Advances and the Capitalist’s Intention: From Wages Fund to Aggregate Profits

By Peter Cresswell Auckland, New Zealand

ABSTRACT

At issue in Thornton’s challenge to the nineteenth-century Wages Fund Doctrine was the rigidity or otherwise of the Fund. In both the challenge and Mill’s ‘recantation,’ the “intention of the owner” regarding the disposal of his “accumulated means, all of which is potentially capital,” was highlighted.

‘The capitalist’s intention’ formed the heart of the earlier Advances Theory of Capital, the causes of these intentions partially explained by the later time preference theory.

This paper looks at a novel integration by Austro-classical1 scholar George Reisman of these theories

and doctrines, suggesting the entrepreneur-capitalist’s decision to either invest or consume directly drives accumulation, production, real wages and aggregate profit; a conclusion in contrast to that of “left-Keynesian”

2 Michał Kalecki, “a most important patron saint of the post-Keynesian,”

3 and his post-

Keynesian follower Joan Robinson, despite all three being in possession of the same formula for aggregate profit.

1 By way of introduction, since Reisman may not be familiar to all: George Reisman was a student of

both Ludwig Von Mises and Ayn Rand: … in having been the student of both Ludwig von Mises and Ayn Rand, I was able [he says] to acquire what by my own standards at least is the highest possible ‘intellectual pedigree’ that is possible for any thinker to have acquired in my lifetime, or, indeed, in any lifetime. [Emphasis in the original] (Reisman, Capitalism: A Treatise on Economics, 1996, p. xlvii)

Mises's biographer identifies Reisman as [t]he third important Misesian [after Sennholz and Kirzner] from the ranks of Mises's regular students [at NYU], … who got a PhD under Mises in 1963 for a theoretical study of interest rates entitled 'The theory of aggregate profit and the average rate of profit.' (Hülsmann, 2007, pp. 927-928) However, [says Reisman], because of the profound influence of the classical economists on my thinking, it would be more appropriate to describe my views as ‘Austro-classical’ rather than ‘Austrian.’ … Nonetheless “[i]t is to von Mises, more than to any other single source, that [my] book is indebted. [It] … could be accurately described as ‘Misesianism’ reinforced by a modernised, consistently procapitalist version of classical economics – it is the ideas of von Mises fused with insights derived from Ricardo and Smith.” (Reisman, Capitalism: A Treatise on Economics, 1996, p. 5)

2 The title was bestowed on Kalecki by his somewhat competitive colleague Oskar Lange.

(Toporowski, 2013) 3 Quip courtesy of HETSA Editorial Board member Geoff Harcourt (Harcourt G. , 1977)

2

“…without proper attention to the role of the

subsistence fund, capital theory goes astray.”

- Jorg Guido Von Hülsmann,

Introduction to 2000 English translation of

Richard Von Strigl’s ‘Capital & Production’

1. The Capitalist’s Decision

The capitalist’s decision to consume or produce, and how much of each, is crucial to capital

accumulation and employment. In Section 1 I introduce the competing views of

Productionism and Consumptionism, and discuss classical and Austrian views on capital

accumulation and employment, in which the decision to save and invest is primary. Section 2

offers a brief interlude on causality, preparatory to its being overturned by the

Consumptionist protagonists of Section 3, for whom the decision to consume was primary.

Section 4 introduces a fully causal Austro-Classical Productionist ‘macroeconomics,’ George

Reisman’s Net Consumption/Net Investment Theory of Profit, which clarifies both what it

means to save and to produce, and what effect the capitalist’s decision to spend or save has

on growth, accumulation and profits. Section 5 is a brief note on the non-contact between

our protagonists of sections 3 & 4, which is followed by three Appendices of what I hope

might be useful charts and diagrams.

1.1. The Capitalist’s Decision: to Consume or Employ

The effect of the capitalist’s decision to consume or invest has been at issue for over two

centuries.

The two competing views have been labelled Productionism and Consumptionism. The

former view, initially under the influence of the British Classical economists, holds that the

fundamental problem of economic life is the production of wealth, and that capitalist saving

and productive expenditure accumulates capital, produces wealth, and pays wages

(primarily in advance of production); the latter, coming initially from the influence of the

Mercantilists, “proceeds as though the problem of economic life were not the production of

wealth, but the production of consumption,”4 thereby suggesting that the best way by which

wealthy capitalists grant the working public a boon is by spending more on personal

consumption.

But demand for consumables is not demand for labour. “[T]he two phenomena, namely,

purchasing of consumer goods and the demand of labour services represent two physically

4 (Reisman, 'Production versus Consumption’, 1964)

3

separate events. That is, when one buys a consumer good one does not simultaneously

buy anything else but the consumer good in question.”5

To buy labour, classical productionists understood the capitalist must employ labour; to

employ more, he must consume less. Thus, employment and consumption were understood

as opposites. The Advances Theory of Capital6 and the related idea of the Wages Fund7

express this Productionist doctrine while retaining focus on the crucial role of capitalists and

entrepreneurs in advancing production.

The fund itself may be obscured from view because, as in Ricardo’s conception of it “as a

succession of advances to labour”8 it is both ever-becoming and ever-diminishing,9 but its

magnitude at least should make it hard to miss:

The entire wealth of the economical community serves as a subsistence fund, or advances fund, and, from this, society draws its subsistence during the period of production customary in the community.

10

5 (Menshikov, 2005)

6 The term and the doctrine – in English, we might call it the Advances Theory of Capital–was both

more circumscribed than ‘capital’ and a more direct acknowledgement that “roundabout” production took time; that it required goods, outlay, wages and subsistence in advance of production; and someone to make the decision to produce.

The way in which Quesnay used the term clearly indicates he was referring to what is now called capital or means of production. The advances can be regarded as a sum of money, but more frequently the Physiocrats referred to the commodities which had to be ‘advanced’ in order to carry on the process of production. … Turgot, too, employed the concept of advances … [to refer] to the employment of money in one of the several types of investments; he also uses the terms ‘moveable wealth’ and ‘capital’ … Adam Smith substitutes the term ‘capital’ for ‘advances,’ even though he still uses Quesnay’s notion of means of production, which must be advanced by the entrepreneur in order to carry on the process of production. (Vaggi, 1987)

6

A fairly comprehensive account and description of the theory and the comparative contributions of Smith and Turgot can be found in Mark Donoghue’s unpublished Masters thesis titled Classical Advances Theory of Capital: A Comparative Analysis of A.R.J. Turgot and A. Smith (Donoghue, 1991) 7 “The idea of capital as a wages fund arises from the idea of capital as an advance to sustain labour

during the period output takes to fructify, or be produced. The theory emerges naturally in commercially agricultural and mercantile economies, and became a foundation stone of the developing economies of the late 18

th century in Western Europe. The idea was expressed by

Cantillon, Quesnay and Hume, and developed more fully by Turgot and Smith.” (Blyth, 1987) [Emphasis mine.] “Adam Smith took over from the Physiocrats the idea that wages are advances to workers in anticipation of the sale of … output. Wages could not be increased unless the capital destined to pay them was increased. Capital, in turn, was determined by savings.” (Bannock, Baxter, & Davis, 1988, fourth edition) 8 Taussig’s summary of Ricardo’s position. (Taussig, 2008 (1896), p. 316 and elsewhere)

9 Rather like the widow’s cruse analogy wielded by Keynes to describe never-ending profits (about

which, more below), which would have more apposite meaning to the fund. 10

(Bohm-Bawerk, 1891) Be it noted that both Bohm-Bawerk and his translator were quick to dissociate his Subsistence Fund from the “generally discredited Wage Fund of the classical economists … The difference between the two will be found in a few pregnant sentences on pp. 419 & 420,” where Bohm-Bawerk concludes ”The English Wage Fund theory has a core of truth, but is wrapped up in a quote overpowering mass of error.” Similar ritualistic hand-washing for similar reasons was undertaken by Jevons, Marshall, Keynes, Hayek, Robinson and Mises. The difference in the essential truths they each suggest seems however more apparent than real.

4

And as Frank Shostak explains,

The introduction of money doesn’t alter the essence of what [this] pool of funding is. Money can be seen as a permit to access the pool of funding [that sustains us], or we can also say that money is a claim on the goods in the pool of funding, so to speak.

11

In modern division-of-labour societies, whose epistemological complexity requires all the

more our focus on essential principles,12 the notion (whether prefixed “Wage” or

Subsistence”) remains an important conceptual tool going “beyond the ‘yearly harvest’ to the

very concept of the division of labour itself.” (Ekelund, 1976) Arguably, instead of decreasing

in importance as the division of labour expands, the concept becomes more ever more

crucial in identifying facts relevant to human survival:

In a primitive, non-specialised economy, with no extended time period of production, there is no need for a fund of real goods. As the division of labour proceeds … and processes are lengthened, a store of real goods – the output of past labour and capital – must stand ready to tide labour over the production period. The fund … [may] be regarded as a flow of goods augmentable through time, [or, as] in classical theory, which assumes a discontinuous period, the given stock of circulating capital is, in the short run, fixed.

13

The wages fund qua advances represented the total money funds advanced by capitalists

and entrepreneurs to employees who, qua consumers, were thus enabled to access this

pool of “wage goods.” The wage fund then in monetary terms

is simply … the aggregate demand for labour, i.e., total payrolls. The classical economists recognised it, together with the supply of labour, as determining the level of average wage rates. They also recognised that the demand for consumer goods is separate and distinct from the demand for labour, and that prices of consumer goods are determined by the demand for goods together with the supply of goods. Indeed, Cairnes, the last major classical economist … [recognised] that ‘real wages will advance with the productiveness of industry in producing such real wages – in producing, that is to say, the commodities of the labourer’s consumption.’

14

This was challenged in 1807 however, when William Spence published a pamphlet15 arguing

that the primary source of national wealth was not investment for greater production, but the

consumption of the landed gentry.

Like Malthus, whose point of view he anticipates, he attacks savings not because they are hoarded, but because they entail a diversion of expenditure towards investment and away from immediate consumption. The fall in consumption expenditure brought about by an increase in investment leads to a decline in national prosperity. Since 'expenditure not

(On the former two, for example, see (Taussig, 2008 (1896)), pp. 306-308 for Jevons, pp 312-318 for Bohm-Bawerk; for Marshall see (Donoghue, A History of the Classical Wage Fund Doctrine in English Economic Thought from John Stuart Mill to Alfred Marshall, 1998), pp 194-213; and (Kates, 'Mill's Fourth Proposition on Capital and Say's Law: Why the Demand for Commodities Really Isn't Demand for Labour', 2012) p15-18, for Hayek in part. 11

(Shostak, 2004) 12

“Ours is an age of ‘complexity worship’“observes philosopher Leonard Peikoff. Yes, “life is complicated, enormously so; but man has a conceptual faculty, a faculty of forming principles, which is specifically his weapon for coping with complexity.” (Emphasis mine.) (Peikoff, 2011 (1988)) 13

(Ekelund, 1976) 14

(Cairnes, 2013 (1874), p. 282) quoted in (Reisman, Capitalism: A Treatise on Economics, 1996). Reisman uses this insight in forming his Productivity Theory of Wages. 15

William Spence, ‘Britain Independent of Commerce,’ 1807

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parsimony is the province of the class of land proprietors', they perform their 'duty' best if their expenditure increases progressively.

16

In responding, James Mill attacked the general misapprehension of the “two senses of the

word consumption,” distinguishing between unproductive consumption which is extinguished

in the act of consumption, and productive consumption which effectively reproduces itself–

the latter of which part of his working capital the capitalist “would most properly be said to

employ, not to consume.”17 Greater employment thus means greater wealth; greater

consumption, not so much.

