt in time of peace will ever force an increase in taxes. He thereupon presents a calculation which purports to show that Great Britain could expand its National Debt each year, starting with 1948, by 775 million pounds “without involving on that account any increase of tax rates to meet the additional charge for interest.”

Applying this calculation to the United States would permit an annual increase of $26 billion in the national debt without requiring any increase in taxes to meet the service charges.

This is where Marriner Eccles comes in. If he has any doubts regarding the validity of English debt doctrine or the soundness of the logic which supports it, he can find a Harvard professor who has already demonstrated that our national debt could be increased to $4,000 billion without any increase in burden. In fact one academic calculation has already raised the figure to $10,000 billion. He can refer to such a popular treatment of the subject as the Stuart Chase study for the Twentieth Century Fund, Where’s the Money Coming From?

BANKRUPTCY IMPOSSIBLE

Says this gifted writer:

If the national debt is all internal, as ours is, the nation can hardly go bankrupt. The American people are on both sides of the balance sheet. Nations do not hand themselves over to outsiders in settlement of internal debts. . . . The idea of national bankruptcy in the modern world is a verbal bugaboo.

Chase “proves” a la Beveridge that the interest charge on the debt cannot be a national burden.

The complete capitulation of a large segment of high level American thinking to the Keynesian thesis is illustrated by the following from Professor Alvin Hansen. Under certain assumptions of continued growth and technical efficiency, says Hansen,

. . . it can be shown mathematically that if the government continued to borrow indefinitely on the average 10 per cent each year of the national income, and if the rate of growth of increase was 2.5 per cent, (of the national income), and if the average rate of interest on government obligations continued at 2 per cent, then the interest charges would never exceed 8 per cent of the national income. In other words, the government could continue to borrow, on the average, 10 per cent of the national income indefinitely without the tax burden, caused by the public debt, ever rising above 8 per cent of the national income.

In fairness to Hansen, it should be pointed out that he is not advocating such an increase but merely saying that it could be done without leading to bankruptcy or even an increase in the tax burden.

TRUE ONLY UNDER COMPLETE COMMUNISM

What precisely is the fallacy in the we-owe-it-to-ourselves-and-cannot-go-bankrupt argument? It rests on a communal conception of rights and obligations which in fact does not—yet—have a counterpart in the reality of a free society. The duties of an individual toward his government are never bulked with similar duties of other citizens. He has an obligation to fight for his country in time of war. This is a specific, personal obligation. Whether he does in fact serve in the armed forces depends upon his age, his physical condition, his occupation, his sex. Whether this citizen pays taxes and how much he pays depends upon his income and his family status. Whether he holds any of the securities of his government depends upon his means and his judgment.

The obligation to fight for country, to pay taxes and the decision to buy government bonds are not determined by any impersonal count of heads—that is not yet. There is no uniform distribution of these duties owed by a citizen to his government. They can become uniform and generalized only in a communist society.

The government does not owe its debt to all the citizens. It owes that debt to particular citizens, with the obligation to each precisely defined. It is not a general debt to all the citizens. To say that we owe it to ourselves is to ignore all those careful demarcations between individual citizens, between such citizens and the institutions which serve them, between such citizens and their government. It has been the chief burden of civilized jurisprudence to define and protect these distinctions. The meticulous boundaries between the rights and duties of citizens within a community are the true test of whether that community is free or is the fief of a totalitarian master.

It would be just as logical for Marriner Eccles, or William Beveridge, or Stuart Chase to argue that a tax could never be burdensome since we pay in our capacity as citizens to our instrument, the government, which in turn pays it right back to us. Therefore whether the tax is high or low is irrelevant. In fact, with this brand of logic we may argue that there is no point in paying any taxes at all, since we merely take them out of one pocket as citizens and put them in another. Why not leave them there in the first place and save all the cost and friction of collection and disbursement?

ANOTHER DEFINITION OF BANKRUPTCY

Can a government go bankrupt? If it appears not to go bankrupt it is due solely to its power as the sovereign. However, bankruptcy in the sense in which the word is used by the aforementioned Keynesians refers primarily to a limited legal procedure following bankruptcy under which the assets of the bankrupt are formally seized to satisfy the claims of creditors.

