WEBVTT NOTE 21. Prices And Money 1 00:00:00.000 --> 00:00:09.000 Chapter 21. Prices and Money. 2 00:00:09.000 --> 00:00:13.000 Costs are prices. 3 00:00:13.000 --> 00:00:20.000 Another strange thing about Keynes's Chapter 21 is that though it is called the theory of prices, 4 00:00:20.000 --> 00:00:31.000 The Theory of Prices is hardly a theory of individual prices at all, or even of relative prices, but merely a theory of changes in the price level. 5 00:00:31.000 --> 00:00:34.000 Keynes even specifically declares, 6 00:00:34.000 --> 00:00:49.000 The Theory of Prices, that is to say, the analysis of the relation between changes in the quantity of money and changes in the price level, with a view to determining the elasticity of prices in response to changes in the quantity of money. 7 00:00:49.000 --> 00:00:59.580 Now, unless one has a correct theory of individual prices and of relative prices, one is unlikely 8 00:00:59.580 --> 00:01:05.540 to have a correct theory of the price level, which is merely an average made up of individual 9 00:01:05.540 --> 00:01:07.040 prices. 10 00:01:07.040 --> 00:01:13.560 But when we try to analyze Keynes's theory of individual prices and of relative prices, 11 00:01:13.560 --> 00:01:20.020 We encounter so many confusions and contradictions that the task of straightening them out becomes 12 00:01:20.020 --> 00:01:22.320 next to hopeless. 13 00:01:22.320 --> 00:01:28.560 In a single industry, we are told, its particular price level depends partly on the rate of 14 00:01:28.560 --> 00:01:34.700 remuneration of the factors of production which enter into its marginal cost and partly 15 00:01:34.700 --> 00:01:36.900 on the scale of output. 16 00:01:36.900 --> 00:01:42.640 There is no reason to modify this conclusion when we pass to industry as a whole. 17 00:01:42.640 --> 00:01:45.360 Page 294 18 00:01:45.360 --> 00:01:51.080 Let us notice first of all a couple of the minor ambiguities in these two sentences. 19 00:01:51.080 --> 00:01:56.960 We have already seen that a single industry involves an arbitrary classification without 20 00:01:56.960 --> 00:01:59.160 definite boundaries. 21 00:01:59.160 --> 00:02:05.760 Notice also that even in speaking of a single industry, Keynes speaks of its price level, 22 00:02:05.760 --> 00:02:10.340 which is already a collective concept involving an average. 23 00:02:10.340 --> 00:02:25.340 What he probably meant to say, or in any case, what would have been theoretically more defensible, is that the particular price of a single homogeneous product depends partly, etc. 24 00:02:25.340 --> 00:02:44.340 But, this minor difficulty surmounted, we find that what we have here is a crude, Ricardian cost of production theory of prices, in which the marginal utility of a particular commodity, or the relative marginal utility of two or more commodities, is not even mentioned. 25 00:02:44.340 --> 00:02:46.340 Keynes continues, 26 00:02:46.340 --> 00:03:03.040 The general price level depends partly on the rate of remuneration of the factors of production which enter into marginal cost and partly on the scale of output as a whole, i.e., taking equipment and technique as given on the volume of employment. 27 00:03:03.040 --> 00:03:05.040 p. 294 28 00:03:33.040 --> 00:03:48.040 In modern marginal theory, prices and costs mutually determine each other. There is no one-way causation. Wicksell, endorsing the mathematical formulation of Walrus, put it forcibly. 29 00:03:48.040 --> 00:03:55.640 As soon as we have more than one factor of production, e.g. simple manual labor, and 30 00:03:55.640 --> 00:04:01.480 in fact we have hundreds of different kinds, the principle that costs of production determined 31 00:04:01.480 --> 00:04:06.280 the exchange value of a product can no longer be maintained. 32 00:04:06.280 --> 00:04:12.140 These costs become quite simply the prices of the factors of production, which are necessarily 33 00:04:12.140 --> 00:04:20.140 be determined in combination with the prices of commodities in a single system of simultaneous equations. 34 00:04:20.140 --> 00:04:29.140 Relative costs of production may legitimately play a part in modern economics when we are dealing with the problem of relative price formation. 35 00:04:29.140 --> 00:04:40.140 Here costs may be said to determine prices, not directly, but by their influence on relative supply and hence on relative marginal utilities. 36 00:04:40.140 --> 00:04:51.140 It is true that Keynes finally does bring in the effect of demand on the general price level, but what he discusses is merely the effect of changes in demand. 37 00:04:51.140 --> 00:05:01.140 It is true that when we pass to output as a whole, the costs of production in any industry depend partly on the output of other industries, 38 00:05:01.140 --> 00:05:07.060 But the more significant change of which we have to take account is the effect of changes 39 00:05:07.060 --> 00:05:10.780 in demand both on costs and on volume. 40 00:05:10.780 --> 00:05:16.760 It is on the side of demand that we have to introduce quite new ideas when we are dealing 41 00:05:16.760 --> 00:05:23.180 with demand as a whole and no longer with the demand for a single product taken in isolation 42 00:05:23.180 --> 00:05:27.860 with demand as a whole assumed to be unchanged. 43 00:05:27.860 --> 00:05:31.620 Prices 294 through 295. 44 00:05:31.620 --> 00:05:37.340 All that Keynes does at this point, however, is to consider the effect on the general price 45 00:05:37.340 --> 00:05:40.860 level of an increase in the money supply. 46 00:05:40.860 --> 00:05:44.300 But here, his confusions simply increase. 47 00:05:44.300 --> 00:05:51.060 He has presented no theory at all, or at best, only a circular theory of what determines 48 00:05:51.060 --> 00:05:56.660 a particular price or the relationship of particular prices to each other. 49 00:05:56.660 --> 00:06:03.700 But he proceeds to explain why the average of all prices, i.e. the general price level, 50 00:06:03.700 --> 00:06:05.500 rises or falls. 51 00:06:05.500 --> 00:06:11.640 Perhaps what he is really talking about is the average of retail commodity prices, as 52 00:06:11.640 --> 00:06:17.820 he seems to consider costs and wage rates to be somehow outside of the general price 53 00:06:17.820 --> 00:06:19.820 level. 54 00:06:19.820 --> 00:06:26.160 What makes prices rise, according to Keynes, is a rise in aggregate effective demand, an 55 00:06:26.160 --> 00:06:32.120 That aggregate or effective demand turns out to be, for all practical purposes, synonymous 56 00:06:32.120 --> 00:06:34.680 with the money supply. 57 00:06:34.680 --> 00:06:40.280 Keynes is right in not accepting the crude quantity theory of money, but his treatment 58 00:06:40.280 --> 00:06:44.160 on the whole subject is superficial and confused. 59 00:06:44.160 --> 00:06:50.400 He does draw a distinction between effective demand and the quantity of money. 60 00:06:50.400 --> 00:06:55.200 Effective demand will not change in exact proportion to the quantity of money. 61 00:06:55.200 --> 00:07:00.200 Page 296 But two pages later, he makes the astonishing 62 00:07:00.200 --> 00:07:04.560 statement that The primary effect of a change in the quantity 63 00:07:04.560 --> 00:07:11.000 of money on the quantity of effective demand is through its influence on the rate of interest. 