Keynes Repressed and Mutilated by His Advocates

Here’s further proof that my facts aren’t theirs.  They—the economists—know savings and investment drive growth, and that’s that.  Ask Dean Baker, he explained it all last Wednesday at his Beat the Press site..  Any difference with the party line must be derived from ignorance of the relevant economic theory or willful defiance of the obvious facts.

This is King Banaian posting about my New York Times op-ed at a site called Ricochet, fed from another site, “Historians for Keynes,” on October 26th.  Bless his heart, he’s responding with equal parts bewilderment and condescension.  But ask yourself, why would anybody want to be for Keynes?  Isn’t that something like being for Marx (or Freud or Weber), trying to prove the man right, instead of trying to understand the world?  In other words, isn’t that something like trying to prove the world must accord with a sacrosanct text?  Doesn’t that make you a holy man rather than, say, an economist, or a historian, just someone trying to address this world, this life, not the next?

Here we go, my interpellations are in italics, quotations of the King himself are in boldface.


As a historian [him or me?] I would expect Prof. Livingston to be aware of the writings of John Maynard Keynes.  As I read this article I recalled a famous radio speech Keynes gave on the BBC in 1931.  (The speech is in a collection of writings and speeches titled Essays in Persuasion.)  Let me illustrate that Prof. Livingston is channeling the great man himself, then why the situations are so different in 1931 and 2011.

[Keynes start/: There are to-day many well-wishers of their country who believe that the most useful thing which they and their neighbours can do to mend the situation is to save more than usual.  If they refrain from spending a larger proportion of their incomes than usual they believe they will have helped employment.  If they are members of Town or County Councils they believe that their right course at such time as this is to oppose expenditure on new amentities or new public works.

Now, in certain circumstances all this would be quite right, but in the present circumstances, unluckily, it is quit wrong.  It is utterly harmful and misguided…:/end Keynes]

Note that in economics a basic notion is that savings and investment are two sides of the same coin.  Savings can be private or public; both provide a supply of funds to be lent in financial markets to those wishing to build new capital.

Well, no, public savings—say, the purchase of a Treasury bond—has nothing, necessarily, to do with building new capital, but then neither do private savings in the hands of investment banks.

Prof. Livingston would argue this matters not a bit, and to make his point he cites the decline in net non-residential business investment.  But economics also teaches that as economies advance this number naturally falls.  What makes it grow rapidly is the productivity of new capital.  It had been strong in the early part of the 1920s, but fell as radio had taken full hold of the U.S. communications industry.

These pronouncements are almost inane, and I leave aside the absconded antecedents of “it” in these sentences.  Here’s why they tarry too long with inanity. 

(1)  Net private/business investment doesn’t naturally fall, as its rise from the mid-19th to the early 20th century demonstrates.  In the 20th century, the Soviet Plans emphasized spending on capital goods—which, like private or public saving and investment in a market economy, requires withholding income from spending on consumer goods—for decades after the “extensive” growth thus enforced had hollowed out the Soviet bloc economies (with the possible exceptions of Hungary and Czechoslovakia, where “marketization” was on the planning agenda from the late 1950s).

(2)  Improved productivity doesn’t always require new capital—that is, increased inputs financed from savings in the form of profits.  In the early 20th century, as Edmund Phelps (a Nobel-winning economist who is not exactly on my side of these debates) observed in 1962, the new social complex of corporate goods production allowed for increased output without increased inputs of labor or capital.   

(3)  In fact, starting in 1919, improved productivity and increased output didn’t require “new capital” because the replacement and maintenance of the existing capital stock made for astonishing gains in productivity and output.  Robert Gordon’s research on investment patterns in manufacturing in the 1920s and Wesley Mitchell’s research on employment patterns in the same decade—not to mention the Keynes of the Treatise on Money, volume 2—should convince you of this simple fact.  You can see the citations at Chapter 4 of my 1994 book, Pragmatism and the Political Economy of Cultural Revolution, and in Chapter 2 of my new book, Against Thrift.

(4)  The productivity of capital didn’t fade any more than the productivity of labor in the late 1920s, indeed it increased, and precisely because it did, the banking system and the stock market were flooded with corporate profits unneeded for (re)investment in the industries of origin.  That’s why industrial corporations opened time deposits at the banks and stated loaning on call in the stock market—to the combined tune of about $15 billion—and, oh, why Federal Reserve banks doubled their loans in the stock market at the same moment.  

