Section V.2C of II.1 (“The Problem of Scale (Part I)”)
Considering “The General Theory” of Lord Keynes
V.2C
There is an assumption in Classical Economics (CE) that savings today means consumption tomorrow, which ultimately means savings are economically significant and that it’s safe to assume they will contribute to a return to “market equilibrium” eventually. Keynes disagreed, arguing that we cannot safely assume that what we save today will translate into consumption tomorrow, because the very act of saving money today may contribute to a fall in demand that makes it so that there are no businesses around tomorrow thanks to which consumption could be possible. Considering all this, Keynes writes:
‘An act of individual saving means — so to speak — a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand — it is a net diminution of such demand.’³²³
This sounds extreme, and I do sometimes think that Keynes could have toned down his language a little more to make his arguments more digestible. Indeed, Keynes makes it sound like choosing to save today never translates into consuming tomorrow, which simply isn’t true, and we know Keynes understands this position. The key word in the above quote is “necessitate” — he wants us to stop assuming that we can safely estimate and project future consumption based on present savings.³²⁴ Things are much less “given” than CE assumes, and it’s Keynes hope that by deconstructing “the moral system of saving,” there will be an increase of the probability that savings do in fact end up “in” investment and/or used for consumption. To accomplish this goal, Keynes discuss who I will call “the vice saver.” Keynes uses the language of “hoarding” to suggest “the immorality of saving,” but I fear that term is too easy to dismiss. Most savers don’t view themselves as “hoarders,” but prudent: my hope is to suggest that we are only prudent if we eventually take the step to invest our savings, which is certainly what Keynes believed, but this goal was not aided by his language of “hoarding” (in my view).³²⁵
If we save today and contribute to the collapse of demand, we will not necessarily be able to use our savings to consume tomorrow. If we assume this like CE does, then basically as long as we save today, we can do no wrong: things will work out in the end. If we save, we are safe. It is this idea that Keynes opposes, for it suggests that “preparing for the future” necessarily “makes the most of the today,” which Keynes argues that the act of preparing for the future could be precisely why the future never comes. We cannot be like religious believers who ignore or rationalize what occurs presently because, ultimately, “we’ll all be saved”: Keynes will not allow that kind of escapism. The picture is much more complex, as I would argue is the case in Christianity, where it seems like the goal is to “get to Heaven,” but really the goal is a reflection more of how “New Jerusalem is on earth.” What we do today matters, but then the obvious question arises: What should we do? For Keynes, the answer was basically that we must be “investors,” “savers/suppliers” (seeing as consumption helps supply) per se, not just one or the other (likewise, Christians should be “earthly/heavenly”-minded, just not worldly-minded). We must be dialectical, but I will abstain from discussing Hegel today.
For Keynes, the fact economic theory was often designed according to what was considered “virtuous” was a major problem, not because virtue was bad, but because all conceptions of virtue always reflection a certain worldview about how life and people. ‘Virtue and vice play no part’ in ultimately deciding which economic system works and which doesn’t: there’s no necessary reason why vice can’t create wealth just as much as virtue.³²⁶ No, he’s not saying that vice does create wealth, but Keynes is arguing that our desire that it be the case that (what we define as) “virtuous life” necessarily gives rise to the best economic outcome blinds our judgment and muddles our thinking. ‘[I]t may well be that the classical theory represents the way in which we should like our Economy to behave,’ Keynes wrote, ‘[b]ut to assume that it actually does so is to assume our difficulties away.’³²⁷ This is another way Keynes is like Nietzsche: not only does Keynes deconstruct “non-contingency,” but Keynes also critiques ethics, aware that ethics can be used to stifle thinking, control us, and worse. But as Nietzsche was not arguing against “being ethical,” so Keynes isn’t either; rather, Keynes wants us to be aware of how “ethics can do our thinking for us” and lead us into faulty conclusions. If we “own” our ethics, that’s one thing, but failing to do so is something else entirely.
