By Howard Richards, November 2016
In this note I will review some ways John Maynard Keynes exposed fallacies in classical economics, especially the fallacy that supply creates its own demand. Today the same fallacies have made comebacks in theory and in practice. On my view the failures in practice of social democratic and New Deal policies associated with Keynes’ ideas –in spite of the accuracy of his diagnosis of the problems to be solved– led to the rise of today’s neoliberalism and neo-conservatism.[1] The failures and the reactions that followed them produced and are producing (with important assists from other factors) what I will call three kinds of Trump disaster: (1) the disasters Donald Trump has been denouncing, such as the North American Free Trade Agreement (NAFTA); (2) the disasters Trump will aggravate, such as global warming; (3) the racial, ethnic, and gender conflicts that threaten to end in chaos and repression. My recommended way forward will be to deepen Keynes’ macroeconomic analysis to make it an historical analysis of social structure leading to a communitarian reformulation of social and economic democracy. This theoretical move supports a flexible approach to practice called “unbounded organization.”
Near the beginning of his General Theory (1936) Keynes lists three fallacies of classical economics that his book will be devoted to refuting:[2]
- Wages are equal to the lowest amount the last worker hired is willing to work for.
- There are jobs for everyone, or would be if workers were willing to accept lower wages. There is no such thing as involuntary unemployment.
- There is no such thing as overproduction. Supply creates its own demand. If some goods produced remain unsold, it is because the producer has made a mistake and produced what people do not want instead of what people do want. People in general never stop desiring more things, and never run out of money to buy them with.
Keynes writes that these three fallacies logically imply each other and stand or fall together. In what follows I will consider only the third, the fallacy that economies never falter for a general lack of demand. Keynes has this to say about it: “The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand.”[3] Since the insufficiency of effective demand undermines profits, Keynes often also writes frequently of a parallel insufficiency of inducement to invest. These are not minor matters, since the dynamic that moves a capitalist economy –without which it does not move— is investment in the expectation of profits from sales
The arguments Keynes advances to prove that classical economics is mistaken and his approach is superior rely on adjusting the definitions of key terms to empirically observed realities, on proposing mathematical models, on history, on observations about the psychology of human behavior, and especially on accounting identities. I will comment on accounting identities.
It is crucial at several points in Keynes’ reasoning to bear in mind that total purchases must equal total sales. A sale from the seller’s point of view is a purchase from the buyer’s point of view. Therefore, it is impossible for everybody to take in more money than they pay out. It is impossible for everybody earn more from sales than they spend on purchases. It is impossible for all firms simultaneously to have bigger accounts receivable than accounts payable.
Once the accounting identity TOTAL SALES EQUAL TOTAL PURCHASES is appreciated, it is only a short step to the conclusion that classical economists (and therefore the supply side economists who advise Trump) underestimate the insufficiency of effective demand. Keynes quotes Hobson: “But though men have the power to purchase, they may not choose to use it.” “But”, Mr. Hobson continues, “he fails to grasp the critical importance of this fact, and appears to limit its action to periods of ‘crisis’.”[4]
Keynes baptizes the institutional fact[5] that one person’s desperate need to sell something to get money to live on does not impose on any other person a duty to buy as “liquidity preference.” People, firms, and governments have good reasons for keeping cash in reserve, not spending it. (Keynes makes lists of those reasons.)
The concept of “liquidity preference” implies that capitalist economies are inherently unstable. It implies that there is a constant tendency for sales to lag behind the levels needed to induce enough investors to invest in the expectation of profits. Investment, to repeat, is what keeps the system going. The capitalist world is moved by the profit motive and without the profit motive it does not move.
Not surprisingly, Keynes’ “liquidity preference” concept has given rise to endless academic debates. Conservatives argue that the system is after all inherently stable (provided that wages are not distorted by unions, prices are not distorted by “tax wedges” etc.) because when people keep cash in reserve they do not just put it under a mattress. They put it in a bank. The bank then lends it out again to someone who spends it. So, conservatives argue, if only the leftists would get out of the way and let the free market do its thing, there would, after all, be plenty of effective demand to induce investors to keep investing and to keep creating wealth. Paul Krugman has persuasively argued that whatever may be the practical outcome of the crisis that began in 2008, at the level of academic economics the theoretical outcome is that Keynes has been proven right by history.[6] There really is a chronic insufficiency of effective demand. It is the conservatives, not Keynes, who were dreaming.