64 00:07:11.000 --> 00:07:16.560 Page 298 This is like asserting that a circuitous detour 65 00:07:16.560 --> 00:07:19.880 is the shortest distance between two points. 66 00:07:19.880 --> 00:07:27.100 By effective demand, Keynes seems to mean little more than total monetary demand. Therefore, 67 00:07:27.100 --> 00:07:32.900 doubling the quantity of money, say, directly doubles the effective demand, because the 68 00:07:32.900 --> 00:07:39.420 two terms practically mean the same thing. Keynes is also right, though not for the reasons 69 00:07:39.420 --> 00:07:46.320 he gives, in pointing out that, if we begin with a condition of underemployment, a given 70 00:07:46.320 --> 00:07:57.320 An increase in the quantity of money will probably not raise prices proportionately, but will spend itself partly in raising employment. 71 00:07:57.320 --> 00:08:11.320 But, though he almost invariably assumes a condition of underemployment, he just as consistently fails to recognize or acknowledge the real reason for this underemployment when it exists. 72 00:08:11.320 --> 00:08:19.320 That reason is almost invariably the existence of excessive wage rates in relation to prices. 73 00:08:19.320 --> 00:08:25.320 To put the matter in another way, some wage rates are above the point of equilibrium. 74 00:08:25.320 --> 00:08:31.320 If, now, we pour an increased supply of money into the system, 75 00:08:31.320 --> 00:08:36.320 and if the effect of this is to raise wholesale and retail prices 76 00:08:36.320 --> 00:08:44.320 Without raising the excessive wage rates proportionately, then the result will be increased employment, 77 00:08:44.320 --> 00:08:52.320 and the consequent increased supply of goods will make the general price rise lower than it would otherwise have been. 78 00:08:52.320 --> 00:09:04.320 But Keynes gets to this conclusion by a set of artificial assumptions and arbitrary reasons that have little relation to economic realities. 79 00:09:04.320 --> 00:09:09.320 The Positive Theory of Money 80 00:09:09.320 --> 00:09:26.320 Instead of making a detailed criticism of Keynes's implied theory of money, it would affect a considerable economy of time and space if I said a few words at this point concerning what I believe to be the correct theory of money. 81 00:09:26.320 --> 00:09:40.320 These remarks must necessarily be sketchy, and as they will often give conclusions without the underlying argument, they may sometimes unintentionally sound dogmatic. 82 00:09:40.320 --> 00:09:54.320 The quantity of money is always a relevant consideration in determining the value of the monetary unit, just as the total supply of wheat is relevant in determining the value of a bushel of wheat. 83 00:09:54.320 --> 00:10:16.320 But the value of the monetary unit is not necessarily in exact inverse proportion to the quantity of money, as held by the rigid or mechanical quantity theory, any more than the value of a bushel of wheat is necessarily in exact inverse proportion to the supply of wheat. 84 00:10:16.320 --> 00:10:25.720 The inflexible quantity theory of money tacitly assumes that the elasticity of demand for money is unity. 85 00:10:25.720 --> 00:10:32.020 This proposition has never been proved, and receives little statistical support. 86 00:10:32.020 --> 00:10:40.920 The value of the monetary unit is determined not merely by the quantity of money, but by the quality of that money. 87 00:10:40.920 --> 00:10:47.160 Putting the matter in another way, the value of the monetary unit is not determined merely 88 00:10:47.160 --> 00:10:54.760 by the present quantity of money, but by people's expectations concerning the future quantity, 89 00:10:54.760 --> 00:11:01.000 and by such other factors as the assumed integrity or stability of the issuing government or 90 00:11:01.000 --> 00:11:02.000 banks. 91 00:11:02.000 --> 00:11:08.600 Hence, it is typical at the beginning of any inflation to find that prices rise less than 92 00:11:08.600 --> 00:11:14.480 and the increase in the money supply, and that in the later stages of an inflation prices 93 00:11:14.480 --> 00:11:18.760 rise more than the increase in the money supply. 94 00:11:18.760 --> 00:11:24.440 It must be borne in mind, furthermore, that an increase in the quantity of money, no matter 95 00:11:24.440 --> 00:11:31.440 by how much it may raise the average of prices, never results in an exactly proportionate 96 00:11:31.440 --> 00:11:33.920 increase in each price. 97 00:11:33.920 --> 00:11:40.640 It is only in fact because Keynes and other inflationists tacitly assume that an increase 98 00:11:40.640 --> 00:11:47.320 in the quantity of money will raise some prices more than others, particularly retail prices 99 00:11:47.320 --> 00:11:54.720 more than costs and wage rates, that they conclude that inflation will cure unemployment. 100 00:11:54.720 --> 00:12:02.360 I have said nothing above about the much discussed velocity of circulation of money and its supposed 101 00:12:02.360 --> 00:12:10.440 Effect on Prices. This is because I believe the term velocity of circulation involves numerous 102 00:12:10.440 --> 00:12:18.080 irrelevancies and confusions. Strictly speaking, money does not circulate. It is exchanged 103 00:12:18.080 --> 00:12:26.120 against goods. A house that frequently changes hands does not circulate. A man can only spend 104 00:12:26.120 --> 00:12:29.080 and his monetary income once. 105 00:12:29.080 --> 00:12:35.280 Other things remaining equal, velocity of circulation of money, can increase only if 106 00:12:35.280 --> 00:12:41.760 the number of times that goods also change hands, save stocks or bonds or speculative 107 00:12:41.760 --> 00:12:46.120 commodities, increases correspondingly. 108 00:12:46.120 --> 00:12:52.520 The annual rate of turnover of demand bank deposits is normally twice as great in New 109 00:12:52.520 --> 00:13:09.520 New York City as it is in the rest of the country. In 1957, for example, it was 49.5 in New York and averaged only 23.0 in 337 other reporting districts. 110 00:13:09.520 --> 00:13:14.520 This is because New York is the speculative center. 111 00:13:14.520 --> 00:13:28.520 An increase in the velocity of circulation of money, therefore, does not necessarily mean other things remaining unchanged, a corresponding or proportionate increase in the price level. 112 00:13:28.520 --> 00:13:43.520 An increased velocity of circulation of money is not a cause of an increase in commodity prices. It is itself a result of changing valuations on the part of buyers and sellers. 113 00:13:43.520 --> 00:13:50.280 It is usually a sign merely of an increase in speculative activity. 114 00:13:50.280 --> 00:13:56.920 An increased velocity of circulation of money may even accompany, especially in a crisis 115 00:13:56.920 --> 00:14:04.840 at the peak of a boom, a fall in prices of stocks or bonds or commodities. 116 00:14:04.840 --> 00:14:08.920 What Theory of Prices? 117 00:14:08.920 --> 00:14:26.920 Though I shall elaborate upon this at a later point, it follows from the above that inflation is 1. a dangerous remedy for unemployment, because the inflation may get out of hand and will in any case create great injustices. 118 00:14:26.920 --> 00:14:42.920 2. An unnecessary remedy for unemployment, which can be cured simply by the appropriate free market adjustment and coordination of wage rates and prices to each other and to the existing money supply. 