Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Interest Rates and the Keynesian Myth

Interest-Rates / US Economy Apr 08, 2008 - 02:55 PM GMT

By: Gerard_Jackson

Interest-Rates Still lurking in the Keynesian woodshed is the myth that interest is a monetary phenomenon that is artificially keeping capital scarce. Eliminate interest and presto! Capital will become superabundant. Keynes repeated this preposterous fallacy in the Paper of the British Experts , 8 April 1943, in which he asserted that "Credit expansion performs the miracle . . . of turning stone into bread".


So why was it that stone had not already been turned into bread? The answer, according to Keynes, is that rentiers and capitalists deliberately created scarcity in order to exploit consumers. This is no distortion of Keynes' views. On page 376 of The General Theory (MacMillan St. Martin's Press, Royal Economic Society edition, 1973) he said that "there are no intrinsic reasons for the scarcity of capital". This is a truly amazing statement for a so-called economist to make.

On pages 575-576 he calls for "the euthanasia of the rentier, and, consequently, the cumulative power of the capitalist to exploit the scarcity-value of capital". No wonder so many Keynesians are lefties. But what about savings and investment? That, so claimed Keynes, could be safely left in the hands of the state: meaning omniscient bureaucrats and, as Adam Smith scathingly put it:

. . . that insidious and crafty animal, vulgarly called a statesman or politician, whose counsels are directed by the momentary fluctuation of affairs. ( The Wealth of Nations , LibertyClassics, Vol. I, 1978, p. 468).

Missing from The General Theory is any genuine understanding of the nature of interest and therefore any meaningful discussion of the dire economic consequences of central banks manipulating interest rates. Ludwig von Mises exposed the shallowness and dangers of Keynes' thinking when he wrote:

It regards interest as compensation for the temporary relinquishing of money in the broader sense. A view, indeed, of unsurpassable naivet?Scientific critics have been perfectly justified in treating it with contempt. (Ludwig von Mises, The Theory of Money and Credit , The Foundation for Economic Education, Inc. 1971, p. 353).

He went on to say that such views "are continually being propounded afresh. . . ." (Ibid . 353). And this was written 24 years before the The General Theory was published. Keynes' response was to falsely claim that "Professor von Mises and his disciples have got their conclusions exactly the wrong way round" (GT. pp. 192-93). If Keynes had bothered to study the subject properly it would have become clear that the marginal efficiency of capital is the rate of interest. This is the natural rate of interest and a price on the time market.

Despite claims to originality by his disciples Keynes' theory of interest is one of the oldest economic fallacies around. It would have been far better for the world if he had studied Richard Cantillon's brilliant analysis of the microeconomic effects of expanding the money supply. ( Essay on the Nature of Commerce in General , Transaction Publishers, 2001, written about 1734 and first published in 1752). Cantillon also nailed Keynes on interest rate determination with the observation:

Just as the Prices of things are fixed in the altercations of the Market by the quantity of things offered for sale in proportion to the quantity of money offered for them, or, what comes to the same thing, by the proportionate number of Sellers and Buyers, so in the same way Interest of Money in a State is settled by the proportionate number of Lenders and Borrowers (ibid. p. 82).

The rest of the chapter makes Keynes look like a rank amateur, as the following quote from the General Theory makes clear:

Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of classical economics stands in the way of anything better. (p.129).

It is truly astonishing that any man who could seriously write this rubbish could be taken as a great economist. Nevertheless, it was enthusiastically taken on board by Paul Samuelson who proclaimed:

There is nothing special about government spending on jet bombers and intercontinental ballistic missiles that leads to a larger multiplier support of the economy than would other kinds of government expenditure. ( Economics , Seventh Edition, New York: McGraw, 1967).

Truth be told, if our so-called statesmen had adhered to classical principles the world not only be in a far better economic state it would not have had to bear the burden of publishing Samuelson's text book and his outlandish claim about the mythical multiplier.

Ideas have consequences — specially bad ideas. Keynesian policies have attacked savings, reduced the rate of investment, created balance-of-payments problems, produced recurring international financial crises, given us permanent inflation, and provided grasping ignorant politicians with the rationale to levy heavy tax rates and continually try to raise government spending.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules