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Consumption – To Repeat the Obvious – Is the Sole End and Object of All Economic Activity

(photo: Wikimedia)

Conservatives loathe Keynes. It isn’t his title, Lord Keynes, or his profession, financial speculator, that causes heartburn, they eat that up. No, they hate him because he has so little respect for the rich and their money. That is why rich conservatives so avidly supported some marginal economists (a group which is perfectly willing to perform like trained seals for money) who reworked classical economics, and renamed it supply side theory. It gave the very rich a pretense for rejecting Keynes. In the face of the drastic consequences of that stupid idea, the zombie party is pushing it harder than ever.

Keynes’ theory explains why unemployment was so high in the 30s: there was no demand, so businesses didn’t invest. He explains it this way. The purpose of economic activity is consumption. Consumption either is present consumption, or expenditures to make future consumption possible. That is, either we buy clothes, or we buy machines to make clothes. Either way, we are consuming. We can’t push expenditures on plant and equipment for future consumption too far into the future. We only buy them when there is a reasonable prospect for selling products for consumption fairly near the time of investment.

That gives rise to a big problem: we must defer some of our consumption into the future, to cover retirement, involuntary lay-offs and illness, and future needs of our kids, like college, and so on. That saving reduces aggregate demand. Note that this is a huge problem in the current political situation. The zombie party and its corporatist democratic sycophants demand reduction in Social Security and Medicare, and push the cost of education onto families, and are prepared to cut spending that might help ordinary people. Families have to protect their future. But those savings reduce demand for current consumption, and increase the amount of money pushed into some kind of financial asset, or used to pay down debt.

On top of that, there is the skewed distribution of income. Keynes makes the uncontroversial observation that the more you earn, the more you save as a percentage of your income. Low-income workers spend their income, while high-income people save and invest more. Savings from high incomes are a drag on aggregate demand.

All consumption is either produced currently or in a prior period. Machines and plant used in production are a good example of the latter. The goods produced in a prior period are themselves capital in the hands of the owner. Selling those goods is a form of disinvestment:

Now, all capital-investment is destined to result, sooner or later, in capital-disinvestment [people want to sell their capital assets at some point]. Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between net income and consumption, presents a problem which is increasingly difficult as [total] capital increases. New capital-investment can only take place in excess of current capital-disinvestment if future expenditure on consumption is expected to increase. Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between income and consumption, presents a problem which is increasingly difficult as capital increases.

105. To understand this fully, I recommend that you take a careful look at this from Stephanie Kelton, helpfully posted by selise.

This stuff isn’t rocket science, and it isn’t some ideological position, designed to make money for me. These outcomes are the consequences of simple algebra from definitions and observed reality. For this purpose, it is enough to note that as capital is withdrawn from consumption, that is, saved, it creates claims for future consumption. That future consumption can only exist if there are plants and equipment sufficient to create it. You can’t eat a bond, or buy wine with a credit default swap. When capital is created (by saving as opposed to consumption), current consumption goes down. In the absence of demand, why would anyone build more plant and equipment?

But the problem is actually worse. The system is trying to create more claims on future income, without creating the means for production of future income. How is that supposed to work?

Keynes recognizes that capital increases as capitalist societies evolve. It’s a reasonable guess that there is more than $60 trillion in capital in the US alone. That is money that is not being used for current consumption. The whole point of the government response to the Great Crash was to make those financial claims good, at the expense of the entire nation. None of the money helped the average consumer. Now there is no demand for consumption, but that $60 trillion demands a return, which will be paid by the people who still have jobs or cash, in the form of taxes, interest and investment fees.

What are the consequences of this mismatch between consumption and savings? Keynes says the only answer is to increase unemployment.

What is to be done? Well, this problem doesn’t just affect the real world, it affects the virtual world as well. Charlie Stross, Paul Krugman’s favorite scifi writer gives us an example in his book Halting State.

The book begins with a bank robbery in a virtual world by a group of creatures from another virtual world. Hayek and Associates is in the business of stabilizing the economies of seventeen virtual worlds, including the one in which the robbery occurred. A Hayek manager explains

Our task is to keep speculation down, and effectively to drain quest items and magic artefacts from the realm to prevent inflation. One way we do this is by offering safe deposit services to players. Avalon Four runs a non-persistent ownership mode so you can lose stuff if you’re killed on a quest and respawn, and the encumbrance rules are tight.

Players can migrate from one virtual world to another, taking their loot with them.

Which in turn means there are exchange rates between games – and not just game-to-game, I’m talking game-to-euro rates, game-to-yuan, game-to-rupee. All the strong currencies, … even US dollars So there’s currency speculation and an external market in gaming currency hedge funds….

One way we take currency out of circulation is to sell imaginary real estate.

Let’s define “useless capital” as capital that will never, ever be consumed, like, for example, the money held by the Ford Foundation, or Warren Buffett’s fortieth billion dollars. One way to take useless capital out of circulation is to tax it and use the proceeds to build public goods. That creates jobs and infrastructure and public assets like parks and bridges. It won’t even hurt: once you get past a certain amount of capital, it’s all virtual anyway.

Or, you could do nothing, in which case we are doomed to be serfs for those people who own the vast majority of the $60 trillion.

[John Maynard Keynes, The General Theory Of Employment, Interest and Money, p. 104 (Prometheus Books, 1997)]


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