Whether or not conservatives admit defeat on the battlefield of economic theory, as Krugman says they should, if one steps back to take a wider view of historically evolving social structures, it can be seen that Keynes’ insight into the chronic insufficiency of effective demand, or something very like it, must be true. Nowadays most people acquire the necessities of life most of the time by market exchange. In a market, it is not possible to have a sale without a purchase. Purchases are voluntary. Purchases may or may not happen. There can be no general guarantee that there will be enough sales to induce investors to invest sums sufficient to create full employment or general prosperity. There can be no general guarantee that there will be enough sales to enable all the poor people who need to sell something to make a living to get by.
Given that there must be something basically right about Keynes’ diagnosis of the chronic insufficiency of effective demand, at this point in history it is clear that Keynesian prescriptions do not cure the ills Keynes’ diagnosed. He never thought they would. He died prematurely at age 62. If he had lived longer he might have pursued his own advice to pursue an historical analysis of social structure and seek communitarian alternatives. Such advice is implicit in passages in his General Theory like these: “It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated— and, in my opinion, inevitably associated— with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.”[7] And: “But we must not conclude that the mean position thus determined by ‘natural’ tendencies, namely, by those tendencies which are likely to persist, failing measures expressly designed to correct them, is, therefore, established by laws of necessity. The unimpeded rule of the above conditions is a fact of observation concerning the world as it is or has been, and not a necessary principle which cannot be changed.”[8]
The limitations of Keynes are, in short, that although he showed that a system that runs on profits that depend on sales, where sales are not reliably sufficient to keep it running well, does not succeed in effectively mobilizing resources to meet human needs; and although he was aware that satisfactory solutions to the problems of such a system would require modifying capitalist individualism, he did not propose sustainable solutions. The partly satisfactory “Keynesian” solutions of the pre-and-post-World War II years proved to be unsustainable. They were followed by reversions to neoliberalism and to neo-conservatism.
“Unbounded organization” is an umbrella name for an open-minded and flexible search for the sustainable satisfactory solutions that Keynes felt a need for.[9] It regards the number of possible solutions as potentially infinite, and the ultimate goal as a fully nurturant society that meets human needs in harmony with the natural environment.[10] It calls for the alignment of all sectors in pursuit of the common good, and it expects satisfactory large solutions to be sums of many small solutions.
As a transition to making a case for unbounded organization, let us consider another researcher who also takes a short cut temporarily bypassing the need for empirical data by demonstrating what must be true because of accounting identities. Randall Wray demonstrates that it is logically impossible for the private sector and the public sector (considered as two wholes) to run a surplus simultaneously. If the private sector is piling up aggregate net profit, then the public sector must be sinking deeper into net debt; and vice versa. Having demonstrated that this result must be true because of accounting identities, Wray produces data showing that in the “Goldilocks” years of the Clinton administration when the federal government was taking in more money each year than it paid out, the public surplus was in fact exactly matched by private debt; while in normal years aggregate private surpluses exactly match aggregate public deficits.
Thus, two scientists, Keynes and Wray, deduce important conclusions from accounting identities. They shatter the common-sense dreams of business people who imagine a United States where business people as a whole will pay fewer taxes and be hampered by fewer regulations; and therefore, will in the aggregate invest more, create more wealth, and create more employment; while the government simultaneously will cease profligate spending, and pay down its old debts. The stage is set for a Trump disaster type two. What seemed true when seen from points of view derived partly from bogus supply side theory but mainly from the personal experience of Donald Trump and his supporters, is false.
One might ask what more can science do? If the purpose of science is to discover truth, then its purpose might seem to be fully achieved when an economic principle is proven to be an accounting identity. There is nothing more true than a tautology. A tautology is logically true by the definitions of its terms. An accounting identity is a tautology.
This is not a happy conclusion because after science knows that because of accounting identities, there must be a chronic insufficiency of effective demand, and that not all businesses can have more receivables than payables, and that a balanced public budget necessarily impedes growth in the private sector; the world goes on as before. The mendacious poor continue to turn to begging, the audacious poor continue to turn to stealing, little children continue to watch terrified while their parents quarrel about money; lack of profit opportunities and lack of employment opportunities elsewhere continue to make the millions who cash its paychecks want to believe that the military sector is not just de facto where their bread and butter comes from, but also de jure a force for good and an antidote to evil.
