According to Bernanke there is good evidence that cash that goes to low- and moderate-income individuals is more likely to be spent in the near term — hence, from this perspective, it is going to be beneficial for economic growth.
Only if the amount of money in the economy increases, all other things being equal, spending in money terms will follow suit. However, the spending increase in this case is not on account of some multiplier but because of the increase in the money supply. The increase in monetary expenditure that results from an increase in money supply cannot produce the expansion in real output, contrary to the popular story.
All that it will generate is a reshuffling of the existing pool of real savings. It will enrich the early receivers of the new money at the expense of last receivers. Obviously then, a loose monetary policy that 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. FULL ARTICLE
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It is one thing to promote lies that are to your advantage. I can understand the underhanded conniving of the people who benefit from monetary sleight of hand.
But it is quite another thing to believe lies that bring you to ruin. I will never understand the whole-hearted foolishness of a wide range of people who refuse to hear the truth about our economic house of cards and go on to destruction.
I guess its the Foxy Loxy syndrome where all the chickens will follow him into his den because he promises something they when they are not too concerned about the ultimate consequences. People will take a few thousand dollars for themselves and let the givers take a few billion without doing the math.
Keynesianomics is a Ponzi scheme.
According to Bernanke there is good evidence that cash that goes to low- and moderate-income individuals is more likely to be spent in the near term — hence, from this perspective, it is going to be beneficial for economic growth.
If his premise is true, his conclusion is exactly wrong.
If we assume that dollars that are in the hands of lower-income people are more likely to be consumed immediately (as opposed to saved or invested) as compared to the same dollars in the hands of high-income people, then forcibly transferring these dollars reduces the pool of savings from which all economic growth is derived.
The doctrines of Lord Keynes are not some minor mistake in the details of economic reasoning – they are a tissue of absurdities.
People who teach any of these doctrines as truth do not deserve to be called “economists”, and university departments that employ such people do not deserve to be called Economics Departments.
The concepts of “real output” and “real savings” imply that someone in the economy produces “unreal output” and has “unreal savings”. Thus it is incumbent on a theory that uses these terms of objective realism to show in what sense there is unreal output and unreal savings, and what effects those have.
If I bring forth unreal output or have unreal savings, then it would seem I would not be able to accomplish anything with them as they are unreal. Or, if I can accomplish something with these things, then they are real by virtue of this fact.
At issue is the consistent theoretical treatment of economic phenomena, and whether this treatment is best achieved by methodological subjectivism (which in Mises’s conception, does not distinguish between “real” and “unreal” savings and output), or by methodological realism which is a theoretical economic approach at fundamental odds with Mises’s.
True, Mises could possibly be wrong. Then, it would be instructive to see an article, working paper, or book by the objective realists, stating exactly where Mises goes wrong.
Is Something Out of Nothing Possible?
This is a great question and Frank Shostak
has answered it perfectly in the realm of economics. However this question also applies in the Philosophical realm of Metaphysics. Something out of nothing is NOT possible therefore Existence has always existed and will always continue to exist.
What Keynes tired to do in economics is create something out of nothing, all he did is create a system of theft in which SOMETHING is stolen from the productive and given to those that produce NOTHING.
I think you’re misunderstanding Keynes.
Keynesians will readily admit that money is a generalized claims on goods and services already produced. They will also acknowledge that an increase in consumption will does not immediately lead to an increase in output.
However, when the causes of recession is inadequate demand, inventories accumulate. This leads to a decrease in production, since units aren’t being moved. So the accumulated inventory is real savings that is not being consumed.
The effect of this drop off in production is cyclical unemployment. In order to encourage production, the accumulated inventory must be consumed. When the real goods produced are being consumed, there is an incentive to resume production. This alleviates unemployment.
Your contention, if I read correctly, is that the resources being consumed by government stimulus represents a cost on society. Yet your argument is folly, because consuming resources not being utilized poses no opportunity cost. Society, or the American consumer, do not face a loss as a result of consumption of accumulated inventory, because those resources were not being consumed by society in the first place.