119 00:14:42.920 --> 00:14:54.920 3. An uncertain remedy for unemployment, because the unemployment will either continue or be resumed if wage rates go up to the same extent as prices, 120 00:14:54.920 --> 00:15:02.420 so that the maladjustment which caused the unemployment is, after all, not corrected. 121 00:15:02.420 --> 00:15:09.640 I have already pointed out that, though Keynes calls chapter 21, The Theory of Prices, he 122 00:15:09.640 --> 00:15:18.160 defines The Theory of Prices, page 296, as the analysis of the relation between changes 123 00:15:18.160 --> 00:15:22.920 in the quantity of money and changes in the price level. 124 00:15:22.920 --> 00:15:30.420 This, as I have remarked, is merely a theory of changes in a statistical average of prices. 125 00:15:30.420 --> 00:15:42.420 It therefore omits any analysis or explanation of, one, what determines any one particular price, say, the price of eggs, and, two, 126 00:15:42.420 --> 00:15:48.420 what determines the relation of individual prices to each other. 127 00:15:48.420 --> 00:15:52.420 But these are the really fundamental problems involved. 128 00:15:52.420 --> 00:16:00.420 Until we have solved them, we cannot go on to any rational discussion of why individual prices change, 129 00:16:00.420 --> 00:16:10.420 and why the price level, which is a purely statistical construct put together from individual prices, changes. 130 00:16:10.420 --> 00:16:15.420 But Keynes simply takes these fundamental problems for granted. 131 00:16:15.420 --> 00:16:20.300 It is hard to escape the verdict of Hayek. 132 00:16:20.300 --> 00:16:25.860 Although the technocrats and other believers in the undoubted productive capacity of our 133 00:16:25.860 --> 00:16:32.540 economic system do not yet appear to have realized it, what Keynes has given us is really 134 00:16:32.540 --> 00:16:38.700 that economics of abundance for which they have been clamoring so long, or rather he 135 00:16:38.700 --> 00:16:44.980 has given us a system of economics which is based on the assumption that no real scarcity 136 00:16:44.980 --> 00:16:51.920 exists and that the only real scarcity with which we need concern ourselves is the artificial 137 00:16:51.920 --> 00:16:58.680 scarcity created by the determination of people not to sell their services and products below 138 00:16:58.680 --> 00:17:06.180 certain arbitrarily fixed prices. These prices are in no way explained, but are simply assumed 139 00:17:06.180 --> 00:17:12.920 to remain at their historically given level, except at rare intervals when full employment 140 00:17:12.920 --> 00:17:18.260 is approached, and the different goods begin successively to become scarce and to rise 141 00:17:18.260 --> 00:17:19.560 in price. 142 00:17:19.560 --> 00:17:27.040 Now, if there is a well-established fact which dominates economic life, it is the incessant 143 00:17:27.040 --> 00:17:33.260 even hourly variation in the prices of most of the important raw materials and of the 144 00:17:33.260 --> 00:17:37.300 wholesale prices of nearly all foodstuffs. 145 00:17:37.300 --> 00:17:43.420 But the reader of Mr. Keynes's theory is left with the implication that these fluctuations 146 00:17:43.420 --> 00:17:50.340 of prices are entirely unmotivated and irrelevant except toward the end of the boom, when the 147 00:17:50.340 --> 00:17:57.020 fact of scarcity is readmitted into the analysis as an apparent exception under the designation 148 00:17:57.020 --> 00:18:00.140 of bottlenecks. 149 00:18:00.140 --> 00:18:07.220 Let us look at Keynes's strange picture of the economic world a little more closely. 150 00:18:07.220 --> 00:18:12.220 But in general, the demand for some services and commodities will reach a level beyond 151 00:18:12.220 --> 00:18:19.380 which their supply is, for the time being, perfectly inelastic, whilst in other directions 152 00:18:19.380 --> 00:18:24.500 there is still a substantial surplus of resources without employment. 153 00:18:24.500 --> 00:18:31.860 Thus, as output increases, a series of bottlenecks will be successively reached, where the supply 154 00:18:31.860 --> 00:18:38.860 of Particular Commodities Ceases to be Elastic and Their Price Have to Rise to Whatever Level 155 00:18:38.860 --> 00:18:42.980 is Necessary to Divert Demand into Other Directions 156 00:18:42.980 --> 00:18:45.580 Page 300 157 00:18:45.580 --> 00:18:50.980 Some of the shortcomings in this picture have already been pointed out in the quotation 158 00:18:50.980 --> 00:18:53.340 from Hayek above. 159 00:18:53.340 --> 00:19:00.620 There are assumed to be, as a usual and virtually a normal condition, all sorts of unemployed 160 00:19:00.620 --> 00:19:07.820 resources kicking around, including, apparently, surplus raw materials, so that for a long 161 00:19:07.820 --> 00:19:13.560 time increase in demand does not lead to increase in price. 162 00:19:13.560 --> 00:19:19.740 Increasing costs are not regarded as typical but as exceptional, and then only because 163 00:19:19.740 --> 00:19:22.820 bottlenecks are created. 164 00:19:22.820 --> 00:19:29.900 And bottlenecks themselves are treated as exceptions instead of as the outcome of varying 165 00:19:29.900 --> 00:19:37.900 Degrees of Scarcity, and varying but inevitable lags in the responsiveness of demand. 166 00:19:37.900 --> 00:19:44.900 This brings us to an aspect of Keynes's thought that has been seldom recognized even by his 167 00:19:44.900 --> 00:19:45.900 critics. 168 00:19:45.900 --> 00:19:52.740 A surprisingly large number of his errors sprang not from his heterodoxies but from 169 00:19:52.740 --> 00:19:59.780 From his uncritical acceptance of certain classical or, it would be better to say, Marshallian 170 00:19:59.780 --> 00:20:03.660 doctrines, concepts or terms. 171 00:20:03.660 --> 00:20:11.860 One of these concepts, now used almost universally, is that of the elasticity of demand, supply, 172 00:20:11.860 --> 00:20:14.820 price or what have you. 173 00:20:14.820 --> 00:20:21.340 The concept, or rather the term, owes its present great vogue to Marshall. 174 00:20:21.340 --> 00:20:28.620 It is a very useful concept, but it can also be a deceptive one, particularly when, as 175 00:20:28.620 --> 00:20:35.580 in the last thirty years, a whole literature develops around it that combines oversimplification 176 00:20:35.580 --> 00:20:38.180 with a spurious precision. 177 00:20:38.180 --> 00:20:43.780 This latter development is mainly the result of the use of the dubiously appropriate term 178 00:20:43.780 --> 00:20:46.300 elasticity. 179 00:20:46.300 --> 00:20:52.740 I have previously adverted to the misleading quality of this term, but it is now worth 180 00:20:52.740 --> 00:20:55.700 scrutinizing even more closely. 181 00:20:55.700 --> 00:21:02.980 Responsiveness, as I shall now try to show, is a term that not only expresses more clearly 182 00:21:02.980 --> 00:21:10.860 and directly what is meant, but avoids most of the pitfalls of elasticity. 183 00:21:10.860 --> 00:21:17.820 It is an ironic misfortune in the recent history of economic thought that, though Marshall 184 00:21:17.820 --> 00:21:27.220 himself suggested this alternative, he immediately dropped it and used the term elasticity instead. 