Bankruptcy of the sovereign occurs in fact when he uses his authority to evade the penalties visited upon the private debtor who fails to meet the terms of his obligations. Considerate euphemisms have been contrived to describe various forms of sovereign bankruptcy. An irredeemable paper currency is such a euphemism. A pegged bond market is another.

Every paper dollar is defined by law as 13.71 grains of pure gold. The American sovereign has long since welshed on this obligation and persists in his welshing although he has more gold on hand now than he ever had before.

Every time a government, which has repudiated this currency covenant with its citizens, issues additional I O Us under circumstances in which those citizens cannot assert their rights as creditors, it is compounding its bankruptcy.

The fact that it has not been haled before a court by a sheriff is not proof of its financial strength, as Eccles implies, but merely proves that all the instruments of justice so quickly applied to the offending private debtor are subservient to the state and cannot impose upon it the penalties which they apply to other similar transgressors.

The fact that a public sale of assets does not take place when the government welshes on its obligations hardly affects the end result. In both cases the creditor loses out. The French government has not confessed its bankruptcy and it is not likely that it will ever do so. Such action can hardly affect the position of the French citizen who bought a bond in 1939 and now finds that it has lost 98 per cent of its real value. Here is a creditor of the state who can now realize, in real terms, only two per cent on his claims. What difference can a formal confession of bankruptcy make?

The debt fallacies of Keynesian dogma are probably among its less serious features. It is a perfect Pandora’s box of mischievous incitement to the statesman seeking a degree of power which the legitimate framework of an authentic democracy and a free society does not permit.

II

A MISCHIEVOUS ASSAULT

Actually The General Theory of Employment, Interest and Money constitutes the most subtle and mischievous assault on orthodox capitalism and free enterprise that has appeared in the English language. Where Marxian communism proceeds with bludgeon and meat cleaver, Lord Keynes uses a sharp rapier. Where Marx claims capitalism is unjust, Keynes “proves” it cannot work. Where Marx threatens capital with violent overthrow by the miserable and exploited working classes, Keynes assures it of collapse through self-frustration. Where Marx calls for seizure of all the instruments of production and individual egalitarianism, Keynes believes that many of the vital functions of capitalism can be performed more efficiently collectively without the incentive of private gain. He proposes semi-autonomous bodies for this purpose not subject to popular vote or constitutional restrictions, like the TVA or the Bank of England.

Consider the strategic scheme. Thrift breaks the circuit of income and spending because the decision to save and the decision to invest are separate decisions. They are made by different parties with entirely distinct motives. Booms are caused by the optimism of the businessman, the promoter, the investment banker, the speculator. Depressions are caused by their pessimism. In the former they over-invest; in the latter they under-invest.

Their decisions to invest or not to invest, moreover, are generally irrational. They are the result of “animal spirits” and not “careful mathematical calculation.” These fellows are motivated by private profit and not by public welfare. The incentives to risk the funds which promoters and businessmen control, namely, the prospect of personal gain, are unnecessary and socially undesirable.

This is where the theory that all value traces to labor, that all value, even of capital goods, should be measured by labor input, comes in. If this is the source and measure of value, then the promoter, the speculator, the businessman, are entitled to no special rewards that cannot be fixed by the test of labor performance.

Finally, the fellow who saves money, who withdraws his dollars from the “firing line of the economy” should be glad to have the right to spend it at some future date without extracting from the community a charge called interest. This involves no labor beyond clipping coupons or opening the mail. The fellow who lives on interest—a dignified and stuffy parasite called the rentier—should be eliminated gradually but painlessly through a form of financial euthanasia.

A NEAT SYLLOGISM

This all adds up to a neat syllogism. Economic stability depends upon the complete and simultaneous expenditure of all the proceeds of production. The governing variable is the volume of investment. This vital function has so far been left in private hands which have been extravagantly compensated.

