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NOTE 23. Return To Mercantilism?

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Chapter 23 Return to Mercantilism

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Let Goods Be Home Spun

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I have had occasion to point out several times in the course of this book that the leading

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ideas put forward by Keynes in the general theory, far from being advanced and original,

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were a revision to much older and more primitive ideas.

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And though Keynes flattered himself in the preface to the general theory for treading

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along unfamiliar paths and for escaping from the old ideas, he began to recognize increasingly

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in the course of the general theory that he was really moving back in his essential notions

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to pre-classical 17th century thinking, and that his ideas bore a striking similarity

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to those of the mercantilists.

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In chapter 23, he recognized these similarities frankly and explicitly, but treated them as

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confirmation of the correctness of his new views.

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In rejecting the classical views on free trade, he thinks it fairest to point out the extent

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of His Own Conversion.

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So lately as 1923, as a faithful pupil of the classical school, who did not at that

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time doubt what he had been taught, and entertained on this matter no reserves at all, I wrote,

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If there is one thing that protection cannot do, it is to cure unemployment.

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There are some arguments for protection, based upon its securing possible but improbable

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Advantages, to which there is no simple answer, but the claim to cure unemployment involves

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the protectionist fallacy in its grossest and crudest form.

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Page 334.

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Keynes might have quoted a far more comprehensive endorsement of free trade that he made only

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a few months before in the Manchester Guardian commercial supplement of January 4, 1923.

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We must hold to free trade in its widest interpretation as an inflexible dogma, to which no exception

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is admitted, wherever the decision rests with us.

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We must hold to this even where we receive no reciprocity of treatment, and even in those

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rare cases whereby infringing it we could in fact obtain a direct economic advantage.

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We should hold to free trade as a principle of international morals and not merely as

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a doctrine of economic advantage.

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These quotations are chiefly interesting as illustrations of Keynes's intellectual virtuosity

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and instability.

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He could be equally eloquent and brilliant on either side of a question.

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While he repudiates his free trade views in the general theory published in 1936, he had

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repudiated them even more strongly in an article in the Yale Review in the summer of 1933.

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There he announced the abandonment of his former free trade ideas and frankly sympathized

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with those who would minimize rather than with those who would maximize economic entanglement

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Among Nations Let goods be homespunned wherever it is reasonably

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and conveniently possible, Keynes continued there, and above all, let finance be primarily

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national.

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A greater measure of national self-sufficiency and economic isolation among countries than

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existed in 1914 may tend to serve the cause of peace rather than otherwise.

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This last belief must have received something of a jolt with the outbreak of World War II

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six years later.

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It is an historic irony that Keynes wrote these words just when Nazi Germany was about

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to launch on its policy of autarky.

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In that 1933 article, Keynes at least recognized that national self-sufficiency and a planned

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and Domestic Economy went logically together, whereas domestic planning and free trade or

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internationalism did not.

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In the general theory, this is less explicitly admitted.

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As a further example of Keynes's intellectual instability, his admiring biographer speaks

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of his reversion towards free trade at the end of his life.

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But our chief purpose here is not to point to Keynes's many inconsistencies, but to

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examine which of his ideas were right and which were wrong, and clearly the position

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he took in the general theory on free trade versus mercantilism was untenable.

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He begins by stating what seems to him the element of scientific truth and mercantilist

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doctrine, page 335.

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He admits that, the advantages claimed by the mercantilists are avowedly national advantages

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and are unlikely to benefit the world as a whole, page 335.

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But he neglects to add that they are all beggar-thy-neighbor policies, the total result of which, even

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on the mercantilists' own assumptions, could only injure the world as a whole if universally

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applied.

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And he refuses to recognize that the typical mercantilist policies, the chief of which

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is protection, hurt even, and most often especially, the nation that tries them alone.

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For such a nation either forces its own consumers to pay more for the products they wish than

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they would otherwise have to pay, or deprives them of these products altogether.

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Keynes creates home industries that are less efficient than the corresponding foreign industries

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at the cost of injuring home industries that are more efficient than the corresponding

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foreign industries.

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Keynes concedes this in a parenthetic and left-handed way.

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The advantages of the International Division of Labor are real and substantial even though

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the classical school greatly overstressed them.

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Page 338 But he never tells the reader explicitly what these advantages are, for when they are

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spelled out it becomes evident that even some of the authors of the classical school never

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really stressed them enough.

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Keynes states and endorses practically all the ancient and long-exploded fallacies of

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the mercantilists.

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We may safely leave the refutation of these to Adam Smith, Ricardo, Bastia, and Mill,

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or even to Henry George, William Graham Sumner, Taussig, and a hundred others.

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It really is not a task that needs to be done over and over again in every generation or

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decade.

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Or is it?

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What keeps the mercantilist fallacies alive, in spite of a thousand refutations, is, one,

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the special short-run interests of particular producers within each country who would always

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stand to benefit if competition against them alone could be kept out, and two, the persistent

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inability or refusal, even of many economists, to look for or understand the secondary and

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long-run effects of a proposed policy.

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The art of economics consists in looking not merely at the immediate, but at the longer

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effects of any act or policy.

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It consists in tracing the consequences of that policy not merely for one group, but

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for all groups.

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Running Comment on Running Comments

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It may be well, then, to make a running comment on some of Keynes's running comments.

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The weight of my criticism, he tells us, is directed against the inadequacy of the theoretical

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foundations of the laissez-faire doctrine upon which I was brought up and which for

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many years I taught, against the notion that the rate of interest and the volume of investment

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are self-adjusting at the optimum level, so that preoccupation with the balance of trade

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is a waste of time.

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For we, the faculty of economists, prove to have been guilty of presumptuous error in

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treating as a puerile obsession what for centuries has been a prime object of political statecraft.

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Page 339.

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What is to be said of this?

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In a free economy, the rate of interest and the volume of investment are, in the absence

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of government tampering with the money and credit supply, just as much market phenomena

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as the price of milk and the quantity of milk sold.

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They are just as self-adjusting as any other price or any other volume of sales.

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They are just as self-adjusting in relation to current supply and current demand.

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Classical theory held that in free markets, prices, wages and interest rates, volume of

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sales and volume of investment tended to move forward or oscillate about, hypothetical and

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always changing, equilibrium levels.

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But good classical theory never assumed that they invariably adjusted themselves at the

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at the optimum level. If that phrase is used to mean some ideal level, that would require

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perfect foresight on the part of buyers and sellers, lenders, borrowers and entrepreneurs.

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Sound classical theory never assumed perfect foresight. One may ask whether it is not Keynes

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who is guilty of presumptuous error in so cavalierly dismissing what the best economists

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have taught for two centuries.

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Keynes's attack on free interest rates is really an attack on free markets and free

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enterprise generally.

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In the very next paragraph, we find him describing free markets as the operation of blind forces,

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page 339.

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Recently, he continues, practical bankers in London have learnt much, and one can almost

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Page 339

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By 1957, however, bankers had really learnt much.

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They had learnt that Keynes's theories didn't work.

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After twenty years of cheap money policies, they raised the discount rate of the Bank

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of England to 7%, to halt inflation and to protect the foreign balance.

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But the world is only slowly beginning to realize that excessive wage rates can cause

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unemployment under any conditions, and it is precisely at excessive wage rates that

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Keynes forbids us to point an accusing finger.

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His whipping boy was the interest rate.

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He even goes so far as to write in a footnote,

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The remedy of an elastic wage unit so that a depression is met by a reduction of wages

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is liable to be a means of benefiting ourselves at the expense of our neighbors.

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Page 339.

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Just how it injures our neighbors to offer them goods at lower prices,

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or just how it injures the great body of the workers to reduce wage rates to the equilibrium

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There was wisdom in the mercantilists' intense preoccupation with keeping down the rate of

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interest by means of usury laws, and in their readiness in the last resort to restore the

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a stock of money by devaluation if it had become plainly deficient through an unavoidable

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foreign drain, a rise in the wage unit or any other cause.

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Page 340 Practically all the Keynesian remedies then,

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especially arbitrarily holding down interest rates and inflating the currency, were known

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to and practiced by the mercantilists of the seventeenth century and earlier by Keynes's

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Wise Mercantilists, Stupid Economists

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Merchantilist thought never supposed that there was a self-adjusting tendency by which the

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rate of interest would be established at the appropriate level.

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On the contrary, they were emphatic that an unduly high rate of interest was the main

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obstacle to the growth of wealth, and they were even aware that the rate of interest

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depended on liquidity preference and the quantity of money.

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They were concerned both with diminishing liquidity preference and with increasing the

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quantity of money, and several of them made it clear that their preoccupation with increasing

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the quantity of money was due to their desire to diminish the rate of interest.

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Page 341.

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Keynes was charmed to find that his own chief fallacies had been anticipated by the philosopher

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John Locke in 1692.

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The great Locke was, perhaps, the first to express in abstract terms the relationship

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between the rate of interest and the quantity of money in his controversy with petty.

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Page 342

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The reason Locke also mistook this relationship was that he, too, like Keynes, assumed that

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the rate of interest was a purely monetary phenomenon.

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But Locke at least had the excuse of having lived and died not only before the appearance

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of the Classical Economists or of the work of Boehm-Bawerk or Irving Fisher, but even

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before the appearance of David Hume's essay Of Interest in 1741.

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The great Hume was perhaps the first to point out that the rate of interest is not derived

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from the quantity of the precious metals, by which he meant the quantity of money.

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The mercantilists, continues Keynes, were under no illusions as to the nationalistic

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character of their policies and their tendency to promote war.

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It was national advantage and relative strength at which they were admittedly aiming.

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We may criticize them for the apparent indifference with which they accepted this inevitable consequence

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of an international monetary system, but intellectually their realism is much preferable to the

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The Confused Thinking of Contemporary Advocates of an International Fixed Gold Standard and

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Laissez-Faire in International Lending who believe that it is precisely these policies

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which will best promote peace.

