Transcript: 489 A dispute with Keynes over Keynesianism

Today we’re going to explore the proposition that Keynes and the Keynesians have missed a basic point. Or have not noticed the evolution of the economy. I am not talking about NeoKeynesians – classical economists in sheep’s clothing – but the great man himself, his most important interpreter Hyman Minsky, and such able economists of the present day as Joseph Stiglitz. The point they have missed or failed to foresee is the centrality of public goods as investment.

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When Keynes and Minsky talk about socializing investment, at least as I read it, they are talking about the problem of full employment. Basically, the production of consumption goods for everybody does not employ everyone who needs a job, so the gap is filled by government spending or private investment, or there is unemployment. Sufficient private investment is not forthcoming, because it is not profitable. Government can sponsor investment, but does not need to own the investment it sponsors, it just needs to build and employ people.

Not to be out-wonked, here, from the General Theory, page 377,

Keynes says that his theory,

“The foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will cooperate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community.

Suspending the quote for a breath, and to note Minsky’s observation that

THE GENERAL THEORY was a product of the red thirties. With the Great Depression making the weaknesses of capitalism self-evident, thorough-going socialism was very prominent on the agenda of possible resolutions of the crisis. Keynes’ was a contrast to this socialism,

back to Keynes

It is not the ownership of the instruments of production which is important for the State to assume. If the state is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialism can be introduced gradually and without a break in the general traditions of society.

Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own from this point onwards. If we suppose the volume of output to be given, i.e., to be determined by forces outside the classical scheme of thought, then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.

…

To put the point concretely, I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralizing decisions. When 9,000,000 men are employed out of 10,0000,000 willing and able to work, there is no evidence that the labor of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.”

We like to formulate this as macro is demand side, micro is supply side.
HYMAN MINSKY (CONT.) in his best book, John Maynard Keynes, (not a biography) interprets P. 157

There is an apparent inconsistency between Keynes’s belief that it is necessary to socialize investment to achieve full employment and the view that the market does an acceptable job of allocating resources so that private ownership and control can be retained. In part this inconsistency can be resolved if Keynes’s views are put into the context of the time they were stated and the then-current discussion. … in the 1930s, with the world depression raging, socialism was very much on the agenda. At the same time, civilized men were outraged by Stalin’s Russia; questions as to the inherent totalitarian bias of full-blown socialism were being debated. In the early 1930s economists with socialist sympathies were writing about market socialism and various mixed systems in which the towering heights of the economy were socialized while the rest of the economy remained private. Such market or towering-heights socialisms

However, the socialist path was not taken as the Keynesian lessons were assimilated and applied in the postwar period, even in countries such as Britain, which had substantial periods of rule by nominally socialist parties. The lesson that has been accepted, in part because wartime policy succeeded in establishing full employment , is that a large government sector, in part financed by deficits, can achieve and sustain an approximation to full employment. The argument was developed and accepted that there is no need to socialize ownership of industry. The ownership of productive resources can be “safely” left in private hands, as long as government, through its budget, is big enough. In the programs that were developed, the government expenditures necessary to sustain full employment took the form of claims upon productive capacity – building highways, paying for education and hospitals, arms, space adventures, etc. – and the form of transfer payments and subsidized consumption – social security, welfare, food stamps, Medicare, etc.

This big government sector implied a large tax bite, so that the shape of tax schedules became a weapon for subsidizing (thus expanding) or taxing (thus constraining) various activities. As the gap between consumption at full employment, even allowing for transfer schemes, and full-employment output must be filled with either government spending that uses resources or private investment if full employment is to be sustained, measures to induce investment by increasing profitability have been insinuated into the tax and spending systems. Thus a high-profit, high-investment economy has been created in which tax and government-spending policies are evaluated on the basis of their impact upon private investment rather than on the basis of their impact upon consumption or equity with respect to income distribution. Full-employment policy has taken on a conservative coloration; what has been achieved might properly be called socialism for the rich.

However, as the tax schemes to induce investment bias income distribution in favor of the saving sectors [read the rich], a treadmill process has developed in which ever-greater investment and ever-greater stimuli in the form of profits and subsidies to investment are needed to sustain full employment.

Thus, the way the economy has developed is in marked contrast to the idea Keynes advocated, which was that if investment is inadequate to achieve full employment, then it is not desirable to induce a more rapid pace of investment by providing direct stimulants to private investment, but rather “measures for the redistribution of income in a way likely to raise the propensity to consume” (GT, p.373) should be undertaken. In Keynes’s view such consumption-oriented measures may in fact “prove positively favorable to the growth of capital” (GT, p.373); government intervention, outside the socialized investment sector, is to be mainly directed at raising consumption propensities, primarily by policies that aim at achieving a more equitable distribution of income.”

Those observations from Hyman Minsky


So what is our complaint with all of this? It is that public goods have the character of investment, and this is not acknowledged, nor taken advantage of.

And secondly, I guess, that with the collapse of the housing bubble’s leaving behind a housing stock inappropriate to the needs and incomes of the population, with a transportation system gridlocked and crumbling side by side with an energy industry addicted to climate killing greenhouse gases, and with the global imbalances ever more apparent, there is ample evidence – contrary to Keynes in 1934 – that the existing system seriously misemploys the factors of production.