Moreover they have proved themselves incompetent and venal. Since the volume of desirable investment is a matter of mathematical calculation and since the government has the necessary prescience and probity, such investment should be a government function.

Savings similarly should be nationalized.

The accumulation of great wealth is not only immoral. It is also uneconomic.

If labor be the measure of reward, then great wealth and unequal incomes are the result of larcenous acquisitive lusts. They should be curbed by the ruthless surgery of progressive income and inheritance taxes. Better still, the opportunity to acquire great wealth and receive high incomes should be eliminated.

The nationalization of industry and the funneling of thrift and investment through government departments have obvious corollaries. Life insurance companies and savings banks would become superfluous. Security markets would become obsolete institutions and stock brokers unnecessary parasites. Investment bankers and promoters would have to go to work. The fate of the economy would no longer depend on the haphazard hunches of ulcerous old tories who “distrusted the policies of the government.” The new era would be marked by a succession of national programs, the result of “careful mathematical calculation” by “competent and responsible” public officials. These might even be known as “Five Year Plans.”

Let’s look at some of the basic premises.

THIS IS THE KEYSTONE

In terms of theory and the gravity of ultimate effect, the most important postulate of Keynes is his distinction between the act of saving and the act of investment. Classical theory, no less than common sense, assumes that something must first be saved out of current income to make possible the construction of shelter or manufacture of tools, to subsidize periods of experimentation and invention, to underwrite losses in ventures which fail in order that a small fraction may succeed.

. . . it is natural to suppose [says Keynes] that the act of an individual, by which he enriches himself without apparently taking anything from anyone else, must also enrich the community as a whole; so that . . . an act of individual saving inevitably leads to a parallel act of investment. . . .

Those who think in this way are deceived, nevertheless, by an optical illusion, which makes two essentially different activities appear to be the same. They are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former.

It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s “axiom of parallels.” Granted this, all the rest follows—the social advantages of private and national thrift, the traditional attitude toward the rate of interest, the classical theory of unemployment, the quantity theory of money, the unqualified advantages of laissez-faire in respect of foreign trade and much else which we shall have to question.

THE REST OF THE ARCH

In other words, if the “nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption” does not exist, then “private and national thrift” may not have any social advantages; interest may not be the premium for waiting or a first claim against profits or the equalizer of savings and investment; unemployment may not be the result of excessive wages; the value of money may not be the result of its supply; and laissez-faire in foreign trade must yield to government trade.

Out of the philosophic matrix, arising from the discovery that the motives for saving and for investment have nothing in common, we develop the corollaries that thrift itself has questionable social merit in the first place; that it should be socialized; that the payment of interest interferes with that volume of effective demand which insures full employment; that full employment depends upon the complete expenditure of all income at the time it is received; that full employment does not depend upon wage costs per unit of output; that the quantity theory of money must be substantially qualified; that quotas, licenses, bilateral deals, currency controls in foreign trade, and barriers against the movement of capital all constitute sound devices in promoting an optimum economy.

This is an enormous burden upon the single tenuous distinction between the motives of the saver and the motives of the investor. Let’s examine the validity of this distinction.

It would seem to the layman that a premise so pregnant with revolution must be carefully supported by a convincing array of inductive evidence which had hitherto been ignored, or by a test of such evidence with logic that had previously not been applied. The assertion of the Keynesian distinction between the motives of the saver and the motives of the investor is just that, i.e., an assertion. It is solemnly repeated over and over again, as though it were a self-evident truth, that it should be accepted on the plane of exalted revelation and not prosaic demonstration.

GENERALIZATION WITHOUT EVIDENCE

In a world which abounds with precise and approximate measurements of almost every conceivable form of economic activity, in which a rich store of quantitative evidence, contemporary and historical, is available to the student, Keynes in his General Theory uses no such evidence at all. (In 384 pages of text there are two pages of references to statistical studies by Colin Clark and Simon Kuznets.)