Ludwig Wittgenstein faced a similar question in his later philosophical work –similar in that he also considered a tautology where it might seem that once pure truth is found, science is over. Having in his early work gone about as far as you can go in purely logical analysis of what must be true at all times and places, in his later work he embarked on a different approach he called “more anthropological.” He took a close look at what actually happens when words and numbers are used. But when he came to consider the proposition that a thing is identical with itself[11], as in A = A, as in Total Sales Equal Total Purchases, he appeared to confront what he was trying to get away from: a perfectly general truth that required no interpretation and no context.
It turns out that Randall Wray responds in a manner similar to the response of Ludwig Wittgenstein, and similar to Keynes’ questioning whether what is logically inevitable within individualistic capitalism must be inevitable everywhere and always. Having discovered some truths about money that could not possibly be false, Wray says too that our lives are too monetized, and that we should be thinking about what social purposes are served by buying and selling with money.[12] In Wittgenstein’s terms, the language games we play by buying and selling things with money are language games we should play less often and play differently.
This is the cue for unbounded organization to come on stage. The human species has existed on planet earth for perhaps two hundred thousand years. For most of that time humans lived in clans and tribes that did not do market exchange. For most humans throughout most of prehistory and history a necessary truth like it is impossible for every business to have more receivables than payables was not true. It was not even meaningful. What is necessarily true inside the rules of a language game is not necessarily true where and to the extent that the game in question is not being played. Think unbounded. Think with Amartya Sen and Jean Dreze: market exchange is only one way to get human needs met. It is not always the best way. There are many others.[13]
To sum up:
Trump disasters of type one (disasters Trump denounced) can be understood as consequences of successive efforts to cope with the chronic insufficiency of effective demand and the chronic insufficiency of inducements to invest.[14] Jimmy Carter gave up on fighting insufficient demand with low interest rates when he appointed Paul Volcker to head the Federal Reserve. Ronald Reagan reversed the Keynesian policy of stimulating demand by backing organized labor and promoting high wages; he went back to the old-fashioned method of stimulating investment by tilting the scales in favor of capital and boosting consumer spending by lowering taxes (and by the same token ballooning government borrowing). Bill Clinton went one better: he made all of North America into a single free trade area, with neoliberal rules of the game obligatory both north and south of the border. With new opportunities to earn greater profits by moving operations abroad and hiring cheaper labor, investment got a boost for a while. Under G.W. Bush and Barack Obama globalization ran amok, with every round of it inducing new investments while it pitted domestic workers against foreign workers. Wages sank and job security evaporated as 196 nation-states competed with each other to attract capital. The rust belt workers of America were not only impoverished by free trade, runaway industries, weakened unions and porous borders, but also humiliated. They were cast in the role of the uneducated, the xenophobic, the prejudiced, the homophobes, the sexists and the racists. The new world order sells free trade as a humanitarian ideal not only by packaging it as impeccable rationality which only the stupid fail to understand,[15] but also by packaging it as love for neighbor on a global scale that only the hardhearted fail to appreciate. The flipside is that American workers are cast in the role of the stupid and the hateful. The losers become the deplorables.
Trump disasters of type two (disasters waiting to happen): These too can be understood in the light of Keynes’ insights into how the system works. For example, the ecological Trump disaster waiting to happen can be understood in the light of Keynes’ insight that the economy always tends toward stagnation. This tendency is always at work even when it is not empirically observable because its effects are masked by countervailing causal powers.[16] In the absence of the different economy Keynes demonstrated the need for but did not design, there will necessarily tend to be pressure to sacrifice the earth to save jobs and profits.
The chronic insufficiencies of demand and inducement to invest are also the context and the background for the exotic steps recently taken to prevent the system from collapsing such as bailouts, quantitative easing, and negative or nearly negative interest rates. The chronic need for sales explains why cash sales are never enough, why insufficient cash sales need to be augmented by credit sales, why ever higher mountains of debt are needed to keep effective demand strong enough to avoid a descent into debt deflation.[17]
Keynes helps us to see that the system is fragile. It depends on many kinds of confidence. I fear that a businessman whose economic advisers are supply siders with dubious professional credentials will sooner or later do something or other to provoke a collapse of confidence. The system is already tenuously shored up by exotic shenanigans, and already burdened by astronomic levels of public and private debt higher than anything history has seen before. It is probably already so fragile that it is on its way toward collapse anyway, with or without Trump.
