The Mammon of Unrighteousness

John Maynard Keynes on the meme that the speculators--and others--must suffer:

John Maynard Keynes: While some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history.... Doubtless, as was inevitable in a period of such rapid changes, the rate of growth of some individual commodities [over 1924-1929] could not always be in just the appropriate relation to that of others. But, on the whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth [of different sectors]seem to me, looking back, to have been in as good a balance as one could have expected them to be. A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied....

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...

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Comments

[Roland]

Bailouts are perhaps acceptable, when they're combined with a high-level political commitment to a more just economic order.

But I think that a bailout for subprimers today isn't going to come along with any such political commitments.

[Craig Tindale]

its on the fiscal side not the monetary side that we have the imbalance you can take all the monetary measures you want but without fiscal wisdom your wasting your time.

Monetary stimula (as Keyenes himself suggested) will have nil effect in this situation to date this systme is te only one that hasnt failed and its the best weve got to date, what are we going to do after this one fails its time to move on and start looking at the future.

The problem isnt Maynard its Milton.

[bakho]

Some people are suffering and a lot of people that are suffering are not very wealthy and got suckered into teaser loans for overpriced houses by unscrupulous loan sharks. The macroeconomic problem is overinvestment in housing that lacks fluidity and leverage that can be applied to areas of underinvestment.

Monetary policy can make the situation better, but monetary policy is not an efficient way to redistribute wealth. The wealthy always have the ways and means to "bail themselves out" no matter what the policy is. People see the policy as "bailing out the rich" and not help those that got smacked. Helping those who are hurt most by the current situation will probably require more skill than a president who got C- in Econ 101 and lies to the American people about getting a B.

[save_the_rustbelt]

The rich white guys will be bailed out.

The others will suffer.

Nothing new.

[A. Cutten]

I was thinking today, if perhaps the real source of the variance of opinion on the current situation is really one's attitudes towards markets in general?

Should there EVER be loss, or the consequences of risk? Does moral hazard EVER exist or is it a problem? If so, what ought to be done about it?

Should Johnny EVER suffer for anything he does, no matter what, or should we just put it right, and tell him to go and do better next time. Is every Johnny really a good boy at heart?

Is Friedman the true romantic, or is the neo-progressive liberal the real heir of Rousseau and the noble savage?

Personally I think the extremes meet at the far end of their spectrums, and it is only their approach to reaching it that differs.

[David Lloyd-Jones]

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Of course Keynes is confused about the huge gains in "wealth" during that, uh, quinquennium.

A lot of prices went up a lot.

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[gordon]

Sure, but K. isn't attempting to answer the question of how to avoid another disastrous Depression - he is, as Arthur Cutten says, engaging in polemic (which K. enjoyed) against "the rival school of the day".

Economists who attack the idea of necessary suffering as being outdated and puritanical are either missing the point or deliberately fudging the real issue, which is Where Do We Go From Here? How to avoid this happening again?

[Maurice Lanselle]

On "Where Do We Go From Here?", he does diagnose and recommend:
> "I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment."

On the other hand, this does seem to pose a problem for what can happen if we buy "A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied....". If needs are met, shouldn't investment diminish? And wouldn't that then lead to "to impoverishment and depression" at that future time? If not, why not? What would be different?

[matt wilbert]

I am no Austrian, but I would say that an awful lot of the investment of the past quinquennium in the US was in excess housing square footage, paid for by borrowing overseas.

Sone kind of pain from shifting the economy to doing something different is to be expected. I'm all in favor of a high level of investment, but I would prefer it to be aimed at producing something exportable, or at least import-substituting.

[wood turtle]

"A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied...."

How many, after all these years of economic research, have reached their economic Eldorado? It would be interesting to know what the characteristics of an economic Eldorado are, at a personal and national level.

[andres]

Sorry Brad, but like all great men, Keynes' writing on this subject was rather inconsistent. Here is The Maynard at the end of the General Theory:

"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."

http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm
(I still find it a hoot that the only complete text of the General Theory is in the Marxists.org website. It really shows which group of ideologues (Marxists vs. mainstream economists) is more tolerant of Mr. Keynes)

Now obviously Keynes wasn't talking about the immediate punishment of rentiers by way of failing to bail out the financial system in times of crisis. And in fact most "bailouts" fail to actually bail out the worst and most fraudulent speculators; by the time the Fed steps in, the Lays and Skillings have had to descend into bankruptcy at best and leave the country/face charges at worst.

What Keynes was talking about was in creating an economic system where speculators and/or frauds are not allowed to destabilize the financial system in the first place. Part of the answer is libertarian in nature (eg avoid government commitments to price fixing such as fixed exchange rates), but a large part has to do with regulation and stabilization. First, stabilize the financial system by making sure that fraudulent and/or risky investors can't take down the whole public with them, and secondly, prosecute them for violating financial regulation strictures regardless of what happens to their investment.

Keynes did not want to use financial recession and collapse as a tool of discipline, but he did want to see people like Ponzi and Stavisky (the Lays and Skillings of their day), not to mention excessively optimistic speculators, _euthanized_ in the sense of no longer having the opportunity to get rich by speculating with other people's money.

[STS]

How do we prevent this happening again? The main weakness that financial innovation introduced into the system was a lack of accountability. Simply applying appropriate underwriting standards at the level of the 'non-bank' bank level would have curbed much of the excess. In other words, we need to rediscover the value of innovation on the part of regulators which can keep pace with (rather than simply reflexively outlaw) private innovation.

Easier said than done perhaps, but it might help to stop reflexively equating regulation with monstrous tyranny.