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Keynesianism Loves the Total State

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September 18, 2009 – Comments (11)

Before I get to the article of the day, I want to throw a couple things out there.  First, and I will expand on this tomorrow or as soon as I have a chance, can you imagine all of the American bank customers suddenly in a panic, running to the banks to pay back all their loans?  No? Then you should begin to understand why there will be no bank runs by the typical American customer.

Second, let's talk about gold.  My friends here know that I'm not as big of a gold bug as Sinchi or binve, though politically and economically I think of them as great champions of liberty.  Others may know that I differ with gmx and alstry on the inflation/deflation argument, as I have said repeatedly that this is an inflation fueled rally that no one should be shorting and that stagflation is coming soon to a theater near you.  That being said, I like and respect both of those bloggers.  Alstry is funny and relevant, and a little crazy, while gmx is brilliant and thoroughly researched.  Just because you disagree with someone on one point that should never outweigh all that you can learn from each other.

I used to say that gold is money.  I was wrong.  Gold would be money, were the free market allowed to make currency.  Gold or silver would be the backing of certificates and the hard money coinage exchanged for commensurability if the State was not in total control.  So gold is not money. Historically it has been the preferred money.  The State has so thoroughly dominated our society that there is no way that gold will be money any time soon.  It doesn't even matter if we have hyperinflation and massive civil unrest.  Look around you.  Look at all the people tethered to the State, educated by the State, dominated in thought by State propaganda. 

A second reason that I'm not a fan of gold is that the purpose of gold in a free society is to facilitate exchange.  If we suffer from some massive currency calamity, as Mises called the crack-up boom, we will lose the exchange economy with it.  Gold will have little usefulness. At that point, local script currencies will be more useful than gold (see the Worgl experiment.)

Third, gold is easy.  It's an easy play.  You don't have to think or do research.  Things that worth having in life are difficult.  If everything came easy, socialism would work.  You stockpile gold and GLD and amass capital, but for what purpose?  You're not a capitalist if you are collecting gold.  Capitalists employ capital.  They only park it in a vault if they can't find a productive use for it.  You're the socailist fantasy tale of hoarders come to life.  A rainy day fund? Sure, that's a good idea. Three to six months salary worth of gold depending on your family needs?  Maybe I can see that.  Stockpiling gold for the great crash?  That's not capitalism.  That's just foolish.

Individual greatness is what I love, not gold.  No condition makes individual success more probable than capitalism.  So rather than gold, I want companies that have strong balance sheets, smart leaders (not managers!) and good cash management, and perhaps a dividend.

Do I want to live in a world with real currency, not this funny money garbage?  Of course.  Do I want to live in a world where governments are prevented from confiscating my wealth through inflation to finance their wars and propaganda for the less intelligent?  Sure.  But I don't and facts are facts.

Of course, I say this shortly after recommending GRZ.  That was a lucky call, nothing more.

Here is an article on J.M. Keyes.

David in Qatar

[The following introductory remarks by James J. Martin are excerpted from his book Revisionist Viewpoints: Essays in a Dissident Historical Tradition.]

J.M. Keynes's Famous Foreword to the 1936 German Edition of the General Theory

Historians write about economics with a fearful and trembling hand, but economists brashly and cheerfully tackle historical enterprises as if they enjoyed some special commissioned prerogative. What follows this brief introductory material is not an expository essay but a document for all to examine: economists, historians, and the general reader alike.

It may be of some embarrassment to both Keynesian and anti-Keynesian partisans, to both those who have never known of this subject and those who have known of it but who have been inhibited by psychic pressures, ranging all the way from an exaggerated sense of delicacy to intellectual cowardice, from ever saying anything about it.

One can read whole reams of economic literature written by both fervent followers of John Maynard Keynes and his attackers as well and never know that there was a German language edition of his profoundly influential General Theory late in 1936, for which Keynes wrote a special foreword addressed solely to German readers. By that time the National Socialist regime of Adolf Hitler was four months short of four years in power in Germany.

Even the perfumed and sanctified Life of John Maynard Keynes by R.H. Harrod, a book going on to almost 700 pages, never even faintly alludes to the fact that Keynes had a German publisher, nor that the General Theory appeared in Hitler Germany a few months after it was published by Macmillan in England in 1936. (Keynes's foreword to the English edition was dated December 13, 1935.) Perhaps it would have thrown readers off stride for Harrod to discuss such a matter since his book was published in the heat of the immediate post-World War Two years, appearing in 1951. But incongruous and ill-fitting matters such as this are almost always left out of romantic and poetic essays passing as biography.