The broad principles, the premises on which they rest, the elaborate details and the revolutionary implications of Keynesian theory derive from heroic deductions which are completely innocent of any contact with the measurable realities of the world in which we live. It is difficult, in fact, to discover a single concrete example in which any of his prodigious propositions are given a living form. Even More’s Utopia and Plato’s Republic, Das Kapital of Karl Marx, and Progress and Poverty of Henry George reveal a regard for the inductive method which is singularly absent in The General Theory.

The Federal Reserve Bulletin, the National Income Supplement of the Survey of Current Business, and occasional studies of private research agencies, such as Social Security and the Economics of Saving of the National Industrial Conference Board, provide continuing figures on both savings and investments. Furthermore, these figures are analyzed to a degree which permits fairly valid conclusions regarding the issues of theory raised by Keynes. There is nothing in the phenomena of savings that warrants its analysis on a purely deductive level—unless it be an apprehension that the facts cannot be reconciled with the theory.

WHO SAVES AND WHO INVESTS

During the year 1948 net personal savings amounted to $12 billion out of total disposable income of $190.8 billion. Corporations saved another $11.1 billion, making a total of $23.1 billion. Since national income before taxes amounted to $211.9 billion, the aggregate of corporate and personal savings amounted to 10.9 per cent of the national income.

Bear in mind now the Keynesian emphasis on the fallacious “nexus” between savings and investment. Of the total savings—$23.1 billion—$11.1 billion, or 48 per cent, was accounted for by corporations. In the aggregate, these savings were reinvested by the very managements which made them in the first place.

Can anyone say that these savings did not serve, directly and immediately, the purpose for which they were made? If there was any distinction in motives it could have been no greater than the distinction between the decision to order a steak and the decision to eat it.

In 1948 business savings accounted for almost one-half the total of savings. In 1947 they accounted for more than two-thirds. Obviously, the distinction which Keynes makes between the motives governing savings and those governing investment—if it has any validity whatsoever—shrinks in importance to the extent that savings and investment are made by the same party.

SAVINGS NOT INVESTED BY THE SAVERS

Within the area of individual savings, amounting to $12 billion in 1948, or 5.3 per cent of the national income, we have substantial quantitative adjustments which further limit the area to which the Keynesian distinction may be applied. Roughly a quarter of personal savings are accounted for by social security contributions which are promptly spent by the government and covered in the trust funds by its own I O Us. Another quarter is represented by purchase of U. S. Savings Bonds and savings and loan association shares.

A little less than half of the total of liquid institutional savings is represented by an increase in life insurance reserves and time deposits. Insofar as banks utilize savings, they are limited to legal investments determined by the states within which they operate. The investments of life insurance companies are in the hands of professionals. The decisions to invest on the part of savings banks and insurance companies, though they represent a purpose distinct from that which induced the individual to save, are competent decisions.

Now, having granted that one-quarter of total net savings (less than 3 per cent of the national income in 1948) is converted into investments by institutions which are partly guided by law and partly by the judgment of competent professionals, what horrendous conclusions can this support? There can hardly be any doubt in the mind of a layman, whose horse sense has not been overcome by ponderous dogma, that the individual who saves and entrusts his funds to a savings bank or an insurance company is much better off than if he were compelled, as Keynes suggests, to spend all his income for consumption or invest his surplus income in some “specific capital asset.”

It might be interesting to speculate on the type of capital asset which a vested bureaucracy might specify for such compulsory investment. In all the countries of the world where the dirigisme, toward which Keynesian thinking inevitably leads, is in effect, the investment which absorbs savings must be in government bonds.

A VAIN DISTINCTION

The distinction which Keynes laboriously distills between the motives of saving and investment lacks substance. It applies in any event to only a small fraction of all savings—those made by individuals in the lower income brackets, who are interested primarily in the rainy day purpose of thrift. Without the benefit of more exalted advice, these individuals take only a passive interest in the ultimate application of their savings and wisely entrust them to institutions which, in the course of time, have evolved to serve this particular function.

The great bulk of savings—those by business and individuals in the upper fifth of income brackets—is usually invested directly. In these instances there is definitely “a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption.”

