The Virtue of Saving vs. J.M. Keynes

Originally Published in Flourishing July/August 2010

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on the well-tried principles of laissez-faire to dig up the notes again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there would be no more unemployment,…the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.”

—John Maynard Keynes, The General Theory of Employment, Interest, and Money, Great Minds Series, Prometheus Books, 1997, p 129.

The term “Keynesianism” is in the news, and several of you have asked me, in effect, “What is Keynesianism?” Sadly, the answer is embedded in the nonsense quoted above, but the question deserves a more definitive response.

Keynes was a British subject who lived from 1883 to 1946. The work cited above was first published in New York City by Harcourt, Brace, and World in 1936. Keynesianism is the economic school of thought derived from Keynes’ work, as developed in his “General Theory”. It’s in the news because it’s the economic policy of the Obama administration and the current Congress, e.g. “stimulus” spending, financed by new government debt.

The fundamental aspect, then, of a Keynesian “stimulus package” is the government’s deficit-financing of consumer spending and make-work projects. Keynesians assume that this will cause an increase in employment and production as a way of replacing what is consumed by the stimulus spending. In some degree that may be true; just as consuming one’s savings and acquiring more debt may motivate an individual to seek a second job. I believe the bankruptcy courts might show that’s generally not a good plan.

Our representatives in Washington perennially promise to avoid wasteful spending, but from the point of view of Keynesianism, the bigger the make-work project, the better. That was made clear by Keynes himself in the citation above. And, he continued on the same page with this little gem: “Pyramid-building, earthquakes, and even wars may serve to increase wealth.” If that’s all true, the BP oil spill, along with a good hurricane, should serve to enrich the gulf coast. And, instead of filling up coal mines with bottles of banknotes, we should spend “stimulus” money on today’s equivalent: “green jobs”.

Sarcasm aside, what the economic system really needs for recovery – whether from natural disasters, industrial accidents, or a severe economic recession – is saving and the accumulation of new capital, not deficit spending and make-work projects. In the wake of the housing and mortgage meltdown, new saving and capital accumulation could replace the financial capacity that was lost through the mal-investments of homeowners, homebuilders, banks and other financial institutions. Savings and capital accumulation represent money that can be put to work by businesses (large and small), producing goods and services that meet the real wants and needs of consumers. It’s in that process that real new jobs are created. It’s my opinion that the virtuous cycle of job-creation and prosperity begins with saving (not spending):

Saving leads to capital accumulation, which leads to greater productive capacity—including the creation of productive jobs—which leads to more consumer choice, which leads to more consumer spending and the satisfaction of individual wants and needs, which leads to business profits, which leads to saving and capital accumulation, etc.

Antithetically, Keynesianism—as history and logic have repeatedly shown—destroys savings and capital investment through deficit-financed government spending.* mh

* George Reisman, Keynesianism: A Critique, Capitalism: A Treatise on Economics, Chapter 18, pp 863-894,   Jameson  Books, 1996.