Public goods do not have the character of private consumption goods. They are not depletable and they are not excludable. A private good has to be depletable, or there is no reason to keep producing it. It has to be excludable or there is no way to target it to the customer. Attempting to make public goods like health care excludable is done only so the private sector can profit. It is neither natural nor efficient. And it only illustrates further the similarities to investment goods.

In the excerpts from Keynes and Minsky, government spending and private investment both serve the purpose of filling the gap between full employment and that employment provided in the private market by consumption goods production.

Again, it can hardly be denied that the expansion of government after the Second World War corresponded with an explosion of prosperity, such as might be expected from big investment. Minsky here characterizes government expenditures as involving claims on productive capacity – highways, education, hospitals, arms, space adventures – without noting that these (aside from military spending) are additions to productive capacity.
The idea of Keynesian stimulus has come down to us here in the second decade of the 21st Century as the idea of stimulating consumption, and this is indeed part of it. The element of equalizing incomes for the sake of raising the propensity to consume is not widely accepted anywhere, except perhaps here at Demand Side. Employment for employment’s sake is another, more liberal part. But our point, public goods as investment is absent. Not even thought of by the Right, which sees nothing but wasteful bureaucracy in police and fire protection, in courts and roads and education and public utilities and the institutions of governance.

Consequently the public goods of social order, education and infrastructure are underfunded. Instead tax breaks for private investment – as Minsky said here – distort both the tax code and the things we build.

Profit in the private market sense involves creation of a stream of value that is tapped to pay for the cost of the investment, a cost adjusted by various government subsidies. But public goods are the basis for growth and stability. They are not a ragbag of charity and waste. Nothing is more apparent than this when you confront the reality of climate change. The value of a habitable planet. The savings from not having to adapt to and mitigate the destruction to come. The physical and social welfare of billions. Immense value. These values are invisible to market-based investment.

Instead, this value should be the source of financing for investment on a massive scale through the public sector.

This is a very short step. A painfully short step. It is made long only by the control of the government by the private marketeers and by the deficiencies of accounting which cannot see resource depletion or the destruction of natural systems or – as in the health arena – value not according to well-being or outcomes, but according to inputs.

Compare the tremendous debt incurred to build McMansions and fill them with outsized appliances to (A) the value of these investments now, which is deteriorating, or to (B) the value of an investment of one-tenth that amount in retrofitting buildings to conserve energy.

We have had a global financial crisis, a recession that doesn’t, to us, appear to have ended (or if it has only because of a technicality of definition), and deepening climate deterioration. We have had an incredible intervention on behalf of banks, including a heroic but ultimately unsuccessful effort by the Fed to keep housing prices from falling out from under mortgage debt.

Retrofitting buildings on this scale produces jobs. The debt incurred can be paid back from energy savings in seven to ten years, that’s conservative for most buildings.

And the example follows to infrastructure and education. By maintaining current roads and bridges and rail, we avoid future costs. Beyond a certain point, crumbling road surfaces cannot be restored, they have to be rebuilt. We avoid immense costs by timely maintenance. Or education. Economists have puzzled at the lag between an invention, a technological breakthrough, and its full impact on the economy. Electricity, printed circuits, the Internet. Decades pass before they are incorporated in the fullest sense. Obviously it is education and training.

And the germ of every technological advance sprouted from the soil of education. To say education is not an investment that pays off is purposely obtuse. Consider the value to companies of an educated work force or an educated and presumably more prosperous customer base.

So, I don’t get it. Actually I do get it.

Public investment is perceived to be a subtraction from somebody’s wallet, either in taxes or in lost profits. But taxes are just the way we buy public goods. Consider:

15 – car payment
5 – insurance
10 – gas
5 – maintenance
15 – climate damage
Say $50

How much for the roads? $2.50. Less than the latte you buy on the way. Sorry. Doesn’t work for me.

I have an uncle, an old uncle, went to college on the GI bill, taught for decades in a public university, had the luck to have a gravel bed on his farm next to an interstate construction project, watches the students pay ever higher tuition with ever bigger student loans, and votes Hard Right, no property tax for him. “I got mine, what do I need to worry about….”

At a minimum it exposes Ricardian equivalence, which predicts somehow his concern for the future would outlast his old age.

But I digress. Public goods are a good deal. For everybody. Even capitalists can make real profits building and selling infrastructure or services. The proper accounting and proper financing mechanisms need to be in place. Government needs to act as the sponsor. The markets need to be made visible.

Who does not benefit from investment in public goods? The banks. There is no massive debt to sell. The government can sell its own bonds without too much help. Banks make their money on writing debt. At least their managers do. If the debt goes bad, their government is there to bail them out. And indeed, that’s where the profit has been – in the expansion of debt, not in building things and employing people.

So, our point today. Expansion and stimulation of consumption as the only Keynesian policy is wrong. Although we do espouse redistributive tax policy as a way of transferring spending power to those with a greater proclivity to spend. It doesn’t bother us if a little social justice is a byproduct. Even direct job creation which we propose and the MMT-ers have right – in the form of a job guarantee – is not the be-all and end-all. Socializing investment in a way that identifies value, often avoided costs, often expanded opportunities, in a way that can be monetized and used to finance that investment is the way to go. Jobs, prosperity, follow.