Two prestigious English economic periodicals, the Economic Journal and The Economist, with meticulous coverage of European and world economic affairs, failed to make any reference to a German edition when they reviewed Keynes's tour de force, nor did subsequent issues in the immediately following years, as far as I have been able to determine. In recent years only Henry Hazlitt has called attention to this important matter.

Some economic scribblers hostile to Keynes want too much to attack him personally as if he created the modern state, but appear to be most hesitant about challenging the state themselves. Keynes did not create the modern state. He found it the way it is, and, obviously, from the context of his German foreword, prepared a scheme or system to work within its confines; the greater and more total the state employment of his General Theory, the better. The core of Keynes is found in two consecutive sentences in the German foreword:

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory.[i]

We are deep in an age of scriptural exegetics devoted to Keynes and a plethora of what-Keynes-really-meant glosses akin to the tidal wave of similar print which deluged us on Marx in the 1930s. But it ought to be interesting to see what kind of sinuous evasion must be employed to discount the very clear testament involved in this declaration by the Master.[ii] The main purpose for this publication is to make it available to students of all persuasions and to general readers who might have an interest in original documentation, for a change. The original German text is included to aid those who wish to make a careful examination of their own.

James J. Martin

Foreword to the German Edition/Vorwort Zur Deutschen Ausgabe[1]

Alfred Marshall, on whose Principles of Economics the education of all contemporary English economists has been based, took particular pains to call special attention to the relationship of his thought to that of Ricardo. His work consisted for the most part in stuffing the law of limited use [Grenznutzen] and the law of substitution into the Ricardo tradition, and his theory of production and of consumption as a whole — contrary to his theory of producing and distributing a given production — has never been laid open. I am not certain whether he himself ever perceived the need for such a theory. but his immediate successors and disciples surely have abandoned it and evidently never perceived its absence.

I was educated in this atmosphere. I have taught these doctrines myself and it was only in the course of the last decade that I became aware of their inadequacy. In my own thought and development, this book, therefore, presents a reaction, a transition and a disengagement from the classical English (or orthodox) tradition.

How I have stressed this and the points in which I deviate from the recognized doctrine has been regarded by certain circles in England as extremely controversial. But how could someone educated in English economic orthodoxy, who was even once a priest of that faith, avoid some controversial emphasis, if he becomes a protestant for the first time?

I can, however, imagine that all this may concern the German readers somewhat differently. The orthodox tradition which reigned in the England of the 19th century never had such a strong influence on German thought. In Germany there have always been important schools of economics which strongly questioned the adequacy of classical theory for the analysis of contemporary events.

The Manchester School as well as Marxism, have, after all, stemmed from Ricardo — a conclusion that need cause surprise only when superficially considered. But in Germany there has always been a majority of opinion which adhered neither to one school nor the other.

However, it can hardly be contended that this school of thought ever established a theoretical counter-structure, nor did it ever attempt to do this. It has been skeptical and realistic, satisfied with historical and empirical methods and results which reject a formal analysis.

The most important unorthodox discussion on the theoretical level has been that of Wicksell. His books (until recently not available in English) were available in the German language; one of his most important was in fact written in German. His successors, however, were mainly Swedes and Austrians; the latter linked his ideas in with a substantially Austrian theory, and thus in reality actually brought them back to the classical tradition. Germany thus has — in contrast to her custom in most fields of science — contented herself for a whole century without a dominant and generally recognized formal theory of economics.

I may, therefore, perhaps expect to meet with less resistance on the part of German readers than from English, when I submit to them a theory of employment and production as a whole which deviates in important particulars from the orthodox tradition. But could I hope to overcome the economic agnosticism of Germany? Could I convince German economists that methods of formal analysis constitute an important contribution to the interpretation of contemporary events and to the shaping of contemporary policy?

It is, after all, a feature of German character to find satisfaction in a theory. How hungry and thirsty German economists must feel having lived all these years without one! It is certainly worthwhile for me to make the effort. And if I can contribute a single morsel to a full meal prepared by German economists, particularly adjusted to German conditions, I will be satisfied. For I must confess that much in the following book has been mainly set forth and illustrated in relation to conditions in the Anglo-Saxon countries.

