photo: wikimedia

Conservatives relentlessly bash all the people who got it right about the economy; and at the same time insist we follow the austerity policies that Herbert Hoover laid down after the Crash of 1929. Among the bashees is John Maynard Keynes, whose book, The General Theory of Employment, Interest, and Money, is the classic example of getting it right, and being hated for it. One explanation for conservative hatred of Keynes is his complete lack of respect for large aggregations of capital and the people who own and manage them.

The first part of the book is directed at setting up basic ideas about supply and demand curves. Keynes defines aggregate demand as the sum of (i) the propensity to consume currently, which is a function depending on several variables primarily including net income, and (ii) demand for new investment in factories and equipment. Aggregate supply is a complex function based for our purposes on the amount of employment. At the equilibrium point, the aggregate supply of goods and services equals the amount of demand for goods and services. Using simple math, Keynes writes:

Hence, the volume of employment in equilibrium depends on (i) the aggregate supply function, f, (ii) the propensity to consume, c, and (iii) the volume of investment, D2. this is the essence of the General Theory of Employment.

Keynes says that as income increases, the propensity to consume increases, but not as much as the increase in income. Part of the increased income goes to increased savings. Keynes says that classical economists assume that demand for investment in factories and equipment will always increase by the amount of increase in savings by individuals. Keynes says that it doesn’t, except rarely.

Keynes observes that the total amount of employment is dependent on net income, which is equal to the sum of consumption and net investment. Net investment equals the difference between total investment and costs of and reserves for repairs and replacements, which amounts to total depreciation. If businesses increase their reserves for depreciation, total income goes down. As total income drops, so does aggregate employment. Keynes provides a concrete example:

In the United States, for example, by 1929, the rapid capital expansion of the previous five years had led cumulatively to the setting up of sinking funds and depreciation allowances, in respect of plant which did not need replacement, on so huge a scale that an enormous volume of entirely new investment was required merely to absorb these financial provisions, and it became almost hopeless to find still more new investment on a sufficient scale to provide for such new saving as a wealthy community in full employment would be disposed to set aside. This factor alone was probably sufficient to cause a slump. And, furthermore, since ‘financial prudence’ of this kind continued to be exercised through the slump by those great corporations which were still in a position to afford it, it offered a serious obstacle to early recovery.

Consider what a sinking fund is: a company puts money in a separate fund in an amount such that at the end of a specified period, there is enough to retire a debt, or purchase a replacement for a building or a piece of equipment. It doesn’t matter what the purpose of the fund is, the important thing is that the money is saved rather than spent immediately.

Keynes’ description of the last part of the 1920s also describes the US in the period leading up to the Great Crash of 2008. The percentage of wealth held by the top 1% of us increased dramatically. Little of that money was spent on consumption or on investment in productive enterprises. Much the money spent on productive enterprise was spent overseas, where it does nothing for US employment, or on houses, which are not themselves productive, and for which there was no market except through rancid mortgages

Instead of being spent in ways that would increase US employment, trillions of dollars were stowed away in hedge funds, private equity funds, endowments and foundations. Part of the gigantic paychecks for top management went to buy wine and third homes, but most of it went into hedge funds or was saved in some other form. In short, the Great Crash of 2008 was bound to happen, at least in Keynes’s analysis. Now we learn that corporations are holding obout $1.8 trillion in cash reserves.

No wonder conservatives hate Keynes. He lacks the proper respect for capital. He puts a big share of the blame for depressions on the rich people who own it and do nothing useful with it. His analysis says that the innovations of the financial industry are destructive to the extent they do not create increased employment. That reflects badly on people like Jamie Dimon, master of the derivative, and Lloyd Blankfein, who is busy doing the work of the Almighty by trading something.

Keynes must be discredited at all costs.
———–
Quotes are from the Prometheus Books edition, 1997 – first quote, page 30; second quote, page 100.