185 00:21:27.220 --> 00:21:35.340 We may say generally, he wrote, that the elasticity or responsiveness of demand in a market is 186 00:21:35.340 --> 00:21:41.380 It's great or small according as the amount demanded increases much or little for a given 187 00:21:41.380 --> 00:21:47.740 fall in price, and diminishes much or little for a given rise in price. 188 00:21:47.740 --> 00:21:50.740 And he continues in a footnote. 189 00:21:50.740 --> 00:21:57.460 We may say that the elasticity of demand is one if a small fall in price will cause an 190 00:21:57.460 --> 00:22:04.060 equal proportionate increase in the amount demanded, or as we may say roughly, if a fall 191 00:22:04.060 --> 00:22:23.060 If a fall of 1% in price will increase the sales by 1%, that is, 2 or 1 half, if a fall of 1% in prices makes an increase of 2 or 1 half percent respectively, and the amount demanded, and so on. 192 00:22:23.060 --> 00:22:27.380 But there are serious drawbacks to the term elasticity. 193 00:22:27.380 --> 00:22:34.980 One, the mechanical analogy on which it rests is somewhat forced and far-fetched, and does 194 00:22:34.980 --> 00:22:42.820 not suggest what happens as directly and simply as response or responsiveness does. 195 00:22:42.820 --> 00:22:50.300 Two, it leads easily to the false assumption that the elasticity of demand for a commodity 196 00:22:50.300 --> 00:22:58.100 is something built into the commodity rather than merely the responsive consumers to a change of price. 197 00:22:58.100 --> 00:23:05.900 Three, it has led to a literature of mock precision and at the same time of oversimplification, 198 00:23:05.900 --> 00:23:12.800 to which the term response or even responsiveness is unlikely to lead. 199 00:23:12.800 --> 00:23:19.600 Our present purpose, however, is not to elaborate in general upon each of these drawbacks, 200 00:23:19.600 --> 00:23:31.500 but merely to show how Keynes's thought and writing were vitiated both by his use of the term elasticity and by his careless concept of it. 201 00:23:31.500 --> 00:23:35.500 It constantly leads him into tautology. 202 00:23:35.500 --> 00:23:45.200 They may also have different elasticities of supply in response to changes in the money rewards offered, page 302. 203 00:23:45.200 --> 00:23:53.400 But, as elasticities of supply means response, this could have been written more briefly, 204 00:23:53.400 --> 00:23:55.640 simply and clearly. 205 00:23:55.640 --> 00:24:01.320 The response of their supply to changes in price may also be different. 206 00:24:01.320 --> 00:24:07.800 Again, the elasticity of effective demand in response to changes in the quantity of 207 00:24:07.800 --> 00:24:16.240 of Money, page 305, could be at once clarified and shortened by writing the response of demand 208 00:24:16.240 --> 00:24:20.080 to changes in the quantity of money, etc. 209 00:24:20.080 --> 00:24:27.320 And still again, the elasticity of money prices in response to changes in effective demand 210 00:24:27.320 --> 00:24:35.280 measured in terms of money, page 285, could have been phrased simply the response of prices 211 00:24:35.280 --> 00:24:48.280 It is largely on such pretentious pleonasms and circumlocutions that Keynes's reputation for profundity seems to rest. 212 00:24:48.280 --> 00:24:54.280 Another digression on mathematical economics. 213 00:24:54.280 --> 00:25:03.280 Keynes devotes a whole section of chapter 21 to a statement of his price theories in mathematical form. 214 00:25:03.280 --> 00:25:19.480 It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic 215 00:25:19.480 --> 00:25:26.800 analysis, such as we shall set down in section 6 of this chapter, that they expressly assume 216 00:25:26.800 --> 00:25:33.720 strict independence between the factors involved and lose all their cogency and authority if 217 00:25:33.720 --> 00:25:36.560 this hypothesis is disallowed. 218 00:25:36.560 --> 00:25:42.280 Whereas in ordinary discourse, where we are not blindly manipulating but know all the 219 00:25:42.280 --> 00:25:48.240 time what we are doing and what the words mean, we can keep at the back of our heads 220 00:25:48.240 --> 00:25:53.640 the necessary reserves and qualifications and the adjustments which we shall have to 221 00:25:53.640 --> 00:25:59.520 to make later on, in a way in which we cannot keep complicated partial differentials at 222 00:25:59.520 --> 00:26:05.280 the back of several pages of algebra, which assume that they all vanish. 223 00:26:05.280 --> 00:26:11.880 Too large a proportion of recent mathematical economics are mere concoctions, as imprecise 224 00:26:11.880 --> 00:26:18.440 as the initial assumptions they rest on, which allow the author to lose sight of the complexities 225 00:26:18.440 --> 00:26:25.160 and Interdependencies of the Real World in a Maze of Pretentious and Unhelpful Symbols, 226 00:26:25.160 --> 00:26:29.360 pages 297 through 298. 227 00:26:29.360 --> 00:26:35.420 This is admirably said, but Keynes himself does not seem to have realized the full force 228 00:26:35.420 --> 00:26:36.640 of it. 229 00:26:36.640 --> 00:26:42.660 It is hard otherwise to account for the maze of pretentious and unhelpful symbols that 230 00:26:42.660 --> 00:26:45.300 he himself uses. 231 00:26:45.300 --> 00:26:49.380 Even after he has used them in section six, he declares, 232 00:26:49.380 --> 00:26:56.820 I do not myself attach much value to manipulations of this kind, and I would repeat the warning 233 00:26:56.820 --> 00:27:03.460 which I have given above that they involve just as much tacit assumption as to what variables 234 00:27:03.460 --> 00:27:10.140 are taken as independent, partial differentials being ignored throughout, as does ordinary 235 00:27:10.140 --> 00:27:38.380 Do such symbols and manipulations, however, in fact, usually serve this purpose? Or do 236 00:27:38.380 --> 00:27:44.820 Do they not much more frequently deceive the writer who uses them, and many of his readers, 237 00:27:44.820 --> 00:27:51.380 into supposing that he has discovered something that it will now be easy, or at least possible, 238 00:27:51.380 --> 00:27:58.460 to ascertain and substitute real numerical values for his algebraic symbols, and hence 239 00:27:58.460 --> 00:28:05.460 determine real relationships or make precise predictions that apply to the real world? 240 00:28:05.460 --> 00:28:12.660 The majority of Keynesians undoubtedly believe this, and the Master has encouraged this belief. 241 00:28:12.660 --> 00:28:19.660 Nevertheless, if we have all the facts before us, we shall have enough simultaneous equations 242 00:28:19.660 --> 00:28:22.380 to give us a determinate result. 243 00:28:22.380 --> 00:28:25.020 Page 299 244 00:28:25.020 --> 00:28:30.060 Of course, if we have all the facts, we shall have all the facts. 245 00:28:30.060 --> 00:28:33.980 If we already know the future, we can predict it. 246 00:28:33.980 --> 00:28:40.140 But when Keynes leads his readers to suppose that they can make real economic predictions 247 00:28:40.140 --> 00:28:47.620 or solve practical problems of economic policy if they only pull enough simultaneous equations 248 00:28:47.620 --> 00:28:54.900 together, if they only make sure to have as many equations as unknowns, he reminds one, 249 00:28:54.900 --> 00:28:59.180 by contrast, of the much sounder warning of Irving Fisher. 250 00:28:59.180 --> 00:29:07.180 Fisher, though he used even more mathematics in his theory of interest than Keynes does in his general theory, 251 00:29:07.180 --> 00:29:13.180 had a much surer sense of the limitations of the algebraic method. 