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions.

Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced. For the theory of psychological laws which bring consumption and saving into relationship with each other, the influence of loan expenditures on prices, and real wages, the role played by the rate of interest — all these basic ideas also remain under such conditions necessary parts of our plan of thought.

I would like to take this opportunity to thank my translator, Mr. Waeger, for his excellent effort (I hope that his vocabulary at the end of this book will prove useful beyond its immediate purpose), as well as my publishers, Messrs. Duncker & Humblot, whose enterprising spirit ever since the days 16 years ago when they published my "Economic Consequences of the Peace"[2] has made it possible for me to maintain my contact with German readers.

7 September 1936

J.M. Keynes

Notes

[i] The word "general," italicized in original. This portion of Keynes's foreword, with minor stylistic variations, appeared in Hazlitt's The Failure of the "New Economics" (Princeton, N.J.: Van Nostrand, 1959), p. 277.

[ii] In a letter to Sir Percival Liesching of the British Board of Trade dated October 8, 1943, Keynes also made the following clear and unequivocal declarations:

Thank you for your note on state trading. If in this matter you leave loopholes in your scheme, it will not upset me. Indeed, the more loop-holes you leave the wiser you will be in my opinion.

As you know, I am afraid, a hopeless sceptic about this return to 19th-century laissez-faire, for which you and the U.S. State Department seem to have such a nostalgia.

I believe the future lies with

State trading for commodities; International cartels for necessary manufactures; and Quantitive import restrictions for nonessential manufactures.

Yet all these future instrumentalities for orderly economic life in the future you seek to outlaw.

This letter was quoted by Harrod for reasons which are hard to fathom. In fact, his effort to extricate Keynes from his position and to assert that the latter underwent a fundamental and total conversion to a position contradictory to the views expressed here is quite unconvincing.

[1] Note from James J. Martin: The expert assistance of Robert H. Beebe and Mabel E. Narjes in the preparation of this translation is gratefully acknowledged. The German text is reproduced with the express permission of the publisher, Duncker & Humblot (Berlin and Munich), from whom a 1955 edition of Allgemeine Theorie der Beschäftigung, des Zinses und des Geldes containing this foreword may still be obtained. The full extent of the circulation of the German edition will probably never be known. According to a letter from the publisher of November 4, 1966, figures on the distribution between 1936 and 1945 are missing because all pertinent documents were destroyed during the war. An edition of 1,000 copies was printed in 1952, and one of 2,000 copies in 1955, with another printing of 2,000 copies to appear in 1967.

[2] Note from James J. Martin: The English language edition of this book was published in the United States by Harcourt, Brace (New York) in 1920 under this title.

11 Comments – Post Your Own

#1) On September 18, 2009 at 2:44 PM, PeteysTired (< 20) wrote:

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions.

WOW, I think the item in BOLD is extremely telling.  This assumes that those remarks were really written by Keynes in the forward section and translated correctly from german to english.

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#2) On September 18, 2009 at 3:11 PM, whereaminow (20.23) wrote:

PeteysTired,

No one has ever come forward with evidence that it's a fake or improper translation.  I don't have the original text so this is the best we can do. 

David in Qatar

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#3) On September 18, 2009 at 5:05 PM, whereaminow (20.23) wrote:

I also want to add that if you follow the link above to the original article there is another link with a pdf that includes the original German text of the Forward.

David in Qatar

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#4) On September 18, 2009 at 5:15 PM, PeteysTired (< 20) wrote:

So if Keynes admits that we need a totalitarian state for his theory where are we? 

If we assume gov't decisions have been backed by Keynes and we certainly aren't laissez-faire, then what is next?  More control until we get it right :)  Another meltdown to remove private enterprise :)

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#5) On September 18, 2009 at 5:26 PM, NOTvuffett (< 20) wrote:

to be fair, maybe keynes just meant it would be easier to analyze in a totalitarian state.  that doesn't mean he wasn't a jackass though, lol.

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#6) On September 18, 2009 at 6:08 PM, whereaminow (20.23) wrote:

The relationship between Keynes and Hayek is fascinating from an economic historical perspective. (Not so much for people not interested...)