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Page 348.

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This is the beginning of a series of closely packed paradoxes and contradictions in which

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Keynes proceeds to prove triumphantly that nationalism is the best internationalism,

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that hostile policies bring peace and friendly policies war, that international currency

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stability and free trade bring instability and chaos, and that nationalistic and mutually

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hostile policies bring international stability and prosperity.

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Having just implied in the passage quoted above that nationalistic and beggar-my-neighbor

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Their policies were realistic, and that an international gold standard and freedom of

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lending and trade lead to war rather than peace, Keynes goes on.

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For in an economy subject to money contracts and customs more or less fixed over an appreciable

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period of time, where the quantity of domestic circulation and the domestic rate of interest

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are Primarily Determined by the Balance of Payments, page 348.

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I must interrupt here to point out that this is an obvious confusion of cause and effect.

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The balance of payments is itself heavily influenced and largely determined by relative

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rates of interest in different nations, relative national changes in the quantity of money,

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and Relative Changes in National Price Averages, or rather in specific prices.

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The balance of payments, in fact, is far more often a consequence of one or more of these

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changes than they are of the balance of payments.

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Continuing from the point where I interrupted, Keynes goes on to declare that, under these

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conditions, there is no orthodox means open to the authorities for countering unemployment

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at Home, except by struggling for an export surplus and an import of the monetary metal

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at the expense of their neighbors.

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Never in history was there a method devised of such efficacy for setting each country's

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advantage at variance with its neighbors as the international gold or formerly silver

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standard, for it made domestic prosperity directly dependent on a competitive pursuit

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of Markets and a Competitive Appetite for the Precious Metals, p. 348-349.

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What this passage mainly illustrates is how thoroughly mercantilistic Keynes's assumptions

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had become, and how infirm and uncertain was his grasp of classical theory.

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Under an international gold standard and freedom of trade, the import of gold by Alfavia is

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is no more at the expense of betavia, which exported the gold, than the import of wheat

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by betavia is at the expense of alfavia, which exported the wheat.

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Just as an individual merchant in either country may wish to exchange his money for wheat or

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vice versa, so one merchant in alfavia may wish to exchange his wheat for money and another

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Another merchant in Batavia may wish to exchange his money for Alfavian wheat.

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The transaction occurs because both parties to the transaction gain by it.

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It is at neither's expense.

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To say that Alfavia gains gold and that Batavia loses gold is merely a mercantilistic confusion.

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The transaction is between individual merchants.

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To assume that only the person who gets the money or gold gains, and that the person who

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gets goods for it must lose, is another puerile confusion.

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True, free trade under an international gold standard involves a competitive pursuit of

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markets.

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So does domestic trade.

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An American and a German steel company may bid against each other for a construction

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and Contract in Italy, but other American and German steel companies may also bid against

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their respective compatriots, either for domestic or for foreign business.

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It is precisely mercantilism, medieval and modern, that turns what ought to be competition

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between individuals or firms into competition between nations.

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It is precisely domestic currency manipulations, devaluations, exchange controls, import quotas,

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bilateral trade treaties and high tariffs that create international antagonisms.

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As for a competitive appetite for the precious metals, one may just as well speak of a competitive

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appetite for Swiss watches or for German cameras or for French wines or for English dinnerware

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or for American typewriters and automobiles.

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If I want to buy anything at all, at home and abroad, my bid must compete with that

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of others who want it.

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Was Keynes against competition itself?

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If so, what did he propose to substitute?

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His actual proposals merely tend to substitute nationalized and politicalized competition

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for interpersonal or inter-firm competition.

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They would increase rather than reduce the pressure for beggar-my-neighbor policies and

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for trade wars and real wars.

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When by happy accident the new supplies of gold and silver were comparatively abundant

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—Keynes continues without break from the foregoing quotation— the struggle for the

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precious metals might be somewhat abated.

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Page 349

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Here is another glaring fallacy.

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If the precious metals had been abundant, they would not have been precious.

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If abundance of the monetary metal is what is needed, then the logical remedy would be

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a copper standard, or, still better, an iron standard.

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And the remark just quoted, even the most elementary and basic economic principle, the

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relationship between value and quantity, is forgotten.

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Unless, of course, Keynes's unstated argument is that it would have been precisely necessary

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to have a constant cheapening of the precious metals to perpetuate a rise of prices, a

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constant inflation.

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Keynes goes on, adding bad controversial manners to bad logic.

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The part played by orthodox economists whose common sense has been insufficient to check

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Check Their Faulty Logic Has Been Disastrous to the Latest Act, page 349

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Here is a wholesale jibe at Adam Smith, Ricardo, John Stuart Mill, Bastier, Bostable, Marshall

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and Taussig, at everyone who has contributed anything to the extension or clarification

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of the theory of foreign trade, and made by a man whose own common sense was insufficient

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to check his illogic.

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One begins to suspect that Keynes's reputation, like Shaw's, rests in large part on sheer impudence.

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And what, in the place of the disastrous policies favored by the orthodox economist, does Keynes

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recommend?

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The opposite.

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It is the policy of an autonomous rate of interest, unimpeded by international preoccupations,

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and of a national investment program directed to an optimum level of domestic employment,

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which is twice blessed in the sense that it helps ourselves and our neighbors at the same

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time, and it is the simultaneous pursuit of these policies by all countries together which

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is capable of restoring economic health and strength internationally, whether we measure

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it by the level of domestic employment or by the volume of international trade.

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Page 349 So, this is what logic and common sense are

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supposed to look like.

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If each nation follows nationalistic policies, regardless of their effect on other nations,

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if each nation tries to maximize exports and to minimize or forbid imports, the volume

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of international trade will be greater than ever.

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If the bureaucrats seize our savings and forbid us to invest our own funds for fear that

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and we would make a terrible mess of it, they will have the omniscience to know just when

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to invest in and just where, and just how much to put into each venture, and just what

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ventures will succeed and what will not.

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And we shall all live forever in a perfectly regulated economic paradise.

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For further particulars, see what happened to the British government investment program

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since the end of World War II and the history of our own Reconstruction Finance Corporation,

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The Religion of Governmental Controls.

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In Sections 4, 5 and 6 of Chapter 23, in his further onslaught on the doctrine of free

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trade and a free market rate of interest, Keynes continues to abuse the classical economists

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and to praise, in contrast, the medievalists and the present-day currency cranks.

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The classical school created a cleavage, he contends, between the conclusions of economic

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theory and those of common sense.

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The extraordinary achievement of the classical theory was to overcome the beliefs of the

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natural man and at the same time to be wrong.

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Page 350 Such epigrams came easily to Keynes. They are the chief source, I suspect, of his

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reputation among literary men as a great economist. But it is astonishing how much more appropriate

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they are when applied to Keynes's own theories than to those against which they were directed.

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Certainly there is a yawning gap between the conclusions of Keynesian theory and those

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of Common Sense.

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Keynes's own most extraordinary achievement was to overcome the beliefs of the natural

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man and at the same time to be wrong.

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For the natural man, unconfused by Keynesian economics, assumes in theory, if not in practice,

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that thrift is better than squandering, and Robinson Crusoe took it for granted that the

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I remember Banar Law's mingled rage and perplexity in face of the economists, writes Keynes in

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approval of Banar Law, because they were denying what was obvious, page 350.

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That is, they seemed to Banar Law to be denying what was obvious.

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Mises might have done better to remember the remark by a character in Bernard Shaw's Saint

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Joan when told of the theory of Pythagoras that the earth is round and revolves around

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the sun.

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What an utter fool!

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Couldn't he use his eyes?

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But Keynes goes gaily on.

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One recurs to the analogy between the sway of the classical school of economic theory

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and that of Certain Religions, pages 350-351. It was Keynes's own great contribution to

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exorcise the obvious, page 351, and to substitute the religion of spending, the religion of monetary

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inflation, the religion of governmental controls with the government bureaucrats as the high

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by Priests, Regulating the Volume, Direction and Nature of Investment with Infallible Wisdom.

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There remains an allied but distinct matter where for centuries indeed for several millenniums

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enlightened opinion held for certain and obvious a doctrine which the classical school has

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repudiated as childish but which deserves rehabilitation and honor.

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I mean the doctrine that the rate of interest is not self-adjusting at a level best suited

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to the social advantage, but constantly tends to rise too high, so that a wise government

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is concerned to curb it by statue and custom and even by invoking the sanctions of the

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moral law.

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Page 351 Here Keynes entirely misconceives or misstates

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It's the classical theory of interest rates, indeed the classical theory of prices generally.

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That theory does not contend that whatever is, is right.

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It does not say that today's prevailing interest rate arrived at in the free market is always

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the right one, best suited to the social advantage any more than it asserts that the price of

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a commodity or of a share on the stock market is at any moment the right one.

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The classical theory merely asserts that, in the long run, the unhampered market reflecting

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the composite desires, valuations and actions of the individuals composing it is the best

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method for determining prices or interest rates, and, while never infallible, is more

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calculated to bring optimum social advantage than any other method.

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Mises' own tacit assumption is that he or his friends or bureaucrats who would be necessarily

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politically motivated by the desire to please the politically dominant groups and to stay

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in power would be far better judges of the right interest rate than lenders and borrowers

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acting in accordance with their own judgment.

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It is true, of course, that borrowers always consider interest rates too high, just as

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As workers always think wages too low, producers always think prices too low, and consumers

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always think prices too high.

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But to appeal to these interested sentiments is political demagogy, not economics.

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Provisions against usury, continues Keynes, are amongst the world's most ancient economic

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practices of which we have record, page 351.

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So indeed they are.

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And so are all forms of government price control, from the Code of Hammurabi, circa 2000 BC,

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through the edicts of the Roman Emperor Diocletian, 245 to 313 AD, and through the dreadful Law

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of the Maximum in the French Revolution.