[I]t is of importance to the interests of the country, that as much as possible of its annual produce should be employed, but as little as possible of it consumed. The whole annual produce of every country is distributed into two great parts; that which is destined to be employed for the purpose of reproduction, and that which is destined to be consumed. That part which is destined to serve for reproduction, naturally appears again next year, with its profit. This reproduction, with the profit, is naturally the whole produce of the country for that year. It is evident, therefore, that the greater the quantity of the produce of the preceding year, which is destined to administer to reproduction in the next, the greater will naturally be the produce of the country for that year. But as the whole annual produce of the country is necessarily distributed into two parts, the greater the quantity which is taken for the one, the smaller is the quantity which is left for the other. We have seen, that the greatness of the produce of the country in any year, is altogether dependent upon the greatness of the quantity of the produce of the former year which is set apart for the business of reproduction. The annual produce is therefore the greater, the less the portion is which is allotted for consumption. If by consumption therefore Mr. Spence means, what we have termed consumption properly so called, or dead unproductive consumption, and it does appear that this is his meaning, his doctrine is so far from being true, that it is the very reverse of the truth. The interests of the country are the most promoted, not by the greatest, but by the least possible consumption of this description.

18

The issue was further clarified half a century later by Mill’s son, John Stuart, in his Four

Propositions on Capital19. Consumption spending on velvet and other luxury goods by

16

Spence, summarised by Donald Winch, in his introduction to (Mill, 1966) 17

James Mill’s Commerce Defended may be credited with the earliest clear exposition of Say’s Law (to such extent that some argue that “[w]hat has come down to us as Say's Law may, perhaps with equal propriety, be called Mill's Law.” (Reisman, Production versus Consumption’, 1964; and Reisman, 1996, p. 599 n 3) with the clearest early understanding of the distinction between productive and unproductive expenditure (a great advance on Adam Smith); and was the first to build upon Smith with a clear exposition of the role of saving and capital accumulation in producing wealth. Economist George Reisman’s introduction places it foremost in the defence of the Productionist view.

That the arguments of Mill are now [205] years old is true; but it does not follow that they are therefore false. One of the things the attentive reader will be shocked to discover as he proceeds, is that the doctrines which Mill attacks, and which, therefore, are older than his own, are precisely those which are today considered modern. If the reader ignores the occasional archaic expression, he may come to regard Mill as a revolutionary critic of contemporary economics. (Reisman, ‘Overproduction and Underconsumption Fallacies,’ January 11, 2007, http://mises.org/daily/2449/)

18 (Mill James, Commerce Defended,1808)

19 These propositions may be taken as the final statement of classical economics on the subject of

capital and its accumulation: 1. “industry is limited by capital…”2.“capital ... is the result of saving” 3. “Capital ... although saved, and the result of saving, is nevertheless consumed.” 4. “What supports and employs productive labour, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour.” (Mill, 2004 (1900) [1865], Book I, Chapter V: ‘Fundamental Propositions respecting Capital’)

6

capitalists not only did nothing to advance the general prosperity, as the judicious

employment of his capital would have done, neither did it do anything to raise employment.

“What supports and employs productive labour,” he said, is not spending on final goods, no

matter their degree of opulence. “What supports and employs productive labour is the

capital expended in setting it to work.”

This was his famous Fourth Proposition on Capital, “that Demand for Commodities is not

Demand for labour.”20

1.2. Wages Fund: Naïve or Vulgar?

The “naïve” or “vulgar” form of the classical wage-fund doctrine attacked by everyone from

Marx, to Mill’s friend Thornton, to Keynes’s inspiration J.A. Hobson21 said no more than that

average wage rates were determined by dividing money capital by the number of

employees, or in even shorter and more naïve form,22 capital divided by population. Even in

this form, however, the forward-directed view of capital and production was maintained.

Thus, in real terms, the maximum average real wage (that is, in wage goods) is determined at the start of the production period. Importantly, a great mass of textual support from the writings of Smith, Ricardo, Senior and McCullough (sic) can be marshalled to support this belief in three important assumptions of the fund: (1) a stock of real goods, (2) existing at a macroeconomic level, (3) that is expended over a technically determined discrete time period of production.

23

Ekelund’s depiction of the short-run ‘naïve” wages fund in the situation of a static, annual

harvest is instructive: ‘w’ at each time period ‘t’ represents wage goods produced as the

result of the previous production period, to be consumed reproductively over each

subsequent production period in producing wage goods for the next period.

The reader might, as an exercise, contemplate the direction of causality in each of these propositions, and compare them to the direction proposed below by Kalecki et al. 20

The effect of derived demand with respect to this proposition, and by corollary to the Wages Fund, has been much misunderstood. According to this proposition, the amount of capital advanced sets the height of production and employment ex ante (with all the inherent entrepreneurial uncertainty), while demand for particular consumer goods sets the direction of capitalist production ex post in the various branches of production so demanded. Thus, any amount of consumption can do nothing to boost total labour in the short run, whereas extra capital employed will. 21

One of Keynes’s Honour Roll of Heretics, this otherwise obscure and unexceptional Victorian earns himself seven whole pages in the General Theory (364-371)for “having flung himself with unflagging, but almost unavailing, ardour and courage against the ranks of orthodoxy… [T]he publication of [his] book marks, in a sense, an epoch in economic thought.” (Keynes, 1936, p. 365) This last, at least, is true. Keynes quotes approvingly Hobson’s unsubstantiated claim of 1889 that the only reason “the educated world” accepted the conclusion that “saving enriches and spending impoverishes”

was exclusively due to their inability to meet the now exploded (sic) wages-fund doctrine. … Economic critics have ventured to attack the theory in detail, but they have shrunk appalled from touching its main conclusions. (Hobson, 1889) quoted in (Keynes, General Theory of Employment, Interest and Money, 1936, pp. 366-367)

22 Fawcett, for example. (Donoghue, 1998, pp. 35-42) argues the more developed “dynamic” version

of Mill’s Wages Fund exposition can be found not in Book II of Mill’s Principles, but in Books IV and V. 23

(Ekelund, 1976)

7

From (Ekelund, 1976)

The essential truth of the Wages Fund somewhat obscured by the naïve theory, and by the

related debates about the efficacy or otherwise of “combinations”24 in raising wages, was

this: that it is capital that pays for labour, not consumers.

A productive labourer is supported out of the wages fund and “adds generally to the value of the material he works upon … that of his own maintenance and his master’s profit.”

25

As Frédéric Bastiat points out, there is a rarely discussed but natural harmony between

capital and labour: capital advances wages not just to provide subsistence, but to remove

risk and uncertainty from employees.

In order to create new means of satisfaction, it is almost always—I could say, always—necessary to have both current labour and the fruits of previous labour available. At the outset capital and labour, when they join forces in a common project, are each obliged to share its risks. … When two persons share a risk, they cannot eliminate the risk itself, but there is a tendency for one of the two to assume it on a contractual basis. If capital takes the responsibility, then labour receives a fixed return, which is called wages. If labour chooses to accept the risk, for better or for worse, then the return on capital is set aside and fixed under the name of interest.

26

It might be useful here to adapt one of Hayek’s famous triangles27 to demonstrate the role of

the capitalist in what Skousen had dubbed the capitalist structure of production (a more

ambitious diagram appears in Appendix Two). We can see that it is capital, not consumer

spending, that pays for most economic activity; and that without the capitalist’s decision to

advance capital in advance of production, neither wage payments nor production can

happen at all:

24

By which, in this context, was meant combinations of labour, i.e., trades unions. 25

Adam Smith, Wealth of Nations, Book II, Chapter III, quoted in (Rima, 2000 (1975)) 26

Frédéric Bastiat, Economic Harmonies, 27

A development from Bohm-Bawerk’s “bullseye” diagram of the capital structure, Hayek’s famous triangles first appeared in his early-1931 LSE lectures and subsequently in (Hayek F. , Prices and Production, 1967 (1931)). They have been used since to great effect by Mark Skousen in his Structure of Production, and Roger Garrison in his Time and Money.

8

Fig. 2: Hayekian Triangle showing Advances and the Aggregate Production Structure, adapted from (Skousen, 1990)

Understood properly then, we can understand what it means to say both that wages are

advanced from capital, and that if employment is to be encouraged, it is capital and its

accumulation that must be favoured over consumption.

1.3. The Capitalist’s Decision: Consumption or Employment?

Despite lingering consumptionist sentiments around the classical fringe on which Lord

Keynes would later pounce, James Mill’s Productionist argument largely carried not just the

day but the next half- century. But the ground of the debate was still shifting. Where

previously the important effect was identified as the capitalist’s decision either to consume or

invest, the new debate recognised the truth of advances, and questioned the extent to which

he could spend less consuming, and more buying labour.

This was the proximate cause of the younger Mill’s later calamitous recantation of the

Wages Fund28.

Neither J.S. Mill’s recantation nor the arguments of the fund’s antagonists29 challenged the

essential truth of the wages fund: i.e., that wages are advances to employees out of money

28

Calamitous mainly due to its dire effect on a classical school still struggling to fully answer Malthus’s population challenge, and to fully understand value. Seen from this distance, the ‘recantation’ can be seen as the curtain coming down on the classical period.

9

capital in advance of production and subsequent sales. What was at issue in Mill’s

‘recantation’30 was the size and “elasticity”31 of the pool of money capital that could be

directed labour’s way.

Less spending on velvets, argued Mill’s opponents, would leave more available to employ

labour.

While conceding the point for the short run (allowing that in the face of pressure to raise

wages from some “combination” of employees, a single capitalist might advance the

additional funds by temporarily restricting his consumption32), Mill did nothing to indicate

either by comments or subsequent revision of his Principles that he accepted the point either

in the longer run, or for capitalists taken in aggregate.

For him, or more especially for John Elliot Cairnes, who quickly took up the cudgels that J.S.

Mill appeared increasingly disinterested in wielding, there was both a natural limit to the

extent that capitalists’ consumption may be naturally limited, and a consequence. The

29

Primary among those Mill acknowledged being his friend William Thomas Thornton’s book On Labour (1869), Mill’s ‘recantation’ was contained in his review of Thornton’s book appearing in the Edinburgh Review,, 30

As you would expect, there is a considerable secondary literature on Mill’s recantation. For five useful accounts of the recantation debate and its context to which I am sympathetic, see:

1. (Donoghue, A History of the Classical Wage Fund Doctrine in English Economic Thought from John Stuart Mill to Alfred Marshall, 1998) pp. 97-144 and 217-222, who in arguing that Mill never really repudiated the wage fund doctrine points to the subsequent non-amendment of Books IV and V of Mill’s Principles where the more “sophisticated version” lay unamended, his alleged recantation merely being “a plea to other economists to refrain from interpreting the wage fund doctrine in a ‘vulgar’ fashion;

2. (Taussig, 2008 (1896)), pp. 241-254, who recognises the central issue of “Mill’s surrender” being disagreement over the “elasticity” of the fund, which concept he explores in detail in pp. 82-98;

3. (Reisman, Capitalism: A Treatise on Economics, 1996) pp. 646-653, 664-666, who argues “the whole basis of Mill’s recantation is demolished by our analysis in [pages 646-653]. … [where] we examined the ability of the demand for labour to increase at the expense of net consumption (viz., the personal consumption of businessmen and capitalists)”;

4. (Ekelund, 1976) and (Robert E. Ekelund, 1983) pp. 163-172, who argues that Mill’s concession that businessmen and capitalists can increase the size of the monetary wages fund does nothing in the short run to increase the pre-existing pool of real wage goods, thus raising their price commensurate with any monetary increase; and

5. (Hutt, 1954 (1930)), with whom I am otherwise in agreement, but who throws the “clumsy … erroneous and misleading” doctrine under the bus: “The realisation of the absurdities of the doctrine gave the apologists of the unions something they could attack with the full support of authority.” Against this it might be argued that the failure to fully defend the actual doctrine gifted a greater victory to those apologists.

