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Graphs for Thought and Readings for September 2, 2011 Meeting of Economics 24-1: Understanding the Lesser Depression

Paul Krugman Reminds Us of the Context of Keynes's "Bury Banknotes in the Ground and Dig Them Up" Discussion

And here is Keynes:

General Theory of Employment, Interest, and Money: If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. Just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress….

In addition to the probable effect of increased supplies of gold on the rate of interest, gold-mining is for two reasons a highly practical form of investment, if we are precluded from increasing employment by means which at the same time increase our stock of useful wealth. In the first place, owing to the gambling attractions which it offers, it is carried on without too close a regard to the ruling rate of interest. In the second place the result, namely, the increased stock of gold, does not, as in other cases, have the effect of diminishing its marginal utility. Since the value of a house depends on its utility, every house which is built serves to diminish the prospective rents obtainable from further house-building and therefore lessens the attraction of further similar investment…. But the fruits of gold-mining do not suffer from this disadvantage….

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the 'financial' burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to 'enrich' an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

Which reminds me of:

Karl Marx: Theories of Surplus-Value, Chapter 17: This is the childish babble of a Say, but it is not worthy of Ricardo…. Previously it was forgotten that the product is a commodity.  Now even the social division of labour is forgotten.  In a situation where men produce for themselves, there are indeed no crises, but neither is there capitalist production.  Nor have we ever heard that the ancients, with their slave production ever knew crises…

Marx's Half-Baked Crisis Theory and His Theories of Surplus Value, Chapter 17: It seems to me that Marx has two and only two major points to make in a long, uneven, and very discursive chapter. The first is John Stuart Mill's point: a general glut of commodities is the same thing as an excess demand for money…. Marx's second major point is the balanced capitalist growth at full employment is impossible…. Because capitalists extract surplus only to reinvest it and because larger capitals extract more surplus, as a boom continues consumption must fall as a share of full-employment output. Thus the investment share of output must rise. Capitalists must be not just confident that the boom that will continue, but increasingly confident as time passes that the boom will continue faster. From this Marx deduces the conclusion that crisis must come, and will come as soon as capitalists lose confidence in their belief that the boom will continue at an increasing rate.

In this way Marx, I think, links his value theory through Mill's monetary theory to produce a crisis theory. Or, rather, if I were the referee on Marx's chapter 17, that is what I would conclude that he really wanted to say, and that is what I would urge him to revise his chapter when I sent him his revise and resubmit. As it stands the thing is a mess….

What I do not understand is Marx's rejection of monetarist or Keynesian solutions. Marx says the ancient and feudal modes of production did not have crises. Why not? Because they used their surplus for crusade or war or display or elite consumption and not for accumulation, hence the surplus was recycled into demand for labor and there was never any of the interruptions of M-C-M' that we get under the capitalist mode of production when capitalists lose confidence that if they turn their M into C they will then be able to turn it back into M'. For the government to use the surplus for public betterment in a downturn would seem to be just as effective a cure for depression under the CMP as conquering Gaul is under the AMP or building a cathedral is under the FMP…