The whole purpose of Keynesian stimulus is not to destroy resources, but rather to ensure that the productive capacity of the economy is running at full employment, and even more important, to prevent underconsumption from preventing a drop in production.
Yet. where does this ‘stimulus’ come from? A void?
The most accurate analogy to Keynesian economics is the broken window fallacy. There people see a kid break a window and they think great the building owner needs to pay a window maker who buys raw materials etc. But they miss what the building owner could do with the money that helps someone else. If this is true then a logical thing to do would be to blow up all the cities and we could get rich rebuilding them.
A less accurate analogy but more amusing one is Keynesian economics is the pumping of water from the deep end of the pool to the shallow end expecting the water level to rise.
The interest rate is the pump speed.
William,
If units are not being moved it is an indication that the entrepreneur in question is asking too high a price and should lower his price to clear his inventory, even if it means selling at a loss. That may discourage production in that particular industry but the reason his costs are too high in relation to his selling price is that those resources are more highly valued for other purposes.
William, the above analysis of Keynesian economics (it’s been a while since I’ve done it) assumes that markets will not adjust to the fall in demand, right?
William, your former analysis of Keynesian economics (it’s been a while since I’ve done it) assumes that markets will not adjust to the fall in demand, right?
Inquisitor,
As far as I can tell Keynesian economics is based on the assumption that markets are incapable of adjusting to changes in social time preferences or the demand for money. I think Roger Garrison describes the difference between Austrian and Keynesian economics as Keynesians assume the interest rate is incapable of coordinating savings and investment, whereas Austrians think it can.
The second William is someone else.
@ Inquisitor:
The stimulus would come from the government. The government would merely stimulate consumption of goods that are not being consumed already.
The whole idea of the Broken Window Fallacy is that people ought to recognized unseen costs. Opportunity Costs, to be accurate. Yet there is no opportunity cost to consuming accumulated inventory. The opportunity cost is zero when you’re operating below your full productive capacity.
Shostak has written another great article! I realize that with space limits he couldn’t cover every aspect of Keynesian theology, but I think one point is important to remember: Keynesians believe that producers will have to invest in greater productive capacity to meet the increased demand. The multiplier works because, supposedly, business owners keep a figure in their head of the amount of capital investment they must make for each unit of demand. They see the demand increasing so they start planning to increase production, which includes demand for labor.
But as someone has pointed out, the demand for products is not demand for labor. Besides, any businessman who would increase production to meet the new, short term demand caused by a one-time shot from the government would be pretty stupid.
The concepts of “real output” and “real savings” imply that someone in the economy produces “unreal output” and has “unreal savings”. Thus it is incumbent on a theory that uses these terms of objective realism to show in what sense there is unreal output and unreal savings, and what effects those have.
Sigh… We’ve been through this before, Adam.
The concept of “real” savings is not that something exists whereas another thing does not; it’s the context of use. You can’t build a house out of paper and you can’t manufacture computers out of digital numbers.
Real savings are savings that have been created through economic process, that’s all.
William1,
You said:
Where does the government get the money for the stimulus?
From William1:
Whether or not this is true depends on why the inventory was unconsumed in the first place, what it would be consumed for if the price level were allowed to adjust itself, and for what purpuses the government or its proxies use the excess inventory. On net, there may well be an opportunity cost to government action, and I think very good arguments can be made that these cost will be a net negative to future production.
Keynesianism isn’t quite as silly as many make it out to be. It my be invalid, but its arguments are not that simplistic.
Keynes believed an increase in the demand for money always causes a decline in the aggregate demand, and that prices (and interest rates) could not fall quickly enough to increase demand. Hence, a recessionary spiral would occur. There are supposedly a number of reasons why prices don’t fall as quickly as might be optimal, but I’m not familiar with those. So Keynes believed increasing the aggregate demand (i.e., a stimulus) could fix this spiral. I don’t think it has anything to do with the fallacy that paper money is wealth.
Of course, I can’t think of a single instance in history when a drop in aggregate demand has caused a recession.
when the causes of recession is inadequate demand
“Inadequate demand” is a meaningless phrase.