31 Taussig’s felicitous term. See Taussig, 2008 (1896) Chapter IV for a thorough discussion of the

concept. 32

But see Ekelund’s discussion of the futility of raising money wages without raising production.

10

habits and desires of capitalists would remain what they are, he argued, due to the nature of

economic law.33 Taussig summarises the position well:

[T]he habits and desires of capitalists would lead them to maintain accumulation and investment at a certain rate [while being led to reduce consumption instead] … but the “character of the wealthy classes remaining on the whole what it is…”

34 [t]he disposition to

accumulate [is] thus fixed… At the root of the argument we find the theory of what Mill called the effective desire of accumulation, -- that with a given return to capital, accumulation will be maintained; and so a determination and even predetermination of a certain amount of capital to wages … “[Further, said Cairnes], [t]he wealth available for … the remuneration of labour can not at the utmost be more than the balance which remains [after supporting the maintenance of stock and fixed capital] under pain of a complete failure of the fund.” (Cairnes, Book II, ch.iii, s. 1) For a while [then], trade-unions may secure a general rise in wages … and in consequence of a shrinkage of capital, they will find they have killed the goose that laid the golden eggs.

35

Sustainable rises in money wages achieved by combination therefore were confined

between the Scylla of prosperity’s need to continue accumulating capital, and the Charybdis

of “effective desire of accumulation” – this last economic principle we would today with only

slight modification and subsequent development call Time Preference.36

2. A Note on Causality

If we are going to make generalisations about any field of study, it is impossible to overstate

how important it is to get causality correct.

Let us start by noting that all generalisations—first-level and higher—are statements of causal connection. …The only justification for inferring the future from the actions of the past is the fact that the past actions occurred not arbitrarily … but for a reason, a reason inherent in the nature of the acting entities themselves… Without the fact and the knowledge of causality, there would be nothing but a flow of unconnected, random data.

37

As Aristotle identified 2,300 years ago, scientific knowledge only becomes such when we

have knowledge ‘down to the root,’ which is to say when we understand the full causality:

we do not have knowledge of a thing until we have grasped its why, that is to say, its cause. 38

According to Aristotle,

We think we know a thing (in the unqualified sense, and not in the sophistical sense or accidentally) when we think we know both the cause because of which a thing is (and know that it is its cause) and also that it is not possible for it to be otherwise.

Thus, causality and necessity are twin conditions set upon any science.39 Aristotle’s

framework famously recognised Four Causes, “four ways of answering different but equally

33

“What an economic law asserts is, not that men must do so and so, whether they like it or not, but that in given circumstances they will like to do so and so; that their self-interest or other feelings will lead them to this result.” Cairnes, quoted in Taussig 34

(Cairnes, quoted by Taussig) 35

(Taussig, 2008 (1896), p. 259) 36

See further discussion below, Section 4.6. 37

(Harriman, 2010, p. 21) 38

(Aristotle, Physics 194 b17–20; see also: Posterior Analytics 71 b9–11; 94 a20 and: (Harriman, 2010)) 39

Aristotle quoted and summarised in (Barnes, 1982, p. 33)

11

crucial questions about why things are how they are. If we cannot answer these

questions … we cannot really know the objects of which we speak.”40

As we shall see, two of the Four, the final and efficient causes are particularly easily

confused (i.e., respectively, the end for which and the means by which things are done), and

are ripe for abuse in professional conjuring tricks.

Fig 3: The Aggregate Production Structure as a Horn of Plenty:

“Consumption is the final, not the efficient cause of production”

3. Enter the Master41

3.1. The “Axiom” of Hobson

Mill’s Four Propositions on Capital represented the high-water mark of classical capital

theory.42 By 1936, the truth and causality of virtually every one of these propositions was

reversed, or in the process of being so. “The essence of this [new movement, i.e.,

Keynesianism], is its complete failure to conceive the role that saving and capital

accumulation play in the improvement of economic conditions.”43

40

(Hankinson, 1995, pp. 120-121) 41

The evaluation is entirely Skidelsky’s. 42

See note 19 above, (Mill, 2004 (1900) [1865], Book I, Chapter V: ‘Fundamental Propositions respecting Capital’), and (Kates, 'Mill's Fourth Proposition on Capital and Say's Law: Why the Demand for Commodities Really Isn't Demand for Labour', 2012). 43

(Mises, 'Capital Supply and American Prosperity', 1952)

12

Keynes quotes (Hobson, 1889)44 as “the first explicit statement of the fact that capital is

brought into existence and maintained and accumulated not by saving but in response to

the demand resulting from actual and prospective consumption. The following portmanteau

quotation,” purrs Keynes, “indicates the line of thought”45:

It should be clear that the capital of a community cannot be advantageously increased without a subsequent increase in consumption of commodities. ... Every increase in saving and in capital requires, in order to be effectual, a corresponding increase in immediately future consumption....

46

Hobson and his new fan had it backwards. In contradistinction to Hobson’s assertion we

offer Rand’s:

Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s “supply”; in the role of consumers, they represent a market’s “demand.” The law of supply and demand has an implicit subclause: that it involves the same people in both capacities. When this subclause is forgotten, ignored or evaded—you get the economic situation of today.

47

Hobson’s “axiom” inverts causality. Ayn Rand’s use of Aristotle’s framework of the Four

Causes demonstrates the error48:

Consumption [she identifies] is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent

44

The otherwise forgotten Hobson appears frequently in the General Theory, somewhat in the manner of Shakespeare’s fools, being employed to spout what Keynes held as truths but was fearful may be (rightly) held as absurdities. Hobson’s fool is Keynes’s alibi, if needed. His first appearance is his unsubstantiated claim of 1889 that the only reason “the educated world” accepted the conclusion that “saving enriches and spending impoverishes”

was exclusively due to their inability to meet the now exploded (sic) wages-fund doctrine. … Economic critics have ventured to attack the theory in detail, but they have shrunk appalled from touching its main conclusions. (Hobson, 1889) quoted in (Keynes, General Theory of Employment, Interest and Money, 1936, pp. 366-367)

The essential truth of the Wages Fund (only somewhat obscured by the naïve wages fund theory’s obsession with population numbers and average wage rates) were these two propositions: that it is capital that pays for labour, not consumers; and this capital is advanced by businessmen in advance of production. The causality is clear. Keynes overturns it not directly, but by artifice and innuendo. 45

(Keynes, 1936, Chapter 23): 46

(Hobson, 1889, p. vi), quoted in (Keynes,1936) 47

Ayn Rand, ‘Egalitarianism and Inflation,’ 1974, republished in Philosophy: Who Needs It? (Rand, 1982) 48

As I’ve said above, it is impossible to overstate how important it is to get causality correct. So while Henry Hazlitt does allow that

… while treating Keynes’s method of treating consumption as a “cause” of production and income cannot be called entirely erroneous, it is certainly misleading, and in fact disastrous as the major premise of public policy… (Hazlitt, Failure of the New Economics, 1959, p. 93)

Ayn Rand’s use of Aristotle’s framework of Four Causes however demonstrates Hazlitt is over-generous. For as Aristolian scholar John Herman Randall explains, “ends, final causes, outcomes are fundamental in understanding processes; but they never ‘do’ anything. Ends do not act or operate, they are never efficient causes.” (Randall, 1960, p. 128) (Emphasis mine.)

13

unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. [Emphasis in the original.]

49

Nonetheless, the damage was done, and within a few short years the intellectual decay50

was complete.51 The previous understanding of saving and capital accumulation could now

be regarded as “an incomprehensible absurdity” to be evicted from the profession like the

money changers being thrown from the temple. And Hobson’s reversal of causality52 was, to

the Keynesian school, now to be revered as an “axiom which only half-wits could

question.”53, 54

49

(Rand, 1982) 50

The phrase, evaluation, and the link to Hobson’s quotation are all George Reisman’s: (Reisman, 1996, p. 865) 51

The decay is ongoing, and the ‘wisdom of Hobson’ is now pabulum to be doled out in populist lectures. To take just recent example out of hundreds, One Charlie Hagel lectures readers in a letter to the New Jersey Star Ledger,

Businesses have never created a job — consumer demand for goods and services creates jobs. Charlie Hagel, ‘Letter: Trickle-down econmics (sic) is a ruse,’ 2014.

Mr Hagel is thoroughly answered in the paper’s subsequent letters column, "Try tying that premise to reality. How do you consume before producing? Try eating a loaf of bread before you bake it. As any rational person knows, you (or somebody) have to earn money by productive work before you go to the store to spend it. For that, you need a job. Businesses create jobs. Jobs create consumer demand. Production precedes consumer demand. No production, no consumer demand. And if there are no entrepreneurs to organize the factors of production toward the creation of goods and services—create businesses—there is no consumer demand because there are no products and services for your money to buy and no jobs for which to earn the money that stands for your productive contribution. Michael A. LaFerrara, ‘Money vs. Wealth: Which is the Cart, and Which is the Horse? Ask Gilligan,’ 2014)

52 Pointing out the reversal of causality in Keynesian thought is a leitmotif of Henry Hazlitt’s book-

length dissection of the Keynesian magnum opus, Failure of the New Economics (Hazlitt, 1959). I take one example out of many, his discussion of Keynes’s “multiplier”:

There are, in fact, so many things wrong with the "multiplier" concept that it is hard to know where to begin in dealing with them. Let us try to look at one probable origin of the concept. If a community's income, by definition, is equal to what it consumes plus what it invests, and if that community spends nine-tenths of its income on consumption and invests one tenth, then its income must be ten times as great as its investment. If it spends nineteen-twentieths on consumption and invests one-twentieth, then its income must be twenty times as great as its investment. If it spends ninety-nine hundredths of its income on consumption and invests the remaining one-hundredth, then its income must be a hundred times its investment. And so ad infinitum. These things are true simply because they are different ways of saying the same thing. The ordinary man in the street would understand this. But suppose you have a subtle man, trained in mathematics. He will then see that, given the fraction of the community's income that goes into investment, the income itself can mathematically be called a "function" of that fraction. If investment is one-tenth of income, income will be ten times investment, etc. Then, by some wild leap, this "functional" and purely formal or terminological relationship is confused with a causal relationship. Next, the causal relationship is stood on its head and the amazing conclusion emerges that the greater the proportion of income spent, and the smaller the fraction that represents investment, the more this investment must "multiply" itself to create the total income!

53 (Kates, 'Mill's Fourth Proposition on Capital and Say's Law: Why the Demand for Commodities

Really Isn't Demand for Labour', 2012) quotes (Hayek F. , 'Personal Recollections of Keynes and the ‘Keynesian Revolution,' in 'Contra Keynes and Cambridge: Essays, Correspondence', 1995 (1966)) on Keynes’s own thinking:

14

3.2. Enter the Pole

The ‘axiom of Hobson’ and Kalecki’s development of it was taken up with wild abandon by

post-Keynesians.

An apocryphal story has it that Polish economist Michał Kalecki was on his way to (what he

thought was) the home of the New Economics in Sweden when he first read Keynes’s

General Theory, at which point he took to his bed for a week -- reportedly because, he

thought, Keynes had gazumped him in print with ideas that were already his own.55

Immediately upon rising he set sail for the New Atlantis in Cambridge, UK, whereupon he

encountered Joan Robinson, who immediately adopted him as “her Pole.”56

The professional relationship would be good for her.