Hayek and Keynes debated for years and the establishment and academia declared Keynes the victor.  I think even Keynes realized that it was a hollow victory and that he never actually answered Hayek's criticisms.  Here is a really good interview with Hayek, near the end of his life, which looks back at their discussions:

The Road From Serfdom, Foreseeing the Fall - An Interview with Hayek

Reason: Of your bestselling The Road to Serfdom, John Maynard Keynes wrote: "In my opinion it is a grand book.... Morally and philosophically I find myself in agree- ment with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." Why would Keynes say this about a volume that was deeply critical of the Keynesian viewpoint?

Hayek: Because he believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. His famous phrase about, "in the long run we're all dead," is a verv good illustration of being constrained by what is now politicallv possible. He stopped thinking about what, in the long run, is desirable. For that reason, I think it will turn out that he will not be a maker of long-run opinion, and his ideas were of a fashion which, fortunately, is now passing away.

Reason: Did Keynes turn around in his later years, as has frequently been rumored?

Hayek: Nothing as drastic as that. He was fluctuating all the time. He was in a sort of middle line and he was always concerned with expediency for the moment. In the last conver- sation I had with him (about three weeks before his death in 1945). I asked him if he wasn't getting alarmed about what some of his pupils were doing with his ideas. And he said," Oh, they're just fools. These ideas were frightfully impor- tant in the 1930s, but if these ideas ever become dangerous. you can trust me--I'm going to turn public opinion around like this." And he would have done it. I'm sure that in the post-war period Keynes would have become one of the great fighters against inflation.

Reason: Was the Keynes thesis that govemment spending is needed to bolster aggregate demand in times of unemployment correct at one time?

Hayek: No. Certainly not. But, of course. I go much further than this. I believe that if it were not for govemment interference with the monetary system, we would have no industrial fluctuations and no periods of depression.

Reason: So trade cycles are caused solely by government monetary authorities?

Full Article

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#7) On September 18, 2009 at 7:55 PM, whereaminow (20.23) wrote:

Let me rephrase one thing I said at the top. If you're using gold as alternate form of savings, which you plan to use at a future time for consumption or investment, then I applaud you.  I think that is smarter than trying to save dollars, and certainly safer than investing in an up-and-down market.  But I make a clear distinction between that type of effort (which I think is rare) and holding gold in case of currency collapse (which I view to be futile.)  I know many libertarians disagree with me and I welcome their criticism.

David in Qatar

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#8) On September 18, 2009 at 8:53 PM, SkepticalOx (99.44) wrote:

to be fair, maybe keynes just meant it would be easier to analyze in a totalitarian state.  that doesn't mean he wasn't a jackass though, lol.

To be fair, a lot of economists and philosophers seem like jackasses (read some info on Mises for example)... doesn't mean they're wrong...

#4 has the right idea. I don't think JMK is saying that he prefers a totalitarian state, but that his theories work better under it. For sure we are nowhere near laissez-faire capitalism at the moment. 

Oh, and David, I think you'd be interested in reading this for a little friendly debate ;): End The Fed? Ron Paul is Wrong For All The Right Reasons. 

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#9) On September 18, 2009 at 9:43 PM, whereaminow (20.23) wrote:

SkepticalOx,

I've prob already read it - they've been coming out in droves (a good sign), but the link doesn't work. Try it again.

David in Qatar 

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#10) On September 21, 2009 at 12:59 AM, XMFSinchiruna (27.47) wrote:

whereaminow

You know I have deep respect for your mind and your contributions to this site, but I find this post disappointing on several points.

Third, gold is easy.  It's an easy play. You don't have to think or do research.

If you truly believe this, then it's just as well that you not invest in gold or silver. It is NOT an appropriate investment for anyone who does not conduct the necessary research on the myriad factors affecting their prices ... from inflationary drivers to global mining activity ... from investment demand to industrial demand ... from manipulation by bullion banks through leveraged short positions to the algorithmic trading of hedge funds on technical moves ... all of these factors must be keenly understood by any investor looking to follow the central tenet: "invest in what you know". This has to be a miscommunication of sorts ... I know you don't really think it's easy to understand the precious metals market. It's a continuous research process .... and after countless thousands of hours dedicated to the task, I remain in a disadvantaged position relative to the bullion banks and the brokerages in their incessant games. There is nothing easy about gold and silver as investments, and had you been exposed to the 2008 correction and the 50-90% decline in mining equities, you'd agree. :)

I used to say that gold is money.  I was wrong.