In a recession, demand is not “inadequate.” It can never be “inadequate.” Only someone who thinks that consumers ought to be consuming at some arbitrary, pre-selected level would think that demand is “inadequate.”
The logical, rational explanation for excessive inventory is that producers of economic goods have overestimated the true demand for their goods.
But why would that happen? Why would capital be misallocated in this manner? What could be the root cause of such widespread, clustered and pervasive errors on the part of so many businesses? I can understand when one or two businesses within an industry make mistakes. But all of them, all at the same time? What could cause them to all become so out of sync with their consumers?
There’s only one common denominator among all of these businesses that can explain the unusual coincidence of such systematic errors — currency.
Producers across the board make mistakes in predicting real demand because they have been deceived by an artificially-expanded money supply. (Or, another way to express it would be “an artificially-accelerated rate of money creation.”)
there is no opportunity cost to consuming accumulated inventory
1. Prices act as signals to production.
2. Prices fall to market-clearing levels.
3. When you artificially “stimulate” consumers into consuming excessive inventory, you prevent prices from falling to the level that would have represented the true market demand.
4. These artificially-elevated prices, in turn, send a signal to producers to continue to produce more goods than the market truly demands, thereby essentially guaranteeing that the excessive inventories will continue or become even more excessive.
5. Repeat 3 and 4 until a total economic collapse.
I think it would help the analysis if there were a few accounting examples used. It is difficult to see from words alone that the farmer produced something that didn’t previously exist, thus adding to the total wealth. Also, eating some of the farmer’s tomatoes reduces total wealth. I think it is this lack of looking at the bottom line that confuses some especially when many costs are ignored.
Also, the Keynes quote about burying money so others can dig it up could be seen to be silly by showing some accounting entries such as the costs spent on the bury and dig operations. Surely, it would be less costly to existing wealth if this currency was simply left in bags so that neither bury nor dig up operations needed to be done at all yet we would arrive at the same result. This could then be compared with the economics of creating jobs where people dig holes so others can fill them.
Another way to look at this would be to simply let everyone counterfeit his or her own money to the tune of say, $300 which is often mentioned as the “stimulus” to be handed out. Why is it OK if the Fed counterfeits it first and then distributes it thus magically transforming the activity into an “economically†useful event? But if individuals engage in counterfeiting that leads to the same result is somehow different. Most people instinctively understand the problem with counterfeiting by individuals.
This Keynes example reminds me of my government education on the New World explorations. We were told that the Spanish explorers stole gold that was originally dug out of a hole in the ground in America and moved it to Europe where it was then eventually stored in underground vaults. I was taught that this somehow made the world much wealthier. That this gold simply caused monetary inflation in Europe was never mentioned. True, the Spanish became wealthier, but only by the amount that the rest of Europe became poorer.
Grant, that seems largely correct. That is why I inquired as to whether the Keynesian argument is one that assumes that the market won’t clear. I’ve of course forgotten the exact justification behind it, which seems to be the one you offered.
I’m not sure how many economists still take the multiplier seriously. It’s been subject to criticism from multiple sources.
This Keynesian ‘solution’ is a bad economics. It demonstrates a lack of vision about the long-run consequences and only considers the effect it will have on the group favored by the new money, the first receivers.
As Keynes said ‘We’re all dead in the long-run,’ but this signature remark by a bad economist is actually an oppressive statement that is especially significant to us since we are living in the Keynesian long-run.
Keynes was a fraud back then and all of the advocates of his doctrine of pseudo-economics have for some time been undermining the economy that is based on property rights and contracts.
Keynes was a closet socialist among other things and his fallacious approach to economics was designed to convert the Western economies into State-run bureaucracies.
Keynes was ignorant of and defiant of the forces of equilibrium. Eventually the forces of equilibrium will wipe away the scum of Keynesianism and the world will recover from that affliction.
There is always opportunity costs. If there were no costs to consume accumulated inventory it would have been consumed. Why not? It costs nothing! It doesn’t even cost time to consume! But still it’s not consumed. That means people have a better way of spending their time and money.