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But it is certainly strange to find the antiquity of a stupid economic prohibition put forward

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in 1936 as a serious argument for its revival.

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The destruction of the inducement to invest by an excessive liquidity preference, continues

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Keynes, was the outstanding evil, the prime impediment to the growth of wealth in the

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ancient and medieval worlds.

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Page 351.

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Here is another striking illustration of the way in which Keynes's thought was distorted

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by an inappropriate vocabulary of his own coining.

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What is excessive liquidity preference if it is not merely the absence of inducement

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to invest, or just another name for that absence?

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The inducement to invest, by Keynes's definition, is the inducement to buy capital goods or

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other investment assets, but no one would seriously think of saying that the inducement

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Inducement to buy anything at all is destroyed by a preference not to buy.

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00:32:57.520 --> 00:33:03.960
An insufficient inducement to invest, or a more than sufficient liquidity preference,

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are merely two ways of saying the same thing.

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The second is not an explanation of the first, it is merely a repetition of it in different

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words.

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Of course, if we think of the investor and the lender as two different persons as they

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sometimes are, then the inducement to invest of the borrower must be at least a tiny bit

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higher than the reluctance to lend of the lender before a transaction can take place.

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The two must agree upon an equating interest rate, in short, that is mutually satisfactory.

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But the like is true of any transaction in any commodity whatever.

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The inducement to buy of the buyer of shares on the stock market or of anything else must

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be high enough for him to offer a price sufficient to overcome the reluctance to sell of the

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seller.

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Otherwise, there is no transaction.

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If the reluctance of any merchant to sell his goods at a certain price is greater than

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When the inducement of customers to buy at that price, then the goods will not be sold

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until the seller either lowers his asking price or the buyers overcome their reluctance

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to pay the existing price.

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My reluctance to buy a share on the stock exchange at seventy-five may be overcome by

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my inducement to buy it at seventy.

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My reluctance to sell it at seventy may be overcome by my inducement to sell it at seventy-five.

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Buying and selling, lending and borrowing, in short, can all be explained either in terms

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of inducement or in terms of reluctance.

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My desire to buy a Buick may be greater or less than my reluctance to part with the necessary

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but it does not constitute a new and revolutionary system of economics or a more penetrating

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one to explain the economic process in terms of reluctance rather than in terms of desire

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and inducement.

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The term liquidity preference does not explain the level of interest rates a whit better

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than the term egg preference would explain the price of eggs.

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And an explanation of the level of interest rate in terms of a reluctance to part with

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cash no more proves that interest rates are chronically too high than an explanation of

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the price of jewelry in terms of the holder's reluctance to part with the jewels would prove

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that jewelry is chronically priced too high.

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I would blush to expound the obvious and elementary at this length if it were not constantly denied

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for 400 pages in a book hailed by the dominant academic economist today as the greatest economic

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revelation of the twentieth century.

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Keynes resumes,

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I now read these discussions of the medieval church as an honest intellectual effort to

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keep separate what the classical theory has inextricably confused together, namely the

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rate of interest and the marginal efficiency of capital.

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For it now seems clear that the disquisition of the schoolmen were directed against the

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elucidation of a formula which should allow the schedule of the marginal efficiency of

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capital to be high whilst using rule and custom and the moral law to keep down the rate of

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interest.

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Page 352 As Keynes merely returns here to one of the

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fallacies in his Theory of Interest, we need not repeat our analysis of it.

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It is simply necessary to point out that, while the rate of interest is of course not

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identical with the marginal efficiency of capital, or even caused by it, the two are

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intimately related.

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The relationship is analogous to that between price and marginal cost of production.

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Though in the short run, these may often vary from each other in either direction, there

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is always a long-run tendency for them to come to equality.

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To treat interest rates and the marginal efficiency of capital not only as separate but as disconnected

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and without reciprocal influence is to be blind to one of the central relationships of economic

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life.

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Though time preference, or the rate of time discount, is primary, there is always a tendency

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for the rate of interest and the marginal yield of capital to come into equilibrium

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with each other.

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Keynes's belief that a special deus ex machina or government bureaucrat is necessary to adjust the rate of interest to the marginal efficiency of capital goes with the belief that a government price controller is necessary to adjust prices to marginal production costs.

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What Keynes is proposing here is, in fact, government price fixing in a special field.

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A free market can be counted on to make the appropriate adjustments infinitely better.

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Canonization of the Cranks

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Just as Keynes was astonished to find that his new opinions had been anticipated by the

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mercantilists of the 17th century, so he found that some of these opinions had also been

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anticipated by modern monetary cranks.

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But in the second case, as in the first, instead of taking this as a warning to reexamine his

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assumptions and deductions, he greeted the agreement as a confirmation of his new doctrines.

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And one of those whose reputation he tried to rehabilitate was the strange unduly neglected

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prophet Silvio Giselle, page 353.

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Giselle had attracted some attention in the economic underworld by proposing a form of

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money that would automatically lose part of its value every month, like a rotting vegetable.

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His proposed method of achieving this was to require the holder of every currency note

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to have it stamped each month, with stamps purchased at the post office, in order to

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keep it good at its face value.

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This meant, in effect, that people would have to pay interest to the government for the

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privilege of holding their own money.

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Money held without being stamped would lose a fraction of its purchasing power every month.

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The purpose of this was to discourage people from saving, to make monetary saving practically

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impossible, to force everyone to spend his money, for no matter what, before it lost

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its value.

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Anyone who was wicked enough to wish to put aside money against the contingency of illness

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in his family, for example, would thus be effectively frustrated.

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It is obvious that such money would never freely circulate except in a community of

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idiots, unless it were made legal tender and there was no choice but to accept it.

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There was in principle nothing original in the proposal.

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It did not differ essentially from the immemorial practice of coin clipping, except that it

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would have occurred much more systematically and much more often.

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It combined nearly all the evils of ordinary paper inflation with some special disadvantages

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of its own.

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Its sole advantage as compared with ordinary paper money inflation is that the holder would

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but clearly recognize and identify the government tax and know precisely what the incidence

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of that tax was on himself.

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But Keynes takes it all very seriously, regrets that once.

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Like other academic economists, I treated Giselle's profoundly original strivings as

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being no better than those of a crank, page 353, and suggests exactly how much the monthly

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It should be roughly equal to the excess of the money rate of interest apart from the

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stamps over the marginal efficiency of capital corresponding to a rate of new investment

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compatible with full employment.

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And this figure could be determined by Trial and Error, page 357.

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We need not linger over this particular absurdity.

450
00:41:51.580 --> 00:41:57.460
When most Keynesians maintain an embarrassed silence about it, in this new wonderland into

451
00:41:57.460 --> 00:42:03.260
which Keynes has wandered, it was the classical economists who suddenly seemed stupid and

452
00:42:03.260 --> 00:42:09.580
lacking in common sense, and it was the works of the currency cranks, for Giselle was only

453
00:42:09.580 --> 00:42:16.740
one of scores with similar schemes, that were full of flashes of deep insight.

454
00:42:16.740 --> 00:42:22.940
I shall pause only to comment upon one sentence in the course of Keynes's discussion of Gisele's

455
00:42:22.940 --> 00:42:23.940
ideas.

456
00:42:23.940 --> 00:42:31.260
The prime necessity is to reduce the money rate of interest, and this, he pointed out,

457
00:42:31.260 --> 00:42:36.980
can be effected by causing money to incur carrying costs, just like other stocks of

458
00:42:36.980 --> 00:42:38.660
barren goods.

459
00:42:38.660 --> 00:42:44.660
Page 357 Thus, Keynes endorses the medieval idea that

460
00:42:44.660 --> 00:42:52.300
money is barren, but if money is barren and if, on Keynes's own theory, interest is paid

461
00:42:52.300 --> 00:42:59.120
only for money itself and never for the yield of what it will buy, why are borrowers so

462
00:42:59.120 --> 00:43:06.780
foolish as to agree to pay interest for money, and why are lenders not happy to find themselves

463
00:43:06.780 --> 00:43:12.620
able to lend money at any rate whatever above absolute zero.

464
00:43:12.620 --> 00:43:18.200
Why do people insist either on borrowing or on holding on to something that yields them

465
00:43:18.200 --> 00:43:20.400
nothing whatever?

466
00:43:20.400 --> 00:43:25.900
Such questions have already been answered not only in our previous chapters on the rate

467
00:43:25.900 --> 00:43:33.460
of interest, but specifically by W. H. Hutt in his essay, The Yield from Money Held, in

468
00:43:33.460 --> 00:43:40.580
in which he shows that money is as productive as all other assets and productive in exactly

469
00:43:40.580 --> 00:43:47.280
the same sense, that its marginal productive yield is constantly being equated with that

470
00:43:47.280 --> 00:43:54.260
of all other assets, and that its yield, like the yield of so many other assets, consists

471
00:43:54.260 --> 00:44:00.400
precisely in its availability at the moment when it is wanted or needed.

472
00:44:00.400 --> 00:44:05.320
The reader may consult Hutt's essay for the expansion of this argument.

473
00:44:05.320 --> 00:44:10.760
It is simply necessary to point out here that the failure of Keynes and his followers to

474
00:44:10.760 --> 00:44:17.160
recognize the real yield enjoyed by the holder of money assets is one of the most serious

475
00:44:17.160 --> 00:44:20.600
fallacies in their theory of interest.

476
00:44:20.600 --> 00:44:24.600
Mandeville, Malthus and the Misers

477
00:44:50.600 --> 00:45:15.600
In the first place, because real income was believed to diminish by the amount of money which did not enter into exchange, and secondly, because saving was believed to withdraw money from circulation.

478
00:45:15.600 --> 00:45:21.520
Surely, the Keynesians ought to conspire to suppress this quotation.

479
00:45:21.520 --> 00:45:28.480
It so perfectly and nakedly sums up Keynes's central contribution to economic thought.