Savers were considered by default to be more virtuous than spenders by CE, and so the entire economic system was basically designed to incentive savings (believing this would also cultivate virtue, which would help society, and so on). But the morals went too far for Keynes, for the morals incentivized savings without ultimately leading to investment, which paradoxically meant the ethics contributed to collapse of death that caused suffering. In the name of righteousness, pain was inflicted, for ethical action which proves incomplete can prove unethical. Please note that Keynes is not arguing that thinkers like Deirdre McCloskey are wrong that Capitalism can engenders virtues — certainly there are ways in which Capitalism makes us better — rather, the ethical critique of Keynes is very targeted at the virtue of “savings,” and more precisely the lack of a transitional ethic from out of savings into investment. If CE emphasized “the virtue of saving” in the context of (an eventual) investment, there would be no problem, but for Keynes this wasn’t the case: CE moralized saving as an end in-of-itself.
For Keynes (and to use language from The Conflict of Mind by O.G. Rose), the CE ethical system provided one step that was arguably necessary (“not wasting money”), but without the second, there was a “flip moment” that made it “as if” the whole ethical premise was misguided and self-destructive. Worse yet, the morals which incentivized saving could “overfit” and keep a saver from “transitioning” into investment, afraid that he or she was tempted by “the vice of spending.” Keynes believed “Classical Morals” needed to be updated: saving was a virtue only if it (eventually) became “savings in” investments. Savings that stayed savings were a vice, and, considering the “multiplier effect,” they were even more of a vice than “frivolous spending” — a dramatic and extraordinary claim for the ears of people during Keynes’s life.
On CE, Keynes writes:
‘They are fallaciously supposing that there is a nexus which unities decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former.’³²⁸
We cannot assume that saving $100 today means we will spend $100 tomorrow, because the stores tomorrow may all be bankrupt, in part due perhaps to our unwillingness to spend today. Keynes spends a great deal of time in Chapter 9 exploring the possible motives for why someone would ‘refrain from spending out of their incomes,’ and generally comes upon a few categories: ‘Precaution, Foresight, Calculation, Improvement, Independence, Enterprise, Pride and Avarice.’³²⁹ ³³⁰ Whether this list is exhaustive is beside the point: the point Keynes will ultimately make is that these motives behind savings ultimately give us reason to think savings won’t be available or deployed in mass when the market downturn strikes. Far from the motives of a saver contributing to investment, they will probably contribute to a saver continuing to save during a downturn, making the downturn worse. Below I will list out some reasons why the morals Keynes lists out might backfire on the economy:
Precaution: We wait to spend knowing a downturn might hit, but when the downturn hits, it’s wise to wait until the downturn ends.
Foresight and Calculation: We know markets boom and bust, and so we wait until a bust to begin investing. But once the bust occurs, since we tend to predict the future in light of what’s happening presenting, it becomes wise to assume that the bust will continue, and so also wise not to invest yet.
Improvement: We save our money so that we can invest when prices come down and improve our lot in life, but when the market downturn hits, there’s reason to think the downturn will get worse or continue, and so we hold our money, not wanting to waste our golden ticket.
Independence: We save our money so that we don’t have to work a job we don’t want to work and can sustain ourselves on our own, but this can contribute to a downturn that robs us of the prosperity that makes our independence desirable. Furthermore, general business may dry up, reducing incomes, meaning people won’t have money to spend on our particular enterprise, ruining our entrepreneurship and freedom.
Enterprise: Keynes uses this term to mean ‘the activity of forecasting the prospective yield of assets over their whole life,’ contrasted with “speculation” in markets.³³¹ Thus, a person may save today in hopes of having enough to invest for the “long-term” in a company that will produce notable yield in the future, but the very act of saving today could result in their being no “investment opportunities” in the future, precisely because they have gone out of business due to a lack of demand.
Pride and Avarice: We save our money to impress people with our wealth or because we are too greedy to part with it. As a result, the economy dries up and our wealth is eaten away by the necessities of life, without any hope of restoring it.
These motivations are not all equal to Keynes, and he certainly sees virtue in the person motivated by “enterprise” (for example). Moreover, Keynes is not saying a saver will necessarily fail to invest when the time is right, but he is saying that there is just as much reason for the saver to keep saving as there is for the saver to start investing according to his or her motivations. Keynes simply wants us to stop assuming that savings will maintain future demand, for this removes the imperative to assume and incentivize the transition from “savings” to “investment.” It is this transition that Keynes is all about and wants to stress, which for him is captured in stressing “investment” and arguing that “savings ‘in’ investment” are the only “real savings” around.