Why would someone operate below full capacity if it costs him nothing to operate at full capacity?
“Yet there is no opportunity cost to consuming accumulated inventory. The opportunity cost is zero when you’re operating below your full productive capacity.”
This is one of the more economically illiterate things I have seen in a while. The opportunity cost of operating at less than full productive capacity most certainly is not zero, the opportunities include selling the inventory later when the market condition is more favorable, selling at a discount, selling off the fixed assets, maybe including the whole business, in order to right-size the operation to better reflect market conditions, etc. Absolutely not zero.
The funds used by the govenment in order to pay some citizen to consume goods they wouldn’t have otherwise has an opportunity cost way higher than zero. The problem is that the cost of taking money from some productive, profit making enterprise and re-directing into the consumption of goods that nobody wants to buy (at the current time and at the current price) results in a net loss to total economic activity. It moves money from more productive enterprises to less productive enterprises, which is a net loss to everybody. But, since this money is taken in small amounts from everybody (higher taxes or devalued currency) it is very hard to pinpoint how it affected one individual. But when you sum it up it is a net loss. People see the money from the government in their hands but they don’t see the money that was taken away from them in lowered output and lowered value of earnings and savings. “what is seen and what is not seen”.
This is a perfect situation for politicians and it is no wonder that the political classes and government bureaucrats really, really want Keynsian economics to be true. They get to give away money and most of the recipients never even realize that they are simply being paid their own money, but at a slightly lower value. Brilliant!
If they tried to do something like that in the private sector they would go to jail.
Keynesian economics has distorted the thinking of most business people, politicians, bureacrats, Wall Street financiers and the average citizen.
The fundamental flaw is the concept of “demand” as if it were some tangible, measurable, stable object that could be measured and controlled. It is not.
The problem is that economics is fundamentally the interplay between supply and demand, which implies that they are two sides of a coin, mathematically are identical ideas with identical, if opposite properties. But that’s just an arbitrary way to get the simple mathematical equations to balance, not an accurate definition of reality. The equal sign commonly placed between them implies that they are the same thing in slightly different form. They most certainly are not.
“Supply” is a much more tangible quantity especially with goods like food, machinery, etc. It has a definite form, it has a physical presence and a finite lifetime (again only for goods, this is somewhat true for services, labor, knowledge, and other things that people pay for). The monetary value fluctuates but the nature of most goods and services, is relatively stable and tangible, it can be measured at least approximately. The average person can wrap their brain around the idea of supply rather easily.
“Demand” however is not simply the mirror image of supply it is a different concept entirely. “Demand” is human wants and needs, can vary dramatically over short periods of time, is subject to all the whims and vaugarities of human beings living day to day human life, and it is NOT measurable in any meaningful way. It is a SUBJECTIVE quantity (which is a contradiction in terms) which means it can’t be measured. Yet Keynsian economics has it’s very basis in the idea that “demand” CAN be measured, and that there is an optimal level of “demand” that would produce the best world for all people living in it.
What an absurd concept.
Yet most economic discussions involving thousands of economists every day are based on this idea to the point that nobody even thinks about it anymore.
And by the way, the people who use this concept on a daily basis as a way to predict the future economic state of the world have been down right DREADFUL at predicting anything at all, short term or long term. Monkies throwing darts can predict the future state of the economy better than economists trained in Keynsian economic theory.
supply, demand;
production, consumption;
revenue, expense;
bid, offer;
sell, buy;
export, import;
give, receive;
If people only thought of economics in terms of the dichotomy of trade, then we would have to hear silly statements like, “70% of the economy is made up of consumer spending.”
We now know that, according to quantum mechanics, it is possible for something to come from nothing. This is a conclusion of the uncertainty principle.
So all the Fed has to do is keep us in the dark about the real nature of economics and quantum mechanics produce all the money we’ll ever need.
(It is interesting to note that in the actual framework of quantum theory, “somethings from nothing” are called quantum fluctuations and take the form of virtual particles and thinking about quantum fluctuations led Alan Guth to discover the now standard Big Bang cosmology–the inflation theory.)