480
00:45:28.480 --> 00:45:34.920
Incidentally, though Keynes takes many quotations from Heckscher's two volumes and holds them

481
00:45:34.920 --> 00:45:41.320
up for admiration of mercantilist thought, there are some passages in Heckscher's history

482
00:45:41.320 --> 00:45:45.160
that are conspicuously not quoted by Keynes.

483
00:45:45.160 --> 00:45:51.360
I take one as an example, a passage concerning French mercantilism during the seventeenth

484
00:45:51.360 --> 00:45:54.680
and eighteenth centuries.

485
00:45:54.680 --> 00:46:00.120
It is estimated that the economic measures taken in this connection cost the lives of

486
00:46:00.120 --> 00:46:07.720
some 16,000 people, partly through executions and partly through armed a phrase, without

487
00:46:07.720 --> 00:46:13.800
reckoning the unknown but certainly much larger number of people who were sent to the galleys

488
00:46:13.800 --> 00:46:16.320
or punished in other ways.

489
00:46:16.320 --> 00:46:21.600
On one occasion in Valence, seventy-seven were sent to the galleys.

490
00:46:21.600 --> 00:46:25.360
One was set free, and none were pardoned.

491
00:46:25.360 --> 00:46:31.440
But even this vigorous action did not help to attain the desired end.

492
00:46:31.440 --> 00:46:37.480
Printed calicoes spread more and more widely among all classes of the population, in France

493
00:46:37.480 --> 00:46:40.040
as everywhere else.

494
00:46:40.040 --> 00:46:46.120
Would Keynes have presented this as another example of the realism of mercantilist thought,

495
00:46:46.120 --> 00:46:50.120
which deserves rehabilitation and honor?

496
00:46:50.120 --> 00:46:55.800
Keynes next launches upon an extended series of quotations from Bernard Mandeville's Fable

497
00:46:55.800 --> 00:47:02.640
of the Bees, or Private Vice's Public Benefits, which first appeared in 1714.

498
00:47:02.640 --> 00:47:07.800
There is much wisdom in this remarkable poem, and much fallacy.

499
00:47:07.800 --> 00:47:13.160
Man's likes the fallacious part and quotes extensively from Mandeville's doctrine that

500
00:47:13.160 --> 00:47:19.960
prosperity is increased by expenditure and luxurious living, and reduced by thrift and

501
00:47:19.960 --> 00:47:22.000
prudence and saving.

502
00:47:22.000 --> 00:47:26.240
It is a little late to start answering this fallacy of Mandeville's.

503
00:47:26.240 --> 00:47:32.040
The classical economists did it quite adequately, and I shall excuse myself from repeating the

504
00:47:32.040 --> 00:47:33.040
task.

505
00:47:33.040 --> 00:47:38.560
Besides, we shall have a chance to answer the same doctrine as formulated much more

506
00:47:38.560 --> 00:47:41.640
guardedly by Malthus.

507
00:47:41.640 --> 00:47:49.080
For after praising Petty for his statement in 1662, justifying entertainments, magnificent

508
00:47:49.080 --> 00:47:55.800
shoes, triumphal arches, etc., on the ground that their costs flowed back into the pockets

509
00:47:55.800 --> 00:48:04.660
of Brewers, Bakers, Tailors and Shoemakers, page 359, and after depreciating, by contrast,

510
00:48:04.660 --> 00:48:13.720
the penny wisdom of Gladstonian finance, page 362, Keynes comes to the later phase of Malthus,

511
00:48:13.720 --> 00:48:20.680
where the notion of the insufficiency of effective demand takes a definite place as a scientific

512
00:48:20.680 --> 00:48:25.680
explanation of unemployment, page 362.

513
00:48:25.680 --> 00:48:32.160
He quotes practically two full pages from Malthus, from which I shall take two passages, for

514
00:48:32.160 --> 00:48:39.200
it is instructive to distinguish what was right in Malthus's views from what was wrong.

515
00:48:39.200 --> 00:48:45.960
Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public

516
00:48:45.960 --> 00:48:51.680
benefactor, and that the increase of wealth depends upon the balance of produce above

517
00:48:51.680 --> 00:48:59.280
Consumption, that these propositions are true to a great extent is perfectly unquestionable.

518
00:48:59.280 --> 00:49:05.720
It is important to notice that Malthus, unlike Mandeville and Keynes, did not ridicule thrift

519
00:49:05.720 --> 00:49:12.200
as such, but only what he considers an unreasonable degree of it.

520
00:49:12.200 --> 00:49:18.360
It is quite obvious, he continues, that they are not true to an indefinite extent, and

521
00:49:18.360 --> 00:49:25.360
In still another passage, which is notable for its failure to grasp the essential truth in Say's law, Malthus asks,

522
00:49:48.360 --> 00:49:56.360
They demand for commodities if all consumption except bread and water were suspended for the next half year.

523
00:49:56.360 --> 00:50:02.360
Now, the conclusions of Malthus just quoted are perfectly true, and even truisms,

524
00:50:02.360 --> 00:50:08.360
if we accept the quite unrealistic assumptions on which they are based.

525
00:50:08.360 --> 00:50:13.360
They tacitly assume that everyone has approximately the same income,

526
00:50:13.360 --> 00:50:18.360
and that everyone tries to produce more than he is interested in consuming.

527
00:50:18.360 --> 00:50:24.360
And they explicitly assume that every person is satisfied with the meanest house, etc.

528
00:50:24.360 --> 00:50:29.360
and that all consumption except bread and water is suspended.

529
00:50:29.360 --> 00:50:34.360
But it is very difficult even to imagine a community in which everybody,

530
00:50:34.360 --> 00:50:38.360
or even any substantial percentage of the population,

531
00:50:38.360 --> 00:50:45.260
Education would act in so irrational a manner as the Malthus Hypothesis assumes.

532
00:50:45.260 --> 00:50:50.880
It is true that there are nations and communities that are poor because most of the people are

533
00:50:50.880 --> 00:50:53.980
satisfied with low living standards.

534
00:50:53.980 --> 00:50:59.080
But these communities are poor not because they try to save too much out of what they

535
00:50:59.080 --> 00:51:03.200
produce but simply because they fail to produce.

536
00:51:03.200 --> 00:51:08.560
Their characteristic mark is not thrift, but laziness or improvidence.

537
00:51:08.560 --> 00:51:10.260
They live from day to day.

538
00:51:10.260 --> 00:51:15.560
They are wracked periodically by disease and famine, because they do not produce enough

539
00:51:15.560 --> 00:51:21.760
in order to save enough to carry them through years of bad crops or other contingencies.

540
00:51:21.760 --> 00:51:27.400
The people in a community who produce above the subsistence level are, in the overwhelming

541
00:51:27.400 --> 00:51:34.060
The majority precisely the people who want to live and spend above the subsistence level.

542
00:51:34.060 --> 00:51:40.100
A community in which everybody strove to work enough and earn enough to live at ten times

543
00:51:40.100 --> 00:51:46.940
or even twice the subsistence level, but refused to live above a subsistence level and insisted

544
00:51:46.940 --> 00:51:54.180
on saving the rest, would be a community possessed by a psychology so irrational and so difficult

545
00:51:54.180 --> 00:52:02.260
to imagine that the implications of the hypothesis are hardly worth working out in much detail.

546
00:52:02.260 --> 00:52:08.100
But even if we assume such a community with such a psychology, it would at least be possible

547
00:52:08.100 --> 00:52:14.380
to imagine it surviving successfully for the six months assumed in Malthus's rhetorical

548
00:52:14.380 --> 00:52:15.380
question.

549
00:52:15.380 --> 00:52:20.780
For, it could invest its money in capital goods, and these capital goods industries

550
00:52:20.780 --> 00:52:26.940
would give the necessary employment to those laid off from employment on consumption goods,

551
00:52:26.940 --> 00:52:31.860
and the capital goods industries would even earn a profit, provided they were capital

552
00:52:31.860 --> 00:52:37.380
goods for which there was a real demand, and the community at the end of the six months

553
00:52:37.380 --> 00:52:43.740
gave up its Spartan frugality and used its income to buy the added consumption goods

554
00:52:43.740 --> 00:52:48.780
that the new capital equipment was capable of producing.

555
00:52:48.780 --> 00:52:54.740
Any country has done something closely equivalent to this in wartime, when it lived on a subsistence

556
00:52:54.740 --> 00:53:00.780
level of consumption in order to support armies and produce implements of war.

557
00:53:00.780 --> 00:53:07.460
And if, moving from Malthus' violent hypothesis toward less unrealistic but still grossly

558
00:53:07.460 --> 00:53:14.120
oversimplified assumptions, we assume a community with only two income classes, in which the

559
00:53:14.120 --> 00:53:20.280
The great mass consisting of nine-tenths of the population has a per capita subsistence

560
00:53:20.280 --> 00:53:26.440
income of X dollars and spends it all as it goes along, while the remaining tenth of the

561
00:53:26.440 --> 00:53:33.960
population has a per capita income of three X dollars but consists entirely of Mises who

562
00:53:33.960 --> 00:53:41.080
also spend only X dollars a year and save two-thirds of their income, or two X dollars

563
00:53:41.080 --> 00:53:42.480
per capita.

564
00:53:42.480 --> 00:53:49.080
We have a community which, assuming that producer's expectations are based on this situation, would

565
00:53:49.080 --> 00:53:52.960
nonetheless progress and grow constantly richer.

566
00:53:52.960 --> 00:53:56.920
For the misers would invest their money in capital equipment.

567
00:53:56.920 --> 00:54:02.100
This would be used to increase production of consumer goods, to improve the quality

568
00:54:02.100 --> 00:54:05.840
of such goods, and to lower production costs.

569
00:54:05.840 --> 00:54:11.780
The real wages and income of both the masses and the misers would increase.