Other Trump disasters waiting to happen cannot be fully understood without acknowledging that on a crucial issue the simplifying Keynes of 1936 has become a wholly misleading Keynes of 2016. Keynes simplified his analysis by assuming that employment was a function of investment. In 1936 investment tended to mean more production and more jobs. Today that simplification is not valid partly because today, as Keynes in 1936 feared, “enterprise becomes the bubble on a whirlpool of speculation.”[18] It gets worse: Think of robots, of 3D printers, of artificial photosynthesis replacing agriculture as we know it; think in general of an exponentially growing trend toward labor-saving technologies.[19] Human labor is fast becoming obsolete as a factor of production. Do I exaggerate? I wish I were exaggerating, but I fear I am not. My immediate point is that Trump’s plan to create good jobs by tilting the balance of economic power even farther in the direction of capital is a disaster waiting to happen. There is no reason today to equate having more money with investing it in the real economy. There is no reason today to equate increased production with hiring more humans at higher wages. There never has been any reason to equate the availability of more funds to invest with the appearance of customers willing and able to buy the products.
My larger point is that nothing short of unbounded organization can cope with the future. Economics and law as we know them ought to be bracketed in parentheses, while the human family rethinks its relationships to each other and to the earth. This crying need to rethink the basic social structure in the light of disappearing jobs and dying nature in the 21st century collides with another Trump disaster waiting to happen. He will appoint to the Supreme Court judges hell-bent on preserving intact with no concessions to present-day reality the Constitution’s 18th century principles of property rights and limited government.
With respect to what I have been calling Trump disasters of a third kind: Both the achievements and the limitations of Keynes General Theory reveal causal powers of underlying social structures that together with intentional human actions and the laws of nature act to move history.[20]
Some fear that Trump’s electoral victory signals that American history is at the beginning, or is at a mid-point, of a downward spiral descending into fascism.[21] Keynes’ achievements explain the why of the stagnation, exclusion and inequality behind the unfolding drama of social conflict. They explain the underlying structures that set the stage for the economic frustrations behind the angers that engulf not only white nationalists, but also blacks harassed and sometimes killed, local police, the global military, immigrants and anti-immigrants, Muslims and other embattled minorities, workers suffering year after year the erosion of the economic security they or their parents used to have, drug gangs, evangelists announcing the imminent end of the world, intemperate conservative talk show hosts, blacks who fight back, and whoever may feel dissed, betrayed, and threatened. As I write this, my granddaughter writes me that she is scared because the new president is anti-woman and anti-latino and she is a latina. She reports that in her town some fascist types already have the attitude “we won” and “we’re taking over.” They express their prejudice against her more openly than they did before the election. Meanwhile, as I write this, Congressman Tim Ryan of Ohio is challenging Nancy Pelosi for the post of Minority Leader of the House of Representatives. Ryan argues that if the Democratic Party is to have any hope of retaking political power it must communicate to the American people a “deep economic message.” Truer words were never spoken.
In this note I have argued that the new deep economic message should not be a warmed-over Keynesian New Deal. Instead it should be an open-minded and flexible search for the sustainable satisfactory solutions Keynes felt a need for. It should follow Amartya Sen and Jean Dreze in regarding market exchange as only one way to meet human needs and often not the best way. Instead of acting over and over like a horse with blinders on stubbornly trying to force itself forward in the same direction even when it runs into a brick wall; that is to say, instead of looking over and over for one way or another to stimulate an economy that depends on sales to generate profit to induce investment; hearers of the new deep economic message should constantly bear in mind the ultimate goal of a fully nurturant society that meets human needs in harmony with the natural environment. Keeping the ultimate goal in mind, it will be seen that there is more than one way to serve it. The new deep economic message should call for the alignment of all sectors in pursuit of the common good. It should expect satisfactory large solutions to be sums of many small solutions.[22]
Suggested Further Reading
Gavin Andersson and Howard Richards, Unbounded Organizing in Community. Lake Oswego, OR: Dignity Press, 2015.
Riane Eisler, The Real Wealth of Nations. San Francisco: Berrett-Kohler, 2007.
Catherine Hoppers and Howard Richards, Rethinking Thinking. Pretoria: University of South Africa, 2012.
