Transcript:Theory of Employment edited

Listening to David Stockman last week was welcome diversion, the Tasmanian devil at the Chamber of Commerce ball.

Some of the things I let go by without too much annoyance. Like his hysteria about money printing. True the Fed has ballooned its balance sheet in order to create investment that is not occurring and to bid up stock prices and give the casino players cheap chips and inflate the next bubble. Well, maybe I do get annoyed. But that is not money you and I ever see. As Stockman says, the money is dumped into the canyons of Wall Street and not coming out, setting up another bubble for us to clean up, for the benefit of the well-to-do, because we need them. As we know from our Minsky, real money is produced and destroyed by the lending process. That is lending to real people, who pay wages, not to the trading floors where they lever up trades and inflate the value of financial assets. Anyway, there is something pleasant about a David Stockman shaking his fist under Ben Bernanke's nose. Maybe a little spittle sticks to his beard.

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But one thing we could not let pass, as Stockman called everything that had to with government deficits and tax give-aways and targeted concessions Keynesian. David Stockman has never read Keynes. He does not understand Keynes. He should be banned from using the man's name. This is completely evident when he dubs Lawrence Summers as the vicar of Keynesianism. Give-aways to corporations and tax cuts for the wealthy are results of government capture and exploitation by those social forces, not the policy preference of any Keynesian who has read Keynes.

Now I sound like every other self-assured pundit who has the goods from the on high. But it bugs me.

So, today, we will let Lord Keynes speak for himself, or nearly so, as we have edited a bit of the General Theory for the more modern ear. Not distorted, a bit abridged, edited.

The complete General Theory of Employment in four minutes, with an afterward on the cluelessness of the orthodoxy, applicable as much today as it was in 1936. Embedded in the same chapter.

This is from Chapter 3: The Principle of Effective Demand

II

...

The outline of our theory can be expressed as follows. When employment increases, aggregate real income increases. When aggregate real income increases, aggregate consumption also increases, but not by so much as income. Some is saved. Hence, employers would make a loss if the whole of the increased employment were to be devoted to consumption goods. To justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the consumption spending is. Unless there is this amount of investment, the entrepreneurs will not offer the given amount of employment. It follows that, given what we shall call the community’s propensity to consume, the equilibrium level of employment (i.e., the level at which there is no inducement for employers either to expand or to contract employment) will depend on the amount of current investment. The amount of current investment will depend, in turn, on the inducement to invest. The inducement to invest will depend on the relation between the projected output of the capital versus the complex of rates of interest on loans of various maturities and risks.

Thus, given the propensity to consume and the rate of new investment, there will be only one level of employment consistent with equilibrium; since any other level will lead to inequality between the aggregate supply price of output and its aggregate demand price. ... there is no reason in general to expect this level to be equal to full employment. The effective demand associated with full employment is a special case, arrived at when the propensity to consume and the inducement to invest stand in balance. ... when, by accident or design, current investment provides an amount of demand just equal to the excess of what the community will choose to spend on consumption when it is fully employed.

...

This is an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will constrict production in spite of the fact that the marginal product of labor still exceeds in value the marginal disutility of employment. [That is, people will want to work at the prevailing wage, but cannot find work.]

Moreover, the richer the community, the wider the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. 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 to balance the saving of its wealthier members with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then it will reduce its actual output, until, in spite of its potential wealth, it has become so poor that the surplus over its consumption has shrunk to correspond to the weaker inducement to invest.

But worse still. Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls sufficiently ...

...



[The Ricardian cluelessness with regard to aggregate demand... The same as today]

The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics;... and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world, but controversy ceased. The other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to the suitability of the doctrine to the environment into which it was projected. It reached conclusions quite different from what the ordinary uninstructed person would expect, it is true, but I suppose this simply added to its intellectual prestige. Translated into practice, its teaching was austere and often unpalatable, and this may have lent it virtue. It was adapted to carry a vast and consistent logical superstructure; this gave it beauty. It was commended to authority because it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, thus any attempts to change such things were likely to do more harm than good. And finally, it justified the free activities of the individual capitalist, and so attracted to it the support of the dominant social forces behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists, its signal failure for purposes of scientific prediction greatly impaired the prestige of its practitioners. Professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation -- a discrepancy which the ordinary man has not failed to observe. The result was a growing unwillingness to accord to economists that measure of respect given to other groups of scientists whose theoretical results are confirmed by observation.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, having left this world to cultivate their gardens, suggest the best of all possible worlds will arrive if we will let well enough alone. There would obviously be a natural movement toward optimum employment of labor and resources in a Society which functioned in the manner of the Ricardian classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave, but to assume that it actually does so is to assume our difficulties away.

And so it is today. With the primary economic theory, the one that has carried the day, saying, just get the government out of the way and the private markets will produce the optimal outcome. Very easy to say from the chairs of the elite. Much harder, for being more aware of the actual outcomes, from the position of the fractured middle class.

But let's go back.

This is an edited, but complete, rendition of Keynes' summary of the General Theory of Employment, Chapter 3, parts II and III.

If I may point out the centrality of investment and then the description of how wealthy societies may find profitable investment less and less available, partly because the capital stock has built up and partly because the wealthier the society, the less out of each additional dollar of income is consumed, so the less is used to employ people in consumption goods and the greater is the need for investment.

requote:

....

Moreover, the richer the community, the wider the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. 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 to balance the saving of its wealthier members with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then it will reduce its actual output, until, in spite of its potential wealth, it has become so poor that the surplus over its consumption has shrunk to correspond to the weaker inducement to invest.

But worse still. Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls sufficiently,

....

This may be another seed in the growing of Minsky's financing structures, from hedge to speculation to Ponzi. As I recall, Minsky described the impetus of the reach for yield as the bankers' confidence or competition in the era of financial stability. But it may as well be as Keynes says here, the available investment is less attractive. Then we have the push to make it ever more attractive, with low interest rates and tax concessions.

But imagine for a moment that it also leads to the bifurcation of the society, and the savings of the wealthy do not deteriorate with the impoverishment of the rest, until at last, the divergence becomes overwhelming and the economy collapses.

Also imagine for a moment that there is government, which does not need inducement to invest as profit, but may invest just as a function of serving the society and by the way full employment. This investment may simply be taxed away from the wealthy, or it may be borrowed away, but so long as there is the covering of the gap, full employment will result. From this analysis, one can speculate that indeed, taxation would be better, as it would reduce the savings gap among the wealthy. As people are employed, the higher multipliers of the middle class create a virtuous feedback.

BUT, of course, consumer goods are likely to be bid up in value and the dreaded INFLATION monster loosed for the reactionaries to rally behind.

That aside, Keynes was patently aware that government could also save, invest and spend. He later advocated the socialization of investment, so that the race to the lowest possible interest rate or biggest possible tax cut for investment could be dispensed with, targeted investment done, and full employment accomplished.

The fact that government invests in public goods -- aside from the occasional Big League ballpark -- should not be such an obstacle to understanding. These investments, after all, pay off on a grand scale. The private sector would love to have them if they could only charge everybody who benefited. But tolling every road, collecting a fee from every employer, employee, community and family that benefits from eduction; reaching into the future to collect the benefits of a livable planet. These are beyond the capacity of even the most sophisticated entrepreneur. The fact that we can tax -- a universal fee collected from all -- is an advantage when all benefit. It is too bad taxes have become not ways we finance things we need, but an embarrassment, the fangs of a vampire government.

Next time, we'll hear from Robert Pollin, 2013, and Michal Kalecki, 1943, about why it may be that getting the economy going for the benefit of all does not get support from the capitalists.

Even though they would do better, too.