Keynes’s] main aim was always to influence current policy, and economic theory was for him simply a tool for this purpose…. In these theoretical efforts [Keynes] was guided by one central idea – which in conversation he once described to me as an ‘axiom which only half-wits could question’ – namely, that general employment was always positively correlated with aggregate demand for consumer goods. This made him feel that there was more truth in that underconsumption theory preached by a long row of radicals and cranks for generations but by relatively few academic economists. It was his revival of this underconsumption approach which made his theories so attractive to the Left. John Stuart Mill’s profound insight that demand for commodities is not demand for labour, which Leslie Stephen could in 1878 [sic] still describe as the doctrine whose ‘complete apprehension is, perhaps, the best test of a sound economist,’ remained for Keynes an incomprehensible absurdity. (Hayek [1966] 1995: 248-49)

54 It is impossible to overstate how important it is to get causality correct – not least because, as

Aristotle identified 2,300 years ago, scientific knowledge only becomes such when we have knowledge ‘down to the root,’ which us to say when we understand the full causality:

we do not have knowledge of a thing until we have grasped its why, that is to say, its cause. (Aristotle, Physics 194 b17–20; see also: Posterior Analytics 71 b9–11; 94 a20 and: (Harriman, 2010)

So while Henry Hazlitt does allow that … while treating Keynes’s method of treating consumption as a “cause” of production and income cannot be called entirely erroneous, it is certainly misleading, and in fact disastrous as the major premise of public policy… (Hazlitt, Failure of the New Economics, 1959, p. 93)

… Ayn Rand’s use of Aristotle’s framework of Four Causes however demonstrates he might be over-generous:

Consumption [she identifies] is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. [Emphasis in the original.] (Rand, 1982)

So to confuse the final cause for the efficient cause, as Hobson et al do so blatantly, is a demonstrable error. 55

Nice story though it is, (Toporowski, 2013) both recounts and debunks the anecdote. Joan Robinson however does relate a conversation in which Kalecki confirms he was ill for three days. “I confess, I was ill. Three days I lay in bed. Then I thought – Keynes is more known than I am. These ideas will get across much quicker with him …” ( (Kahn, 1984, p. xix) 56

(Patinkin, 1984, p. 60) mentions “… a note from Joan Robinson to Keynes dated October 1936, thanking Keynes for ‘being kind to [her] Pole’ during Kalecki’s visit at that time to Cambridge (JMK XIV, p.140), on which he Kalecki] presented a paper before Keynes’s Political Economy Club; …”

15

3.2.1. The Capitalist’s Decision and the Widow’s Cruse.

Like the cups in Aegir’s hall, the Widow’s Cruse of Hebrew mythology was a jug of oil able to

miraculously replenish itself – a sort of Iron Age perpetual-motion machine.57

The Widow’s cruse first appeared as a metaphor in economics in John Maynard Keynes’s

Treatise of Money, where he argued that in times of penury “profits as sources of

consumption expenditure are inexhaustible.”58 "For the engine which drives Enterprise,’ says

Keynes, “is not Thrift, but Profit." (Keynes, 1930, p. 148) 59

Straightaway, we are back to the very beginning of the nineteenth-century debate about

consumption and capital, but this time without the context of classical capital theory to guide

us.

Once employed, both the metaphor and referents of the Cruse burgeoned. For example, “[a]

well-known interpretation of Marx’s reproduction schema,”60 says Andrew Trigg, “identifies

5757

The delightful metaphor occurs in the mythology of most cultures. The reader visiting New Zealand might be curious to know, for example, that the naming of the tourist town of Otororohanga is said to be of this origin: “The story is that a warrior chief setting out from here for Taupo in ancient days had only a little provision (o) for the long route march, but by his prayer-charms he stretched it out (torohanga) so that it sufficed him until he reached his destination—a kind of Maori version of the widow's cruse of oil.” ( (Cowan, 1928) 58

(Asimakopulos, 1930, p. 17) 59

Some context is instructive: …thrift may be handmaid and nurse of enterprise. But equally, she may not. And perhaps, even usually she is not. For enterprise is connected with thrift not directly but at one remove [!]; and the link that should join them is frequently missing. For the engine which drives enterprise is not thrift, but profit. Now, for enterprise to be active, two conditions must be fulfilled… [the power of enterprisers] to put their projects into execution on terms which they deem attractive, almost entirely depends on the behaviour of the banking and monetary system… (Keynes, Treatise of Money, 1930, pp. 148-149) It is unthinkable that the difference between the amount of wealth in France and England in 1700 and the amount in 1500 could ever have been built up by thrift alone. The intervening Profit Inflation [from the Aztec spoils] which created the modern world was surely worthwhile if we take a long view. (ibid, p.163)

The ill effects of Spanish inflation due to vast imports of New World gold is well analysed by Spanish scholastics of the time such as Juan de Mariana and Martĩn Azpilcueta Navarro. To brazenly ascribe to it ‘the creation of the modern world’ is far worse than either irony or poor scholarship. It is the Mercantilist error again, imagining that the value of capital accumulation is in the spending it absorbs, not the capital itself. 60

We should note that Marx’s reproductive schema, a bastardisation of classical growth theory, shares the same problem identified by Hayek in Keyne’s Treatise of Money schema of the entrepreneur’s choice,

and the consequent obscurities of his concept of ‘investment,’ which I have noted before … The whole idea that it is possible to draw in the way he does a sharp line of distinction between the production of investment goods and the current production of consumption goods is misleading. The alternative is not between producing consumption goods or producing investment goods, but between producing investment goods which will yield consumption goods at a more or less distant date in the future.” (Hayek F. A., 1931) (Emphasis in the original.)

In other words, while they do lean on the “True Wages Fund” grudgingly admitted to their schemas by both Keynes and Marx [ (Keynes, Treatise of Money, 1930, pp. 127-129) and (Marx, Capital, Vol. I,

16

the role played by the ‘Kalecki Principle,’ or Widow’s Cruse, that [wage-earners spend what

they earn, while] capitalists earn what they spend.”61

It is the money expenditures by capitalists upon consumption and investment that generate the resultant volume of profits. Cartelier … has linked this so-called ‘Kalecki Principle’, that capitalists earn what they spend, to the circulation of money. ‘As a result of their ability to initiate circulation entrepreneurs, as a whole, more or less have the power to determine their income.’

62

Marx’s own profit scheme argued that the money making the difference between his M and

M’ was provided by the consumption spending by the capitalist, “money that he threw into

circulation not as capitalist, but as consumer, i.e., did not advance, but actually spent.” 63

In point of fact, paradoxical as it may seem at the first glance, the capitalist class itself casts into circulation the money that serves towards the realisation of … surplus-value …

64

Kalecki’s theory of economic dynamics65 borrowed both Marx’s reproductive schema, and

his theory of surplus value, viz., profit.66

3.2.2. Kalecki’s “Famous Profit Equation”

The meat of his theory can be found in chapter 3 of his Marx-Luxemburg inspired67 Theory of

Economic Dynamics, in which he derives his “famous profit equation which had a major

impact in Post-Keynesian economics”68.

Ignoring the difficulties with the then-new concept of Gross National Product69, Kalecki

plunges in70 with the GDP relationships71 as his axiomatic starting point. This straightway

Ch. 24, s. 5)], Marx’s (and Keynes’s) two-department schema obscures what is most revealed in Menger’s and Bohm-Bawerk’s time-oriented “structure of production.” I should also note, in the context of this paper, that the two-department schema also obscures, as it is intended to, the substantive alternative of saving-or-consumption – i.e., the decision that drives accumulation. Or, paraphrasing Hayek’s famous “J’accuse”: “Marx’s bastard aggregates conceal the real mechanics of change.” 61

Quoted in (Trigg, 2002). The quip is Kaldor’s, but widely used to describe Kalecki’s theory. 62

Ibid. 63

(Marx 1978, p. 407) 64

Ibid., p. 409 65

“…Kalecki claims (1968, p. 459) that his model is ‘fully in the Marxian spirit… Key passages that demonstrate the role of the Kalecki Principle in relation to the circulation of money are in Chapter 17 of Capital Volume II (see Sardoni 1989, p. 211) …” (Trigg, 2002) Both this Marxist influence and Kalecki’s underconsumptionism are recognised by Ludo Cuyvers, who writes in ‘Contemporary Issues in Marxist Political Economy,’ in an essay benefiting he says from “helpful discussions” with Joan Robinson, that

[Cambridge’s] Neo-Marxist current originated in the writings of Michal Kalecki, who, according to Ernest Mandel, made the "most advanced attempt to combine the Marxist methods of research with econometrics."( E. Mandel, ‘Der Spätkapitalismus’ (Frankfurt am Main, 1972), p. 35.) Although not very apparent in Kalecki's early work on business cycle theory, a [Rosa Luxemburg]-underconsumptionist influence can easily be demonstrated in his ‘Theory of Economic Dynamics’ of 1954. (Cuyvers, 1979)

66 For Marx’s confused conception of the precise relationship between his concepts, see Capital, Vol

III, Part I, Chapter 3, ‘The Relation of the Rate of Profit to the Rate of Surplus Value.’ 67

See note 65 above. 68

(Granados, 2011)

17

downplays, by totally ignoring, the demand for capital goods and for labour “that is separate

and distinct from the demand for consumer goods… [particularly] the additional capital

goods that are … used to produce capital goods.”72 He unsurprisingly ends by privileging

consumption over production.

After laying out his starting assumptions for the basic model on which all his other more

developed models are then based, (i.e., of a closed economy with low tax and negligible G;

that gross national product will be equal to the sum of gross investment73 and consumption;

that income of employees consists of wages and salaries, with no saving; that “the income of

69

For a history of the development of the concept, see (Coyle, GDP: A Brief But Affectionate History, 2014), which notes that the wish to produce this figure began with the desire to see the British economy’s capacity to fight against Napoleon. British figures using the modern sense of GDP however were not produced until the war year of 1941, by a team commissioned by Joan Robinson’s husband, Not coincidentally,

The first American GDP statistics were published in [their first war year of] 1942, … [permitting] economists to see the economy’s potential for war production … Kuznets was highly sceptical: ‘he argued that Commerce’s method tautologically ensured that fiscal spending would increase measured economic growth regardless of whether it actually benefited individuals’ economic welfare.’ In the policy tussle in Washington, Kuznets lost and wartime real-politik won… [producing] a concept strikingly different from the way the economy had been thought about from the dawn of modern industrial growth in the early eighteenth century until the early twentieth century… Crucially, the development of GDP, and specifically its inclusion of government expenditure, winning out over Kuznets’s welfare-based approach made Keynesian macroeconomic theory the fundamental basis of how governments ran their economies in the postwar era... GDP statistics and Keynesian macroeconomics were mutually reinforcing. (Coyle, 2014, Kindle edition, loc. 245-303)

70 “The theory of profits given here [says Kalecki] was developed back in 1935 in my ‘Essai d’une

Theorie de Mouvement Cyclique des Affaires,’ Revue d’Economique Politique, Mars-Avril 1935, and my ‘A Macrodynamic Theory of Business Cycles,’ Econometrica, July 1935.” (Kalecki, p.45) 71

“Expenditures are divided into several categories. Following Keynes, these are [the now well-known categories given by C, I, G and X-M.]. Yet as Skousen and Reisman point out, the sum that is by far the overwhelming amount of spending in the economy, which is business-to-business spending, is netted out , leaving Kalecki’s categories fundamentally short one very important term.

[T]he actual fact is that most spending and income payments are constituted by productive expenditure, not consumption expenditure. The equality [which Kalecki relies upon] between national income, on the one side, and consumption plus net investment, on the other, represents an optical illusion, as it were, insofar as it leads to the conclusion that consumption is the major item of spending and pays most of the incomes in the economic system. Actually, most of the spending and income payments in the economic system are concealed under net investment, which, in effect, is the visible portion of an iceberg. For net investment, as we shall see, is the difference between total productive expenditure in the economic system and aggregate business costs—that is, the aggregate of the costs that business firms deduct from their sales revenues in calculating their profits. (Reisman, p. 700-701, and 705] [Emphasis in the original.]

72 “The failure to recognise the separate existence of the demand for capital goods and the

corresponding separate production of capital goods prevents the development of a sound theory of capital accumulation. However ironic, it leads to both an inadequate appreciation of the role of saving in capital accumulation and to a corresponding overemphasis on the role of saving in capital accumulation.” (Reisman, 1996, starting p. 709, section: ‘Importance of Recognising the Separate Demand for Capital Goods for the Theory of Capital Accumulation and the Theory of National Income.’) 73

On which unrealistic assumption, see notes 71 and 72 above, and diagrams in Appendix Two.

18

capitalists or gross profits includes depreciation and undistributed profits, dividends and

withdrawals from unincorporated business, rent and interest”) Kalecki then proceeds with his

very short derivation:

We … have the following balance sheet of the gross national product, in which we distinguish between capitalists’ consumption and worker’s consumption:

Gross profits Gross [sic] investment Wages and salaries Capitalists’ consumption Workers’ consumption

Gross national product Gross national product

… It follows directly then:

Gross profits = Gross investment + capitalists’ consumption

What is the significance of this equation? Does it mean that profits in a given period determine capitalists’ consumption and investment, or the reverse of this? The answer to this question depends on which if these items is directly subject to the decisions of the capitalists. Now, it is clear that capitalists may decide to consume and to invest more in a given period than in the preceding one, but they cannot decide to earn more. It is therefore their investment and consumption decisions which determine profits, and not vice versa. If the period in which we consider is short, we may say that the capitalists’ investment and consumption are determined by decisions shaped in the past … In this way, capitalists’ consumption and investment … determine the workers’ consumption and consequently the national output and employment. The national output will be pushed up to the point where profits carved out of it in accordance with the ‘distribution factors’ are equal to the sum of capitalists’ consumption and investment. [Emphasis mine.]

74

The theory has further qualifications, but these are its essentials.

Clearly, the decisions of capitalists to invest or consume -- and the question of how much

(and whether there is a limit to either) – these are both crucial but not in the way they are

with the Mills. Because in Kalecki’s schema, both capitalist consumption and capitalist

investment increase profits.

We have entered a promised land!

All that is required to enter this land of Canaan is reversing the causality of saving and

investment and profits.75 Capitalists in aggregate “get what they spend” because, as he fails

to identify, other capitalists are spending.76 And, in his model, investment not only precedes

saving, investment actually generates saving.77

[I]n our simplified model, profits in a given period is the direct outcome of capitalists’ consumption and investment in that period. If investment increases by a certain amount, savings out of profits are pro tanto higher.

78

74

(Kalecki, 1952, pp. 45-47) 75

Consider the direction of causality, for example, in saying that national output will expand so that profits will equal capitalists’ consumption and investment. It is true that mathematics is blind to causality; one fears too that much mathematics blinds too many theorists to causality. 76

His collectivisation of capitalists as a class drives him to his fallacy of composition. Reisman punctures the fallacy (Reisman, 1996, p. 737-739). 77

Identified by Ludo Cuvyers, p. 334 78

(Kalecki, 1952, p. 50)

19

It should be understood that savings in this schema are neither beneficial nor the result of a

real decision; they ooze forth mechanically as a toxic79 by-product of the wealth effect: as a

mathematical function of the capitalist’s “propensity to save.”80 With causality reversed, then

aces are wild, and profits (and consumption)81 become a widow’s cruse the size of an oil

tanker.

Note however the missing real iceberg on which this consumptionist ship founders:

advances, and business-to-business spending.82 This will become important shortly.

And do entrepreneurs really “have the power to determine their own income”? Clearly not.

Indeed, the individual capitalist who tries this will be in an even worse position than the

thirsty Tantalus, condemned to stand for ever in a pool of water under a tree full of low-

hanging fruit, the fruit receding when he sought to eat, and the water ever-receding when he

sought to drink. For while profits in aggregate are assuredly greater the more capitalists in

79

In the long-run, in Kalecki’s Alice in Wonderland framework, the savings of businessmen and capitalists “was found to be an obstacle rather than a stimulus to development,” whereas the deficit spending of governments was, in his framework and that of Hyman Minsky, who later adopted his profit equation, a great stimulus. One is reminded here of the observation of humourist Dave Barry:

See, when the Government spends money, it creates jobs; whereas when the money is left in the hands of Taxpayers, God only knows what they do with it. Bake it into pies, probably. Anything to avoid creating jobs. (Dave Barry, syndicated column, February 23, 1992)

80 I say mechanically because a function, we should remind ourselves, is deterministic, i.e., it denies

individual volition. To assert, in a mathematical equation, that one quantity is a function of another, is to assert that, at least within a specified range of values, there is always a precise, determinate, and predictable relationship between the two quantities. I choose a definition of from the nearest algebra text on my shelves: ‘If a variable y is related to a variable x in such a way that each assignment of a value to x definitely determines one or more values of y, then y is called a FUNCTION of x.’ (Hazlitt, Failure of the 'New Economics': An Analysis of the Keynesian Fallacies, 1959, p. 46) (Emphasis in Hazlitt’s original.)

One should be especially careful of the assertion of a deterministic functional relationship when no proof is adduced for the existence of the functional relationship asserted. For a related example, from the General Theory:

Section I of Chapter 20 on ‘The Employment Function’ consists of a set of equations concerning this alleged function. Keynes assumes that the functional relationship exists, but never attempts to prove it. There is, in fact, no good reason to whatever to assume that any functional relationship exists between ‘effective demand’ and the volume of employment. Everything depends, in fact, upon the interrelationships of wage-rates, prices and the money supply… (Ibid, p. 291)

Indeed, if we follow faithfully the related Wages Fund doctrines and Mill’s Fourth Proposition faithfully, we can assert that effective demand for labour comes not from the direction of consumption but from capital. 81

This is the clear meaning of Pasinetti’s “Cambridge growth equation” r=g/(1-cp) derived from the Kalecki Principle, in which r is rate of profit, g the rate of accumulation, and (1-cp) is the capitalists’ “propensity to save” out of “profits” (by which here can only mean sales revenues). Note that in his bald mechanical statement of “propensity,’ derived independently of Keynes, Kalecki denies real agency to capitalists in their decision to save (saving now being a “propensity” dictated by an equation), ignores the role of saving in capital accumulation (by means especially of the capitalist’s decision to reinvest in new capital goods from sales revenues), and – as revealed in the “growth equation,” and contra to causality and everything in capital theory preceding this – suggests savings are actually a handbrake to growth. 82

See notes 71 and 72 above, and diagrams in Appendix Two below.

20

aggregate consume, should an individual capitalist attempt the experiment for the benefit of

his own bottom line, he will discover that in reaching for the fruit he has been draining his

own individual pool of capital.

The fact remains that the growth in aggregate of capital relies on saving, on the

unconsumed, not on consumption.

3.3. Robinson, and the “Axiom of Hobson”

Robinson followed Keynes and Kalecki, and Kalecki both preceded Keynes and made him

simpler.83 The idea represented in the “axiom of Hobson” was the gravitational attraction

around which all three orbited, their faces turned away from the source of accumulation

identified in classical capital theory84. So much so that, years later when debating Roy

Harrod’s growth theory in their private correspondence, Robinson became incensed that

Harrod might have turned his face from their own false sun:

I have always maintained that altho’ your formula seemed to be saying that ‘the rate of growth depends on the fraction of income saved’ you never intended to throw the General Theory out and say that saving governs investment. … I thought that in your last contribution to the subject you agreed that a separate propensity to accumulate is needed to make the system work. Our formula for the rate of profit is a most useful and necessary development of your theory. It is not mere formalism but a causal relation. … “(Emphasis mine.)

85

The axiom was not to be challenged. Harrod replied, defending his post-Hobsonian

credentials:

I agree fully that a high s does nothing to cause a high g. … What I say is that a high s determines a high value for g in this abstract construction. To determine the value of a term in an ideal construction is quite different from causing something to happen.

86

At which point Harrod abandons causality to maintain the “abstract construction.” At this

point we might take up the implicit invitation and do the opposite, because

[t]he difference in the interpretation of the result of thriftiness is … more apparent than real. Both Harrod and Robinson thought that an increase in the proportion of income saved would (normally) depress the economy.

87

If this sounds surprising in view of Mill’s propositions, it is intended to. Épater le bourgeoisie,

and all that.88

83

See for example (Harcourt G. , The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers, 2006, pp. 21-25) 84

See Appendix Two for a diagrammatic representation of what is not seen, i.e., the strong black line representing sales revenues. 85

(Robinson to Harrod, letter 1 of 8 December [1965], and letter 2 of 20 December 1965, both quoted separately in (Besomi, 2007)) 86

(Harrod to Robinson, letter 4 of 1 February 1966), ibid. 87

(Besomi, 2007, p. 6) 88

Their master Keynes’s membership of the Bloomsbury Group is not irrelevant here, since irreverent disdain and intra-group collegiality were twin leitmotifs of the group from before the First World War.

If there were fewer [public protests from the group] after the war, it was because Bloomsbury chose to epater les bourgeois in other ways. … [T]he basic attitude toward public affairs

21

3.3.1. Robinson’s Growth Theory

Robinson at least recognised there was something lost since the classical era and lacking in

Keynesian theory: a theory of long-run growth.

Economic analysis, serving for two centuries to win an understanding of the Nature and Causes of the Wealth of Nations, has been fobbed off with another bride – a Theory of Value… In recent times [however] the centre of interest has returned to the classical problems of the over-all growth of the economy. (Robinson, The Accumulation of Capital, 2013 (1956), p. xxxi)

Kalecki’s growth doctrine became Robinson’s own. Her growth theory, on which her

proposition contra Mill is based, is driven by profit. “[F]or Robinson [an increase in the

proportion of income saved] would directly act on the desired rate [of growth], by reducing

the rate of profit.” And in Robinson’s model, it would.

In Robinson’s view, thriftiness affects accumulation via the rate of profit: a higher propensity to save lowers the rate of profits, thereby reducing the desired accumulation rate, given the entrepreneurs’ ‘animal spirits’ (and conversely). Robinson also admits a reverse influence: when the rate of accumulation is high, businesses may distribute less to shareholders in order to finance a higher rate of investment (see Joan Robinson, The Accumulation of Capital, pp. 60-1).

89

Fig. 4. Outline View of Joan Robinson’s Growth Theory

persisted, a combination of irreverence, indifference, and aristocratic disdain. In 1938, about the same time that Keynes was preparing his memoir, Forster wrote an essay that perfectly captured the Bloomsbury spirit. "I do not," the essay opened, "believe in Belief." … But pressed for his own belief, he would oblige by invoking "personal relationships," the only good and solid thing in a world full of violence and cruelty. This was the one article of faith he could unequivocally affirm: "I certainly can proclaim that I believe in personal relationships." (Himmelfarb, 1985)

89 (Besomi, 2007, p. 4)

22

Ricardo too recognised that “[w]hile the profits of stock are high, men will have a motive to

accumulate,”90 but he goes on immediately to point out that accumulation doesn’t simply

happen because of demand; for the demand to be effective, it requires real wherewithal:

Whilst a man has any wished-for gratification unsupplied, he will have a demand for more commodities; and it will be an effectual demand while he has any new value to offer in exchange for them.... Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected.

91

But this is of course Say’s Law92 (aka Mill’s Law93), which disappeared undefended at the

birth of the Keynesian system.

It might be helpful to repair to Ricardo at this point, since neither Kalecki nor Robinson seem

to realise that the rate of profits alone is hardly a measure of an economy’s health, or of the

benefits of capital to labour:

The rate of profits is never increased by a better distribution of labour, by the invention of machinery, by the establishment of roads and canals, or by any means of abridging labour either in the manufacture or in the conveyance of goods. These are causes which operate on price, and never fail to be highly beneficial to consumers; since they enable them with the same labour, or with the value of the produce of the same labour, to obtain in exchange a greater quantity of the commodity to which the improvement is applied; but they have no

effect whatever on profit. 94

We might also observe the psychological shadows hovering around Keynesian/Kaleckian

planetary system like spirits at a séance, with “desires” and propensities and “animal

spirits”95 just as inexplicable; not forgetting the axiomatic driver of the “state of confidence”96

that (for Keynes and his followers) comes in “through its important influence on the marginal

efficiency of capital,”97 (“viz. the rate of profits and interest”98). And we should note the

90

(Ricardo, 1821, 3rd Ed., Chap. XXI, ‘Effects of Accumulation,’ p. 340) 91

Ibid 92

See note 31 above, and (Kates, Says Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way, 1998) 93

See note 17 above and (Reisman, Production versus Consumption’, 1964; and Reisman, 1996, p. 599 n 3) 94

David Ricardo, On the Principles of Political Economy and Taxation, Chapter 6, Foreign Trade quoted in (Reisman, Capitalism: A Treatise on Economics, 1996, p. 819) 95

Below which, in terms of explanation, it is impossible to go. These are merely black box ciphers; c/f Section 4.3 below. 96

What truth exists in the acausal “axiom” of “state of confidence” is well explained by Robert Higg’s fully causal concept of “regime uncertainty.” (Higgs, 1997) 97

Though as Hazlitt drily notes, It is hard to see why the “relevance to economic problems” of “the state of confidence” should come in only “through its important influence on the schedule of the marginal efficiency of capital”—particularly if the latter phrase refers merely to the specific yield of new capital assets. For the “state of confidence” refers to all future expectations—including the future prices of consumption as well as capital goods, the future of wage-rates, of foreign trade, of the likelihood of war or peace, of a change of political administration, of a Supreme Court decision, etc. Why should “the marginal efficiency of capital” be singled out as the sole factor which makes the state of confidence “relevant” to “economic problems.” (Hazlitt, Failure of the New Economics, 1959)

23

“unseen”: the assumed but unmentioned ‘dark matter’ that is the real source of growth for

which Robinson is so scared Harrod may have allowed, i.e., the means by which are actually

paid the “investment decisions” that pay for labour, machines, roads, canals, etc., i.e.,

savings – the very savings that are so blithely assumed away in this system as a “leakage,”99

requiring ‘printed savings’ to simply emerge as from a widow’s cruse,100 whose inflationary

beneficence will turn “stones into bread.”101

As for ‘rentiers,’ Robinson’s sniffy term for the providers and earners of money capital, their

primary role in her system is simply consumption.

98

Reisman translates from Keynes’s term into something approaching useability. (Reisman, Capitalism: A Treatise on Economics, 1996, p. 868). Because

the “marginal efficiency of capital,” like most of the key Keynesian terms, is vague, and is used by Keynes in several different senses. (C.f., B. M. Anderson, Economics and the Public Welfare, p. 403: "It goes through more metamorphoses than even Ovid knew about!") At one time it seems to mean the actual present yield of capital assets; at another time the expected future yield of specific capital assets; and at still another time it seems to mean merely the outlook for business profits, regardless of the specific return to a specific capital asset. (Hazlitt, Failure of the New Economics, 1959, pp. 169-170, 319-320)

99 In the Keynesian/Kaleckian system, savings is a “leakage” from the circular flow. See for example

McKenna’s clear exposition of the proposition: It is convenient to refer to investment and government spending as injections into the spending stream; … On the other side saving and net taxes represent leakages from the circular flow… [E]quilibrium occurs when the planned leakages equal the planned injections. (Emphasis in the original.) (McKenna, 1972, p. 71)

100 “The term Widow’s Cruse was first used in economics by John Maynard Keynes (Keynes, Treatise

of Money, 1930, p. 139) ...” (Lavoie, 2008) in committing a fallacy of composition over how businessmen’s consumption affects profit. (Reisman, 1996, pp. 737, 779) warns against the fallacy with respect to his own theory of profits, which in this respect is identical to that of Kalecki and Robinson. 101

The phrase is Ludwig von Mises’s, who in 1948 unapologetically identifies Keynes as “the new prophet of inflationism.”

The ‘Keynesian Revolution’ consisted in the face that he openly espoused the doctrines of Silvio Gesell. …Credit expansion, says the ‘Paper of the British Experts’ of April 8, 1943, performs the “miracle … of turning a stone into bread.’ The author if this document was, of course, Keynes. The author of this document was, of course, Keynes. Great Britain has indeed travelled a long way to this statement from Hume’s and Mill’s views on miracles… There are still teachers who tell their students that “an economy can lift itself by its own bootstraps” and that “we can spend our way into prosperity.” (Tarshis, 1947, p. 565) But the Keynesian miracle fails to materialise; the stones do not turn into bread. … There is no use in arguing with people who are driven by “an almost religious fervour” and believe that their master “had the Revelation.” It is one of the tasks of economics to analyse carefully each of the inflationist plans, those of Keynes and Gesell no less than those of their innumerable predecessors from John Law down to Major Douglas. Yet, no one should expect that any logical argument or any experience could ever shake the almost religious fervour of those who believe in salvation through spending and credit expansion. … (Mises, 'Stones into Bread: The Keynesian Miracle', 1948) [Keynesianism] is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations. Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They are and work and take care of themselves. Notwithstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the "orthodox" economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the "miracle ... of turning a stone into bread," but the not at all miraculous procedure of eating the seed corn. (Mises, 'Lord Keynes and Say's Law', 1950)

24

It is even worse than this, for the widow’s cruse assumed by Keynes and his followers is in

fact a combination of the (unmentioned) monetary inflation pointed out by Ludwig von

Mises102 and the wasteful consumption of the prodigal son, which will we are told boost

forever the “profit (actual)” of the projectors just as long as the profligate doesn’t dare

save103.

Indeed, as Hayek points out,

the famous analogy between profits and the widow's cruse and losses and the Danaid jar, are expressly based on [Keynes’s] assumption "merely [sic!] that entrepreneurs were continuing

to produce the same output of investment goods as before." 104

The “curious” result is

that, from the outset, all of Mr. Keynes's reasoning which aims at proving that an increase in saving will not lead to an increase in investment is based on the assumption that, in spite of the decrease in the demand for consumption goods, the available output is not reduced; this

means, simply, that he assumes from the outset what he wants to prove.105

Curious indeed. And all built into the shared abstract construction of growth and aggregate

profit of Robinson and Kalecki.

Kalecki’s equation has given rise to the aphorism—attributed to Kalecki, but which can be found in Kaldor (1956, p. 96)—that “capitalists earn what they spend, and workers spend what they earn.” This aphorism shows the asymmetry in capitalist relations: Capitalists can always decide to spend more (provided banks accept to finance additional investment), whereas workers cannot decide to earn more, because this depends on the employment they are offered by entrepreneurs. Modern versions of this quantity-adjusting theory can be found

102

See note above. 103

The reader may find it profitable at this point to consume Bastiat’s parable of the brothers Aristus and Mordor, the former of whom saves 10,000 francs yearly from the income of his parental inheritance of 50,000 francs, the latter of whom

“renews his furniture several times a year; changes his carriages every month; … revels in dissipation… He does good with his fortune, if not with himself. He causes money to circulate; he always sends the tradespeople away satisfied. Is not money made round that it may roll?... Yes, the prodigality of Mondor has visible effects in every point of view. Everybody can see his landaus, his phaetons, his berlins, the delicate paintings on his ceilings, his rich carpets, the brilliant effects of his house. Everyone knows that his horses run at the race track. The dinners which he gives at the Hotel de Paris attract the attention of the crowds on the Boulevards; and it is said, “That is a generous man; far from saving his income, he is very likely breaking into his capital.” That is what is seen…” (Bastiat F. , 'That Which Is Seen, and That Which Is Not Seen', 1850 (2007))

That is all that those orbiting the Keynesian sun do see… 104

This is from Hayek’s famous rejoinder to Keynes (Hayek F. , 'Reflections on the Pure Theory of Money of Mr. J. M. Keynes', 1931, p. 31) to which Keynes reacted by inviting Piero Sraffa to demolish Hayek’s Prices and Production, which he went about over two issues of the Cambridge “house” journal, The Economic Journal, for which Keynes was editor. The reviews and responses are (Sraffa, 'Dr. Hayek on Money and Capital', 1932), (Hayek F. , 'Money and Capital: A Reply', 1932), and (Sraffa, '[Money and Capital]: A Rejoinder', 1932). The assessment of the Journal as the “house journal” appears in many places, but (Cord, 2013) offers in addition an account of journal publishing over the decade. 105

Ibid.

25

in the so-called Kaleckian models of growth, which show that a decrease in the propensity to save leads to higher rates of output growth and higher rates of profit. (Lavoie, 2008)

That last phrase bears repeating, since the constrast with classical understanding of savings

and capital accumulation could not be more stark: “a decrease in the propensity to save

leads to higher rates of output growth and higher rates of profit .”

What is even more curious to me however, beyond the sundry fallacies in this statement we

have already observed, when all statements are considered in their aggregate,106 is that the

Robinson-Kalecki theory of aggregate profit “in form, is almost indistinguishable from”107 the

theory of Ludwig von Mises’s student, George Reisman.

4. Re-enter Causality

4.1. Saving and Capital Accumulation

If there really is a widow’s cruse on this earth, it comes from the production of consumer

goods on a base of ongoing savings and capital accumulation – savings accrued from

previous production an rendered in advance of subsequent production. Because as George

Reisman demonstrates, in a culture valuing science and reason, and therefore one of

technological progress, the saving rate to produce continuing accumulation does not need to

continually increase108 -- as long as it remains above the rate that capital depreciates then

the production of capital goods and thence consumer goods will steadily increase by virtue

of the productivity of the increasing volume of new capital goods produced.109

106

Capitalist’s decision to spend in this view, for example, is predicated not on the basis of retained earnings, which has real limits, but on bank lending with no practical monetary limit. And the fallacy of composition in the aphorism, based supposedly on the fact that individual capitalists may “decide” to boost profits through their own spending commits a fallacy of composition that should be obvious (if

not, see Reisman p. 737, 779); and (as we discuss below) ignores the real source of these profits. 107

Reisman’s account: [In 1959] and for a number of years thereafter, I believed the theory to be entirely my own, original discovery. In the course of my [1963] doctoral dissertation, however, in which I presented the substance of the theory and attempted to develop its leading implications, I learned that in the mid-1950s Joan Robinson had propounded, as I put it then, ‘a theory of profit which in form is almost indistinguishable from my own, though in substance is much closer to Schumpeter’s theory.’ Further investigation revealed that Mrs. Robinson had been preceded by some twenty years by the Polish Marxist Michał Kalecki, from whose writings she had learned the doctrine…. Apart from the fact that both these authors are clearly in possession of the formula that aggregate profit equals the sum of net consumption plus net investment … there is surprisingly little further similarity… (Reisman, Capitalism: A Treatise on Economics, 1996, p. 802)

108 The constant saving rate is to capital accumulation, says Reisman, as a constant force is to

acceleration in Newtonian physics. (629-630) 109

Reisman’s theory of capital accumulation is presented in Chapter 14 (Reisman, 1996), and further developed in later chapters. The process is driven by the very retained savings that are considered virtually a toxic by-product by Kalecki; instead, in Reisman’s system, they form the demand for production of capital goods.

26

And, in a context of either invariable or only-slowly expanding money supply, if the

production of consumer goods steadily increases then the price of consumer or “wage

goods” will tend to fall – meaning real wages will tend to rise.110 As Reisman identifies, this is

the mechanism by which capitalist production produces non-sacrificial prosperity; and

indeed, such was the case during the late-nineteenth century when the mechanism was

most able to operate. (See Appendix One.)

And,, crucially, this process does not rely on increasing profits in the aggregate; if barriers to

entry are low, then the mechanism by which profits drive production and innovation is the

principle Reisman derives from Ricardo, his Uniformity-of-Profit Principle,111 which

recognises that greater returns to innovators both rewards them and provides them the

wherewithal for greater production.

4.2. ‘The Third Student’

Ludwig von Mises’s biographer identifies George Reisman as “[t]he third important Misesian”

from among Mises’s students at NYU, after Sennholz and Kirzner.112

[T]he essential point [of the theory is]…that the greater the degree to which the relative demand for and production of capital goods surpasses the proportion required for the mere maintenance of the supply of capital goods, the more rapidly does the economic system tend to progress. For then, each year the production of capital goods exceeds the supply of capital goods consumed in production by a correspondingly wider margin. The production of each succeeding year then takes place with the aid of that much more of a larger supply of capital goods than did the production of the year before. And each year, by virtue of raising the productivity of labour that much more, the more enlarged supply of capital goods makes possible the production of a correspondingly still more enlarged supply of capital goods, as well as consumer goods, in the following year. (p.628)

Compare this to what, according to Joan Robinson, via Blaug, (p. 542) constitutes “the key to the whole theory of capital accumulation,’ which is the so-called Wicksell Effect, i.e., that “that in equilibrium the rate of interest would be greater than the value of the marginal product of capital.” 110

Reisman’s Productivity Theory of Wages, of which this is the conclusion, is presented in Chapter 14 of (Reisman, 1996) as the conclusion of his theory of capital accumulation, and integrated in later chapters with his Net Investment-Net Consumption Theory of Aggregate Profits. 111

“Namely, there is a tendency in [an unhampered] market toward the establishment of a uniform rate of profit on capital invested in all the different branches of industry. In other words, there is a tendency for capital invested to yield the same percentage rate of profit” whether it is invested in a supermarket, a steel mill, or an electric utility. (172-187) Note that the rate of profit on capital invested, which is profit measured as a percentage of capital invested, should not be confused with the profit margin, which is profit measured as a percentage of sales revenues. And since there is progressively increasing capital invested in these three examples, to achieve a uniform rate of profit on capital the profit margins become progressively greater. (216, n.1) “This principle of the tendency of the rate of profit toward uniformity is what explains the amazing order and harmony that exists in production in a free market. It was largely the operation of this principle that Adam Smith had in mind when he employed the unfortunate metaphor that a free economy works as though it were guided by an invisible hand.” (173) And Bastiat, when he employed the less well-known but more felicitous image that “Paris Gets Fed.” (Bastiat, F. Economic Sophisms, First Series, Chapter 18, ‘There Are No Absolute Principles,’ 1.18.12) 112

See (Hülsmann, 2007, pp. 927-928) and note 1 above.

27

In 1962,113 under the direct tutelage of Mises and the indirect (through reading) of the British

Classical School, he developed his own theory of aggregate profits quite independently of

Kalecki and Robinson, based not on Marx’s bastardisation of classical theory but on the

original source. “Most of the major elements of my analytical framework [of accumulation],”

says Reisman, “can be found in James Mill’s remarkable essay Commerce Defended,” with

which my own essay begins.114 Moreover, he says his Net Consumption Theory is “implicit in

classical economics not only in John Stuart Mill’s proposition that ‘demand for commodities

is not demand for labour, which [he considers] at length115, but also in Ricardo’s proposition

that ‘profits rise as wages fall and fall as wages rise.”116117

If the theorists and their conclusions seem far apart, the theories on aggregate are not. In

fact, the most surprising thing is that the conclusion of these theories is, in every formal

aspect at least, identical. In form, but not in substance.

4.3. The Capitalist’s Decision: To Consume or To Reproduce

With Reisman, causality fully re-enters the picture. Developing James Mill‘s framework118,

Reisman identifies the bright line between consumption spending and production spending

to be the intention of the purchaser. The difference between spending on consumer goods

and spending on capital goods is that spending on the latter is spending for the sake of

subsequent sales, whereas spending on the former is not.

As with the Advances Theory of Capital, this is a full recognition of agency. This identifies

that what defines a capital or consumer good as such is nothing intrinsic to the good, but the

intention of the purchaser: the purchaser’s evaluation of the good, based on its value to their

future plans. The distinction is thus not metaphysical, but epistemological.

113

Published as his PhD thesis (Reisman, 'The Theory of Aggregate Profit and the Average Rate of Profit', 1963). 114

Reisman p.669 n. 62. The portion of James Mill’s essay of particular importance, he says, is pages 128-131 of (Mill James, 1808) 115

(Reisman, Capitalism: A Treatise on Economics, 1996, pp. 683-385, 720-721, and 725-734) 116

The link to Mill’s proposition is easiest to see. Ricardo’s proposition “is open to various interpretations, at least some of the time it can be interpreted as tantamount to the net-consumption theory operating under highly restrictive circumstances.” Ibid. (797-799). 117

In addition to this, Jorg Guido Hülsmann’s introduction to the 2000 translation of Richard Von Strigl’s 1934 Capital and Production, (in which Strigl makes extensive use of a subsistence fund) suggests

Strigl anticipated the main tenets of George Reisman's net-consumption/net-investment theory of interest and profit. Strigl insisted that (a) the rate of interest is codetermined by savings (the wage fund), marginal productivity, and the size of the "rations" (see pp. 68, 71) and that (b) the volume of interest payments and entrepreneurial profits corresponds exactly to the extent of pure consumption by entrepreneurs and capitalists. See pp. 56ff., 99, and 103. (Hülsmann in Strigl, 2000 (1934), p. xviii)

I confess, however, that I can’t see it. 118

See note 112 above.

28

Thus, a slab of Tuatara Aotearoa Pale Ale bought to consume at a party is a consumer

good, and a very good one. Yet a slab from the same palette bought to on-sell at a craft

beer pub (also, obviously, a very good one) is a capital good.119 By the same standard,

labour too can be seen as being either productive labour (labour employed for the purpose

of subsequent sales), or not.120

Thus, the very decision to be a Capitalist starts with the purpose of one’s purchase(s), or

hiring; and the decision made by businessmen and capitalists to favour hiring or purchasing

for production over hiring or purchasing for consumption will lead to greater capital

accumulation, a deeper structure of production and accelerated capitalistic production. (See

Appendix Three.)

4.4. Net-Consumption, Net-Investment121

Integrated with a Productionist doctrine of saving and capital accumulation demonstrating

that the source of real effective demand is production and supply122, Reisman’s Net

Consumption/Net Investment Theory demonstrates how business in the aggregate “is the

source not only of the monetary demand for its own products, but a profitable monetary

demand.” (719) (Emphasis added, and in the original)

Aggregate Profit is equal to Net Investment plus Net Consumption.

Net Investment is aggregate sales revenue minus aggregate business costs. These two are

business-to-business costs, which in gross tend to dwarf all other spending. These two

might seem to be an identity, except that costs generally show up in balance sheets in the

production period prior to that in which sales revenues appear – as such, this figure depends

for its magnitude on the degree to which the money supply is increasing. “The addition to

money and spending adds to nominal profit. The addition of production and supply adds to

the real rate of profit.”123 (Reisman, Lecture 4, 33:00)

119

See Reisman (441-462) and (Mill James , 1808, 128-131). This doctrine is a fully causal definition recognising that, as with value, production plans begin inside the heads of individuals. It gas the added benefit of removing the ‘fuzziness’ of the distinction between capital and consumer goods, and productive and unproductive labour, a vagueness that had been there at least since Adam Smith. Further, it easily deals with the alleged problems of durable consumer goods, and the precise nature of government spending. 120

The evaluation is not a moral one, simply a recognition of the purpose of money spending. 121

Jerry Kirkpatrick, a colleague of George Reisman, has written a concise and very readable introduction to George Reisman’s Net-Consumption/Net-Investment Theory. See (Kirkpatrick, 2004). It is set out in full in the Lecture Series (Reisman, 'Capital, the Productive Process, and the rate of Profit', 1989) and in Chapters 16 & 17 of (Reisman, Capitalism: A Treatise on Economics, 1996), although it is essentially the culmination of virtually the entirety of Part Three. 122

See (Reisman, 1996, Chapter 13). 123

But rising profit, in a system of commodity money, is not bought at the expense of economic progress since, in a system of commodity money, money supply tends to expand at a similar rate to the growing supply of goods and services. (775)

29

Net Consumption, in the aggregate, is the quantum of consumption over and above

consumption by employees. It is consumption paid for from draws, partners’ earnings,

interest and investments. (What Joan Robinson jaundicely called “rentier’s earnings). In

short, and as both Robinson and Kalecki identified, it is consumption paid for from the profits

of business activity. In sum and form then, it corresponds to Marx’s M-M’, and answers his

question where the money comes from to pay aggregate profits. Effectively, it comes from

sales revenues prior to the deduction of wages and costs.124

The effect and source of Net Consumption is easily seen in this table, starting not from

National Income or GDP categories, but from the sources of sales revenue.

From Reisman, Table 4, (Reisman, ‘Capital, the Productive Process, and the rate of Profit,’ 1989),

and Table 16.2, (Reisman, Capitalism: A Treatise on Economics, 1996)

As with Kalecki’s schema. the conclusion follows from the tabulation: the only independent

source of spending is that on consumption by businessmen and capitalists. (Note that, as

with Kalecki and Robinson, Reisman assumes no savings by wage-earners125; and, unlike

Marx’s schema on which Kalecki relied, the distinction is between consumption and

124

It was always so. Reisman argues that Adam Smith got it fatally wrong in allowing, in his early and rude state of society, that wages were prior to profits. He argues that in fact, before anyone was employed, all sales revenue would have been profit. Thus, profits are prior to wages. He calls this his Primacy of Profits Doctrine, which he uses as his basis for overturning Marx’s still influential Exploitation Theory. (Reisman, 1996, 478-480) 125

Kalecki’s assumption that the saving of wage earners had no real effect on his conclusions was confirmed by Pasinetti. Reisman’s argument along different lines to the same conclusion can be found in (734-735). A strong argument for its non-importance is that for the most part all saving by wage-earners is the source of loans for durable consumption expenditure. So it is a wash, or near enough.

TABLE 1

Sources of Sales Revenue (The Components of the Demand for Factors of Production and Products)

PRODUCTIVE EXPENDITURE

(Demand for Factors of Production by Business)

SALES REVENUE

(Demand for the Products of Business)

1. Demand for Capital Goods -IDENTITY- 1. Demand for Capital Goods

2. Demand for Labour -EQUALITY- 2. Labour’s Demand for Consumers’ Goods

SOURCE OF EXCESS

3: Businessmen and Capitalists’ Demand for Consumer Goods

30

production, rather than production of different goods – wherein the distinction previously

drawn between productive expenditure and consumption expenditure becomes important.)

All spending in the aggregate is two-sided. And clearly item 3 is the only item of expenditure

for which there is no parallel cost: the source of this expenditure in real terms being the

value-production of businessmen and capitalists.

Obviously, the sum in toto that would be measured here would be aggregate profit, from

which a figure could be derived giving an average overall rate of profit. This average would

reflect of course the spending and activities of businessmen and capitalists that were both

successful and unsuccessful in their plans for value-production.