252 00:29:13.180 --> 00:29:20.180 In science, the most useful formulas are those which apply to the simplest cases. 253 00:29:20.180 --> 00:29:26.180 For instance, in the study of projectiles, the formula of most fundamental importance 254 00:29:26.180 --> 00:29:32.020 The most important is that which applies to the path of a projectile in a vacuum. 255 00:29:32.020 --> 00:29:37.820 Next comes the formula which applies to the path of a projectile in still air. 256 00:29:37.820 --> 00:29:43.180 Even the mathematician declines to go beyond this and to take into account the effect of 257 00:29:43.180 --> 00:29:50.020 wind currents, still less to write the equations for the path of a boomerang or a feather. 258 00:29:50.020 --> 00:29:56.180 And best, science can only determine what would happen under assumed conditions. 259 00:29:56.180 --> 00:30:03.340 It can never state exactly what does or will happen under actual conditions. 260 00:30:03.340 --> 00:30:11.500 Keynes's mathematical equations on pages 304 through 306 are peculiarly suspect because 261 00:30:11.500 --> 00:30:23.500 Because they are all concerned with elasticities of prices, wage units, output, effective demand, employment, etc. 262 00:30:23.500 --> 00:30:35.500 Some of these concepts, e.g. output, are obviously too heterogeneous and hazy to be capable of statement in useful or valid mathematical form. 263 00:30:35.500 --> 00:30:48.500 But my present purpose is simply to ask whether elasticity itself is a precise enough concept to justify its use in a mathematical question. 264 00:30:48.500 --> 00:30:51.500 Marshall himself had great doubts on the matter. 265 00:30:51.500 --> 00:30:58.500 After a long section on elasticity of supply and supply schedules, he writes, 266 00:30:58.500 --> 00:31:06.500 But such notions must be taken broadly. The attempt to make them precise overreaches our strength. 267 00:31:06.500 --> 00:31:11.500 In conditions of real life, the problem is too heavy to be handled. 268 00:31:11.500 --> 00:31:22.500 If we select a few, then long-drawn-out and subtle reasonings with regard to them become scientific toys rather than engines for practical work. 269 00:31:22.500 --> 00:31:25.500 Frank H. Knight points out that 270 00:31:25.500 --> 00:31:32.960 Serious embarrassment arises from the fact that there is no conceivable way of determining 271 00:31:32.960 --> 00:31:40.700 the elasticity of either demand or supply with reference to any particular time period. 272 00:31:40.700 --> 00:31:46.700 The conditions underlying either curve will never actually remain constant. 273 00:31:46.700 --> 00:31:53.320 As to the chance of making any estimate or calculation of elasticity for any real period, 274 00:31:53.320 --> 00:31:59.420 The possibilities and the abstract are limited enough on the supply side, but are virtually 275 00:31:59.420 --> 00:32:02.600 zero on that of demand. 276 00:32:02.600 --> 00:32:07.980 We may surely carry our doubts further than Marshall carried his. 277 00:32:07.980 --> 00:32:15.040 Even to speak of the elasticity of demand for a commodity is to imply, as we have seen, 278 00:32:15.040 --> 00:32:21.520 not only that this elasticity is a quality of the commodity, but that there is something 279 00:32:21.520 --> 00:32:27.120 fixed or constant about it, at least within a given price range. 280 00:32:27.120 --> 00:32:33.200 To speak merely of the response of demand to a change in prices is to make neither of 281 00:32:33.200 --> 00:32:35.680 these tacit assumptions. 282 00:32:35.680 --> 00:32:41.340 We realize then that we are merely speaking of the response of buyers or consumers to 283 00:32:41.340 --> 00:32:48.760 a change of price under a whole complex set of concrete conditions at one moment of time 284 00:32:48.760 --> 00:32:58.760 without jumping to any tacit conclusions regarding what the response would be to a still further change of price of that commodity in the same direction, 285 00:32:58.760 --> 00:33:10.760 or even to precisely the same change of price of the same commodity under another set of concrete circumstances at another moment in time. 286 00:33:10.760 --> 00:33:16.760 Elasticity of demand cannot be measured. 287 00:33:16.760 --> 00:33:24.920 In spite of many ambitious efforts in real years, elasticity of demand is not only difficult 288 00:33:24.920 --> 00:33:27.580 but impossible to measure. 289 00:33:27.580 --> 00:33:34.400 We can collect plenty of statistics approaching infinity, but we can never be sure which to 290 00:33:34.400 --> 00:33:37.500 take and how to interpret them. 291 00:33:37.500 --> 00:33:42.920 To glimpse some of the real difficulties, the closing price of a bushel of ordinary 292 00:33:42.920 --> 00:33:55.920 The closing price of luxury hard wheat at Kansas City on October 2, 1957, was $2.10.25, and X bushels were sold there on that day. 293 00:33:55.920 --> 00:34:03.920 On October 3, the closing price was $2.10, and Y bushels were sold. 294 00:34:03.920 --> 00:34:14.920 On October 3rd, 1956, the closing price was $2.25, and Z bushels were sold. 295 00:34:14.920 --> 00:34:24.920 Assuming that we knew the values of X, Y and Z, that is, the total amount sold at Kansas City on each of these days, 296 00:34:24.920 --> 00:34:29.920 the data would still tell us nothing whatever about elasticity of demand. 297 00:34:29.920 --> 00:34:35.920 The price of wheat fluctuated greatly on each of these three days. 298 00:34:35.920 --> 00:34:43.920 To get an accurate average price, a statistician would have to know how many bushels sold at each different price 299 00:34:43.920 --> 00:34:50.920 – there is an eighth of a cent difference between prices – and make up a weighted average for the day. 300 00:34:50.920 --> 00:34:57.920 But this average would already begin to conceal what the statistician was trying to find out. 301 00:34:57.920 --> 00:35:03.920 for a different amount of wheat was sold at each eighth of a cents difference. 302 00:35:03.920 --> 00:35:08.920 He would have to chart these and draw a very irregular curve. 303 00:35:08.920 --> 00:35:17.920 This information would in turn be valueless because it would only tell us what went on at Kansas City on three days. 304 00:35:17.920 --> 00:35:23.920 Suppose, disregarding the enormous difficulties and complexities, 305 00:35:23.920 --> 00:35:42.920 We could find out and chart the amounts of ordinary hard wheat sold at each different price on every business day of 1956 and 1957, everywhere in the United States, and even that we could do the same for the preceding 50 years. 306 00:35:42.920 --> 00:35:48.920 Would we even then be able to measure the elasticity of demand for wheat? 307 00:35:48.920 --> 00:36:05.920 The figures would still be worthless, because the price of and demand for wheat are influenced in the United States, in spite of controls and price supports, by the total world supply and total world demand for wheat. 308 00:36:05.920 --> 00:36:21.920 Assuming we could collect world prices and world sales and translate them in acceptable statistical ways into terms of the American dollar, would we still be able to measure the elasticity of demand for wheat? 