Evelin Lindner, A Dignity Economy. Lake Oswego, OR: Dignity Press, 2011.
Michael Porter and Mark Kramer, “Creating Shared Value,” Harvard Business Review. January-February 2011, pp. 62-77.
Howard Richards and Joanna Swanger, Gandhi and the Future of Economics. Lake Oswego, OR: Dignity Press, 2013.
[1] Howard Richards and Joanna Swanger, Dilemmas of Social Democracies. Lanham MD: Rowman and Littlefield, 2006.
[2] For Keynes’ exact words see John Maynard Keynes, General Theory of Employment, Interest, and Money. New York: Macmilllan, 1936. pp. 21-22. I have restated what I take to be the essence of his meaning in what I take to be words that are easier to understand.
[3] Keynes, General Theory. p. 33.
[4] Keynes, General Theory, p. 19 in a footnote. In this passage Hobson is quoting Alfred Marshall who is commenting on John Stuart Mill.
[5] I adopt John Searle’s distinction between institutional facts, which are facts only because of human conventions (like property rights and money) and brute facts of nature (sometimes called “brute-relative” because even though natural reality in the last instance limits what humans can do, any “fact” stated by a human is a description using words with conventional meanings). John Searle, “How to Derive “Ought” from “Is,” Philosophical Review. Vol. 73 (1964 pp. 43-58.
[6] Paul Krugman, The Return of Depression Economics. New York: Norton, 2009.
[7] Keynes, General Theory. p. 381.
[8] Keynes, General Theory, p. 254.
[9] www.unboundedorganization.org
[10] Frédéric Mathieu, Les valeurs de la vie. Paris: Book Edition, 2014. This little book provides an example of ethical realism, the view that the bottom line criterion for evaluating and working with the many moral codes human cultures have created is whether they serve life. A similar view is suggested in English at the end of Abraham Maslow, A Theory of Human Motivation (1943) which is easily available on line
[11] Ludwig Wittgenstein, Philosophical Investigations. Oxford: Blackwell, 1958. Paragraphs 215 and 216.
[12] L. Randall Wray, Modern Monetary Theory. London: Palgrave Macmillan, 2015. p. 62, p. 292.
[13] Amartya Sen, “Sraffa, Wittgenstein and Gramsci.” Journal of Economic Literature. Vol. 41 (2003). pp. 1240-1255. P. 1247; Jean Dreze and Amartya Sen, An Uncertain Glory. Princeton: Princeton University Press, 2013.
[14] “The weakness of the inducement to invest has been at all times the key to the economic problem.” Keynes, General Theory. pp. 347-348.
[15] Keynes was among the stupid incapable of grasping the airtight logic of the case for free trade. John Maynard Keynes, “National Self-Sufficiency,” Yale Review. Vol. 22 (1933) pp. 755-769.
[16] Tony Lawson, Economics and Reality. London: Routledge, 1997. Lawson’s recommendation to study the causal powers that generate phenomena more than the patterns of observed data survives the criticism that economists already do what he recommends more than he acknowledges.
[17] Irving Fisher, The Debt Deflation Theory of Great Depressions. New York: Important Books, 2012. (1933)
[18] Keynes, General Theory. p. 159.
[19] Peter Diamandis and Steven Kotler, Abundance. New York: Free Press, 2012.
[20] See Margaret Archer, Realist Social Theory. Cambridge: Cambridge University Press, 1995. For Archer, it is important to keep the social and the cultural levels of analysis distinct in order to be able to study their interaction. I do not disagree; I just use the word “culture” in a different sense for different purposes.
[21] For a cultural-structural account of the descent of Italy into fascism in the 1920s see Howard Richards, Letters from Quebec: A Philosophy for Peace and Justice. San Francisco and London: International Scholars Press, 1995. Chapter 47. For Spain in the 1930s see Howard Richards and Joanna Swanger, The Dilemmas of Social Democracies. Lanham MD: Rowman and Littlefield, 2006. Chapter 3. For Chile before, during and after the Pinochet coup of 1973 see the novel by Caroline Richards Sweet Country. New York and London, Harcourt Brace Jovanovich 1979.
[22] For more details see Howard Richards, The Impossibility of Politics and How to Make Politics Possible, which is easily available on line and other works by the same author available on Amazon and on Google, while also reading insofar as possible all other authors. So many books. So little time.