570
00:54:11.780 --> 00:54:17.340
as the consumption of both the masses and the misers would increase by the hypothesis

571
00:54:17.340 --> 00:54:23.900
for the masses would always spend their whole incomes and the rich misers would individually

572
00:54:23.900 --> 00:54:30.540
spend as much as, though not more than, the poor masses spent individually, consumption,

573
00:54:30.540 --> 00:54:36.100
production and saving would all increase pari passu.

574
00:54:36.100 --> 00:54:43.260
Suppose we change the names of our classes and call the upper 10% with the 3X incomes

575
00:54:43.260 --> 00:54:50.180
the capitalists and the lower 90% with the X incomes the workers.

576
00:54:50.180 --> 00:54:57.560
Then it is the implied contention of the Mandevilles, Malthus' and Keynes' that, assuming the workers

577
00:54:57.560 --> 00:55:04.720
had no surplus incomes to save, the capitalists would maximize prosperity by spending their

578
00:55:04.720 --> 00:55:24.240
But nothing could be further from the truth.

579
00:55:24.240 --> 00:55:30.760
For if the capitalists spent all their income on luxurious living, there would be no capital

580
00:55:30.760 --> 00:55:31.760
investment.

581
00:55:31.760 --> 00:55:45.760
In that case, there would be no increased production and no lowering of production costs, hence no increase in the real wages or incomes of the workers and no increase in their consumption.

582
00:55:45.760 --> 00:55:51.660
If the capitalists saved and invested the whole of the excess of their own incomes above

583
00:55:51.660 --> 00:55:58.660
the workers' incomes, then all this investment would necessarily go into capital equipment

584
00:55:58.660 --> 00:56:03.520
for increasing the production of mass consumption goods.

585
00:56:03.520 --> 00:56:09.300
The investment would not only produce jobs, which is the only consequence that Cain seems

586
00:56:09.300 --> 00:56:16.700
in terms to recognize, but it would increase the average productivity of all jobs.

587
00:56:16.700 --> 00:56:23.700
Hence, it would increase the production of consumption goods, lower production costs,

588
00:56:23.700 --> 00:56:29.620
increase average marginal labor productivity, and average real wages.

589
00:56:29.620 --> 00:56:36.120
In brief, even if we make the extreme assumption that the capitalists or upper-income class

590
00:56:36.120 --> 00:56:43.360
Spend no more on consumption than the workers or lower income class, we find no necessary

591
00:56:43.360 --> 00:56:50.120
insufficiency of investment outlets or investment opportunities.

592
00:56:50.120 --> 00:56:56.680
Production will be increased by the new capital equipment, real costs will be lowered by it,

593
00:56:56.680 --> 00:57:02.680
hence prices will be lowered in the absence of inflation, and real wages will therefore

594
00:57:02.680 --> 00:57:06.000
increase to buy the additional product.

595
00:57:06.000 --> 00:57:13.440
We are assuming by our hypothesis that there is no sudden, uncaused, or irrational saving,

596
00:57:13.440 --> 00:57:19.760
but that workers increase their consumption in proportion to their increase in incomes,

597
00:57:19.760 --> 00:57:25.120
and that the capitalists consume at least as much as the workers.

598
00:57:25.120 --> 00:57:32.360
And directly contrary to the Mandeville-Mulfis-Keynes thesis, this extreme thrift on the part of

599
00:57:32.360 --> 00:57:39.560
The Capitalists would not only NOT retard economic progress, it would maximize it.

600
00:57:39.560 --> 00:57:44.980
It would particularly maximize the progress of the masses, because the capitalist per

601
00:57:44.980 --> 00:57:51.480
capita would not be taking any more out of the consumption cake per capita than the workers

602
00:57:51.480 --> 00:57:52.480
would.

603
00:57:52.480 --> 00:57:58.720
The surplus income of the capitalists, instead of going for ostentation and wasteful siberitic

604
00:57:58.720 --> 00:58:05.720
Living would be going into investment to increase the production, reduce the cost, and improve

605
00:58:05.720 --> 00:58:09.640
the quality of consumption goods for the masses.

606
00:58:09.640 --> 00:58:16.920
Incidentally, envy and hatred, which play such a large role behind the schemes of revolutionary

607
00:58:16.920 --> 00:58:23.080
economic reformers, would be minimized under such behavior by the capitalists, for though

608
00:58:23.080 --> 00:58:28.760
Although there would be inequality of income, there would be equality of consumption.

609
00:58:28.760 --> 00:58:35.440
Ostentatious and sybaritic living on the part of the rich, accompanied by Veblen's conspicuous

610
00:58:35.440 --> 00:58:41.600
waste, which is recommended by implication by the Keynesians, is precisely the course

611
00:58:41.600 --> 00:58:48.420
most calculated to inflame envy and resentment and social discontent.

612
00:58:48.420 --> 00:58:54.420
This is the conclusion that we get even when we make the extreme assumption of two income

613
00:58:54.420 --> 00:59:01.880
classes in which the higher income class saves the whole of its per capita excess of income

614
00:59:01.880 --> 00:59:05.220
above that of the lower income class.

615
00:59:05.220 --> 00:59:11.620
We can generalize this assumption and bring it closer to reality, first by assuming N

616
00:59:11.620 --> 00:59:18.100
different income classes instead of only two, with the poorest class having a mere subsistence

617
00:59:18.100 --> 00:59:37.100
The next worse-off class, an income of x plus 2y, the third class from the bottom, an income of x plus 4y, the fourth an income of x plus 6y, etc.

618
00:59:37.100 --> 00:59:43.100
And instead of assuming that those with incomes above the minimum save the whole excess,

619
00:59:43.100 --> 00:59:55.100
We can assume that they save only half of it, and spend respectively x plus y, x plus 2y, x plus 3y, etc.

620
00:59:55.100 --> 01:00:02.100
Or, we can state our assumptions regarding saving and spending in the form of a continuous function,

621
01:00:02.100 --> 01:00:11.100
in which those with higher incomes not only save a continuously greater absolute amount than those with lower incomes,

622
01:00:11.100 --> 01:00:15.100
but a continuously greater percentage of their incomes.

623
01:00:15.100 --> 01:00:22.100
If there is no reason to fear an insufficiency of investment opportunities or outlets,

624
01:00:22.100 --> 01:00:25.100
even under our preceding extreme assumption,

625
01:00:25.100 --> 01:00:30.100
there is, of course, still less reason to fear such an insufficiency

626
01:00:30.100 --> 01:00:34.100
under these more moderate and realistic assumptions.

627
01:00:36.100 --> 01:00:39.100
The Contribution of Mill

628
01:00:39.100 --> 01:00:46.300
So, when we look at the matter closely, we find that Gladstone and Benjamin Franklin,

629
01:00:46.300 --> 01:00:52.340
with their penny wisdom, were perhaps better economists, after all, in every sense of the

630
01:00:52.340 --> 01:00:59.600
word, than Petty, with his entertainments, magnificent shoes, triumphal arches, etc.,

631
01:00:59.600 --> 01:01:06.740
or Mandeville, with his liveries and coaches and miraculous palaces, or Keynes, with his

632
01:01:06.740 --> 01:01:09.780
Propensity to Consume

633
01:01:09.780 --> 01:01:15.740
I do not wish to be understood as recommending Spartan living or parsimonious spending on

634
01:01:15.740 --> 01:01:18.780
the part of anybody who can afford better.

635
01:01:18.780 --> 01:01:24.220
On the contrary, I am inclined to agree with the conclusion of Malthus himself, which appears

636
01:01:24.220 --> 01:01:30.080
in the preface to his Principles of Political Economy, just after the passage quoted a few

637
01:01:30.080 --> 01:01:32.500
pages back.

638
01:01:32.500 --> 01:01:38.860
The two extremes, prodigality and frugality, are obvious, and it follows that there must

639
01:01:38.860 --> 01:01:45.580
be some intermediate point, though the resources of political economy may not be able to ascertain

640
01:01:45.580 --> 01:01:52.260
it, where, taking into consideration both the power to produce and the will to consume,

641
01:01:52.260 --> 01:01:56.300
the encouragement to the increase of wealth is the greatest.

642
01:01:56.300 --> 01:02:02.460
The exact optimum point could be achieved only on the assumption of perfect foreknowledge

643
01:02:02.460 --> 01:02:07.860
and wisdom on the part of investors, producers and consumers.

644
01:02:07.860 --> 01:02:14.300
But it may be approximated by the exercise of common prudence, civilized wants and tastes

645
01:02:14.300 --> 01:02:16.120
and good sense.

646
01:02:16.120 --> 01:02:23.660
In any case, rational thrift is still a virtue, saving is not an economic crime and no one

647
01:02:23.660 --> 01:02:26.620
Man has a duty to be a spendthrift.

648
01:02:26.620 --> 01:02:32.200
What is certain is that the optimum relationship between saving and spending will never be

649
01:02:32.200 --> 01:02:38.140
determined by algebra, by academicians, or by government bureaucrats.

650
01:02:38.140 --> 01:02:44.540
Consumers, following their own inclinations, will make mistakes, but are likely to come

651
01:02:44.540 --> 01:02:50.060
incomparably closer, on the average, to the optimum balance.

652
01:02:50.060 --> 01:02:55.520
It is strange that in his sweeping historical review from the mercantilists Mandeville and

653
01:02:55.520 --> 01:03:02.540
Petty through Malthus to J. A. Hobson and Major Douglas, Keynes never mentions John

654
01:03:02.540 --> 01:03:09.640
Stuart Mill, yet in his Principles of Political Economy, Mill wrote a passage that reads like

655
01:03:09.640 --> 01:03:13.900
a direct refutation of Keynes's spending theories.

656
01:03:13.900 --> 01:03:20.820
was a direct refutation of the immemorial fallacies that Keynes tried to revive.

