Chapter XVI CONFUSIONS ABOUT CAPITAL

1. On Going Without Dinner

As we advance in the General Theory, the fallacies seem to be crowded in more tightly, and in Chapter 16, “Sundry Observations on the Nature of Capital,” they become particularly thick.

“An act of individual saving means—so to speak,” Keynes begins—“a decision not to have dinner today.” The matter is obviously put this way in order to make an act of saving appear to be inherently absurd. The truth is that an act of individual saving means, for the overwhelming majority of savers, merely a decision not to have two dinners today. It is much more sensible all around to put aside enough to make sure that one also has a dinner tomorrow.

But let us resume the quotation:

An act of individual saving means—so to speak—a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption demand for present consumption demand,—it is a net diminution of such demand (p. 210).

On the basis of Keynes’s own formal definitions of saving and investment earlier in the General Theory, according to which “they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing” (p. 74), this whole passage is nonsensical and self-contradictory. We can make sense of it only if we re-define saving merely as non-spending of money. Even then the passage is (conditionally) true only in a very restricted sense. In order to make it true, we must throw our italics, not on the word not, but on the word necessitate. An act of saving does not necessitate a future act of consumption—particularly if it is accompanied or followed by an equivalent act of deflation (i.e., an actual cancellation or disappearance of the amount of money saved), and if prices and wages are rigid.

But in the modern economic-world, an act of saving, if it is not followed within a month or so by an equivalent spending, is almost invariably accompanied or followed by an act of investment. This is merely a way of saying that people in a modern economic community do not simply hoard money in a sock or under the mattress. Even if they merely deposit it in a checking account, the great bulk of it is immediately loaned out by the bank. If they deposit it in a savings account the whole of it is invested for them.

Moreover [Keynes continues], the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also. In this event it may reduce present investment-demand as well as present consumption-demand (p. 210).

Even Keynes, one might suppose, would have stopped at this point to re-examine either his premises or his paradoxical conclusion. For what he is saying is that though saving and investment are “necessarily equal,” increased saving may mean decreased investment!

Before we examine the basic fallacy here, however, we may pause a moment to point out a secondary fallacy. In the passage just quoted Keynes is tacitly assuming, not merely that there have been acts of saving, but that there has suddenly been more saving than in the immediate past. For if, let us say, people in a given community had previously spent 90 per cent of their incomes on consumption and set aside 10 per cent for savings-investment, both consumption-goods and production-goods entrepreneurs would have adjusted their operations to this distribution. Consumption-goods producers would have expected to sell, say, only 90 units of goods in a given period while capital-goods producers were selling 10 units. Saving at the same rate as in the past would do nothing to disturb the existing balance. Only if savings, say, were suddenly doubled, and consumers only bought 80 units of consumption-goods where they had previously bought 90, would the consumption industries be disturbed.

The assumption of a sudden increase in saving, in fact, is the only one that makes sense out of Keynes’s conclusions. That this is what he does tacitly assume is brought out by a remark on the following page: “An individual decision to save does not, in actual fact, involve the placing of any specific forward order for consumption, but merely the cancellation of a present order.” (My italics, p. 211.) As John Stuart Mill pointed out more than a century ago in dealing with precisely this fallacy about saving: “This is confounding the effects arising from the mere suddenness of a change with the effects of the change itself.” ¹

But even this assumption of a net increase in the rate of saving (or rather of a net decrease in the rate of consumption) is not enough to make sense out of Keynes’s conclusion. We must also assume that what is saved is not invested, as it normally would be. For if, in the new situation, only 80 per cent of income were spent on consumption, but 20 per cent, instead of 10, went into investment, the capital-goods industries would be stimulated sufficiently to absorb any unemployment in the consumption-goods industries. And future income would be even greater than otherwise. The only assumption on which Keynes’s conclusion can be justified is that the increased savings would mean merely increased money hoardings (accompanied by rigid prices and wage-rates). And this would happen only in a period when the expectations of consumers were bearish, either regarding the future price of durable consumer goods, or their own prospects of continued employment, or both.

