On Demand (Part 3, Endnotes 376-377)

From Section V.2E of II.1 ("The Problem of Scale (Part I)"). Considering “The General Theory” of Lord Keynes

Photo by Troy Mortier

³⁷⁶Having discussed the conflation of “the money multiplier” with “the investment multiplier,” let us now address another common accusation, that Keynes was a Socialist and/or a Marxist, which will return us to “the multiplier question” (which I think the views of Keynes on that subject are critical to grasp if we are to understand why he is ultimately a Capitalist). To this point, at the end of Chapter 12, Keynes says something of interest that can help illuminate why we shouldn’t use the term “Keynesianism” as a blank term for all government spending (though I myself am guilty of making this mistake). Keynes writes:

‘For my own part I am now somewhat skeptical of the success of a merely monetary policy directed toward influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an even greater responsibility for directly organizing investment [emphasis added] […]’^A

Keynes was not a Marxist, and he even made a point to say that he saw little of interest in the work of Marx, so we cannot interpret this section to suggest that Keynes believed the government should “own everything” or even be “a central planner.” It also doesn’t seem as if Keynes thought that the State should concern itself with welfare or “social justice” either, and yet “The Great Society” of Lyndon Johnson is often called Keynesian. Gradually, slowly, “Keynesianism” has become a blanket term for all forms of “State economic action,” but this is a mistake (one I’ve admittedly made in my own life, please note). Keynes is a Capitalist who simply believes that Capitalism is not “self-correcting.” It is contingent, and if it falls below a certain “event horizon” of drying-up demand, it will not be able to fix itself easily if ever.

‘In the 1920s, Keynes viewed himself as a man of the left,’ the great Hyman Minsky writes, which today might strike us as proof that Keynes opposed Capitalism, but really Keynes simply opposed the idea that Capitalism was “self-correcting.”^B According to Minsky, ‘Keynes disdainfully rejected the aims and program of the Trade Unionist and the Communists. At the same time, he expressed sympathy with the aspirations of the Socialists though, to put it mildly, he was skeptical about the efficacy of the techniques they favored.’^C Keynes was not convinced that redistribution was the best way to create wealth, though admittedly he did have ‘a flirtation with a humane, decentralized socialism, a flirtation which was tempered by the discipline of an economist.’^D Keynes strictly wanted the State to be a source of “emergency demand”—it doesn’t seem to me that Keynes wanted the State in the business of distributing resources, coordinating prices, or the like. Keynes believed ‘his new theory rendered obsolete the muddle that he felt Marxist economics to be,’ and this entailed implications for Socialist thought in general.^E

Keynes didn’t want the government to simply “increase liquidity” by giving out free money; rather, what Keynes had in mind was something more like the policies of “the FDR administration.” Hyman Minsky, the great Neo-Keynesian, also stresses the need to see Keynes as a Capitalist and not a Socialist or Marxist. Minsky highlights the section in The General Theory where Keynes writes:

‘I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight, but these would not be avoided by centralizing decisions.’^F

Yes, Keynes understood that, below the DEH, ‘the market mechanism does fail in that it leads to a socially oppressive distribution of income and wealth,’ but it did not follow for Keynes that therefore Capitalism should be thrown out entirel.^G Praising “free markets,” Keynes wrote:

‘But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all losses of the homogenous or totalitarian state.’^H

This is not a Marxist speaking, nor is it someone who wants Socialism wholesale. ‘The authoritarian state systems of to-day,’ Keynes wrote, ‘seem to solve the problem of unemployment at the expense of efficiency and of freedom.’^I Keynes wanted to avoid this mistake with a “middle way” that leaned in favor of Capitalism, for though there was the risk of the DEH, ‘it may be possible by right analysis of the problem to cure the disease while preserving efficiency and freedom.’^J According to Minsky, we can see Keynesianism as a ‘three-pronged program [consisting of] the socialization of investment, intervention to affect income distribution, and a decentralized market mechanism.’^K By “socialization of investment,” Minsky means “the State investing taxes for the society”—this is not simple Socialism—and “intervention” here is meant not to “take” money from people, but to incentive them to transform from “savers” into “investors” before they become “hoarders.” And “decentralized market mechanism” cannot be overemphasized: Keynes wants to keep power in the hands of the people. Now, that doesn’t mean Keynesianism doesn’t lead to unintended consequences, but we need to stop thinking that Keynes wanted the State to be “all powerful” because citizens were irrational or something. No, Keynes wants to defend liberty: he’s simply discovered the problem of DEH and “tragically” does about trying to figure out what to do about it. Keynes sums up the dilemma like this:

‘Whilst, therefore, the enlargement of the function of government involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem […] to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.’^L

Keynes cherishes Capitalism precisely because it increases freedom, but he argues that saving that freedom from falling belong the DEH and making it nightmarish requires encroaching freedom. What is the alternative? The total loss of freedom: we either must accept bounds on freedom or give up its desirability entirely For Keynes, the choice is easy, even if difficult to afterwards manage. Furthermore, alluding to Kant’s “perpetual peace,” Keynes thinks ‘the new system might be more favourable to peace than the old has been.’^M This is for desperate nations tend to go to war, and if nations never again fall below the DEH lose hope of recovery, then the incentive for war will drastically be reduced. It is when nations suffer that they look to conquer other nations; if Keynesianism ends suffering, then Keynesianism will mitigate the risk of war. Keynes was not convinced Marxism or Socialism could be advantageous in this way, hence further reason to understand that Keynes was indeed a Capitalism.

As we have already claimed, Keynes would accept simply handing out money if politically necessary, but he would greatly prefer stimulating investment, and in this way Keynes was more on the side of Roosevelt than Lyndon Johnson. To those who would stress increasing liquidity in the system versus emphasize an “investment multiplier,” Keynes would say that ‘they may lay a little too much emphasis on increased consumption at a time when there is still much social advantage to be obtained from increased investment.’^N Still, Keynes was a pragmatist who would settle with something versus nothing, and would readily concede that the wise course [was] to advance on both fronts at once.’^O Keynes could stomach combing Roosevelt and Johnson, but the emphasis needed to be on Roosevelt. He would ‘support at the same time all sorts of policies for increasing the propensity to consume,’ and wrote:^P

‘There is room, therefore, for both policies to operate together; – to promote investment and, at the same time, to promote consumption, not merely to the level which with the existing propensity to consume would correspond to the increased investment, but to a higher level still.’^Q

Keynes could support “money multiplier”-efforts and “investment multiplier”-efforts, but he would hardly favor “money multipliers” devoid of investment concerns. ‘If it is impracticable materially to increase investment,’ he wrote, ‘obviously there is no means of securing a higher level of employment except by increasing consumption.’^R I highly doubt Keynes liked writing that sentence, but he was willing to swallow his pride to assure we avoided falling into economic thought (CE) that pulled us below the DEH. To avoid another Great Depression, Keynes could forgo his preferences.

Now, the Austrian might argue that it’s “practically impossible” for the government to get in the business of being like FDR and not eventually end up in the business of regulation, welfare, and the like—the Austrian may argue that FDR always becomes Johnson eventually—but even if that is true, we should still critique Keynes on his own terms and not on terms we project onto him. Keynes believed that, following his program, ‘there will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.’^S This is critical to note because many Austrians accuse Keynesianism of strengthening the State and contribute to totalitarian control, but Keynes precisely worked to avoid this fate. For him, totalitarianism became appealing when people lost hope, and that was when nations fell below the DEH. Yes, State action to save society from ending up below the DEH could risk totalitarianism, but it wasn’t a simple decision: there was risk either way.

But was FDR a Socialist? If so, we can’t be so quick to free Keynes of the charge (and no doubt Keynes would a lot of faith and power in the State, perhaps too much). FDR certainly spent a lot of money and lead a very active government, but I think Government’s End by Jonathan Rauch does a good job of explaining ways that FDR was different from the general Welfare State which we are familiar with today. FDR focused on creating jobs, spreading investment, and the like: personally, I think he was more a Keynesian than a Socialist, but obviously those terms blur in common discourse.

Following Keynes, could Johnson’s “Great Society” contribute to job creation and investment? Yes, but that gets into the hard specifics of how the Welfare State is managed and run: Austrians argue that it’s only a matter of time before Welfare threatens employment and investment versus help stimulate them. This is because politicians can’t resist using Welfare to score political points and to offer voters easy money, at which points the hopes of Keynesianism fail and faulter. Furthermore, the Austrian would say it’s inevitable that the State start using regulation and “investment funds” to favor special interest groups and corporations which align with State agendas, and in this way “The Great Society” inevitably leads to the “mixed market”-catastrophe we have now (as described in Government’s End by Rauch, as explained elsewhere in O.G. Rose).

