Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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