The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished (p. 211).

Now this “absurd idea” is, in fact, a true description of what normally happens, because normally an act of saving is an act of investment. If a man does nothing else than deposit his weekly salary check in his commercial bank account, for example, and draw out only part of the amount to pay his bills and meet his current expenses, the bank will normally lend out at short term, say, about four-fifths of the deposit. If the same man deposits part of his weekly salary in a savings account, the savings bank will lend out at long term almost the entire deposit. Saving and investment (using both terms in their unsophisticated senses) normally go together, and are normally part of the same completed transaction.

In trying to prove that this is not so, Keynes resorts to reasoning so tortured that it becomes almost impossible to follow it. “This fallacy,” he tells us, “comes from believing that the owner of wealth desires a capital-asset as such,whereas what he really desires is its prospective yield” (p. 212). This distinction, in connection with this particular line of argument, has more subtlety than point. It is equivalent to observing shrewdly that what a concert audience really goes to hear is not the piano but its sound. The distinction is no less true, in fact, of consumption than of capital goods. We buy or rent a house, an automobile, or a piano for the services we get out of it. And the “yield” of capital goods, like the “yield” of consumption goods, is not necessarily a physical product, but a “service,” a value. The yield of a railroad or a truck, like the yield of a pleasure car, consists in the value added by transportation. The yield of an office building, like the yield of a residence, consists in shelter, heat, convenience of location, attractiveness and impressiveness of appearance, and other services, both tangible and intangible. Capital goods “yield” a money income; consumer goods directly yield an enjoyment income.

One of Keynes’s own major fallacies is his assumption that “yield” must mean a physical yield rather than a value yield. That is why he embraces the medieval notion that money is “barren.” That is why he persistently fails to recognize that people wish to hold cash, not because of some wholly irrational or anti-social “liquidity-preference,” but because of the yield they expect from holding cash. This yield may consist in the ability not only to make immediate purchases but to take advantage of future opportunities. Or cash may be held speculatively in the expectation of a rise in the purchasing power of money (or, what is the same thing, in the expectation of a fall in the price of durable goods).

Nor is this speculative holding of money, as Keynes constantly implies, wicked or anti-social simply because it does not go immediately into purchasing consumption goods at excessive prices or making unprofitable investments. If the speculative holders of money are right in their expectations, they perform a social function by refusing to waste resources unprofitably and by forcing a quicker return to more realistic and workable price and wage relationships. It is those who persist in holding wage-rates and prices at excessive and unworkable levels who are acting anti-socially.

After telling us that the owner of wealth does not desire a capital asset “as such,” but only its “prospective yield,” Keynes goes on: “Now, prospective yield wholly depends on the expectation of future effective demand in relation to future conditions of supply. If, therefore, an act of saving does nothing to improve prospective yield, it does nothing to stimulate investment” (p. 212).

This is a strangely inverted argument. An act of saving is not undertaken to “improve” prospective yield, but to take advantage of prospective yield. Saving (somewhere) is indispensable to equivalent investment. Saving represents the supply of the funds needed to satisfy investment demand. Every manufacturer or seller knows that when by production or offer he increases the supply of a commodity he does not thereby raise its price or increase the demand for it. The supplier is merely taking advantage of the existing price and demand; he is helping to meet the existing demand. The actual effect of his own action, indeed, is to tend to lower the price and to reduce the amount of demand that remains unsatisfied. Earlier in the General Theory, as we have seen, Keynes compares saving and investment to selling and buying respectively, and reminds us of the elementary proposition that “there cannot be a buyer without a seller or a seller without a buyer” (p. 85). But in the foregoing argument from page 212 he does in fact assume that there can be selling without buying, saving without investment.