309 00:36:21.920 --> 00:36:31.920 Putting aside the enormous and practically insurmountable difficulties in the way of collecting and arranging statistics of any real precision, 310 00:36:31.920 --> 00:36:46.920 for the annual price of wheat as obtainable in any existing statistical compilation is merely the average of an enormous number of different daily and hourly prices of several different grades of wheat, 311 00:36:46.920 --> 00:36:59.280 When the price of a commodity changes, and the amount of it that is bought also changes, 312 00:36:59.280 --> 00:37:06.440 we are never able to say with confidence whether the amount bought changed because the price 313 00:37:06.440 --> 00:37:12.740 was at a different point on the same demand curve, or whether the amount bought changed 314 00:37:12.740 --> 00:37:17.140 because the demand curve itself shifted. 315 00:37:17.140 --> 00:37:22.800 And this is true whether we are talking about different prices and different amounts sold 316 00:37:22.800 --> 00:37:28.900 from one year to another, from one month to another, from one day to another, or from 317 00:37:28.900 --> 00:37:31.280 one hour to another. 318 00:37:31.280 --> 00:37:36.980 What economists do in practice is usually to beg the question. 319 00:37:36.980 --> 00:37:42.340 If the price is lowered and the amount of the product bought is increased, they say 320 00:37:42.340 --> 00:37:47.260 this proves that the demand for the product is inelastic. 321 00:37:47.260 --> 00:37:52.740 If the price is lowered and the amount of the product bought is not increased, they 322 00:37:52.740 --> 00:37:58.980 say this proves that the demand for the product is inelastic. 323 00:37:58.980 --> 00:38:04.720 But if the price is lowered and the amount sold also declines, the kind of thing that 324 00:38:04.720 --> 00:38:10.680 that happens on the commodity and stock exchanges every day of the week, they say this proves 325 00:38:10.680 --> 00:38:17.040 that the demand curve itself has fallen, or, in the professional jargon, has shifted to 326 00:38:17.040 --> 00:38:19.080 the left. 327 00:38:19.080 --> 00:38:24.800 And when we turn to elasticity of supply, our difficulties of measurement increase rather 328 00:38:24.800 --> 00:38:26.360 than diminish. 329 00:38:26.360 --> 00:38:33.200 For both elasticity of demand and elasticity of supply have a time dimension. 330 00:38:33.200 --> 00:38:39.480 As applied to supply, this time dimension is somewhat different for every commodity, 331 00:38:39.480 --> 00:38:46.940 yet nothing is more frequent than to find lags in adjustment confused with lack of adjustment. 332 00:38:46.940 --> 00:38:53.600 The supply of coffee, for example, is called inelastic, when what is meant is that it takes 333 00:38:53.600 --> 00:38:59.360 about five years for newly planted coffee trees to mature and bear. 334 00:38:59.360 --> 00:39:22.360 Therefore, if there is a rise in the demand for coffee, and a consequent rise in the price, this year's supply and even next year's supply may prove inelastic, but the supply five years from now may prove to be only too responsive to this year's increase in demand, which may not be permanent. 335 00:39:22.360 --> 00:39:37.360 Again, to take an imaginary commodity, we may find that the elasticity of supply in response to an increase in price, as measured in Marshallian terms, is one and a half the first month. 336 00:39:37.360 --> 00:39:45.560 because the increased price brings forth speculative holdings of the commodity, then only one-quarter 337 00:39:45.560 --> 00:39:52.300 the second month, one-sixteenth the third month, zero for the next nine months and then 338 00:39:52.300 --> 00:40:00.840 suddenly unity or better as a new crop comes on the market or a new plant comes into production. 339 00:40:00.840 --> 00:40:06.440 But what then is THE elasticity of supply for that commodity? 340 00:40:06.440 --> 00:40:13.280 I have not entered upon this long digression to attempt to discredit the concept of elasticity 341 00:40:13.280 --> 00:40:19.320 of demand or supply, or demand or supply schedules or curves. 342 00:40:19.320 --> 00:40:26.520 These are useful diagrammatic analogies, concepts and tools of thought when employed with moderation 343 00:40:26.520 --> 00:40:28.720 and humility. 344 00:40:28.720 --> 00:40:35.720 But they have become the basis for an enormous and pretentious and cocky literature of mathematical 345 00:40:36.440 --> 00:40:56.440 and Mathematical Economics, which parades and manipulates a maze of algebraic symbols which are assumed to have scientific and even predictive value, but for which it would be impossible in practice to ascertain or assign real numerical values. 346 00:40:56.440 --> 00:41:07.440 One reason for this is not merely that these values cannot really be known, but that they are oversimplified and hence falsified even in concept. 347 00:41:07.440 --> 00:41:13.440 Demand responds to changes in price. Supply responds to changes in price. 348 00:41:13.440 --> 00:41:26.440 But there is no reason to suppose that any scientifically predeterminable response of demand or supply attaches under all conditions to any given change in price. 349 00:41:26.440 --> 00:41:33.440 To the practical businessman or entrepreneur, this is and must remain a matter of guesswork. 350 00:41:33.440 --> 00:41:42.440 He can find out what has happened to that commodity or similar commodities in the past, but this is no sure guide to the future. 351 00:41:42.440 --> 00:41:48.440 The mathematical economist cannot give him any sure-fire formula. 352 00:41:48.440 --> 00:41:55.440 Keynes, it is true, has no unique guilt for the mathematical part of the general theory. 353 00:41:55.440 --> 00:41:59.440 His mathematics are comparatively modest in extent. 354 00:41:59.440 --> 00:42:08.440 His claims for the usefulness of his equations are far more modest than those of the present school of mathematical economists. 355 00:42:08.440 --> 00:42:09.440 Sacrosanct Wage Rates, Sinful Interest Rates 356 00:42:09.440 --> 00:42:15.600 But it is just as well to point out that nearly all the mathematics employed in the general 357 00:42:15.600 --> 00:42:23.080 theory in so far as practical application or even theoretical illumination is concerned 358 00:42:23.080 --> 00:42:27.880 is empty and useless. 359 00:42:27.880 --> 00:42:34.600 Sacrosanct Wage Rates, Sinful Interest Rates 360 00:42:34.600 --> 00:42:42.280 Payne's ends chapter 21 in a burst of pure demagogy reminiscent of Marx. 361 00:42:42.280 --> 00:42:47.300 It is impossible to treat this final section as serious economics. 362 00:42:47.300 --> 00:42:53.400 It is designed to prove, one, that it would be harmful or dangerous to reduce almost any 363 00:42:53.400 --> 00:43:00.960 wage rate, and two, that it would be beneficial to reduce almost any interest rate. 364 00:43:00.960 --> 00:43:04.960 The confusions in this section are almost hopeless. 365 00:43:04.960 --> 00:43:08.960 Some of them are foreshadowed a few pages ahead. 366 00:43:08.960 --> 00:43:15.560 The cost unit or the wage unit can thus be regarded as the essential standard of value, 367 00:43:15.560 --> 00:43:21.520 and the price level, given the state of technique and equipment, will depend partly on the cost 368 00:43:21.520 --> 00:43:24.720 unit and partly on the scale of output. 