With all due respect ... you had it right the first time. Like the advice they give to test-takers ... stick with your first answer. :)  Greenspan just finished reiterating his position from several years ago that gold remains the ultimate form of payment in the world. Greenspan stated at a conference in NY earlier this month: "What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment". That should end the exhausting debate on the topic. Gold is money ... period. It is not "easy" to come to this conclusion, though ... it requires research to understand the nature of gold in our modern global currency system just as it requires research to invest successfully in the sector.

If we suffer from some massive currency calamity ...Gold will have little usefulness.

That is some contention, David. If the USD deteriorates to a point where the exchange economy seizes and localities adopt scrip currencies like the Worgl experiment you cite ... the price of gold would have already skyrocketed beyond $3,500 on the way towards any such dire scenario. Since I encourage investors to constantly hone carefully formulated target prices and a strategy for converting back into exposure to other currencies as conditions warrant, then for them gold would have already proven a most excellent investment. I hope you're not suggesting that central banks will exchange self-devaluing scrip between each other as a medium of international trade.

I always appreciate the discussion, but I hope you understand I couldn't let some of those points go unchallenged. Scholarship on gold and silver has, for better or worse, become the central focus of my professional life for the past several years. Readers can draw their own personal conclusions, but I believe I have established a solid case through my collective writings that gold is money, that successful pm investing requires a significant amount of research, and that gold will increase in price commensurate with the scale of any collapse in major fiat currencies ... especially the USD.

""In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. ... This is the shabby
secret of the welfare statists' tirades against gold. Deficit spending
is simply a scheme for the confiscation of wealth. Gold stands in the
way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the
statists' antagonism toward the gold standard."

 - Alan Greenspan, from the book "Capitalism, the Unknown Ideal" by Ayn Rand with additional articles by Alan Greenspan - 1967

"Gold still represents the ultimate form of payment in the world."

 - Alan Greenspan - Testimony before US House Banking Committee, May 1999

"What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment"

 - Alan Greenspan, 2009

 

 

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#11) On September 21, 2009 at 6:41 PM, whereaminow (20.23) wrote:

Christopher,

You and I agree on so much, it's probably healthy that we can find some disagreement.

Central banks consider gold money. I don't have any problem with that. That's a fact.  You consider gold money. Yep. I consider gold money. Sort of.  The average person does not consider gold money.  The average businessman does not consider gold money.  That's the problem.  The actions and accounting of central banks are so far removed from the world of the average person they might as well happen on another planet.  America has perhaps the most open and contested government in the world and still it's central bank operates in complete secrecy and with complete immunity.  There are no signs that this will change any time soon. I am skeptical that we will see real money in circulation in the next 20 years.  

Collecting gold is easy.  Much like putting money away thoughtlessly into a 401K hoping it will accrue in value because that's what stock do, collecting gold is the same thing.  What you do is not easy.  I never meant for you to feel that I was lumping you in the same category with a person who collects gold because they're terrified of the big crash.

Now, the big crash.  That's what we need to talk about because that's probably where you and I separate in opinion.  Neither one of us knows what is going to happen, but we can look at history.  In America, the government confiscated gold holdings.  In Europe, the gold fled the country and the citizens were left to the impending tyranny.  That's the typical scenario, repeated pretty much anywhere people could flee. They fled with their gold.

If your plan is to flee America, good luck.  Ask ChrisGraley how easy it is to get out of the country with your shirt still on your back.  Imagine how draconian it will become when the currency collapses.  The American government is not the benevolent overlord the progressives want us to believe.  It will turn on its citizens faster than you can spit.  

So my belief is that the American government will make holding gold so uncomfortable, so risky, that it won't have any use.  You want food, guns, and ammo to stay indoors and somewhat safe from rioting until order is restored.  Nobody will be accepting gold as payment for fear of reprisal. As Mises noted, in Germany, after those with gold fled, the economy was reduced to barter.  The remaining holders of gold had no use of it.

The simple exception is that if Americans wake up in time, hard money can be restored and gold will have value again.  But that's asking a lot.  In the meantime, a savvy investor like yourself can continue to trade metals at a profit.  But anything else is rather futile.  You may consider this pessimistic.  I consider it realistic.  I don't know that I'm right or that you're wrong, but this is where my study of history leads me.

If anything, during the great collapse, you want to be working for the government. It's the safest play.  You have the easist chance to flee that way.

David in Qatar

 

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