As we’ve already said numerous times, Keynes would accept a government like the Johnson administration, but we must acknowledge that he greatly preferred FDR. The main goal of Keynes was the creation and incubation of demand to keep the market from falling below the DEH, and though he understood that required consumption (and thus would support consumption anyway that proved politically necessary), Keynes also understood government spending could become a problem if it wasn’t tied to investment. There seems to be a school of thought out there that suggests there is always “demand,” which means that all the State needs to do is “give people the money” and the rest will take care of itself. If this is true, then the Keynesian emphasis on “making sure the State instigates investments” is completely unnecessary: generally speaking, “money multipliers” and “investment multiplies” are “practically identical.” But Keynes doesn’t seem to think this way: he understands there is a big difference between spending in general and investment in particular, and though “general spending” is better than hoarding, “general spending” is not as good as investment. And Keynes does not seem to think that the average person will invest money the government gives them; the average person will likely just consume with it, which though better than nothing, it would be far preferable for the government to make sure government debt is always in the direction of investment. That way, we get the best multiplier of all: “the investment multiplier.”

Keynes actually offers a detailed examination on how we could actually calculate the return on his “investment multiplier,” and Keynes seems to prove, to some extent, that government debt which creates demand pays for itself. How Keynes proves this exceeds the scope of this work (and it is admittedly a claim I take on faith from other scholars), but if Keynes did indeed succeed like this, it doesn’t follow that “government debt always pays for itself” that backs a “money multiplier” versus an “investment multiplier.” Not all debt is equal, and perhaps one of the most critical questions we face today in Economics is determining “What percentage of national debt backs investment?” Generally, debt that generates a return greater than the debt is “good debt,” whereas debt that doesn’t generate a return is “bad debt.” This is another topic that deserves an expansion focus, but here I mainly want to say that we shouldn’t assume that Keynes thinks “all debt is good” or that he believes the debt resulting from “money multipliers” is “as likely” as debt resulting from “investment multipliers” to turn out to be “good debt.” Keynes is accused of thinking this way, and I think his work makes it clear that this critique is unfair.

Households cannot create inflation, and so Keynes is strongly on the side of stressing that households need to spend, consume, and invest. Yes, a given household can spend money poorly, but overall household spending benefits someone in the economy, for even if families buy new cars they don’t need, that purchase still benefits the car dealership, the truck drivers who delivered the new vehicle, the workers at the car factory, the inventors of the parts—on and on (what constitutes a “waste of money” for a household can constitute “a great buy” for countless other people involved in the production of the product). But Keynes knows that governments can create inflation, which complicates the matter, but Keynes also stresses that “household debt” and “government debt” are not equal—a horrible and common mistake. Government owns the monetary system and can create supply: if the government stops creating new money, then there cease to be money by which we can generate investment and productivity to pay off debt. If government stops spending for the sake of paying off debt, that can be precisely why debt can’t be paid off. And critically, we don’t want to pay off debt entirely; we want to eliminate “bad debt,” which is debt that doesn’t back investment. To eliminate all debt would be to eliminate “all investment,” which would destroy the economy, but it is not the case that “all examples of eliminating debt” are necessary examples of “eliminating investment.” It depends, and problematically discussing “debt” as one large “macro-category” that lacks distinction and nuance contributes to sloppy thinking on the topic.

For Keynes, the likelihood that debt resulting from “money multipliers” is “bad debt” is higher than debt resulting from “investment multipliers,” but even “money multipliers” are better than nothing at all (for even “bad debt” still ends up money in someone’s pocket who can then spend it and possibly even redeem the “bad debt” into “good spending”). Once government spends money, it all indeed becomes just “debt”—the line between “good debt” and “bad debt” because extremely hard to draw if not impossible (like a Schrödinger’s Cat)—so it’s critical that we increase the likelihood that the debt is “good debt” at the onset (furthermore, the meaning and “kind of debt” we are dealing with can change “mid-process” based on how we perceive the future due to interest rates, for example, as Keynes argues, sounding like Hegel on “Absolute Knowing”). But Keynes also understands that politics doesn’t always allow “ideal circumstances,” so again stresses that he will accept “money multipliers,” aware that if the State thinks only debt it knows is “good debt” is allowed to accumulate, then the State will hesitate when it should act and put us at risk of falling below the DEH. Furthermore, it’s arguably impossible for the State to “know” what debt is good and what debt is debt—risk is unavoidable—so it could risk setting a standard for itself that makes action “practically impossible.” At all costs, Keynes wants to avoid this mistake.