657
01:03:20.820 --> 01:03:27.400
Mill set himself to establish the fundamental theorem that demand for commodities is not

658
01:03:27.400 --> 01:03:30.260
demand for labor.

659
01:03:30.260 --> 01:03:36.500
This theorem, that to purchase produce is not to employ labor, that the demand for labor

660
01:03:36.500 --> 01:03:41.980
is constituted by the wages which precede the production and not by the demand which

661
01:03:41.980 --> 01:03:47.500
which may exist for the commodities resulting from the production, is a proposition which

662
01:03:47.500 --> 01:03:51.860
greatly needs all the illustration it can receive.

663
01:03:51.860 --> 01:03:58.620
It is, to common apprehension, a paradox, and even among political economists of reputation

664
01:03:58.620 --> 01:04:06.020
I can hardly point to any, except Mr. Ricardo and Mr. Say, who have kept it constantly and

665
01:04:06.020 --> 01:04:08.260
steadily in view.

666
01:04:08.260 --> 01:04:14.780
Most all others occasionally express themselves as if a person who buys commodities, the produce

667
01:04:14.780 --> 01:04:21.300
of labor, was an employer of labor and created a demand for it as really and in the same

668
01:04:21.300 --> 01:04:27.820
sense as if he had bought the labor itself directly by the payment of wages.

669
01:04:27.820 --> 01:04:34.340
It is no wonder that political economy advances slowly when such a question as this still

670
01:04:34.340 --> 01:04:37.540
remains open at its very threshold.

671
01:04:37.540 --> 01:04:44.340
I apprehend that if by demand for labor he meant the demand by which wages are raised

672
01:04:44.340 --> 01:04:51.300
or the number of laborers and employment increased, demand for commodities does not constitute

673
01:04:51.300 --> 01:04:52.900
demand for labor.

674
01:04:52.900 --> 01:04:59.500
I conceive that a person who buys commodities and consumes them himself does no good to

675
01:04:59.500 --> 01:05:05.900
the laboring classes, that it is only by what he abstains from consuming and expends in

676
01:05:05.900 --> 01:05:12.060
and Direct Payments to Laborers in Exchange for Labor that he benefits the laboring classes

677
01:05:12.060 --> 01:05:16.340
or adds anything to the amount of their employment.

678
01:05:16.340 --> 01:05:22.060
Present-day economists who are aware of this passage assume that it is wholly invalidated

679
01:05:22.060 --> 01:05:27.820
because it was based on the wages-fund theory rather than on the marginal productivity theory

680
01:05:27.820 --> 01:05:30.060
that has supplanted it.

681
01:05:30.060 --> 01:05:34.660
Such a sweeping rejection, however, goes much too far.

682
01:05:34.660 --> 01:05:42.300
It is of course true, notwithstanding Mill's argument, that $1,000 of saving and investment

683
01:05:42.300 --> 01:05:48.580
does not employ any more workers than $1,000 of consumer spending.

684
01:05:48.580 --> 01:05:55.460
But it does help to increase wage rates because it helps to increase marginal labor productivity,

685
01:05:55.460 --> 01:06:01.660
whereas direct consumer spending does nothing in the long run to increase wage rates because

686
01:06:01.660 --> 01:06:04.860
as it does nothing to increase productivity.

687
01:06:04.860 --> 01:06:11.460
If there had been nothing but consumer spending, plus mere capital replacement, since the 17th

688
01:06:11.460 --> 01:06:18.420
century, wages would still be at the miserable levels of that period, and two-thirds to three-quarters

689
01:06:18.420 --> 01:06:23.420
of the present world population would not have come into existence.

690
01:06:23.420 --> 01:06:30.700
Mill, though much of his argument was mistaken, was right as against Keynes in at least emphasizing

691
01:06:30.700 --> 01:06:37.820
Meaning that the demand by which wages are raised is in the long run only investment demand,

692
01:06:37.820 --> 01:06:40.140
not consumer demand.

693
01:06:40.140 --> 01:06:47.020
But I come now to a far more important quotation from Mill, a set of passages amazing in their

694
01:06:47.020 --> 01:06:52.820
anticipation of and masterly answers to the Keynesian fallacies.

695
01:06:52.820 --> 01:06:58.900
Mill was able to anticipate and answer these because, as we have seen, most of them are

696
01:06:58.900 --> 01:07:03.980
are very old, dating back to the seventeenth century and earlier.

697
01:07:03.980 --> 01:07:09.980
The book from which the following passages are taken is Mill's Essays on Some Unsettled

698
01:07:09.980 --> 01:07:13.740
Questions of Political Economy.

699
01:07:13.740 --> 01:07:22.420
These essays were actually written in 1829 and 1830, when Mill was twenty-four, some eighteen

700
01:07:22.420 --> 01:07:29.340
18 years before the appearance of his Principles of Political Economy in 1848, but they were

701
01:07:29.340 --> 01:07:32.900
not published until 1844.

702
01:07:32.900 --> 01:07:39.260
Unlike the Principles, which has run into perhaps 60 editions, these essays are difficult

703
01:07:39.260 --> 01:07:40.740
to come by.

704
01:07:40.740 --> 01:07:48.540
In 1948, the London School of Economics included the work in its series of reprints of scarce

705
01:07:48.540 --> 01:08:04.180
It is perhaps this lack of availability which accounts for the astonishing fact that in

706
01:08:04.180 --> 01:08:09.900
the whole of the Keynesian controversy of the last quarter century Mill's remarkable

707
01:08:09.900 --> 01:08:17.340
essay of the influence of consumption on production has not been quoted, so far as my knowledge

708
01:08:17.340 --> 01:08:21.640
goes by either the pro or the anti-Keynesians.

709
01:08:21.640 --> 01:08:27.880
To come upon it after long trudging in the Keynesian bog has something of the same excitement

710
01:08:27.880 --> 01:08:33.980
for the student of the New Economics as biblical scholars must have felt when they discovered

711
01:08:33.980 --> 01:08:37.020
and deciphered the Dead Sea Scrolls.

712
01:08:37.020 --> 01:08:41.560
It is the rediscovery of a long buried treasure.

713
01:08:41.560 --> 01:08:48.480
Because this 28-page essay is so hard to come by, I shall quote from it at some length.

714
01:08:48.480 --> 01:08:54.300
But first I should like to advert once more to the curious intellectual paralysis that

715
01:08:54.300 --> 01:09:01.440
seems to seize so many contemporary economists where the theories of Keynes are concerned.

716
01:09:01.440 --> 01:09:07.960
When they find gross errors, they still cannot conceive themselves that all the reputational

717
01:09:07.960 --> 01:09:24.880
Even John H. Williams, after a very able critique of Keynes, in which he predicts that the wave

718
01:09:24.880 --> 01:09:32.480
of enthusiasm for the new economics will, in the longer perspective, seem to us extravagant,

719
01:09:32.480 --> 01:09:39.000
draws back, worries about his own bias, tries objectively to appraise Keynes's contribution

720
01:09:39.000 --> 01:09:40.240
and concludes,

721
01:09:40.240 --> 01:09:43.680
Beyond question it was very great.

722
01:09:43.680 --> 01:09:49.600
What he has given us in particular is a much stronger sense than we had before of the need

723
01:09:49.600 --> 01:09:52.480
for consumption analysis.

724
01:09:52.480 --> 01:09:55.440
Did we need this stronger sense?

725
01:09:55.440 --> 01:09:59.720
Let us listen to Mill in 1830.

726
01:09:59.720 --> 01:10:05.260
Among the mistakes of the pre-classical writers which were most pernicious in their direct

727
01:10:05.260 --> 01:10:10.960
consequences was the immense importance attached to consumption.

728
01:10:10.960 --> 01:10:17.640
The great end of legislation in matters of national wealth was to create consumers.

729
01:10:17.640 --> 01:10:24.660
This object, under the varying names of an extensive demand, a brisk circulation, a great

730
01:10:24.660 --> 01:10:31.860
Expenditure of Money and sometimes totidum verbis, a large consumption, was conceived

731
01:10:31.860 --> 01:10:35.460
to be the great condition of prosperity.

732
01:10:35.460 --> 01:10:41.260
It is not necessary in the present state of the science to contest this doctrine in the

733
01:10:41.260 --> 01:10:46.300
most flagrantly absurd of its forms or of its applications.

734
01:10:46.300 --> 01:10:52.460
The utility of a large government expenditure for the purpose of encouraging industry is

735
01:10:52.460 --> 01:10:54.680
is no longer maintained.

736
01:10:54.680 --> 01:11:00.500
In opposition to these palpable absurdities, it was triumphantly established by political

737
01:11:00.500 --> 01:11:05.140
economists that consumption never needs encouragement.

738
01:11:05.140 --> 01:11:10.940
The person who saves his income is no less a consumer than he who spends it.

739
01:11:10.940 --> 01:11:13.720
He consumes it in a different way.

740
01:11:13.720 --> 01:11:20.100
It supplies food and clothing to be consumed, tools and materials to be used by productive

741
01:11:20.100 --> 01:11:22.020
laborers.

742
01:11:22.020 --> 01:11:27.900
Production therefore already takes place to the greatest extent which the amount of production

743
01:11:27.900 --> 01:11:35.700
admits of, but of the two kinds of consumption, reproductive and unproductive, the former

744
01:11:35.700 --> 01:11:40.940
alone adds to the national wealth, the latter impairs it.

745
01:11:40.940 --> 01:11:44.320
What is consumed for mere enjoyment is gone.

746
01:11:44.320 --> 01:11:51.080
What is consumed for reproduction leaves commodities of equal value, commonly with the addition

747
01:11:51.080 --> 01:11:52.720
of a Profit.

748
01:11:52.720 --> 01:11:58.720
The usual effect of the attempts of government to encourage consumption is merely to prevent

749
01:11:58.720 --> 01:12:05.040
saving, that is, to promote unproductive consumption at the expense of reproductive

750
01:12:05.040 --> 01:12:12.020
and diminish the national wealth by the very means which were intended to increase it.