I would really suggest that some people commenting here actually read Keynesian and neokeyensian writings. Its pretty hard to refute them if you only understand their arguments as they are presented on mises.org. Needless to say, they aren’t as silly as most libertarians make them out to be…
The heart of neokeynesian thought, as I understand it, is that prices do not fall as quickly as is optimal when the demand for money rises, and so markets do not clear. This doesn’t rely on measuring aggregate demand, or anything like that, (although I suppose one could measure excess inventories and that sort of thing to get a guesstimate) its just an observation on what would happen in the economy if the demand for money increased.
I think its pretty silly to suggest that this sort of thing actually causes recessions, but that doesn’t mean it isn’t a problem. Some Austrian authors have written about how free banking could solve this issue.
Here is a good paper, painting neokeynesianism with ABCT:
http://paws.wcu.edu/mulligan/www/ABCSMC.htm
The problem, again, is what would an ‘optimal’ price adjustment be? If it doesn’t rely on measuring some quantity or other, then what does the assumption rely on?
Inquisitor, I have no idea. I suspect many Keynesian authors have attempted to calculate such a thing, and I’d bet they’ve all failed. As its been described to me, no one, not government or business, has any good way of figuring this out. Its almost impossible to figure out the extent and duration of a recession until its over.
But we don’t need to measure a suboptimal price to know that one can exist, just as praxeology doesn’t measure the extent of utility gained in a trade to know that a trade produces gains in each actor’s subjective utility. Except instead of praxeology, I think sticky prices have been modeled as games of imperfect information.
I believe downward price adjustments are a “who first?” problem. No firm knows what the ‘correct’ price is, or when prices might recover to their original levels. None wish to lower their prices unless other actors in the economy do the same, and knowledge of what others do is limited (hence it being modeled as a game of imperfect information). So I think its a massive coordination problem (thus the cries for government aid, even though government has no way of knowing how to fix things).
From my perspective, it seems like shifts in the demand for money throw a wrench into the mechanisms that calculate prices, and successful free-banking institutions would evolve to prevent that sort of thing from happening.
I wonder if prediction markets might aid in ‘correct’ price discovery?
Thanks to Frank Shostak for another insightful article about the positive and direct relationship between saving and economic output. Keynes’ thinking was fundamentally at odds with this insight; virtually all of his thinking argued that one need not be bound by the limits of scarcity. “In the long run, we’re all dead.”
Shostak’s insights can be applied to understanding the causes of stagnation in Japan, formerly the rapdily progressing economic “miracle.” Since the Sixties, Keynesian True Believers have sacrificed the Japanese economy to fashionable fiscal and monetary insanity. They have buried the country in public works and public debt, to “stimulate” aggregate spending. They have sought to debase their money by the most profligate expansion of the monetary base–20% growth for several years running–to “jump-start” growth and head off the dreaded spectacle of “deflation”.
The only visible result of this application of Keynesian’ “economics” has been to create a regime of surrealistically low interest rates, which have financed wealth-destroying speculative bubbles that span the globe. Meanwhile, Japan continues, year after year, to languish and idle. For the imposition of 1% interest rates not only inspires the waste of scarce and precious capital on white elphant projects; it also undermines the ability of the Japanese to accumulate savings. And so, capital accumulation grinds more or less to a halt, and with it, economic growth.
We can anticipate similar dismal results in the United States, as the Fed engineers interest rates ever lower to “stimulate” aggregate spending and discourage savings and capital accumulation. Keynesians applaud such irrationality, as for example when the Dallas Fed guy, a few years back, encouraged everyone to rush out and buy a SUV.
Anyone who harbors a warm spot for Keynesianism owes it to himself to read George Reisman’s “Capitalism”–perhaps the most powerful refutation of Keynesian nostrums ever written.
It is not prudent for the government to
“give the drunk another drink”.
Instead, allow businesses a 60% tax credit for plowing up to 20% of net profits back to employees; a built-in, regular, cash-back profitsharing tax credit, before the government or the corporation can abuse it.