369 00:43:24.720 --> 00:43:26.720 Page 302 370 00:43:26.720 --> 00:43:33.160 Now to say that the wage unit is the essential standard of value is to say that the price 371 00:43:33.160 --> 00:43:40.040 in dollars and moreover the average price in dollars of a heterogeneous good or service 372 00:43:40.040 --> 00:43:46.080 is the essential standard of value and not the dollar in terms of which the price is 373 00:43:46.080 --> 00:43:47.980 expressed. 374 00:43:47.980 --> 00:43:54.520 For the wage unit, let us remember, is the money wage of an hour's employment of ordinary 375 00:43:54.520 --> 00:44:11.520 In other words, Keynes is saying that the dollar in which the price of labor is expressed is not the essential standard of value, but that this average price is the essential standard of value. 376 00:44:11.520 --> 00:44:23.520 Logically, this is something like saying that the foot is not the standard of length, but that the arm unit, the length of the ordinary man's arm, is the essential standard of length. 377 00:44:23.520 --> 00:44:36.520 It is like saying that the pound is not the standard of weight, but that the ordinary beefsteak, which, say, now happens to average two and a half pounds, is the essential standard of weight. 378 00:44:36.520 --> 00:44:42.520 I am not myself arguing that the dollar is the standard of value in the United States. 379 00:44:42.520 --> 00:44:49.920 States. All prices are expressed in dollars, and when two or more prices are compared with 380 00:44:49.920 --> 00:44:55.800 each other, they are compared in terms of dollars, and are, in that sense, measured 381 00:44:55.800 --> 00:45:03.220 in dollars. But the dollar or any other monetary unit is not the standard of value in the sense 382 00:45:03.220 --> 00:45:09.040 that a foot is the standard of value, or the pound is the standard of weight. 383 00:45:09.040 --> 00:45:38.040 4. So far at least as practical life is concerned, the foot and the pound are not relative but absolute. They remain unchanged. But the value of the dollar, or of any other monetary unit, is itself constantly changing. Its value is itself measured in terms of its purchasing power, i.e. by the varying amounts of goods and services against which it is exchanged. 384 00:45:38.040 --> 00:45:59.040 Economic value, in short, cannot be measured in absolute terms. Market value can be expressed only as a comparison, as a ratio of exchange, but it is the dollar or other monetary unit in terms of which all economic values are commonly expressed. 385 00:45:59.040 --> 00:46:13.040 The dollar, then, is not the essential standard of value, but this only multiplies the absurdity of regarding the dollar price of an hour's ordinary labor as the essential standard of value. 386 00:46:13.040 --> 00:46:34.040 One might say that this was a return to the crude value theories of Ricardo and of Marx, but it is logically even more indefensible, because in regarding an hour's ordinary labor as the standard of value, Ricardo and Marx were trying to set this standard in real terms. 387 00:46:34.040 --> 00:46:47.040 Whereas Keynes rejects the monetary unit as the standard of value and fails to see that its value is inevitably involved in the essential standard of value he chooses. 388 00:46:47.040 --> 00:47:02.040 For the wage unit, being merely the average hourly wage in terms of dollars, is itself merely the temporary average ratio of exchange between the currency unit and a labor unit. 389 00:47:02.040 --> 00:47:17.040 And when Keynes declares that the price level will depend partly on the cost unit, page 302, he is saying that the average of all prices is determined and caused by a single price. 390 00:47:17.040 --> 00:47:27.040 Modern economic theory has made it clear not only that costs are themselves prices, but that costs and prices mutually determine each other. 391 00:47:27.040 --> 00:47:36.040 How did Keynes come to slip into these logical monstrosities, these apparently quite gratuitous absurdities? 392 00:47:36.040 --> 00:47:42.040 The answer is that he considered these absurdities essential to his central thesis, 393 00:47:42.040 --> 00:47:47.040 that it is always harmful even to think about reducing wage rates. 394 00:47:47.040 --> 00:47:55.040 If money wages were to fall without limit whenever there was a tendency for less than full employment, 395 00:47:55.040 --> 00:48:02.040 The hysterical supposition that any attempt to adjust wage rates to bring them into equilibrium with other prices would cause wages to fall without limit and go to zero is a bugaboo that could scare only men. 396 00:48:25.040 --> 00:48:33.040 and Mental Children. It is just what it sounds like. Howling nonsense. 397 00:48:33.040 --> 00:48:39.040 Monetary Inflation Preferred to Wage Adjustment 398 00:48:39.040 --> 00:48:47.040 Section 7 of Chapter 21 is chiefly given over to the proposition that whenever there is unemployment, 399 00:48:47.040 --> 00:48:54.040 the escape will be normally found in changing the monetary standard or the monetary system 400 00:48:54.040 --> 00:49:00.280 To raise the quantity of money, rather than enforcing down the wage unit and thereby increasing 401 00:49:00.280 --> 00:49:04.080 the burden of debt, page 307. 402 00:49:04.080 --> 00:49:10.080 In other words, unemployment should always be cured by further monetary inflation, never 403 00:49:10.080 --> 00:49:14.040 by adjusting wage rates that have got out of line. 404 00:49:14.040 --> 00:49:19.520 The piano must be adjusted to the stool, not the stool to the piano. 405 00:49:19.520 --> 00:49:24.840 We have already dealt with the folly of all this, but a further point should be expanded 406 00:49:24.840 --> 00:49:27.520 upon here. 407 00:49:27.520 --> 00:49:34.960 Keynes speaks of forcing down THE wage unit, but we have seen that this wage unit is in 408 00:49:34.960 --> 00:49:39.000 fact an average of hourly wage rates. 409 00:49:39.000 --> 00:49:45.800 Now this average is a statistical construct, not a concrete fact, and not necessarily a 410 00:49:45.800 --> 00:49:47.920 relevant fact. 411 00:49:47.920 --> 00:49:55.080 Unemployment at any given time may be cured not by reducing average wages but by reducing 412 00:49:55.080 --> 00:50:01.400 certain specific wage rates and probably by diverse percentages. 413 00:50:01.400 --> 00:50:07.500 Reducing the specific wage rates will, of course, necessarily also reduce the average, 414 00:50:07.500 --> 00:50:12.780 but it is the specific adjustments and not the resulting average adjustment that are 415 00:50:12.780 --> 00:50:16.400 relevant to curing the unemployment. 416 00:50:16.400 --> 00:50:22.640 I have already shown in the illustration of what happened in 25 different industries, 417 00:50:22.640 --> 00:50:31.060 pages 284 through 285, that it is by widely varying, specific changes that wage adjustments 418 00:50:31.060 --> 00:50:33.000 are actually made. 419 00:50:33.000 --> 00:50:35.320 Butical illustration. 420 00:50:35.320 --> 00:50:43.840 Let us say that we have two commodities, gadgets and widgets, each of which sells for $2.50. 421 00:50:43.840 --> 00:50:49.480 The marginal unit cost of each consists chiefly of labor cost. 422 00:50:49.480 --> 00:50:55.500 At a wage of two dollars an hour, say, the total marginal unit cost of each would be 423 00:50:55.500 --> 00:50:59.480 equal to the price, two dollars and fifty cents. 