751
01:12:12.020 --> 01:12:17.600
What a country wants to make it richer is never consumption but production.

752
01:12:17.600 --> 01:12:22.760
Where there is the latter, we may be sure that there is no want of the former.

753
01:12:22.760 --> 01:12:27.520
To produce implies that the producer desires to consume.

754
01:12:27.520 --> 01:12:31.260
Why else should he give himself useless labor?

755
01:12:31.260 --> 01:12:37.080
He may not wish to consume what he himself produces, but his motive for producing and

756
01:12:37.080 --> 01:12:39.680
selling is the desire to buy.

757
01:12:39.680 --> 01:12:46.480
Therefore, if the producers generally produce and sell more and more, they certainly also

758
01:12:46.480 --> 01:12:49.400
by more and more.

759
01:12:49.400 --> 01:12:56.680
But then Mill, with characteristic conscientiousness, wants to make sure that no scattered particles

760
01:12:56.680 --> 01:13:02.240
of important truth are buried and lost in the ruins of exploded error.

761
01:13:02.240 --> 01:13:07.880
He proceeds, therefore, to examine the nature of the appearances which gave rise to the

762
01:13:07.880 --> 01:13:15.800
belief that a great demand, a rapid consumption, are a cause of national prosperity.

763
01:13:15.800 --> 01:13:21.460
After a few pages, Mill makes the admission, which according to the Keynesians no classical

764
01:13:21.460 --> 01:13:29.180
economist ever made, that, at all times a very large proportion of capital may be lying

765
01:13:29.180 --> 01:13:30.680
idle.

766
01:13:30.680 --> 01:13:36.340
The annual produce of a country is never anything approaching in magnitude to what it might

767
01:13:36.340 --> 01:13:43.260
be if all the resources devoted to reproduction, if all the capital, in short, of the country

768
01:13:43.260 --> 01:13:46.460
were in full employment.

769
01:13:46.460 --> 01:13:52.960
This perpetual non-employment of a large proportion of capital, Mill continues, is the price we

770
01:13:52.960 --> 01:13:55.420
pay for the division of labor.

771
01:13:55.420 --> 01:14:01.080
The purchase is worth what it costs, but the price is considerable.

772
01:14:01.080 --> 01:14:07.620
After enlarging upon this for ten pages, Mill calls attention to the folly of the inflationary

773
01:14:07.620 --> 01:14:09.340
remedy.

774
01:14:09.340 --> 01:14:15.340
From what has been already said, it is obvious that periods of brisk demand are also the

775
01:14:15.340 --> 01:14:17.780
periods of greatest production.

776
01:14:17.780 --> 01:14:23.420
The national capital is never called into full employment but at those periods.

777
01:14:23.420 --> 01:14:28.180
This, however, is no reason for desiring such times.

778
01:14:28.180 --> 01:14:33.920
It is not desirable that the whole capital of the country should be in full employment.

779
01:14:33.920 --> 01:14:40.200
For the calculations of producers and traders being of necessity imperfect, there are always

780
01:14:40.200 --> 01:14:46.000
some commodities which are more or less in excess, as there are always some which are

781
01:14:46.000 --> 01:14:47.840
in deficiency.

782
01:14:47.840 --> 01:14:53.520
If therefore the whole truth were known, there would always be some classes of producers

783
01:14:53.520 --> 01:14:57.620
contracting not extending their operations.

784
01:14:57.620 --> 01:15:03.600
If all are endeavoring to extend them, it is a certain proof that some general delusion

785
01:15:03.600 --> 01:15:05.240
is afloat.

786
01:15:05.240 --> 01:15:12.160
The commonest cause of such delusion is some general or very extensive rise of prices,

787
01:15:12.160 --> 01:15:18.160
whether caused by speculation or by the currency, which persuades all dealers that they are

788
01:15:18.160 --> 01:15:19.720
growing rich.

789
01:15:19.720 --> 01:15:26.360
And hence, an increase of production really takes place during the progress of depreciation,

790
01:15:26.360 --> 01:15:31.120
as long as the existence of depreciation is not suspected.

791
01:15:31.120 --> 01:15:36.680
But when the delusion vanishes and the truth is disclosed, those whose commodities are

792
01:15:36.680 --> 01:15:43.800
relatively in excess must diminish their production or be ruined, and if during the high prices

793
01:15:43.800 --> 01:15:50.880
they have built mills and erected machinery, they will be likely to repent at leisure.

794
01:15:50.880 --> 01:15:56.600
The believers in Say's Law and the classical school generally have been accused by the

795
01:15:56.600 --> 01:16:01.240
The Keynesians of ignoring the very existence of business cycles.

796
01:16:01.240 --> 01:16:07.040
True, Mill did not have the phrase, but he points out how

797
01:16:07.040 --> 01:16:13.200
Unreasonable hopes and unreasonable fears alternately rule with tyrannical sway over

798
01:16:13.200 --> 01:16:17.080
the minds of a majority of the mercantile public.

799
01:16:17.080 --> 01:16:23.120
General eagerness to buy and general reluctance to buy succeed one another in a manner more

800
01:16:23.120 --> 01:16:26.620
more or less market at brief intervals.

801
01:16:26.620 --> 01:16:32.660
Except during short periods of transition, there is almost always either great briskness

802
01:16:32.660 --> 01:16:39.120
of business or great stagnation, either the principal producers of almost all the leading

803
01:16:39.120 --> 01:16:45.600
articles of industry have as many orders as they can possibly execute, or the dealers

804
01:16:45.600 --> 01:16:51.620
in almost all commodities have their warehouses full of unsold goods.

805
01:16:51.620 --> 01:16:57.500
In this last case, it is commonly said that there is a general superabundance, and as

806
01:16:57.500 --> 01:17:03.800
those economists who have contested the possibility of general superabundance would none of them

807
01:17:03.800 --> 01:17:09.020
deny the possibility or even the frequent occurrence of the phenomenon which we have

808
01:17:09.020 --> 01:17:14.700
just noticed, it would seem incumbent upon them to show that the expression to which

809
01:17:14.700 --> 01:17:21.580
they object is not applicable to a state of things in which all or most commodities remain

810
01:17:21.580 --> 01:17:27.620
and Unsold, in the same sense in which there is said to be a superabundance of any one

811
01:17:27.620 --> 01:17:34.000
commodity when it remains in the warehouses of dealers for want of a market.

812
01:17:34.000 --> 01:17:39.780
He proceeds, then, to the following exposition of Say's Law, though he never mentions it

813
01:17:39.780 --> 01:17:42.420
by that name.

814
01:17:42.420 --> 01:17:48.800
Whoever offers a commodity for sale desires to obtain a commodity in exchange for it,

815
01:17:48.800 --> 01:17:53.400
and is therefore a buyer by the mere fact of his being a seller.

816
01:17:53.400 --> 01:17:59.400
The sellers and the buyers, for all commodities taken together, must, by the metaphysical

817
01:17:59.400 --> 01:18:06.140
necessity of the case, be an exact equipoise to each other, and if there be more sellers

818
01:18:06.140 --> 01:18:12.140
than buyers of one thing, there must be more buyers than sellers for another.

819
01:18:12.140 --> 01:18:17.940
This argument is evidently founded on the supposition of a state of barter, and on that

820
01:18:17.940 --> 01:18:35.940
In that supposition, it is perfectly incontestable. When two persons perform an act of barter, each of them is at once a seller and a buyer. He cannot sell without buying. Unless he chooses to buy some other person's commodity, he does not sell his own.

821
01:18:35.940 --> 01:18:44.100
If, however, we suppose that money is used, these propositions cease to be exactly true.

822
01:18:44.100 --> 01:18:49.740
Interchange by means of money is therefore, as has been often observed, ultimately nothing

823
01:18:49.740 --> 01:18:51.180
but barter.

824
01:18:51.180 --> 01:18:56.480
But there is this difference, that in the case of barter, the selling and the buying

825
01:18:56.480 --> 01:19:00.300
are simultaneously confounded in one operation.

826
01:19:00.300 --> 01:19:05.740
You sell what you have, and you buy what you want, by one indivisible act.

827
01:19:05.740 --> 01:19:09.380
and you cannot do the one without doing the other.

828
01:19:09.380 --> 01:19:15.740
Now the effect of the employment of money and even the utility of it is that it enables

829
01:19:15.740 --> 01:19:22.780
this one act of interchange to be divided into two separate acts or operations, one

830
01:19:22.780 --> 01:19:29.060
of which may be performed now and the other a year hence, or whenever it shall be most

831
01:19:29.060 --> 01:19:31.060
convenient.

832
01:19:31.060 --> 01:19:37.420
Although he who sells really sells only to buy, he need not buy at the same moment when

833
01:19:37.420 --> 01:19:44.980
he sells, and he does not, therefore, necessarily add to the immediate demand for one commodity

834
01:19:44.980 --> 01:19:47.860
when he adds to the supply of another.

835
01:19:47.860 --> 01:19:54.260
The buying and selling being now separated, it may very well occur that there may be at

836
01:19:54.260 --> 01:20:01.060
at some given time a very general inclination to sell with as little delay as possible,

837
01:20:01.060 --> 01:20:08.180
accompanied with an equally general inclination to defer all purchases as long as possible.

838
01:20:08.180 --> 01:20:13.460
There is always actually the case in those periods which are described as periods of

839
01:20:13.460 --> 01:20:20.420
general excess, and no one, after sufficient explanation, will contest the possibility

840
01:20:20.420 --> 01:20:24.140
of general excess in this sense of the word.

841
01:20:24.140 --> 01:20:30.740
The state of things which we have just described and which is of no uncommon occurrence amounts

842
01:20:30.740 --> 01:20:32.500
to it.