Keynes also notes that, contributing to the assumption that “savings today will be consumption tomorrow,” is the additional assumption that humans are very good at their “long-term expectations,” a view Keynes doesn’t share and deconstructs to further his case that we need to emphasize investment:
‘[…] we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a Coppermine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market.’³³²
We don’t need to read Nassim Taleb to understand that predicting what’s going to happen tomorrow is difficult, let alone next week, let alone next year. We may claim we have “a long-term view,” but often we are giving ourselves too much credit; furthermore, what are we even looking at when we “look to the future?” Nobody knows what it will hold, and even if we are “waiting for a crisis” to buy up cheap prices, since “ideas are not experiences” (as argued throughout O.G. Rose), when that crisis appears, we often find ourselves getting “cold feet” and unable to go through with our plans. ‘[A]s a rule,’ Keynes argues, we tend to ‘fall back on what is, in truth, a convention. The essence of the convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change.’³³³ We claim we’ve thought about the future and make appropriate predictions, but really we’ve more often than not simply extended out our present into the future (like the weatherman who assumes that the weather tomorrow will be the weather today). ‘We [tend to] assum[e], in effect, that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge […]’³³⁴ If x makes money today, x will make money tomorrow, but that also means that if y loses money today, it will lose money tomorrow, and that sets us up for trouble.
Why all this is important to note is because if the market falls toward or below the DEH, the savers will likely not see an opportunity to invest, and so they’ll hoard their money and problems will worsen. Far from “long-term expectation” helping us avoid and recover from the downturn, the hidden “convention” behind our “long-term expectations” will worsen our plight. There are two parts to forecasts: their assessment and our ‘confidence with which we make this forecast.’³³⁵ For Keynes, it is simply “practically impossible” that the majority of savers have enough confidence as we approach and fall below the DEH to begin investing and creating demand, especially considering that most of them were “too scared” to invest when times were good, let alone after market conditions have severely deteriorated. Sure, a few savers might have the guts, but Keynes thinks it’s wishful thinking to believe most let alone all savers can be so understood.
Funny enough, Keynes wants us to realize that much of market success isn’t a result of rational calculation, but other factors like emotion and daringness. ‘If human nature felt no temptation to take a chance,’ he wrote, “no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation.’³³⁶ For Keynes, since the future is impossible to predict and yet our “ideas about” the future are critical for present market action, if the market was in fact just “pure rational calculation” (like how CE seemed to claim about the market when it was at its best), then the market would ironically fail. Far from the “human element” ruining the market, it was what made the market possible at all.
“Long-term expectation,” in ultimately just being a cover for “extending the present out indefinitely,” contributes to “the fallacy of a static state,” which Keynes saw as ‘under[lying] present-day economic theory, [which consequently] import[ed] into it a large element of unreality.’³³⁷ ‘The mistake of regarding the marginal efficiency of capital primarily in terms of the current yield of capital equipment, which would be correct only the static state where there is no changing future to influence the present, has had the result of breaking the theoretical link between to-day and to-morrow.’³³⁸ There are a few reasons why this mistake is so consequential: first, savers always have reason to not invest, first because during good times they have reason to think prices are “too high” now and will be (so they don’t start looking for opportunities), and second because during bad times they have reason to think “the bad times aren’t improving” (and so don’t invest in the cheap prices). Savers are caught off-guard when prices drop, unprepared for the opportunity, and then when the opportunity arises, they’re generally too scared and/or uncertain to act. If, on the other hand, we understood the future was dynamic, we could fight these tendencies, for we could start looking for opportunities now, aware that the ideal time to realize them could manifest anytime, and because we could understand markets can correct while in the midst of a downturn. But problematically, if the market does actually fall below a DEH, the savers might be right to keep “hoarding” their capital, for the market will not be in a position to recover anytime soon. And so “market rationality” turns on the market and keeps it depressed: the fear of the hoarder that they should hoard is why the hoarder is confirmed in their decision (the prophecy is “self-fulfilling” and “total depravity,” per se).