(5)  What can it possibly mean to say that the “full hold” of radio on the communications industry reduced the productivity of capital?  More people listened to music they’d never heard before, and this turned them away from sober investing in German municipal bonds, or kept them home from work?  How is anyone supposed to take this seriously?

And secondly deflation was a strong part of the 1930 economy.  This is not true today.


The U.S. economy has lower net investment because it has a larger capital stock.  That stock depreciates and needs to be replaced.  As we do so, we incorporate new technology.

This is my point!  Precisely because that replacement incorporates new technology, it improves productivity—as Robert Solow and Mose Abramovitz argued in the 1950s, it doesn’t require capital formation.

In some sense we can never replace capital because the capital we buy is different vintage and better technology.  This means that productivity is enhanced by gross investment, not net.

So we’re agreed, then.





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2 responses to “Keynes Repressed and Mutilated by His Advocates

  1. William Neil

    So it would seem we now have “….a world economy beset by a glut of both labor and capital,” a phrase I have quoted from a new paper by Roubini, Alpert and Hockett. and part of their recommendations are increased public investment in infrastructure for long term improvements in overall “efficiency” and for the job creation now.

    Despite reading intensively in poltical economy, I’m intrigued with your distinctions between gross and net investment, and the distinctions between building an entirely new plant, let’s say an auto factory, or upgrading all the equipment in an old one. If a business does the first, an entirely new plant, the equipment is most likely to be all new, correct? So that would be net new investment, correct, a subset of Gross Investment.

    But suppose the old factory doesn’t move, but replaces the older “assembly line” equipment, which needed 10,000 workers on two shifts to function fully.
    Now it’s gone Toyota Japan, Lexus let’s say, sticking to the plant which both Thomas Friedman and William Greider visited. After the new, heavily robotized equipment is installed, they can now produce the same or more number of cars with 200 workers and one shift. This would be called – what – Gross or net under your distinctions – but it is certainly an increase in productivity – which might depress demand because there are now 9,800 newly unemployed, lucky if they have counter-cyclical govt unemployment benefits. So is this second instance an increase in gross or net investment (perhaps the factory that built the robots needed to build a new factory, perhaps they could install new robot making robots in the old one…if you get my point seeking clarification…Doesn’t it all mean that private corporate power can increase profits and productivity with fewer and fewer people empoyed, even as the world labor market (according to “The Way Forward” now has added 2 billion plus new workers, carrying out the “modernization” of peasant agriculture worldwide, a modern mirror of the first industrialization in England – 1750-1840 – now a form of “rolling” 1840’s experiences, if you know what I mean, with worldwide implications, since the attempts to have one world wide “labor market.”

    And it would seem there are two clear choices to deal with the unhappy results of this process, perhaps many more variations later: the more literal old socialism – to socialize this very productive process to more social ends and better working conditions – which the owners have no attention ofallowing, – see US politics, where a conservative corporate Dem like the President is called a socialist, destroying any meaning of the term….or second, Social Democracy revitalized – implied but not explicit in you NY times op-ed, where this private process run by businesses is not directly tampered with but all the social and economic deflationary fallout is dealt with in public investment and employment to make up for thelackof jobs and demand…something which American and perhaps worldwide business leadership also has no intention of allowing….hence the neoliberal austerity program…there is so much contained in the brief private- Republican Right declaration, shared by the Centrist Dems as well: “Only the private sector can create jobs…” and presumably, only it can conduct the creation of “demand” as well…


  2. William Neil

    I also wanted to add that looked at from a private investment perspective, whether it is called gross or net, for a new factory with new equipment or just new equipment in an old factory, is either decision likely under the depressed demand at the present time? NO.

    There is also a debate going on between Thomas Geoghegan, in the Nation magazine, saying Keynes was, would be appalled by trade deficits, the US’s giant current trade deficit, and a reply to his article by Marshall Auerbach at Yves Smith’s blog – Naked Capitalism. on Oct. 3rd, “Are Trade Deficits Really that Bad?” …which gets into the relationship between federal budget deficits and trade deficits…

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