Keynes’s argument on this point shuttles back and forth so much, in fact, and seems to reverse its direction so often, that the task not merely of answering it, but even of saying what it is, often appears hopeless. Immediately after he has treated saving, in effect, as a one-sided operation, like selling without buying, he insists with his own italics on calling it “two-sided.” But “two-sided” in a rather strange way. To quote:

Moreover, in order that an individual saver may attain his desired goal of the ownership of wealth, it is not necessary that a new capital-asset should be produced wherewith to satisfy him. The mere act of saving by one individual, being two-sided as we have shown above, forces some other individual to transfer to him some article of wealth old or new. Every act of saving involves a “forced” inevitable transfer of wealth to him who saves, though he in turn may suffer from the saving of others. These transfers of wealth do not require the creation of new wealth—indeed, as we have seen, they may be actively inimical to it. (His italics, p. 212.)

I find it impossible to make head or tail of this argument, or to read any sense into it. Every sentence of it seems to be wrong. An act of net saving by any individual must involve the creation of a new capital asset. If it fails to do so, if it is in fact a mere transfer of an existing capital-asset (say a stock or a bond), then the only reason it does not lead to the creation of a new capital asset is that it must be offset by an exactly equivalent act of dissaving on the part of some other individual—either the person who sells the saver the existing capital-asset, or some other person. But if there is no offsetting act of dissaving elsewhere, then a net addition to saving by anybody must mean the creation of a new capital asset.

It is, moreover, impossible to see how a saver “forces” some other individual to transfer some article of wealth old or new. A man who earns a wage of $100 a week and saves $10 out of it has not “forced” his employer to transfer this $10 to him. He has earned it for his services; he has produced an equivalent value in return. And if he has not “forced” this $10 out of his employer, it is impossible to say from whom he has forced it. If he has not stolen it, he has given an equivalent. The buyer does not “force” a transfer of goods from the seller; the seller does not “force” a transfer of money from the buyer. It is impossible to make any sense out of such a form of statement.

But if it is impossible to say with confidence what Keynes means in this paragraph, it is not impossible to guess. His errors come mainly from using the terms “saving” and “investment” in many different senses, several of which are mutually contradictory. If we define saving and investment as Keynes formally defines them in Chapter 6 of the General Theory, in which both terms mean merely unconsumed output, then they are not merely equal but identical, and the whole of Keynes’s subsequent discussion of the difference between them is invalid. If saving, however, is thought of purely in terms of hoarded money, and investment is thought of purely in terms of capital goods (excluding money), then there is of course a difference between them. But it does not follow that Keynes’s reasoning even on these foregoing definitions (which he never makes explicitly) is valid. For Keynes (1) constantly writes as if the man who holds money holds nothing of “real” value; (2) never tells the reader whether in any particular case he is assuming a constant or a changing money supply; and (3) never tells the reader whether in any particular case he is assuming flexible or rigid prices and wage-rates.

2. Saving, Investment, and Money Supply

If Keynes is assuming a constant money supply, then an “act of saving” by any individual or group (when “saving” means solely money saving) must necessarily be offset by an act of “dissaving” by some other individual or group. For if the money supply is constant, the average cash holding cannot be increased. If, under such conditions, the majority of people suddenly attempt to save more, then the initial result must be that producers (and nearly all families are producers as well as consumers) will buy less of each other’s goods. It is only in these suddenly changed specific conditions, and for such an assumed initial period, that the predicted Keynesian result of unemployment would take place as a consequence, not of “saving,” but of attempted saving.

And even this consequence is possible only under the further assumption that prices or wage-rates are “sticky” or inflexible in a downward direction. For if prices and wage-rates are fluid in both directions, the immediate response to a falling off in the desire to buy goods or to hire workers would be a lowering of prices or wage-rates to a point where people would cease to attempt to save more than before and would consent to make their usual purchases again. In any case, the reduced supply of money offered would now be sufficient to buy the previous volume of goods and to employ the previous number of workers at the now lower prices and wages.

