Power & Market

While enjoying some Saturday afternoon college football, I was treated to about a dozen reruns of a commercial produced by the Department of Veteran Affairs (VA). Let me paint the scene for you.

A lone figure rests upon his pickup truck beside a lone oak upon a ridge in an otherwise rolling green prairie. The sky is a canvas of orange and purple as the sun sets on a peaceful day in the foothills of rural America. Suddenly, the imagery fades to a small silver case: a gun case for a pistol. Notably unloaded, the hands of the otherwise off-screen figure emerge to affix a lock to his sidearm, as even the case and separated magazine weren’t enough to keep this soldier safe.

But safe from what? The voice-over then chimes in:

A simple lock puts space between the thought and the trigger. Learn how securing your firearms can prevent suicide.

Look, I get it. The message they’re trying to convey is most suicides are an act of impulse. A veteran’s life may be saved if a little patience and deliberation is introduced into the equation. But it’s really hard to receive this advert as anything but a hollow gesture when the prescription provided by the VA is a gun lock, without an ounce of reflection on the root cause of the crisis.

According to estimates, a little over seven thousand soldiers have died during military operations since the start of the “war on terror” following the attacks of September 11. Meanwhile, suicides among both active duty personnel and veterans of those conflicts have exploded to over thirty thousand, or more than four times the number lost in combat. While these numbers are sobering, and possibly even err on the conservative side, the real focus should be on what is driving the dilemma and how best to put an end to it. With the war on terror now exceeding two decades, experts’ reasoning for the cause of the veteran suicide epidemic has evolved just as the wars themselves have evolved over those twenty-plus years. The most avid participants in regime apologism blame the diminishing public support for the terror wars for the rise in veteran mental health issues. While it’s true that Americans’ appetites for forever war are reaching all-time lows, as evidenced by the support for withdrawal from Afghanistan, no matter how mismanaged, this explanation lacks an ounce of self-awareness for how long and costly the wars have been. Others have put forth that a rash of sexual assaults among personnel and a culture of “toxic masculinity” has led to increased mental health issues among service members. Nearly one in four servicewomen have reported cases of sexual assault, an embarrassment and a disgrace to the institution. The “boys club” may be to blame in equal parts for betraying its sisters in arms and for convincing its brothers that they are weak to feel ill at ease. However, the weakest and most deceitful reason suggested may be that veterans are at severe risk of suicide because of their access to firearms. The rate of suicidal persons electing to turn to a firearm to commit the act has been used as fodder by gun prohibition advocates to attack the Second Amendment. This tactic not only belies an agenda totally divorced from concern for military veterans, but it also implies veterans are among the least qualified to possess firearms for personal use rather than among the most qualified.

There’s another explanation worth considering, and it was perfectly illustrated right as the American occupation of Afghanistan was coming to a close. In an attempt to straddle the fence between bringing the war in Afghanistan to a long-overdue end and appeasing hawks who consider “withdrawal” to be synonymous with “surrender,” President Joe Biden signed off on a drone strike against an alleged ISIS-K target. The unfortunate victims of said drone missile were not militants, but rather one Zamarai Ahmadi and his children, as even US military officials have openly admitted. Despite this admittance, no disciplinary action is expected, as senior officials continue to “stand by the intel leading to the strike.” This is quite a callous and remorseless defense of “the intel” that ultimately concluded that Ahmadi, an aid worker who helped Americans during the occupation, deserved to die for the crime of loading his white sedan with jugs of water for his family. This incident is merely a microcosm of the role unmanned combat aerial vehicles (UCAV) have played in the war on terror. According to a recent report, upwards of 90 percent of the people killed in drone strikes in Afghanistan, Pakistan, Yemen, and Somalia were “not the intended targets.” In other words, nearly nine out of ten people executed by the American government were likely innocent civilians. Service members returning home are being confronted with reports of American atrocities and war crimes; actions that they may have been party to. For some, the guilt of being responsible for creating terror abroad when they believed themselves to be in a war to end terror is overwhelming.