Year by year this probably covers no less than three-quarters of all savings.

THE LONG VIEW

Keynes established, for his purposes and to his satisfaction, the distinction between savings and investments. He propounds this distinction at the very opening of his General Theory with all the startled elation of Archimedes discovering the principle of displacement. Thereafter he proceeds to cut down the intelligence, competence, and social solicitude of all those who perform the investment function.

In the first place, the professional investor—and this applies particularly to the American—is disinclined and unable to take the long view. He is interested primarily in the quick turn, in outguessing the crowd.

The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment today is “to beat the gun,” as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half crown to the other fellow.

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls among the public to feed the maws of the professional; . . . it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbor before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.

NOBODY LOVES THE LONG VIEW

The boys who take the long view, says Keynes, have a rough time of it.

Investment based on long-term expectation is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. . . . Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks. For it is the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy.

Keynes qualifies this harsh judgment by admitting that speculative motives do not always govern investment, but

In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enor mous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation.

THE SHORT TERM TRADER

It is difficult to find anywhere in economic literature a more distorted, ill-informed account of the motives and the procedures of the American financial community. In a country as rich as the United States, with highly organized markets in which shares are traded daily, with highly efficient and severely competitive sources of up-to-the-minute information, there is bound to be a fringe of traders constantly striving to determine “what average opinion believes average opinion to be.”

However short term their views may be, these traders serve a useful function in providing volume and fluidity to a security market. Without these traders to absorb the short term shocks of the market, it would be difficult to float issues either for private corporate or government account without greater friction and more risk. It is these “reprehensible” speculators, the “bubbles on a steady stream of enterprise,” who facilitate the application of savings to productive “long term” purposes by helping to provide a ready market.

INVESTMENT FOR INCOME

Americans, Keynes avers, rarely invest for income and “will not readily purchase an investment except in the hope of capital appreciation.” This is both naive and contradictory. It is naive because it fails to note the effect of the income tax on investment “for income.” A capital gain is subject to an extreme tax of 25 per cent, while income in its final personal increments in the upper brackets is subject to a tax of 82 per cent. No investment decision is made today without a careful appraisal of tax incidence on the investor.

However, there is a broad category of investment in which income is the dominant motive. This is true of all charitable, religious, and educational foundations where income is not subject to tax. It is true of all investment trusts which pay out not less than 90 per cent of their income. It is true of the thousands of small trusts managed by banks for beneficiaries who must subsist on income.

CAPITAL APPRECIATION AND THE LONG VIEW

The Keynesian argument here is contradictory because, having just demonstrated that the American investor is prone to “jump the gun” and is disinclined to take the “long view,” the same argument now holds that this American investor looks for capital appreciation rather than income.

The only thing that this argument really proves is that Keynes did not know what he was talking about. For it is precisely the hope of capital appreciation which calls for the long view ahead. Generally speaking, securities are bought for income only after they have demonstrated a stable earning power and a capacity for regular dividends. In other words, such companies are more likely to be matured, established enterprises with their greatest period of growth behind them.

On the other hand, the situations which offer the greatest promise of capital gains are those which are young, whose earning power remains to be established. Still more significant in terms of Keynesian concern for full employment, it is the younger enterprises, those offering the brightest prospect for capital gains, which also offer the greatest opportunities for new and additional employment in the future.

It may be something of an exaggeration—though certainly no greater than those found in The General Theory—that investment for capital gains looks ahead, while investment for yield looks behind.

MISINFORMED

Keynes holds that the investment manager, particularly the man who must work with bank, insurance, and investment company committees has a rough time of it when he tries to take the long view; that he is regarded as eccentric; that he is damned if he fails and similarly damned if he succeeds.

The Englishman could not be more mistaken in his facts. The average investment committee, managing a portfolio for a bank, an insurance company, or investment trust, usually, at least in this country, consists of mature men who have almost invariably been successful in the management of their own affairs; who, by nature, training, and experience are disposed to prefer the long over the short view.