843
01:20:32.500 --> 01:20:39.420
For when there is a general anxiety to sell and a general disinclination to buy, commodities

844
01:20:39.420 --> 01:20:46.140
of all kinds remain for a long time unsold, and those which find an immediate market do

845
01:20:46.140 --> 01:20:48.880
so at a very low price.

846
01:20:48.880 --> 01:20:55.320
There is stagnation to those who are not obliged to sell and distress to those who are.

847
01:20:55.320 --> 01:21:01.820
In order to render the argument for the impossibility of an excess of all commodities applicable

848
01:21:01.820 --> 01:21:07.480
to the case in which a circulating medium is employed, money must itself be considered

849
01:21:07.480 --> 01:21:09.140
as a commodity.

850
01:21:09.140 --> 01:21:15.520
It must undoubtedly be admitted that there cannot be an excess of all other commodities

851
01:21:15.520 --> 01:21:23.040
and an excess of money at the same time, but those who have, at periods such as we have described,

852
01:21:23.040 --> 01:21:30.480
affirmed that there was an excess of all commodities, never pretended that money was one of these commodities.

853
01:21:30.480 --> 01:21:37.360
They held that there was not an excess, but a deficiency of the circulating median.

854
01:21:37.360 --> 01:21:45.120
What they called a general superabundance was not a superabundance of commodities relatively to commodities,

855
01:21:45.120 --> 01:21:49.680
but a superabundance of all commodities relative to money.

856
01:21:49.680 --> 01:21:58.000
Mill then discusses liquidity preference, once more without benefit of having the phrase.

857
01:21:58.000 --> 01:22:05.340
What it amounted to was that persons in general, at that particular time, from a general expectation

858
01:22:05.340 --> 01:22:12.000
of being called upon to meet certain demands, liked better to possess money than any other

859
01:22:12.000 --> 01:22:13.000
commodity.

860
01:22:13.000 --> 01:22:20.960
Money, consequently, was in request, and all other commodities were in comparative disrepute.

861
01:22:20.960 --> 01:22:26.000
In extreme cases, money is collected in masses and hoarded.

862
01:22:26.000 --> 01:22:32.500
In the milder cases, people merely defer parting with their money or coming under any new engagements

863
01:22:32.500 --> 01:22:34.120
to part with it.

864
01:22:34.120 --> 01:22:40.280
But the result is that all commodities fall in price or become unsaleable.

865
01:22:40.280 --> 01:22:46.320
It is, however, of the utmost importance to observe that excess of all commodities in

866
01:22:46.320 --> 01:22:52.720
the only sense in which it is possible means only a temporary fall in their value relatively

867
01:22:52.720 --> 01:22:54.200
to money.

868
01:22:54.200 --> 01:23:01.040
To suppose that the markets for all commodities could, in any other sense than this, be overstocked

869
01:23:01.040 --> 01:23:08.440
involves the absurdity that commodities may fall in value relatively to themselves.

870
01:23:08.440 --> 01:23:15.440
Mill next turns to the Keynes-Hansen bogey of a mature economy, though he had perhaps

871
01:23:15.440 --> 01:23:18.820
the good fortune not to know that phrase.

872
01:23:18.820 --> 01:23:25.920
He treats it as a fallacy discredited at least a generation before 1830.

873
01:23:25.920 --> 01:23:32.800
The argument against the possibility of general overproduction is quite conclusive so far

874
01:23:32.800 --> 01:23:39.160
Or as it applies to the doctrine that a country may accumulate capital too fast, that produce

875
01:23:39.160 --> 01:23:45.080
in general may, by increasing faster than the demand for it, reduce all producers to

876
01:23:45.080 --> 01:23:46.620
distress.

877
01:23:46.620 --> 01:23:52.520
This proposition, strange to say, was almost a received doctrine as lately as thirty years

878
01:23:52.520 --> 01:23:58.240
ago, and the merit of those who have exploded it is much greater than might be inferred

879
01:23:58.240 --> 01:24:05.200
from the extreme obviousness of its absurdity when it is stated in its native simplicity.

880
01:24:05.200 --> 01:24:11.480
It is true that if all the wants of all the inhabitants of a country were fully satisfied,

881
01:24:11.480 --> 01:24:19.200
no further capital could find useful employment, but in that case none would be accumulated.

882
01:24:19.200 --> 01:24:25.560
So long as there remain any persons not possessed, we do not say of substance, but one of the

883
01:24:25.560 --> 01:24:33.000
The most refined luxuries and who would work to possess them, there is employment for capital.

884
01:24:33.000 --> 01:24:38.480
Nothing can be more chimerical than the fear that the accumulation of capital should produce

885
01:24:38.480 --> 01:24:45.680
poverty and not wealth, or that it will ever take place too fast for its own end.

886
01:24:45.680 --> 01:24:51.560
Nothing is more true than that it is produce which constitutes the market for produce,

887
01:24:51.560 --> 01:24:58.040
And that every increase of production, if distributed without miscalculation, among

888
01:24:58.040 --> 01:25:04.280
all kinds of produce in the proportion which private interest would dictate, creates or

889
01:25:04.280 --> 01:25:07.640
rather constitutes its own demand.

890
01:25:07.640 --> 01:25:14.320
This is the truth which the deniers of general overproduction have seized and enforced.

891
01:25:14.320 --> 01:25:18.320
And in a final paragraph, Mill sums up,

892
01:25:18.320 --> 01:25:23.680
The essentials of the doctrine are preserved when it is allowed that there cannot be permanent

893
01:25:23.680 --> 01:25:30.520
excess of production or of accumulation, though it be at the same time admitted that as there

894
01:25:30.520 --> 01:25:37.320
may be a temporary excess of any one article considered separately, so may there have commodities

895
01:25:37.320 --> 01:25:44.800
generally not in consequence of overproduction but of a want of commercial confidence.

896
01:25:44.800 --> 01:25:51.060
If Keynes and the Keynesians had known of this essay and read and pondered it in time, we

897
01:25:51.060 --> 01:26:00.040
might have been spared the dreary and sterile economic revolution of the last quarter century.

898
01:26:00.040 --> 01:26:04.360
J. A. Hobson and Major Douglas

899
01:26:04.360 --> 01:26:11.000
Only a comparatively short discussion is now required on the ideas of J. A. Hobson, from

900
01:26:11.000 --> 01:26:14.520
whom Keynes next quotes extensively.

901
01:26:14.520 --> 01:26:21.760
Unfortunately, states his theory so clearly that his errors are easily detected and answered.

902
01:26:21.760 --> 01:26:27.680
I hardly realized that in appearing to question the virtue of unlimited thrift I had committed

903
01:26:27.680 --> 01:26:31.960
the unpardonable sin, page 366.

904
01:26:31.960 --> 01:26:37.520
Of course, unlimited thrift, if words have any meaning, would mean that nobody would

905
01:26:37.520 --> 01:26:44.500
spend any part of his income at all, an adventure in race-suicide which no sane man has ever

906
01:26:44.500 --> 01:27:00.500
In the problem of the optimum relationship of saving to spending, what we are discussing is ratios and quantities, and none of these are specified in any of the quotations from Hobson that Keynes presents.

907
01:27:00.500 --> 01:27:08.700
Hopson habitually attacks an undue exercise of the habit of saving, page 367.

908
01:27:08.700 --> 01:27:18.220
Any undue exercise of this habit, page 367, undue saving, page 368, and of course whatever

909
01:27:18.220 --> 01:27:22.660
is undue is condemned by the adjective itself.

910
01:27:22.660 --> 01:27:30.220
If by undue saving Hopson means sudden, unusual and unexpected saving to which the previous

911
01:27:30.220 --> 01:27:36.220
If this volume or balance of production was unadjusted, then such saving is of course unsettling.

912
01:27:36.220 --> 01:27:43.220
But even here, we do not know whether this sudden saving is the real cause of the harm done,

913
01:27:43.220 --> 01:27:48.220
unless we know whether it is completely irrational and uncaused,

914
01:27:48.220 --> 01:27:56.220
or whether it is itself a natural or rational consequence of some preceding disturbing factor.

915
01:27:56.220 --> 01:28:13.220
In any case, it is clear that Hobson believes in the existence of general overproduction, page 367, and it is Say's law properly understood, which tells us that general overproduction is impossible.

916
01:28:13.220 --> 01:28:21.220
What is possible is only unbalanced production, misdirected production, production of the wrong things.

917
01:28:21.220 --> 01:28:28.820
But we have now been over this point too often to need to elaborate upon it once again.

918
01:28:28.820 --> 01:28:36.300
This Section 7 of Chapter 23 might have been entitled by Keynes, myself and some eminent

919
01:28:36.300 --> 01:28:41.140
predecessors who have never understood Say's Law.

920
01:28:41.140 --> 01:28:45.620
Keynes closes with a few words on Major Douglas.

921
01:28:45.620 --> 01:28:51.180
Since the war, there has been a spate of heretical theories of underconsumption, of which the

922
01:28:51.180 --> 01:28:56.280
And those of Major Douglas are the most famous, page 370.

923
01:28:56.280 --> 01:29:01.940
Of course, since the appearance of the general theory, the most famous heretical theory of

924
01:29:01.940 --> 01:29:05.260
underconsumption is Keynes's own.

925
01:29:05.260 --> 01:29:07.300
But Keynes goes on.

926
01:29:07.300 --> 01:29:14.840
The detail of Douglas's diagnosis, in particular the so-called A plus B theorem, includes much

927
01:29:14.840 --> 01:29:21.560
Such Mere Mystification, page 371 And is there no needless mystification in

928
01:29:21.560 --> 01:29:29.480
the Keynesian I plus C theorem, or in the S equals Y minus C theorem, or in the Z equals

929
01:29:29.480 --> 01:29:37.480
or in the function of n equals k function of n2 theorem, etc., etc.