It’s certainly a welcome change to acknowledge the suicide epidemic among American service members. But acknowledgement of the problem without any meaningful introspection on the cause signals that the US government is more concerned with its PR problem than with stemming the creation of more psychologically damaged veterans. There may be several reasonable explanations for the trauma American troops are experiencing, but no list is complete without a willingness to confront the damage that US forces have caused, as well as the damage they have received. Regardless of your position on the cause of the crisis, or of America’s foreign policy generally, it is disrespectful and offensive to the nation’s veterans to recommend that their best foot forward against depression is to secure their firearms.

As reported by Reuters on Wednesday:

Yes, inflation is back, and you should probably be relieved if not outright happy.

It seems strange to start a news article with the above sentence. When they talk of inflation, they’re talking about price increases as measured through various inflation calculations. For a news source, supposedly unbiased, they seem unaware of or purposely ignore the loss of dollar purchasing power and currency debasement. What they’re celebrating is an increase in the cost of living for everyone, hurting those at the lowest level of the income bracket the most.

As one of the most trusted news sources in the world explains:

That is the verdict of the world's top central banks, who hope they have hit the sweetspot where healthy economies see prices gently rising—but not spiralling out of control.

Notice the use of euphemism or vague term sweet spot that the marriage between mainstream media and mainstream economics uses to explain concepts that cannot be conveyed. It happens frequently:

Backed by vast government spending, central bankers unleashed unprecedented monetary firepower in recent years to get this result. Indeed, anything less would suggest the biggest experiment in central banking in the modern era had failed. 

A large part of this government spending was thanks to central banks, while the monetary firepower just means expansion of the money supply, also called inflation, coupled with historically low interest rates. The word experiment is often used; this is unfortunate because those in charge of this experiment are among the richest and most powerful people in the world. It’s easy for them to experiment because they will never suffer the consequences of failure, unlike the rest of society, who do.

The possibility of repeating 1970s stagflation was dismissed as quickly as it was mentioned:

The current inflation rise is not without risk, of course, but comparisons with 1970s style stagflation—a period of high inflation and unemployment combined with little to no growth—appear unfounded.

Despite noting that:

On first look, current inflation rates do indeed look troubling. Price growth is already over 5% in the United States … well above policy targets and at levels not seen in well over a decade.

But according to the author the price increases we’re seeing are only temporary and due to the reopening of the economy, acceptable because an expert from the European Central Banks is quoted as having said:

The current inflationary spike can be compared to a sneeze: the economy’s reaction to dust being kicked up in the wake of the pandemic and the ensuing recovery.

Over half a dozen other central bankers are said to be relieved that "price pressures are finally building and policy normalisation, a taboo subject for years, is back on the agenda," while one policymaker who asked to be left nameless said that "[i]f inflation doesn't rise now, it never will…. These are the perfect conditions, this is what we worked for."

For all the meetings, planning, review of data, and deliberation, at last central bankers of the world are rejoicing over what they have done with our money. Debt levels, money supply, interest rates, and prices are in territories some thought were unimaginable. The theory or model behind any of this is still not explained by our planners.

Where some see victory, others see a time bomb. It would have been nice if Reuters had mentioned some of the problems associated with inflationism as economic policy. But who wants to put a damper on things? For now, it’s a celebration of central planners and how they brought their long sought after inflation back to the West, with the hope that the years that follow will similarly go according to plan, lest they’re forced to intervene again.

The famous French socialist economist Thomas Piketty thinks we aren't  moving toward equality fast enough.  In his Long Live Socialism!, he says this to illustrate how much work remains to be done: "The poorest 50% of the world's population is still the poorest 50% of the world's population" (p.13 of the Amazon Kindle edition).

By popular thinking, the key driver of economic growth is increases in the total demand for goods and services. It is also held that the overall economy’s output increases by a multiple of the change in expenditure by government, consumers and businesses. The popularizer of this way of thinking John Maynard Keynes, wrote,

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.1

An example will illustrate how an initial spending increase raises the overall output by a multiple of this increase. Let us assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also, let us assume that consumers have increased their expenditure by $100 million. Because of this, retailers' revenue rises by $100 million. Retailers in response to the increase in their income consume 90 percent of the $100 million, i.e., they raise expenditure on goods and services by $90 million. The recipients of these $90 million in turn spend 90 percent of the $90 million, i.e., $81 million. Then the recipients of the $81 million spend 90 percent of this sum, which is $72.9 million and so on. Note that the key in this way of thinking is that expenditure by one person becomes the income of another person.