In any number of instances, within an extended period of personal experience, in the course of discussion and investment, the suggestion that a short-term profit might be made in guessing what “the average opinion of the average opinion” might be has been deplored. There has been a correlative willingness to sustain short-term fluctuations, even when adverse, in order to make the longer commitment in what was felt to be—usually after careful study—the more promising prospect.

In fact, the shrewdest investors and the best paid professionals are men who operate on the assumption that the crowd is usually wrong. Whenever they find their views coincide with the popular opinion they become uneasy.

AN INTEGRATED TEXT

The Keynesian analysis of the motives and procedures of the financial community are all part of an integrated text. Their purpose is to indict the competence of the financial professional, undermine public confidence in financial institutions, and prepare the way for governmental assumption of all those vital functions now performed by investment banking, security markets, and the private management of capital.

In addition to the charge that investment decisions are generally capricious and short-sighted, that they depend on irrational moods, on “animal spirits” and not on “careful calculation,” there is added the further charge that long-term social interest and private profit rarely coincide; that in any event it is only private profit and not the social interest which actuates the businessman and the financier.

This particular current of thought was already forming in the mind of Keynes at least ten years before he wrote The General Theory. In 1926 he brought out a short volume entitled Laissez-Faire and Communism under the imprint of the New Republic. In a literary sense it shows Keynes at his best, for it is a superb example of writing in the field of philosophic economics. It is also a trenchant assault on individualism and laissez-faire.

Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. 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 and those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.

THE SOLUTION

The foregoing appears at the beginning of a chapter on the future organization of society. More clearly and succinctly than in his later works, in which he too frequently involves himself in fancy reasoning and incomprehensible abstractions, he tells us what our trouble is and what we ought to do about it.

Many of the greatest economic evils of our time are the fruits of risk, uncertainty and ignorance. It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance, and also because for the same reason big business is often a lottery, that great inequalities of wealth come about; and these same factors are also the cause of Unemployment of Labour, or the disappointment of reasonable business expectations, and of the impairment of efficiency and production. Yet the cure lies outside the operations of individuals; it may even be to the interest of individuals to aggravate the disease. I believe that 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 partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know.

My second example relates to Savings and Investment. I believe that some co-ordinated act of intelligent judgment is required as to the scale on which it is desirable that the community as a whole should save, the scale on which these savings should go abroad in the form of foreign investments, and whether the present organization of the investment market distributes savings along the most nationally productive channels. I do not think that these matters should be left entirely to the chances of private judgment and private profits, as they are at present.

My third example concerns Population. The time has already come when each country needs a considered national policy about what size of Population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. 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.

THE PROFIT MOTIVE

With a surface appearance of moderation and sweet detachment, Keynesian economics aims the poniard of its cunning casuistry at the vitals of private enterprise. The general context of his material, together with innumerable specific statements, leave with the reader the strong impression that business leadership is incompetent, ignorant, selfish, and—most damning of all—unenlightened. After re-reading the pertinent passages in The General Theory and in Laissez-Faire and Communism, there remains the conviction that profits and the profit motive are not only occasionally incompatible with the public welfare but that this is generally the case. The business world, according to Keynes, is a jungle without the salutary discipline of that higher regard for the public interest which neo-liberals consider imperative. In this jungle each businessman is a wolf prepared to destroy his competitor, to ravish his customer, to expose his community to calamity.

As in almost every other position taken by Keynes during the generation before his death, he had neglected to consult the record. The strong inference that private profit and the public interest are in conflict, if true, could readily be supported by particular example and general statistics. Keynes carefully avoids the deductive, judicial approach. Let’s look at a typical example of private profit.

During 1948 the General Motors Corporation turned out, among other products, 1,634,000 passenger cars and 508,000 trucks. These were badly needed by the American economy and by scores of other countries striving for recovery. Was this contrary to public interest?

In producing these vehicles the, company provided jobs for 380,000 workers at peak peacetime wage levels. Was this incompatible with the general welfare?