But this analysis reminds us that even when the “Keynes unemployment effect” takes place, Keynes is accusing the wrong factor of being the culprit. The real culprit is not saving, but wages and prices that are inflexible in a downward direction. And even the “saving” of which Keynes complains is not saving or even an attempt to save in the ordinary sense; it is an attempt to hold money rather than goods, in the expectation that the purchasing power of money will go up (i.e., that the price of goods will go down).

But even here it is not the attempted saving (or rather the attempted hoarding) that is the cause of the downturn; it is the expectation of the downturn that causes the attempted hoarding. And the expectation of the downturn is caused, in turn, by the belief that prices or wage-rates or both are excessive at levels unlikely to be maintained. Keynes’s sarcastic shafts, however, are never directed against inflexible or excessive wage-rates, but only against the attempted “saving” that they provoke.

We must come to the conclusion, then, that under the assumption of a constant money supply, saving and investment are necessarily at all times equal, and grow pari passu. Savers invest either directly or indirectly. They either use their savings to buy stocks or bonds or mortgages or houses or other durable goods; or they deposit their funds in savings or checking accounts which the banks invest for them or lend out on short term. Some savers may, of course, “invest” in more pocketbook cash, but only at the expense of others. Under the assumption of a constant money supply, there cannot be a net increase in average cash holdings.

Yet many modern economists do distinguish between saving and investment, and do talk of inequalities between saving and investment. And this distinction, when properly made and understood, is not only valid, but constitutes an important and necessary tool of analysis. The best way to show this is to analyze Keynes’s argument denying it.

Keynes, as we have seen, is bewilderingly inconsistent on this point, assuming in Books III, IV, V, and VI, and in a grossly exaggerated degree, the very difference he has been at such pains to deny in Book II. In Book II he explicitly rejects “the new-fangled view that there can be saving without investment or investment without ‘genuine’ saving” (p. 83). The argument by which he does this is lengthy and complex, but a few quotations will indicate its nature:

The prevalence of the idea that saving and investment, taken in their straightforward sense, can differ from one another, is to be explained, I think, by an optical illusion due to regarding an individual depositor’s relation to his bank as being a one-sided transaction, instead of seeing it as the two-sided transaction which it actually is. It is supposed that a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no saving corresponds. (P. 81.)

Now this is precisely what a depositor and his bank can contrive to do. The way in which “the banking system can make it possible for investment to occur, to which no saving corresponds” is easier to describe, so we shall begin with it. A big manufacturer comes to his bank with a proposition to put up a new plant; and the bank, because it has faith in his judgment or shares his optimism, advances him $1,000,000 toward it. It does this by creating a deposit credit of $1,000,000 against which he is free to draw. Thus $1,000,000 of monetary purchasing power has been newly created. Let us assume that it constitutes a new addition to the outstanding supply of money and bank credit. This sum is invested in the plant. “Investment” has increased by $1,000,000. This increase is represented by a physical asset, which we shall assume is a net addition to the supply of capital instruments. The increase in “investment,” then, is real. But there has also suddenly come into being $1,000,000 of new “cash.” Is this a genuine saving? Keynes insists that it is:

The notion that the creation of credit by the banking system allows investment to take place to which ‘no genuine saving’ corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of the others.... The savings which result... are just as genuine as any other savings. No one can be compelled to own the additional money corresponding to the new bank-credit, unless he deliberately prefers to hold more money rather than some other form of wealth (pp. 82-83).

But this is a very Pickwickian definition of “genuine” savings. The bank creates a “cash” balance by writing a credit on its books—and lo! this becomes “new” savings, and “just as genuine as any other savings,” because somebody must hold the new cash balance! On this definition, we create “new” savings, “as genuine as any other savings,” simply by expanding the credit supply. On the same reasoning we can create any amount of new “savings” we wish overnight, simply by printing that amount of new paper money, because somebody will necessarily hold that new paper money!