424 00:50:59.480 --> 00:51:05.880 But the wage rate in the gadget industry happens to be one dollar and forty cents an hour, 425 00:51:05.880 --> 00:51:12.360 and the wage rate in the widget industry, two dollars and sixty cents an hour. 426 00:51:12.360 --> 00:51:18.040 The average wage rate in both industries together is then $2.00. 427 00:51:18.040 --> 00:51:24.820 The average is not excessive in relation to the demand for and the price of each commodity. 428 00:51:24.820 --> 00:51:31.160 But this average is no consolation to the widget industry, which cannot make a profit. 429 00:51:31.160 --> 00:51:37.080 In a closed economy and with no acceptable substitute, the widget industry could raise 430 00:51:37.080 --> 00:51:46.080 would raise its prices, but this would reduce the demand for its product and hence would create unemployment in the industry. 431 00:51:46.080 --> 00:51:55.080 In an open economy in which, say, the Japanese industry could still sell widgets in New York at $2.50, 432 00:51:55.080 --> 00:52:05.080 the American widget industry would have to close down entirely, throwing all previous workers in the industry out of employment. 433 00:52:05.080 --> 00:52:10.440 There might continue to be full employment in the gadget industry, which would be able 434 00:52:10.440 --> 00:52:17.480 to lower prices and might even expand, but not enough, at least not for a long time, 435 00:52:17.480 --> 00:52:21.680 to absorb the unemployment in the widget industry. 436 00:52:21.680 --> 00:52:27.800 The illustration is perhaps lengthy, but it is apparently necessary to spell it out to 437 00:52:27.800 --> 00:52:33.320 make clear the meaninglessness of averages and aggregates when we are trying to discuss 438 00:52:33.320 --> 00:52:39.320 Realistically, the maladjustments in the economy which led to unemployment. 439 00:52:39.320 --> 00:53:00.320 Keynes's insistence on lumped thinking, on dealing with the economy in such unacknowledged averages and aggregates and mixed bags as the wage unit and the price level, results in systematically missing the very problems to be solved. 440 00:53:00.320 --> 00:53:06.040 Those Arbitrary Moneylenders 441 00:53:06.040 --> 00:53:12.040 Keynes's discussion of interest rates is, as we have seen, even more demagogic than 442 00:53:12.040 --> 00:53:14.440 his discussion of wage rates. 443 00:53:14.440 --> 00:53:20.480 Today, and presumably for the future, the schedule of the marginal efficiency of capital 444 00:53:20.480 --> 00:53:26.960 is, for a variety of reasons, much lower than it was in the nineteenth century. 445 00:53:26.960 --> 00:53:29.480 Page 308 446 00:53:29.480 --> 00:53:36.720 Here is a sweeping generalization based on conditions in 1935, the year in which Keynes 447 00:53:36.720 --> 00:53:43.160 was composing the General Theory, and on the four or five years preceding. 448 00:53:43.160 --> 00:53:46.800 There is no reason for supposing it to be true. 449 00:53:46.800 --> 00:53:53.840 It seems merely quaint in the 1950s in a world of inflation, full employment, over-employment 450 00:53:53.840 --> 00:53:59.000 and unparalleled capital investment plans everywhere. 451 00:53:59.000 --> 00:54:06.620 The acuteness and peculiarity of our contemporary problem arises, therefore, Keynes continues, 452 00:54:06.620 --> 00:54:11.540 out of the possibility that the average rate of interest which will allow a reasonable 453 00:54:11.540 --> 00:54:17.640 level of employment is one so unacceptable to wealth owners that it cannot be readily 454 00:54:17.640 --> 00:54:22.080 established merely by manipulating the quantity of money. 455 00:54:22.080 --> 00:54:28.640 But the most stable and the least easily shifted element in our contemporary economy has been 456 00:54:28.640 --> 00:54:34.760 hitherto, and may prove to be in the future, the minimum rate of interest acceptable to 457 00:54:34.760 --> 00:54:41.680 the generality of wealth-owners, pages 308 through 309. 458 00:54:41.680 --> 00:54:47.160 Here everything that has been discovered about economics since the Middle Ages, when all 459 00:54:47.160 --> 00:54:54.560 interest was called usury and considered wholly unjustified, is thrown out the window. 460 00:54:54.560 --> 00:55:12.560 The interest rates we are to understand, unlike everything else in the market, are fixed merely by one party to the transaction, by the seller or the lender, by sheer arbitrary determination, custom, or crude exploitation theory of interest. 461 00:55:12.560 --> 00:55:21.560 Everything depends on what lenders will accept, and nothing on what borrowers will offer, or why they will offer it. 462 00:55:21.560 --> 00:55:36.560 The current yield of direct capital investments, nor the expected yield of direct capital investments, the marginal efficiency of capital, is supposed to have any influence on the interest rate. 463 00:55:36.560 --> 00:55:44.560 The borrowers and the lenders are supposed to be a different class of people, presumably the poor and the rich. 464 00:55:44.560 --> 00:56:13.560 If A is thinking of buying a stock that is currently yielding 5% a year on its price, it is presumably an outrage for B to ask 5% interest if it is to borrow more. 465 00:56:13.560 --> 00:56:18.860 Interest, if A wants to borrow the money to buy this nonsense. 466 00:56:18.860 --> 00:56:25.200 The rate of interest is a market price like any other market price. 467 00:56:25.200 --> 00:56:33.840 It is as flexible on new loans as any other price, as any historic comparisons will show, 468 00:56:33.840 --> 00:56:40.160 and much more flexible over short periods, especially in the downward direction, than 469 00:56:40.160 --> 00:56:41.720 wage rates. 470 00:56:41.720 --> 00:57:01.720 Moreover, in the modern capitalistic economy, the lenders, owners of bonds, of savings deposits and life insurance policies, are as a rule not the rich, and the borrowers, owners of common stock, of private firms and of real estate, not the poor. 471 00:57:01.720 --> 00:57:10.720 Interest rates are related to other prices and are constantly adjusting to other prices as other prices are to them. 472 00:57:10.720 --> 00:57:23.720 Wage rates are related to other prices and, when not fixed by government or union coercion, are constantly adjusting to other prices as other prices are to them. 473 00:57:23.720 --> 00:57:34.720 When both adjustments are right, when there is full price, wage and interest rate coordination, there is full employment and maximum balanced production. 474 00:57:34.720 --> 00:57:45.720 But Keynes treats both interest rates and wages as if they were completely outside of the price system, or at least as if they ought to be. 475 00:57:45.720 --> 00:57:51.720 Government must constantly step in to keep up wage rates and to push down interest rates. 476 00:57:51.720 --> 00:58:01.720 This, of course, is a naked class theory of the business cycle and of unemployment, strikingly similar to Marxist theory. 477 00:58:01.720 --> 00:58:11.720 As with Marxism, the tacit assumption is that these government policies are necessary to protect the poor and discomfit the rich. 478 00:58:11.720 --> 00:58:24.720 But as also with Marxism, there is the pose that morality has nothing to do with it, that the existing system just won't work and must break down. 479 00:58:24.720 --> 00:58:39.720 The chief difference between Marxism and Keynesianism is that for the former, the employer is the chief villain, and for the latter, the lender, with his nasty and pointless liquidity preference.