For doing this the company earned $801,418,000 in gross profits. Out of these profits $360,970,000 or 45 per cent went to the government in taxes, $210, 774, 000 or 26.3 per cent went to the owners of the company in the form of dividends, and $229,674,000 or 28.7 per cent was reinvested in the business to improve plant, to underwrite research and experimentation for the purpose of getting a better product at a lower cost. Was this unenlightened?

THE ARROGANCE OF THE PLANNER

This is the sensible, the fair approcah to an analysis of profits. To the ideological prosecutor who knows beforehand that business is guilty, such an examination of the evidence has no appeal. If an inductive study of profit evidence fails to sustain the charge of conflict with social interest, on the criteria here suggested, what then do Keynes and the legion of sycophantic satellites who gather about his intellectual star mean by their indictment of profit?

They mean that if the major lines of business policy could be laid down by the ivory tower torchbearers of a new Utopia the nation would be much better off. If all the important decisions affecting the conduct of business could be made by men free from those acquisitive lusts which quench the pure zeal for social welfare, we could readily eliminate unemployment, the violent spasms of the business cycle, and lift human happiness several notches toward the terrestrial peak of mundane paradise to which all bleeding hearts aspire.

What Keynes really means is that he and his company of zealots could manage our affairs through national planning to much better effect than they are in fact being managed by private parties who are unable to work in concert, whose judgments moreover are corrupted by the fatal poison of self-interest.

These fellows are convinced that the risks which private management must always take in planning for the future, on the limited scale necessary within their own field of company responsibility—risks which sometimes go awry—would invariably be sound and successful if taken on a national scale by men imbued with a unique concern for the general welfare.

They mean that the information, which is at present sometimes inadequate and frequently leads private judgment astray, would be adequate under a scheme of national planning; that, in contrast with private decisions, national decisions by a public spirited departmental head would invariably be correct.

They mean in short that planning on a national scale by official intelligence could do a much better job in terms of a stable economy and rising living standards than planning on a local scale by men whose zeal is limited by the harsh requirements of double entry accounting. That is what they mean when they speak of the incompatibility of private profit and social interest.

AN APPLICANT WITHOUT REFERENCES

Before asking for such a revolutionary transfer of power from those who have acquired it, under the rugged rules of private enterprise and open competition, it would seem that some evidence of competence and success should be submitted by the aspirants for this power.

In this the proponents of Keynesian prosperity are understandably coy. In Russia the corrupting lust of private profit has been thoroughly exorcized. During the thirty years in which this has taken place, personal liberty has vanished and living standards have declined at least 40 per cent. The Russian worker must labor for 1 hour for a heavy loaf of bread and 104 hours for a pair of shoes. The American gets the same loaf of bread for hour of effort and the pair of shoes for 7 hours of effort.

England under a Labor Government has experienced a succession of crises since the end of the war. The Empire is disintegrating. Private savings have practically ceased. Britain has been subsisting on the fat accumulated by her rugged individualists during a century in which they were spurred on by the lure of private reward. On such fat, and on aid from her imperial offspring.

It is not to be inferred that the distress of England and the stark reaction in Russia are due to national planning alone. Yet when Keynes says: “Experience does not show that individuals, when they make up a social unit, are always less clear sighted than when they act separately,” one may reply: “No, but the evidence is persuasive.”

Personally Keynes presents a series of paradoxes which cannot help but confuse not only his opponents, but, even more so, his own followers. Here is a man who once made what we regard as one of the best statements which we have ever seen in defense of the gold standard. Yet he proceeded to develop a system of managed currency the end result of which must inevitably be the demonetization of gold.

In a single page of his General Theory he exposes the fallacy and futility of a mathematical presentation of economic theory. Yet in this same volume he resorts to mathematical symbols and procedures which bar comprehension for all but the specially trained professional.

Finally, after several volumes of brilliant but specious reasoning, designed apparently to undermine the basis of a free competitive society, he ends in the “Concluding Notes” of The General Theory with this comment on “the traditional advantages of individualism.”

THE “ADVANTAGES OF INDIVIDUALISM”

Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency—the advantages of decentralization and of the play of self-interest. The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard for the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.