By prioritizing “investment multipliers,” we can increase our changes that probability is on our side that debt is “good debt” (an argument which favors Keynesianism over Socialism or Marxism), and Keynes basically argues that this is what we must attempt to do (with political realities in mind), because the only alternative to accumulating debt is for the State not to spend at all. Yes, where debt isn’t accumulated, there is no risk of inflation, but there is also no risk of inflation where there is no money at all. We must risk inflation if we are to avoid falling below the DEH, but it is also possible that we fall below the DEH because of inflation causing supply chain issues, raising prices without also raising wages, and so on. Keynes is aware of this problem, and he sees the solution in generating “good debt,” but knowing we generate “good debt” is impossible: all we can do is increase our changes at the onset by prioritizing investment. That’s exactly what Keynes does, but the Austrian may counter that it’s inevitable that “political realities” eventually take over and “money multiplier”-efforts replace most “investment multiplier”-efforts, increasing the likelihood that “bad debt” is accumulated. For this reason, the Austrian might say it’s better for the State to do nothing at all, in reply to which Keynes may say that, even if the Austrian is correct, “money multipliers” are better than nothing. Perhaps it is the case that it is “practically inevitable” that “investment multipliers” are replaced by “money multipliers,” but even if that was true, the resulting world would be preferable to a world without either multiplier at all.

Keynes has been accused of failing to foresee the dangers of inflation and stagflation, but I think that accusation conflates “Keynesianism” with “Socialism.” Sure, perhaps ultimately Keynesianism still fails, but if it does so, we should critique it on the terms Keynes intended. He accepted “money multipliers,” but he was aware that they were far more risky than “investment multipliers.” Investments multiply investments more than money multiplies money, though perhaps Lyndon Johnson wanted us to start thinking that Keynes intended a “money multiplier” so that Johnson could fulfill his own agenda. Hard to say—perhaps the same holds truth with politicians to this day. 

To bring this endnote to a close, as I hope has been made clear, when Keynes is critiqued, it is mistaken to critique him as a Marxist or a Socialist: the failures of Marxism and Socialism should not be taken as evidence that Keynesianism doesn’t work (though they often are). And though there are critiques Keynes must answer (mainly from Hayek), the critiques against Marxism and Socialism do not fairly apply to Keynes. I personally have made this mistake, though moving forward I will try to do better. To critique Keynes fairly, we must more so critique government programs to build infrastructure and invest in research and design like NASA (as Jonathan Raugh discusses in Government’s End)—that’s far closer to what Keynes supported. Now, since Keynes accepted “money multiplier”-efforts, we can critique him when “money multipliers” fail, but we must always blunt this critique when an understanding that it is not what Keynes wanted. And as Rauch describes, as special interest groups raised in and started taking advantage of the money government offered, Keynes easily may have changed his mind to favor “investment multiplier”-strategies more exclusively.

But if we desire to keep critiquing Keynes, perhaps it’s the case that once government begins offering money, whether through investments or by simply offering free cash, it’s “practically inevitable” that special interest groups descend upon the government and start all the troubles Mancur Olson warned about in The Rise and Decline of Nations. I’m not sure, but those especially dedicated to Austrian thinking might find this line of attack appealing. This brings to mind a troubling possibility: if it is the case that Keynes is right about the DEH and also right about the governments need to keep the market from falling below the DEH, but the government that attempts to do this is always eventually taken over by special interest groups, setting into motion all the trouble Rauch and Olson discuss, then it is “practically inevitable” that Capitalist societies fail. Unless that is it’s possible to not fall below DEH without eventual State assistance, but that would get us into the topic of the Artifex (as will be discussed).

^AKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 164.

^BMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 144.

^CMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 144.

^DMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 145.

^EMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 145.

^FKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 379.

^GMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 146.

^HKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 380.

^IKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 381.

^JKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 381.

^KMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 147.

^LKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 380.

^MKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 381.

^NKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 325.

^OKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 325.

^PKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 325.

^QKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 325.

^RKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 325.

^SKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 380.

---

³⁷⁷For Hyman Minsky, when it came to Keynes, ‘the cyclical perspective, the relations between investment and finance, and uncertainty, [were] the keys to an understanding of the full significance of [Keynes’s] contribution.’^A Minsky believes Keynes did not help himself make his own case, because ‘the phrasing of the price level of capital assets in terms of interest rates muddle[d] his message with respect to the determinants of investment.^’B Additionally, Minsky thinks that Keynes, in ‘his discussion of finance and portfolios, and how they relate to the pricing of capital assets and the pace of investment, is muddled.’^C

To Keynes’s defense, Minsky notes that Keynes did not focus on the conditions which gave rise to the crash (beyond generally the “loss of investment” due to a turn in favor of hoarding) because ‘[i]n the early 1930s, when The General Theory was conceived, the great crash in Wall Street was in the minds of all; explicit, continuing discussion of the great crash was not necessary in order to make one’s point.’^D Still, Keynes alludes to what brought the crash about, and it is elaborating on this that Minsky spends a great deal of his career. ‘The financial developments during a boom that make a crisis likely, if not inevitable,” Minsky writes, ‘are hinted at but not thoroughly examined. This is the logical hole, the missing link, in The General Theory as it was left by Keynes in 1937 […]’^E Personally, I agree with Minsky’s assessment, and also believe Minsky’s work goes a long way to filling the hole in Keynesianism.

The “cycle perspective” Minsky points out in Keynes is indeed critical (and inspired the paper “Joy to the World”), for it suggests why simply “handing out money” is less desirable than stimulating and organizing investment. Minsky describes “the cycle of booms and busts” that define Capitalism in terms of people becoming overly complacent during “booms” period, and that complacency eventually leads to a “bust” period. To use Minsky’s own words:

‘As the subjective repercussions of the debt-deflation wear off, as disinvestment occurs, and as financial positions are rebuilt during the stagnant phase, a recovery and expansion begins. Such a recover starts with strong memories of the penalty extracted because of the exposed liability positions during the debt-deflation and with liability structures that have been purged of debt. However, success breeds daring, and over time the memory of the past disaster is eroded. Stability—even of an expansion—is destabilizing in that more adventuresome financing of investment pays off to the leaders, and others follow. Thus an expansion will, at an accelerating rate, feed into the boom.’^F

Minsky’s thought is more complex than all this, but basically this part of Minsky’s work constitutes ‘the missing step in the standard Keynesian theory […] the explicit consideration of capitalist finance within a cyclical and speculative context.’^G Summing all this up is a favorite paragraph of mine in all of Minsky (one that always makes me think of Hegel’s “Absolute”):

‘Every reference by Keynes to an equilibrium is best interpreted as a reference to a transitory set of system variables toward which the economy is tending; but, in contrast to Marshall, as the economy moves toward such a set of system variables, endogenously determined changes occur which affect the set of system variables toward which the economy tends. The analogy is that a moving target, which is never achieved but for a fleeting instant, if at all. Each state, whether it be boom, crisis, debt-deflation, stagnation, or expansion, is transitory. During each short-period equilibrium, in Keynes’s view, processes are at work which will “disequilibrate” the system. Not only is stability an unattainable goal; whenever something approaching stability is achieved, destabilizing processes are set off.’^H

‘Thus the behavior of the economy is characterized by equilibrating tendencies rather than by any achieved equilibrium. Keynesian economics as the economics of disequilibrium is the economics of permanent disequilibrium.’^I Past the DEH, there is no ultimate “self-correction,” only “tendencies toward self-correction” that ultimately fail or don’t work for so long that they are “practically useless.”

We’ve already discussed why CE doesn’t “self-correct” and laid out the case, but what else has Classical Economics and “free market” Capitalists argued would help the market “self-correct” that Keynes deconstructs? Well, The General Theory is a dense book, and here I can at best lay out some of the other arguments. For example, Keynes spends Chapter 12 explaining why we can’t rely on “the stock market” to keep the marketing from falling below the DEH either. He notes that long-term investors are likely to be crowded-out by speculators (who Keynes does not like), and furthermore Keynes also makes the case that we simply aren’t very good at “long-term investing.” Reluctantly, Keynes accepts that speculators cannot be removed from the stock market without causing the whole thing to collapse, which ultimately just means we cannot rely on the market to save us from DEH. He writes:

‘The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is ‘liquid’ […] calms his nerves and makes him much more willing to run a risk.’^J

In his day, Keynes believed investing was mostly “speculating” versus “enterprise,” and so did not believe that ‘the best brains of Wall Street’ did in fact help the market achieve its most pressing and sustainable goals “in the long run.”^K Keynes even considered ‘a substantial Government transfer tax on all transactions’ to assure that investors stayed investors (which hints at how horrified Keynes may have been by the Robinhood app available these days), but maybe Keynes was too pessimistic?^L Maybe markets can prove more useful than Keynes realized, and furthermore perhaps he underappreciated how markets could help the overall market self-correct? In my view, Keynes was not familiar enough with “financial markets” to discuss them adequately, and I think it is wise of thinkers like Minsky and other “Neo-Keynesians” to spread a great deal of time introducing “finance” into Keynesian thought. I will not repeat the argument here that is laid out in “Joy to the World,” but I do think it’s the case that the stock market is not guaranteed to “self-correct” either.^M

What about interest rates? Can they make a difference? ‘It is evident,’ Keynes writes, ‘that the rate of interest is a highly psychological phenomenon,’ and he indeed seems to believe that interest rates can play an important role.^N ‘For there is no necessity to hold idle cash to bridge over intervals if it can be obtained without difficulty at the moment when it is actually required,’ which is to say that low interest rates means there cash is easy to obtain, and that means there is less incentive to hoard (mitigating all the risks associated with hoarding).^O But interest rates are useful insomuch as they motivate people to cease “hoarding” and begin “investing,” which suggests State “nudging” to get “the market” to keep itself from deconstructing itself.

“Nudges,” “guidance,” “intervention”—these are the words to describe Keynes’s program, not terms like “takeover,” “replacement,” and/or “claiming ownership.” But this brings us back to differences between “good debt” and “bad debt,” and the government’s actual ability to create demand. If government spending just created demand, in line with Keynes, it might be the case that “the multiplier effect” would always assure that spending and corresponding debt ended up being “unveiled” as “investment” versus wasted. On the other hand, perhaps it’s “practically impossible” for government spending to discipline itself to “only create demand” and, once the purse strings are loosened, perhaps it is “practically inevitable” that special interest groups, corporations, and the like corrupt the government to their benefit. Not all government spending is equal, and perhaps overtime spending is increasingly “pull away from” demand-creation and “investment multiplier”-efforts to favor special interests. As a result, the spending is fragmented and loses its effectiveness, which increases the amount of “bad debt” in the system, leading to inflation and/or stagflation. If this occurred, we’d experience a “tradeoff of wages for hours” (as discussed by O.G. Rose’s paper that goes by the same name), and “asset holders” (the wealthy) would benefit at the expense of lower classes.

In “Flip Moments” by O.G. Rose, it was argued that the difference between Austrians and Keynesians basically came down to a disagreement about what would happen when “the debt was called in.” For Keynes, the “multiplier effect” would prove itself; for Austrians, the shortcomings of the “multiplier effect” would appear. Though perhaps government debt, if strictly used to create “demand,” would prove Keynes right, the Austrian might say that this was idealistic, that government spending could never resist “bleeding over” into other areas that didn’t generate “demand” (say through welfare or in favor of special interest groups), and that thus didn’t pay for itself thanks to a “multiplier effect.” As discussed elsewhere in O.G. Rose, Austrians may say that Keynes ends up “creating money” more than he “creates wealth,” and ultimately it is only the later which matters. The inevitable “flip moment” would unveil if Keynesianism worked “only in theory” or in practice too, but it would perhaps be more “rational” to just push this “flip moment” off for as long as possible, especially if our world is one of MAD Capitalism. 

^AMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 58.

^BMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 58.

^CMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 67.

^DMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 61.

^EMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 60.

^FMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 125.

^GMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 126.

^HMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 59.

^IMinsky, Hyman. John Maynard Keynes. Columbia University Press, 1975: 66.

^JKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 160.

^KKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 159.

^LKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 160.

^MGenerally, without intrinsic motivation, the stock market inevitably causes “boom and bust”-cycles, and that means it can always fall below the DEH.

^NKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 202.

^OKeynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 196.

.

.

.

For more, please visit O.G. Rose.com. Also, please subscribe to our YouTube channel and follow us on Instagram, Anchor, Facebook, and Twitter.