The invisible hand meets economic democracy.
Will this not increase household income?
incentivize full employment?
stimulate demand and production?
prune government?
make self-sufficiency easier to achieve on-the-street? Without additional education?
increase the government tax base?
increase safety net coffers; MC and SS?
Redistribute wealth to the people who actually create the wealth?
Refine capitalism to what it was meant to be?
Restore moral leadership where it was lost?
Set an example for national economies on the left as well as economies on the right?
But we don’t need to measure a suboptimal price to know that one can exist…
I don’t even think one can define suboptimal price. What is price, if not the amount some two parties are willing to accept in a trade. Prices, as we normally think of them are simply the asking value that some market player has put on some item he is trading for money. If I put a price of $1 million on a cheeseburger, that price is only meaningful if someone trades for the item. On a desert island, that price could be paid by a billionaire who is starving.
Prices are an array of product vs. money pairs that one market player subjectively uses to indicate his preferences. Since each player has his own set of values, there is no “price” of an object. After all, prices are adjusted all the time. Go to any computer store and prices of the same items vary daily. And prices also reflect how many of an item I already have, so even one individual may have several prices for the same item. My first 1 terabyte disk drive is more valuable to me than the 3rd one. So what is an optimal price here?
Keynes and his lot believe you can create economic models where there are things like optimal prices (optimal for the modeler) but these don’t exist in the real world.
Eric,
‘Suboptimal’, in this case, would be prices which do not let markets clear in the short-term. If all firms in an economy somehow had perfect information and coordination with other firms, they would be able to adjust their prices as was needed to counteract monetary shocks, and we wouldn’t say prices are ‘sticky’. But that can’t happen since no one, not the government or the firms, can calculate what ‘optimal’ prices are without the very act that creates them (i.e., voluntary exchange).
Of course, businesses of all sorts use complex models to estimate the best ways to price their goods for optimal profits. But ultimately they are all just estimations of what the market will do.
Does optimal mean “optimal for the seller”, or “optimal for the buyer”.
For the seller, optimal is the highest price possible at which they can still sell goods.
For the buyer, optimal is the lowest price possible at which they can buy goods.
To me, it looks like they are diametrically opposed. Only the buyer and seller determine if the trade is acceptable, it appears to me that one “optimal” precludes the other!
Who gets to decide “optimal” for me? Is it even a relevant concept at an individual transaction level, or can it only be wrongly applied at the aggregate level?
BTW, if the government takes my money and gives it to someone else, or reduces the real unit value of my money by printing more and giving it to someone else – aside from all other discussions of opportunity cost, there is certainly one for ME. If a thug mugs you and takes your money, you have certainly suffered a loss. It is the same if government or the mob does it.
Of course something from nothing is impossible. No matter what mathematical operation you perform on zero, apart from adding something real, the result is zero.
This is not the point of the ponzonians. They want this false promise to believed, so that YOU produce (and give them) real goods and services in pursuit of this false promise.
Giving a gift to financial lowlifes and middles may give them some credit headroom to make bad nothing for something choices (declining fiat dollars) in exchange for an actionable promise of debt servitude.
This is proven, for those inclined to serious thinking:
http://www.nazisociopaths.org/modules/article/view.article.php/c1/32
Bill Ross;
Electronics Design Engineer
I have no argument with the critique of Keynes, but I confess to being somewhat disappointed by the title, which could well have been answered in the affirmative if it headed a treatise on the operations of the bona-fide free market, allowing for a little poetic license.
It is through trade and the division of labour that wealth ( or value) of any quantity is created out of (less wealth or value) by the simple expedient of the parties involved co-operating to mutual benefit., or trading.
sure, there are hairsplitting philosophical arguments that will deny this is possible at a strict semantic level, but in substance, the miracle of the free market does indeed permit the extraxction of something out of nothing, (or , put more strictly, more from less).
which makes a waste of such a nice poetic and imaginative title, if argued in the afirmative!
so everyone’s an economist now?
you cant tell the masses of people your in a recession. Recessions are self-feeding. if people think the economy sucks, they wont make those big investments like houses and cars. and since GDP = C + I + G+ X and a recession happens when GDP drops, people not buying big invesetments (I) or buying anything at all (C), well, that will just make GDP drop even more. Its why we have the Fed and the ECB and all these different central banks constasntly fighting to keep our respective economies up and running. Entropy will bring all economies back to the same fate.