It is only by rejecting this whole perversion of words and meanings that we are able to make any sense at all of the General Theory after Book II. For then we find that Keynes’s fear of “savings” and praise of “investment” follow because of his constant assumption that these two words not only refer to two quite distinct things, but that savings and investment are constantly likely to be unequal. And when we analyse how this inequality can come about, we uncover the hidden assumption that gives to the Keynesian system whatever plausibility it may have.

Under the assumption of a constant money supply, as we have seen, saving and investment are necessarily at all times equal, and move together. But when new money and bank credit are created (by, say, new bank borrowings to construct new plants) investment increases without any corresponding increase in ordinary saving. This may be put the other way. When investment exceeds genuine saving, it is because new money and bank credit are being created. In short, when investment exceeds genuine saving, it is because we are in a period of inflation. Contrariwise, in a crisis, or period of liquidation, bank loans are being repaid and not renewed; the money supply is shrinking, and ordinary saving exceeds subsequent investment.² In short, when genuine saving exceeds investment, it is because we are in a period of deflation.

To put it still another way, an excess of prior saving over subsequent investment (when we use these terms in their monetary or monetary-value sense, and not both in the technical sense of “unconsumed product”) is but another way of describing deflation, and an excess of investment over prior saving is but another way of describing inflation. As long as there is an equality of genuine saving and investment (using both terms in their monetary or monetary-value sense) there is neither inflation or deflation.

Of course, there is always, and under all conditions, simultaneous equality of “saving” and “investment,” i.e., equality at any one moment of time. But there is often inequality between prior saving and subsequent investment (using both terms in a monetary or monetary-value sense). And this inequality between saving at one moment and investment at another moment is usually the consequence, rather than the cause of, the monetary deflation or inflation that must necessarily accompany it.

So the harmfulness of “saving,” on which Keynes expatiates so often, and the blessings and necessity of “investment,” on which he is equally eloquent, do not follow from the absolute amount of either savings or investment in themselves, but from the unstated assumption that one exceeds the other. If an excess of saving over investment means deflation, then there is no trick (and no revolutionary “new” economics) in “proving” that it causes deflation. And if an excess of investment over saving means inflation, it is supererogatory to prove that it causes inflation.

The whole Keynesian policy is a policy of averting, at any cost, deflation of any amount, and courting almost any risk of perpetual inflation in order to maintain perpetual “full employment.” And the whole Keynesian theoretical system rests, among other tricks or errors, on ignoring the fact that with a constant money supply all saving implies an equal amount of investment, and assuming, instead, that there is a constant tendency for saving to exceed investment unless the government bureaucracy as constantly steps in to dream up and order enough “investment” to “fill the gap.”

3. Roundabout Production

Section II of Chapter 16 contains a number of curious non sequiturs which it hardly seems profitable to stop to straighten out. The section is noteworthy chiefly because it repeats the criticism that Marshall made of Böhm-Bawerk in a footnote.³ I have already anticipated this criticism in my previous chapter (p. 212); but it may be worth while to examine it in the form in which it is stated by Keynes.

“It is true,” he writes, “that some lengthy or roundabout processes are physically efficient. But so are some short processes. Lengthy processes are not physically efficient because they are long” (p. 214).

This is true. But, first of all, what counts in economics is not physical efficiency or productivity but value productivity. And because the precise causal relationship between roundabout processes and production was sometimes misleadingly stated by Böhm-Bawerk, it does not follow that the “length” or “roundaboutness” of the productive process is irrelevant or that the Böhm-Bawerkian analysis is “useless,” as Keynes (p. 176) and Marshall supposed. It is the expected greater (value) productiveness of certain more lengthy or roundabout processes of production that makes producers willing to undertake them. The causation is the reverse of what Böhm-Bawerk sometimes implied.

But if the length or roundaboutness of various periods of production is to be thrown out as irrelevant to a discussion of saving and investment or capital and interest, then consistency would force us also to throw out all considerations of relative costs of production in a discussion of prices of consumer or capital goods. For Böhm-Bawerk’s analysis of the length or roundaboutness of production periods is only a special case of relative-cost-of-production analysis in connection with the valuation or pricing process, with particular emphasis on the cost of time. Now both Marshall and Keynes, far from ignoring or rejecting considerations of costs of production, constantly emphasize them in their discussion of prices. And Keynes, especially, constantly falls into the very cause-and-effect-reversal error in connection with production costs and prices of which he accuses Böhm-Bawerk in connection with roundabout processes and productivity.

4. Abundance Unlimited

Sections III and IV of Chapter 16 are so fantastic in their assumptions and reasoning that it is difficult to know where to start picking up the fallacies and misstatements.

Keynes begins with the bland statement: “We have seen that capital has to be kept scarce enough in the long-period to have a marginal efficiency which is at least equal to the rate of interest” etc. (My italics, p. 217.) This is much as if he had written: “We have seen that commodities have to be kept scarce enough to give them a price.” This statement embodies the insinuation both that the rate of interest is a purely artificial and unnecessary thing and that capitalists have to conspire to “keep” everything scarce so that somebody or other can make a profit.

Keynes then goes on to speculate upon what would happen in “a society which finds itself so well equipped with capital that its marginal efficiency is zero and would be negative with any additional investment” (p. 217). And this is not merely a hypothetical assumption for the purpose of deducing hypothetical consequences, nor even an assumption which is not supposed to be realized for an indefinitely remote future. If

State action enters in... to provide that the growth of capital equipment shall be such as to approach saturation point at a rate which does not put a disproportionate burden on the standard of life of the present generation... I should guess that a properly run community equipped with modern technical resources, of which the population is not increasing rapidly, ought to be able to bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation (p. 220). [And, going further:] If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism (p. 221).

Nonsense could hardly be carried further. The central problem with which economics deals, the problem with which mankind has been struggling since the beginning of time, is the problem of scarcity, and this problem is assumed away in a few blithe words. It is “comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero.”

Did Keynes stop to think for a moment what this would imply? It would imply that capital goods were so abundant that they had no exchange value! And if they had no value, they would be as free as air or (most) water or other goods without scarcity. It would be worth nobody’s while to keep such capital goods in repair (unless it cost nothing, not even anybody’s labor, to keep them in repair). There would be no problem even of replacement. For as soon as there were a problem of replacement, it would mean that capital goods once more had a value and cost something to produce: therefore, presumably, capital goods would cost nothing to produce.

Moreover, if the marginal efficiency of capital were zero, it would also mean that no consumer goods would have any scarcity, price, or exchange value. For as long as any consumer goods anywhere failed to reach the point of satiation, and had a price or a value, then capital to help produce these consumer goods would have some marginal yield above zero.

A marginal efficiency of zero for capital would mean, in brief, such an abundance of everything that neither capital goods nor consumers goods would have any scarcity, any price, or any exchange value. In such circumstances the rate of interest, of course, would also fall to zero—not only because the rate of interest and the marginal yield of capital tend toward equality, but because it is one of the implications of a zero marginal yield for capital that no one would want to borrow money for investment. If someone did want to borrow money for investment (enough to pay anything for the privilege), it would imply that to this borrower, at least, capital did have a marginal yield above zero.

Capital will continue to have a marginal yield above zero, in brief, as long as it continues to help in the production of consumer goods that have a price above zero. And if these consumer goods have a price above zero, it will be not only because they fill human wants, but because their supply is not unlimited and because they cost something to produce. And it is this cost of production (and not some wicked conspiracy of the capitalists) that keeps them scarce.

The capitalist system, in fact—which is the system of free, private, competitive enterprise—has been doing more to reduce production costs, and to relieve scarcity, than any system in history. It is because America has come nearer to adopting a full free private enterprise system that it has done more to relieve scarcity than any other nation in history. But as human wants are insatiable, and as both consumer and capital goods will always, to repeat, cost something to produce, the day when capital will cease to have any yield at all, and when consumer goods cease to have a price, and when no scarcity of any kind exists, is still far, far off. All talk of making capital so plentiful as to reduce its marginal efficiency to zero “within a single generation” is the purest moonshine.

