I have deliberately devoted a lot time on this topic – Keynesian Economics, because much of the modern economic difficulty in a place like our own country Ghana can be traced to his work. The most important caveat is if you extricate the deadly cancer of corruption from the equation. In this piece I will concentrate on the main theory that led him to advocate for government deficit spending. He went after Jean Baptiste Say just like Karl Marx did in his Das Kapital. Say, who was a businessman and an advocate of free trade, wrote in his book ‘A Treatise On Political Economy’ that ‘It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products.’
Now, Keynes gave the following rendition of Say’s law in his magnum opus that ‘supply creates its own demand’. He argued aggressively that there is no guarantee that goods supplied to the market will be bought automatically nor will suppliers demand what others are selling. In effect abstention from spending i.e. holding unused cash could thus lead to glut of goods on the whole. It is important to note that this interpretation of Say’s law is false. The truth is before someone produces a product his purchases of raw materials constitute demand for someone else. The statement that supply creates its own demand as explained in his book is the zenith of untruth, because if the statement holds then any Tom, Dick and Harry who excel in what he does can supply any product and become successful.
When Marx went after Say’s Law, he didn’t have the benefit of the debacle of unwanted production in the Soviet Union – the ultimate model of state planning. The irony is damning, because Engels, his collaborator, foresaw this when he alluded to the fact in one of his writings that price fluctuations have forcibly brought home to commodity producers what things and quantity of them society requires or doesn’t require. Lack of such mechanism, he queried, what guarantee we have that necessary quantity and not more of each product will be produced, that we shall not go hungry in regard to corn and meat while we are choked in beet sugar and drowned in potato spirit, that we shall not lack trousers to cover our nakedness while trouser buttons flood us in millions. It is obvious that Engels had more brains than his modern followers.
Again, I can also pardon Keynes, because at the time the Soviet Union was just busy butchering their people to build their railways and metro so production for consumption was very minimal. He, therefore, did not have a model to counter his falsehood. Anybody who is serious should look again at the demand curve and the answer will be clear. Jean Baptiste Say and other economist like John Stuart Mill were right, in the sense that whatever is supplied can always find buyers if the prices are attractive enough. For example, prior to the 2010 general election a lot of retailers in Britain reduced their wares to attract buyers. Others were constantly organising sales; and even the Labour Party waived VAT on lots of consumer products, which the Conservative government that replaced them continued and it brought shoppers into the malls.
This diseased theory picked up from Das Kapital by the Soviet Union led to a glut of goods in Soviet warehouses while goods that needed to be produced were in short supply. It was terrible, because it led to the lowering of the standard of life in the Soviet Union. While in a capitalist system over production will lead to the reduction of prices to release locked up capital this mechanism is not available in a planned economy. Besides, in other instances, it will also serve as a signal that the production of certain goods must be curtailed and the resources reallocated. The fact is the fundamental principle of economics is the allocation of scarce resources, which have alternative uses. It is only capitalism that has the inbuilt mechanism that quickly reshuffles the allocation of scarce resources.
However, Keynes was opposed to the piecemeal adjustment to restore employment equilibrium and favoured inflation of the money supply, which will raise the price level and eventually lowering real wages. I wrote about his money illusion in the second part, yet he wanted to use another illusion to solve the problem of unemployment. It is simply a magician’s stage trick. The reality is labour unions are smarter. They know that rising prices is a direct dent in the real value of their wages, and without doubt will demand for more wages. It is like the dog chasing its tail; therefore Keynesian unemployment solution is emphatically false.
After governments all over the world tried this stupidity for almost a generation some people who were wise and could see the wreckage of the Keynesian poison began to see the foolishness. So the Labour Prime Minister, James Callaghan, in his speech during the 1976 labour conference declared vigorously, ‘We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.’
If I will listen to anybody’s advice does Mr Kwarteng think I will acquiesce to what he tells me or that of James Callaghan who was a former chancellor of the exchequer and much familiar with the outcome of the Keynesian prescriptions? This is a food for thought for my readers. It is important to note that it is not the leader of the Conservative Party speaking, but the thoughts of a Labour Prime Minister – a believer in socialism. And if his denunciation coincided with Milton Friedman’s prominence in economic thoughts does that mean a thing? It is only someone who has binged himself on political economic thoughts who will think like this. Callaghan had the brains and was strategically placed to know the harmful effects of Keynesian economics even better than Milton Friedman who was only an academic. Because Mr Kwarteng cannot evaluate things for himself he thinks everyone is like that. He reads his rubbish authors, and picks up their thoughts verbatim without any critical analysis of his own just like a parrot.
Government spending does not actually stimulate the economy fast enough. If you have to build a new bridge, which can inject liquidity into the system that cannot come fast enough, because the bridge needs to be planned and executed. However, if you cut taxes, which is anathema to the left, example, reducing VAT on certain products i.e. petrol, it quickly revamps the economy. And we have seen it in action after the last recession in Britain, which happens to be the fastest growing advanced economy.
Recession is an unpalatable part of the capitalist economy and there is nothing that can be done about it due the incomprehensible slippery phenomenon of praxeology. Individual desires are Indeterminate. The choices, beliefs, taste etc. of even non-identical twins can sometimes be quite different. That is why being able to predict human behaviour has been the waterloo of many thinkers. We can try incrementally, but we can never get close. I remember Tony Blair during the 1997 campaign pitching the slogan ‘no more boom and bust’ in reference to the record of the Conservative government. However, it was under the watch of the Labour Party when Britain experienced the worst bust since the 1930s.
Recession is a self-fulfilling prophesy in a capitalist system. It is difficult to prepare for it, or determine when the bubble, which is always the storm before the inevitable, is going to burst. Mr Kwarteng said Allan Greenspan did not see the 2007 crash coming. Of course, he didn’t, but did Keynes see the1929 crash coming? The almighty all knowing Keynes did not have any clue during his time. Most leading economist of the era, for example, Irving Fisher, not to mention Keynes, had money invested in the stock market. If he knew about the eminent crash of the 1929 stock market why did he have his money invested on the stock market? It was when he got his hands burnt badly on the stock market that he came to write his two books full of unmitigated nonsense. Thank you and look forward to the concluding part.
Philip Kobina Baidoo Jnr
London
baidoo_philip@yahoo.co.uk