Shostak seems to claim that conventional economics does not understanding the distinction between saving goods and saving money: see the para just above the picture of Keynes in a bowler hat – “So, contrary to popular thinking, more savings actually expands and not contracts the production flow of consumer goods.â€
“Popular thinkers†(which includes me) are well aware of the fact that saving in the form of additional capital equipment allows additional production. Indeed, this is a statement of the obvious, isn’t it? This is quite distinct from saving MONEY which is what Keynes was concerned about.
To illustrate, if I am in the habit of spending $200 a week to employ a gardener for say 40 hours a week, and suddenly I decide to save the $200 a week instead, and stuff the money under my mattress, the gardener is unemployed? Am I right or am I right?
Keynes’s solution to this problem was to have government spend more than it collected in tax: e.g. if government spends $200 more a week than it collects in tax and spends this $200 employing the gardener in a public park, say, the unemployment problem is solved.
To be more accurate, the above solution is more of a Monetarist solution to the problem than a Keynsian one. To oversimplify, Monetarists believe in printing money (which is what is involved in the above example) or rather they believe in expanding the money supply by a small amount every year. Keynes claimed governments should borrow and spend money, rather than print it. But I don’t want go get bogged down in the Keynes v Monetarist argument.
Shostak repeats the error when he says “The increase in production is in accordance with what the pool of real savings permits and is not constrained by consumers’ demand as such. Production cannot expand without the support from the pool of real savings, i.e., something cannot emerge out of nothing.â€
Taking the example of the gardener again, assuming the gardener used my gardening equipment rather than supply his own equipment, then I would still have this equipment in my garden shed after sacking the gardener. Thus the gardener would NOT unemployed through lack of real savings (gardening equipment). He/she is unemployed because of lack of demand.
Also, the fact that unemployment does not occur in Shostak’s “bread, shoes and tomatoes†economy proves nothing. Keynsians (and Monetarists, come to that) are well aware of the fact that barter economies can work quite well. I.e. conventional economics is well aware of the fact that the introduction of money, while it has its advantages, has some very real disadvantages: in particular that saving excessive amounts of money can lead to unemployment.
Ralph Musgrave: “…conventional economics is well aware of the fact that the introduction of money, while it has its advantages, has some very real disadvantages: in particular that saving excessive amounts of money can lead to unemployment.â€
You should distinguish between savings and hoarding. Keynes got the two mixed up and so confused most economists who follow him. Savings is money invested for the purpose of earning a return. It doesn’t cause unemployment; it just shifts employment from one sector to another, to the sector that borrows the savings.
Hoarding is keeping a cash balance. No one borrows it; it just sits there. Today, hoarding takes place only if people stash dollar bills under a mattress. If any of it finds its way to a bank it will be loaned out for someone else to use even if it’s in a checking account.
In addition, the Feds determine the total cash available in the economy. If the money supply is fixed and consumers hold less cash, then businesses must hold more and if consumers hold more cash then business must hold less. Of course, if the Feds pump more cash into the economy, then both can hold more cash than they held in a previous period, but changes in consumers’ desire to hold cash does nothing but cause an opposite reaction in businesses. Someone has to beholding the cash that the Feds pump into the economy. If both businesses and consumers want to hold more cash and the Fed doesn’t create it, then prices will drop as money becomes more valuable.
People don’t more cash for no reason. They want to hold as little cash as possible because it earns no return. Everyone holds more cash during a crisis because the future is less certain. They want to make sure they can pay their bills. So holding more cash is not a cause of crises, it is an effect. The crisis happens first and causes people to hold more cash because they face greater uncertainty. Of course, if everyone, businesses and consumers, hold more cash at the same time, it can aggrevate the crisis, but it doesn’t cause the crisis.
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