No doubt Keynes’s “system” owes part of its popularity to the impression that he has at last provided not only that Economics of Abundance,⁴ of which the Utopians have been dreaming from time immemorial, but has combined with it a Conspiracy Theory according to which the Moneylenders keep everything scarce in order that they may continue to receive Interest. But if everybody could have Complete Abundance of everything simply by ceasing to “keep capital scarce,” then this Conspiracy must certainly be the most stupid and pointless in history. Did Keynes seriously believe all this?

Having announced this triumphant fallacy Keynes proceeds to draw some triumphant corollaries from it:

The post-war experiences of Great Britain and the United States are, indeed, actual examples of how an accumulation of wealth, so large that its marginal efficiency has fallen more rapidly than the rate of interest can fall in the face of the prevailing institutional and psychological factors, can interfere, in conditions mainly of laissez-faire, with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing (p. 219).

This little passage contains four major fallacies:

(1) It is based, not on a cyclical theory of depression, but on a secular theory. It contains the seeds of the Stagnationist Theory of a Mature Economy which the Keynesian disciples in the United States, notably Alvin H. Hansen, did so much to develop. This theory has been so thoroughly disposed of by George Terborgh in his The Bogey of Economic Maturity (Chicago: Machinery and Allied Products Institute, 1945) that I shall not deal with it here. It rests on the assumption that a nation goes into an economic tailspin because it becomes too rich for its own good. The tremendous growth of the American economy (and even of the British economy) since Keynes’s paragraph was written is a sufficient refutation in itself.

(2) It assumes that the interest rate is not only a merely monetary phenomenon but a purely arbitrary one. Both of these fallacies have already been sufficiently discussed.

(3) It shares with the Technocrats and similar crank groups the naive belief that production is being held down to existing levels, not by limited capital and labor, but by some sort of Conspiracy or Perversity in the “System.”

(4) It reveals Keynes’s bias against economic freedom and in favor of statist controls. As we shall see later, his whole theory is based on the tacit assumption that neither businessmen, bankers, speculators, investors, nor consumers can be expected to act rationally in their own self-interest, but that government bureaucrats can always be depended upon to act with great rationality and disinterested regard for the public good. On the same page, in fact, from which the foregoing quotation is taken, Keynes expresses the fear that nations “will suffer the fate of Midas” if “the propensity to consume and the rate of investment are not deliberately controlled in the social interest but are mainly left to the influences of laissez-faire” (p. 219).

Keynes’s hostility to the rich and to the capitalist system breaks out in sarcasms reminiscent of Marx:

Insofar as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed (p. 220).

Such sentences throw considerably more light on Keynes’s emotional attitudes than they do on the process of economic production.

One is moved to wonder, in fact, whether the popularity of the General Theory among government bureaucrats and in many academic groves doesn’t rest precisely on its anti-business bias.

¹Principles of Political Economy, Book I, Chap. V, § 9. (Eighth Edition), p. 104.

² I have made no use in my exposition of such technical terms, so fashionable in recent literature, as ex-ante saving or investment vs. ex-post saving or investment. I find these adjectives vague and confusing. Obviously they mean, respectively, before or after something has happened, but few of those who use them ever trouble to specify clearly before or after what. Sometimes ex-ante is used merely to mean intended and ex-post to mean realized. But it is much less confusing to use these established English adjectives, when they express the meaning, than the new-fangled Latin coinages. After all, a mere intention to save is not saving, and a mere intention to invest is not investment.

³ Alfred Marshall, Principles of Economics, (Eighth edition), p. 583.

⁴Cf. F. A. Hayek, The Pure Theory of Capital (London: Macmillan, 1941), p. 374