Keynes Gets A Bum Rap.

I feel for John Maynard Keynes these days. New age economists seem to want to take pot shots at someone who lived in an entirely different world. So perhaps in this postmodern world it is appropriate to bring Michel Foucault to the rescue of Keynes.

I believe Foucault’s career changed after reading Nietzsche’s essay “On the uses and abuses of history for life.” Nietzsche’s point was that the only reason to dig up the past is to find examples of how to lead a better life now.

Foucault turned this into what he called philosophical history, the aim being to look to the past to sort out the issues of today.  While he got well off track with the content, the original concept was great and is what is required when looking at Keynes today.

Keynes believed that government stimulus would reduce unemployment and boost the economy. Let us look at the economy as it was in his day. Globalisation didn’t exist, agriculture and manufacturing dominated the economy, government spending was under 2% of GDP. https://ourworldindata.org/government-spending , taxes were less than 10% of National Income. https://ourworldindata.org/taxation and Finance represented 2% of GDP.

We transfer Keynes’s theory into a world where we import the majority of manufactured goods, services are coming to dominate the economy, government represents over 35% of GDP, and Finance represents over 12% of GDP.

Keynes said that government stimulus should be used to boost consumer spending. But in 1920 when you bought a pair of shoes a third of the cost went to the retailer, a third to the wholesaler and a third to the manufacturer. The retailers third paid for wages and rent. The wages in turn went for more consumer goods. The wholesaler paid for the financing, the purchasing, the warehousing, delivery and packaging. The shoemaker paid for their raw materials and wages. And that is how Keynes gets his 5 multiple. Every dollar spent on consumer goods went around 5 times before it came to rest.

Stimulus that is Spent Today.

Today with some rough figures I have done 37% of job seeker ends up back with the government and 56% of job keeper. In the case of consumer goods 60% of ends up in the hands of the Chinese Manufacturer, the International brands or the international insurance companies. Only a small percentage of government stimulus even hits the ground once, let alone 5 times.

It is unfair to blame Keynes for a theory that even he had seen was no longer relevant by the end of World War II. His final published papers didn’t discredit his theories, just the use of them in a very different world. Prompting this quote from Keynes.

The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods.

Keynes encourages us to think differently. Economics does not seem to be able to struggle free from old ideas, as Keynes was quoted 

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

The importance of money flows from it being a link between the present and the future.

This is something that Morrison, O’Dwyer and Shorten did and do not understand. Money is only a storehold that will be of use in the future. Rarely does our ability to earn coincide with our need to consume. 

It was during this time after the War that Keynes was most revered, yet here he is saying it didn’t work.

Most men love money and security more, and creation and construction less, as they get older.

In recent years there has been the start of the realisation of just how correct Keynes was in this statement. The reality is that the baby boomers have been guilty of two sins. The first was spoiling their children rotten. The boomers were brought up by parents from the depression and war eras. They made saving for a rainy day an art form. The second sin was that they saved for their old age. From Gen X through to the Millennials there has been a focus on spending and not worrying about the future, as seen by the massive spending spree in the second half of the 2020 Financial Year. https://www.theaustralian.com.au/business/companies/lockdown-turns-boom-time-for-harvey-norman/news-story/ee0b0ba25b791ae8b8f5ee2ac5b95780

In June 2020 the boomers were saying they had saved a fortune during the lockdown, no dining out, travelling or entertainment. They had maximised their subscriptions to Netflix and Stan but overall had come out with a greatly increased bank balance. The younger generations had saved the same or more but used it for aesthetic household updates and new equipment.

The result is that the majority of wealth is held in the hands of the boomers and it appears the younger generations now want to get their hands on it. Remembering that 80% of the wealth is held by 20% of the people, we have a situation where the vast majority of personal wealth in Australia is held in the hands of a few. 

Now comes the real problem. We have learned that the majority of that wealth is invested in assets that are creating wealth for the owners, we have also learned that if that wealth is handed down to the spending generations that came next then the assets will turn into lifestyle capital. 

There has been a massive growth in testamentary trusts which is the latest method of the boomers trying to preserve assets for another generation.

But then comes the bigger problem as the boomers get older and crave more security, they are selling out of their creation assets and getting more not construction assets in the name of security, leaving a massive gap in the area of creation.