Third, Keynes wants us to understand our choices to save today impact what opportunities will be available tomorrow: today and tomorrow are linked (again, think Hegel’s Absolute). We indeed conclude the good times will continue forever, we will act in a way that will help the good times “stay around” (hence Keynes’s desire for us to always “signal” with interest rates that prosperity “waits ahead”), whereas if we believe the bad times will last, then the bad times will indeed last. Our ideas of the future actively create our present, and to save money, regardless the reasons, is always a choice to benefit today at the expense of tomorrow. And yet paradoxically “benefiting today” ends up hurting and depressing the present, for what hurts the future hurts us now — this “feedback loop” between present and future in Keynes is critical and lacking from CE.
To close this section, it should be noted that Keynes didn’t seem to much like discussing psychology and made a point to basically apologize for sections about it being ‘on a different level of abstraction from most of this book.’³³⁹ But it couldn’t be helped, Keynes decided, for ethics which accompanied CE results in psychologies and actions which destroyed demand today in the name of making the future prosperous, the very act of which threatened tomorrow’s prosperity. Capturing the point:
‘An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date.’³⁴⁰
Opposing Say’s Law, Keynes writes that saving money ‘is not a substitution of future consumption-demand for present consumption-demand — it is a net diminution of such demand.’³⁴¹ Yes, Keynes understands that we have to “save money to have money to invest” — this is obvious — but what Keynes is trying to do here is restore a sense of “trade-offs” with saving money that CE ethics doesn’t presently allow. Saving money only might be good — it’s contingent upon a “flip moment” brought about by investing it — but CE spoke as if saving money was good. For Keynes, the key word is “contingency” — the functionality of markets, under no circumstance, is “given.” “Equilibrium is dead,” after all.
‘We should not conclude from [Keynes’s thinking that] everything depends on waves of irrational psychology,’ but instead we need to understand that our thinking doesn’t ‘depend on strict mathematical expectation, since the basis for making such calculations does not exist,’ seeing as we cannot know the future.³⁴² ³⁴³ Since “the long-term” must always be veiled in darkness, “pure rationality” cannot guide our decisions, and that meant there was “space” into which ethics could creep and influence our thinking. For this reason, Keynes found it impossible to avoid discussing ethics.
For Keynes, if CE ethics emphasized the need to eventually transition from saving into investment, the “the ethics of saving” would not fall into “the vice of hoarding” and ultimately the ethic would absorb its morality from the action of investment (which would “reach back in time” and justify the savings.). Keynes writes:
‘If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specific order for future consumption, the effect might indeed be indifferent. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption could be turned over to preparing for the future consumption.’³⁴⁴
Unfortunately, ‘an individual decision to save does not, in actual fact, involve the placing of any specific forward order for consumption, but merely the cancellation of a present order.’³⁴⁵ As a result, it did not follow that saving money today necessitate an act of consumption tomorrow — nothing was “given,” creating a problem.
As things stood during Keynes day, he believed the ethics of CE proved part of the problem, thus his vicious attacks against it. Because of CE ethics, savers failed to capitalize upon opportunities which arose as markets depressed, and the very personalities of savers contributed to the problem (which CE ethics helped them rationalize). Looking ahead, please note that all this talk on “virtues” and “ethics” suggests that there might be something more “fundamental” at work than demand, mainly “intrinsic values,” which I will later relate to “The Artifex Class,” but for now let us proceed with a little more examination on “the personalities of savers.” After so many years of being “over-taught” the incomplete virtue of “pure savings,” the subject requires special attention for us to untangle our minds. To finish that task, we will examine Adam Smith, but only after a short examination of interest rates and their role in Keynesian thought.
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Notes
³²³Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 201.
³²⁴In Keynes, small words like “if” and “necessitate” make all the difference: the writing is extremely subtle and easy to misinterpret (not that I always get it right).
³²⁵I sometimes think that Keynes was his own worst enemy due to his writing style, random outbursts of sarcasm, and word choice. Dying at sixty also didn’t help.
³²⁶Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 111.
³²⁷Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 34.
³²⁸Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 21.
³²⁹Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 107.
³³⁰Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 108.
³³¹Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 158.
³³²Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 149–150.
³³³Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 152.
³³⁴Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 152.
³³⁵Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 148.
³³⁶Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 150.
³³⁷Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 146.
³³⁸Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 145.
³³⁹Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 148.
³⁴⁰Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 210.
³⁴¹Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 210.
³⁴²Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 162.
³⁴³Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 163.
³⁴⁴Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 210–211.
³⁴⁵Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, Inc., 1964: 211.
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