At each stage in the spending chain, people spend 90 percent of the additional income they receive. This process eventually ends, so it is held, with total output higher by $1 billion (10*$100 million) than it was before consumers had increased their initial expenditure by $100 million.

Observe that the more that is being spent from each dollar, the greater the multiplier is and therefore the impact of the initial spending on overall output will be larger. For instance, if people change their habits and spend 95 percent from each dollar the multiplier will become 20. Conversely, if they decide to spend only 80 percent and save 20 percent then the multiplier will be 5. All this means that the less that is being saved the larger is the impact of an increase in overall demand on overall output. Note that on this way of thinking an increase in savings weakens the pace of economic activity. Following this way of thinking it is not surprising that most economists today are of the view that by means of fiscal and monetary stimulus it is possible to prevent the US economy falling into a recession.

Is the multiplier a real thing?

Are increases in savings bad for the economy, as the multiplier model indicates? Take for instance Bob the farmer who has produced twenty tomatoes and consumes five tomatoes. What is left at his disposal is fifteen saved tomatoes, which are his savings. With the help of the saved fifteen tomatoes, Bob can now secure various other goods. For instance, he secures one loaf of bread from John the baker by paying for the loaf of bread with five tomatoes. Bob also buys a pair of shoes from Paul the shoemaker by paying for the shoes with ten tomatoes. Note that savings at his disposal limit the amount of consumer goods that Bob can secure for himself. Bob’s purchasing power is constrained by the amount of savings i.e. tomatoes at his disposal, all other things being equal. Now, if John the baker produced ten loaves of bread and consumed two loaves his savings are eight loaves of bread. Equally, if out of the production of two pair of shoes Paul uses one pair for himself then his saving is one pair of shoes.

When Bob the farmer exercises his demand for one loaf of bread and one pair of shoes he is transferring five tomatoes to John the baker and ten tomatoes to Paul the shoemaker. Bob's saved tomatoes maintain and enhance the life and wellbeing of the baker and the shoemaker. Likewise, the saved loaf of bread and the saved pair of shoes maintain the life and wellbeing of Bob the farmer. Note that it is saved final consumer goods, which sustain the baker, the farmer and the shoemaker, that makes it possible to keep the flow of production going. Now, the owners of final consumer goods, rather than exchanging them for other consumer goods, could decide to use them to secure better tools and machinery. With better tools and machinery, a greater output and a better quality of consumer goods can be produced some time in the future.

Note that by exchanging a portion of their saved consumer goods for tools and machinery the owners of consumer goods are in fact transferring their savings to individuals that specialize in making these tools and machinery. Savings sustain these individuals whilst they are busy making these tools and machinery. Once these tools and machinery are built this permits an increase in the production of consumer goods. As the flow of production expands this permits more savings all other things being equal, which in turn permits a further increase in the production of tools and machinery. This in turn makes it possible to lift further the production of consumer goods. So contrary to popular thinking, more savings actually expands and not contracts the production flow of consumer goods.

Can an increase in the demand for consumer goods lead to an increase in the overall output by the multiple of the increase in demand? To be able to accommodate the increase in his demand for goods the baker must have means of payment i.e. bread to pay for goods and services that he desires. Note again that the baker secures five tomatoes by paying for them with a loaf of bread. Likewise, the shoemaker supports his demand for ten tomatoes with a pair of shoes. The tomato farmer supports his demand for bread and shoes with his saved fifteen tomatoes. The baker’s increase in the production of bread permits him to increase demand for other goods. In this sense, the increase in the production of goods gives rise to demand for goods. People are engaged in production in order to be able to exercise demand for goods to maintain their life and wellbeing.

Note that what enables the expansion in the supply of final consumer goods is the increase in capital goods or tools and machinery. Savings in turn enables the increase in tools and machinery. We can thus infer that the increase in consumption must be in line with the increase in production. From this, we can also deduce that consumption does not cause the production to increase by a multiple of the increase in consumption. The increase in production is in accordance with what the pool of savings permits and is not constrained by consumers’ demand as such. Production cannot expand without the support from the pool of savings i.e. something cannot emerge out of nothing.

Let us examine the effect of an increase in the government's demand on an economy's overall output. In an economy, which is comprised of a baker, a shoemaker and a tomato grower, another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force. Can such demand give rise to more output as the popular thinking has it? On the contrary, it will impoverish the producers. The baker, the shoemaker, and the farmer will be forced to part with their product in an exchange for nothing and this in turn will weaken the flow of production of final consumer goods. Not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general. According to Mises,

[T]here is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

Murray Rothbard in his Man, Economy, and State discussed the absurdity of the Keynesian multiplier.

The theory of the “investment multiplier” runs somewhat as follows:

Social Income = Consumption + Investment

Consumption is a stable function of income, as revealed by statistical correlation, etc. Let us say, for the sake of simplicity, that

Consumption will always be .80 (Income).

In that case, Income = .80 (Income) + Investment.

.20 (Income) = Investment;

 or Income = 5 (Investment).

The “5” is the “investment multiplier.” It is then obvious that all we need to increase social money income by a desired amount is to increase investment by 1/5 of that amount; and the multiplier magic will do the rest….

The following is offered as a far more potent “multiplier,” on Keynesian grounds even more potent and effective than the investment multiplier, and on Keynesian grounds there can be no objection to it. It is a reductio ad absurdum, but it is not simply a parody, for it is in keeping with the Keynesian method.

Social Income = Income of (insert name of any person, say the reader) + Income of everyone else. Let us use symbols:

Social income = Y

Income of the Reader = R

Income of everyone else = V

Let us say the equation arrived at is: V = .99999 Y

Then, Y = .99999 Y + R

.00001 Y = R

Y = 100,000 R

This is the reader’s own personal multiplier, a far more powerful one than the investment multiplier. To increase social income and thereby cure depression and unemployment, it is only necessary for the government to print a certain number of dollars and give them to the reader of these lines. The reader’s spending will prime the pump of a 100,000-fold increase in the national income.

Does the introduction of money make the multiplier possible?

The introduction of money does not alter our conclusions. Money only helps to facilitate trade among producers— it does not generate any real stuff. Paraphrasing Jean Baptiste Say Mises wrote that,

Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.2

When an individual increases his spending by $100 all it means is that he has lowered his demand for money by $100. The seller of goods has now acquired $100, which he can employ when deemed necessary. We can also say that the seller's demand for money has increased by $100. Likewise, if the seller will now spend 90 percent of $100 all that we will have here is a situation wherein his demand for money has fallen by $90 whilst somebody else's demand for money has now risen by $90. In addition, all other things being equal, if individuals have increased their expenditure on some goods then they will be forced to spend less on other goods. This means that the overall spending in an economy remains unchanged. Only if the amount of money in the economy increases, all other things being equal, spending in money terms will follow suit. However, also in this case the increase is not because of some multiplier but because of the increase in money supply. The increase in monetary expenditure because of an increase in money supply cannot however produce the expansion in real output as the popular story has it.

All that it will generate is a reshuffling of the existent pool of savings. It will enrich the early receivers of the new money at the expense of last receivers or no receivers at all. Obviously then, a loose monetary policy which is aimed at boosting consumers' demand cannot boost real output by a multiple of the initial increase in consumer demand. Not only will loose money policy not lift production, but on the contrary it will impoverish wealth generators in exactly the same way as the enforcer in our previous example.

Summary and Conclusion

John Maynard Keynes's writings remain as influential today as they were eighty-five years ago. His ideas remain the driving force of economic policy makers at the Fed and Government institutions. These ideas permeate the thinking and writings of the most influential economists on Wall Street and in academia. The heart of the Keynesian philosophy is that what drives the economy is demand for goods. Economic recessions are predominantly the result of insufficient demand. In the Keynesian framework, an increase in demand not only lifts overall output but that output increases by a multiple of the initial increase in demand. Within this framework, something can be created out of nothing.

• 1. J.M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1964), p. 129.
• 2. Ludwig von Mises, "Lord Keynes and Say's Law," in The Critics of Keynesian Economics, edited by Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), p. 316.