Now, if we reflect back to the earlier Advances Theory and Wages Fund Doctrine, we can

see the essential truth of these doctrines reflected back. All receipts from the sales of

business are either directly or indirectly generated by the entire expenditure of businessmen

and capitalists (727-728) – i.e., all spending is either the result of advances by businessmen

and capitalists, or their consumption.126

Whatever spending that is not either advances or the result of advances, is profit.

Laid bare is what Reisman refers to as the “macroeconomic” dependence of consumers and

employees, at the economy-wide level, on businessmen and capitalists,127 and that business

itself is the ultimate source of both its own demand and profitability. (696-698)

At this point we can further adapt Hayek’s triangle, which shows these relationships and

those of consumers and capitalists alike to the products and advances of businesses. (See

Appendix 2). We have both a real and monetary picture of an economy, set within a universe

of free goods and resources used in production and (unpaid) consumption.128 Production at

each period is paid for out of advances, derived primarily from sales revenues earned in the

previous period. Labour and capitalists both access the subsistence fund during production.

And we can easily see the ‘iceberg’ of business-to-business spending, represented in the

126

This should be no surprise, since Reisman identifies the role of net consumption as “implicit in classical economics not only in John Stuart Mill’s proposition that ‘demand for commodities is not demand for labour’ … but also in Ricardo’s proposition that ‘profits rise as wages fall and fall as wages rise.’” (797-799) Neither Robinson nor Kalecki see any connection with either Mill’s proposition, nor Ricardo’s. “Mill does not even appear in [the books’ indices in which their theories appear], and Ricardo is mentioned [in Robinson’s] only in connection with the erroneous doctrine of the so-called Ricardo effect, to which Mrs. Robinson subscribes.” (803, and 798-799 for his critique of this doctrine.) 127

This is a mirror image of the situation for individual businesses, who can be said to have a “microeconomic” dependence on consumers. (696) 128

We might be reminded here of Smith’s Great Wheel of Circulation: “The great wheel of circulation is altogether different from the goods which are circulated by means of it. The revenue of the society consists altogether in those goods, and not in the wheel which circulates them.” (Smith, 1776, Book II, Ch. II)

31

diagram by sales revenues to successive orders of production, that the Keynesian/Kaleckian

production schema blanks out.

Prosperity and economic progress does not require that profits be high, since it is not profits

that drive economic progress, but savings and capital accumulation – with the rate of saving

simply being above the “maintenance rate” of capital.

Nor does the savings rate need to continually advance to maintain progress, since capital

reproduction will advance as long as it stays ahead of depreciation – in this respect savings

is to capital accumulation as force is to an object under acceleration (Newton’s equation F =

ma describing the relationship of constant force to acceleration), with taxation and

government spending and deficits in this analogy being equivalent to friction. (709, 714-715,

829-831).

The most important saving in this context is not personal savings but “gross saving—mainly

saving out of business sales revenues,” (835-837), i.e., the result of future production and

investment decisions by businessmen and capitalists.

The theory recognises several springs to prosperity in the times of penury about which great

books are written. It is the case, to take one “spring,” that – since they will always have to

consume to live – capitalist consumption in the aggregate never disappears even in a

depression. To the extent that conditions are dire and they are consuming capital

unproductively instead of reproductively, then business sales revenues, and hence costs,

will diminish in aggregate, allowing business profits to increase directly. (Understood within

an Austro-classical capital framework, in which causality is not reversed, we can see that

this is the mechanism by which, as Keynes struggled to identify, profits in times of penury do

offer springs to prosperity.129)

And while Robinson argues that it is profit that drives capital accumulation,130 with higher

profits driving higher accumulation, Reisman points out another fallacy of composition, in this

case “making an invalid generalisation from the consequences of a low rate of profit in an

individual industry to the consequences of a low rate of profit in the industry as a whole.”

Indeed, as he points out, a low economy-wide rate of profit is another “spring to profitability”

in that it tends to lower the cost of capital-intensive production, making possible lower costs

of production in all later production periods. (779-784)

4.5. The Capitalist’s Decision: Present or Future?

129

See discussion above of Keynes’s “widow’s cruse.” 130

“In our argument … profit is desired mainly as a means of accumulating capital, rather than capital being desired mainly as a means of consuming profit.” (Robinson, The Accumulation of Capital, 2013 (1956), p. 392)

32

Which brings us directly to time preference, what it is and where it enters into the economic

system.

Abstracting from the adapted Hayekian Triangle what structural engineers call a free-body

diagram allows us to see the Capitalist’s Decision laid bare.

Ignoring borrowing, all income is from sales revenues. All outgoings therefrom are either for

present consumption, or are advances for production (out of which wages are paid, in

advance of production). In other words, the capitalist’s decision regarding disposal of sales

revenues is directed either towards the present or towards the future. The proportion

directed towards each, of course, is based on the capitalist’s own time preference –

advances are future-oriented, consumption focussed on the present.

Fig 5: Free-Body Diagram: The Capitalist’s Decision

Unlike the various Kaleckian/Keynesian propensities and spirits, time preference is fully

causal. Time preference recognises that, all things being equal, jam today is more valuable

than jam tomorrow. In our terms, it measures the value businessmen and capitalists place

on consuming today over investing for tomorrow – the extent to which they “devote their

income and wealth to present consumption versus provision for the future.”

The Pure Time Preference Theory accounts for “the phenomenon of pure value-productivity”

over time

33

by reference to widespread (possibly universal) preference for the earlier, rather than later, achievement of goals. Market rates of interest, and market interest income, are expressions of this underlying phenomenon …

131 (Emphasis mine.)

Reisman at once fully universalises the time preference theory132 and argues that in its pure

form its place in the economic system is mis-stated. He identifies, as the astute reader will

have already, that net consumption is itself not the ultimate cause of profit. This is because

the ultimate source of net consumption is time preference. Thus, in Reisman’s system, since

it is net consumption that always underlies profits, it is not interest133 that is a direct function

of time preference, but profit, by way of net consumption – a result that is fully causal.

That is to say, time preference enters the system based on the capitalist’s decision to

consume, thereby (in aggregate) setting the prevailing rate of profit in the economic system.

(743-744).

4.6. Looking Back

Readers might now recall that the effect of the capitalists’ decision to spend either

consuming or producing was precisely at issue in the challenge to Mill over the Wages Fund,

over which he capitulated.134 At issue there was the ability of capitalists to spend less on

131

(Kirzner, 'The Pure Time-Preference Theory of Interest', 1993) 132

In contrast to the floating abstractions of Robinson’s psychological shadows (see above, Fig 4), Reisman’s base for time preference is fully real (an advance on the doctrine’s traditional bases), most especially his identification, 1, of the role of reason and property rights in the formation and expansion of an individual’s and a culture’s time horizons, and 2, that we value today more than tomorrow for the simple reason that to be alive tomorrow requires we first be alive today. (55-58) 133

This will come as a shock to some, but the phenomenon of interest can then be removed from its place as the doctrine that has launched a thousand treatises, and its many veils of mystery fall to the ground. Interest exists simply because businesses in the aggregate are able to make a profit, out of which it can be paid. Interest as a phenomenon is ultimately determined by profits, as is the rate. For in a sense, interest is simply profit’s leavings:.

The rate of profit taken pre-deduction of interest determines the rate of interest that business borrowers are able and willing to pay. In order for them to borrow, they must expect to earn a rate of profit in this sense that is greater than the rate of interest that business borrowers are able and willing to pay. In order for them to borrow, they must expect to earn a rate of profit in this sense that is greater than the rate of interest they are asked to pay. At the same time, of course, insofar as business firms are sources of loanable funds, the rate of interest they ask as lenders depends on the rate of profit they expect to be able to make by investing the funds in question in their own operations. In these ways, the rate of profit determines the rate of interest. (720)

134 And not only might Mill have been in possession of the concept in fairly well-developed form from

his reading of Turgot (Rothbard M., Vol. 1, 1995, p. 399-400) and John Rae (Rothbard M., Vol. 2, 1995, p. 146), Mill had in his grasp a proto-time preference theory he and Cairnes called the Principle of Accumulation. See for example (Mill J. , 2004 (1900) [1865]; Bk.I, Ch. XIII, 1.3.2; Bk. IV, Ch.V, 5.2; ). Cairnes’s is the fullest explanation:

The reader has already seen the conditions on which depend the investment of capital in productive industry, and the circumstances which determine its distribution, when invested, among the several instruments of production. He has seen that the motive to its investment is the prospect of profit, and that, the character of the owners of wealth being given, the strength of the inducement will vary as this prospect varies. Such being the fundamental facts on which the accumulation and investment of capital depend, there exists for every industrial society, as Mr. Mill has pointed out, a

34

their own consumption and more on productive consumption by way of wages, and the effect

of greater spending on productive labour being forced upon them. But this is now fully

revealed as a question of time preference, with results clarified by that doctrine in the light of

Reisman’s Net Consumption/Net Investment theory.

Now the smoke has cleared from this battle, and with the outline of Reisman’s theory at our

fingertips, we can stand on a mountain-top and easily review the battleground.

Ekelund135 has indicated that the short-run effect of raising money wages in the face of

economy-wide union pressure would be short-run inflation of the price of wages goods pari

passu, making the effect nugatory, and in the face of industry-wide pressure would simply

make costs of that industry higher. This certainly seems persuasive. So, combining the

Advances Theory of Capital with Reisman’s NI/NC Theory and his Productivity Theory of

Wages now allows us to see that the long-run effect of raising wages in the face of union

pressure is either to raise costs and reduce profits (if the addition to wages reduces

capitalists’ consumption) or, more likely to raise costs and stifle capital accumulation (if the

addition comes from a reduction in capital goods). If the addition stifles accumulation, then

real wages are permanently reduced by the subsequently smaller production of wage goods,

no matter the extent of agitation; if it reduces profits, then it matters whether the agitation is

economy-wide or industry-wide – if the latter, then capital will tend to flow out of that industry

seeking better returns; if the former, then it will reinforce the degree to which the heightened

money wages makes it more desirable to replace labour with fixed capital.

5.0. Contact?

As a last note, and unfortunately for historians of thought, no communication was ever

entered into between Reisman and Robinson/Kalecki.

Neither Robinson nor Kalecki could be expected to have heard of Reisman’s independently-

developed theory: at the time of Reisman’s thesis preparation, Kalecki was working as a

planner in Soviet Poland, and Robinson was at the peak of her own academic career. Other

than the publication of his thesis in 1963, ('The Theory of Aggregate Profit and the Average

certain rate of profit which is the lowest that will suffice to call the accumulative principle leading to the investment of capital into action. This lowest rate of profit will be different for different communities and for different stages of civilization. It will be comparatively high where the accumulative principle among the owners of wealth is weak, since here the inducement will need to be proportionally strong, and low where that principle is strong. But under all circumstances there will be a minimum rate, below which, if the return on capital fall, accumulation, at least for the purpose of investment, will cease for want of adequate inducement. (Emphasis mine.) (Cairnes, 2013 (1874), pp. 215-216)

135 (Ekelund, 1976)

35

Rate of Profit'),’ and its dissemination in public lectures,136 Reisman did not publish his

NI/NC theory until publication of his lifelong project, a 1000-page integration of classical and

Austrian thought, in 1996, long after Kalecki and Robinson had passed away.

For his part, Reisman admits that while Robinson at least “continued to be prominent for

many years after I became aware of her [and Kalecki’s] theory of profit,” “I could never

conceive of cooperating with them” because of their avowed socialism, so “I never attempted

to contact Mrs. Robinson.” (803)

If this sounds a trifle jaundiced, consider that in her first lecture series after her Accumulation

of Capital, in which she first presented her version of Kalecki’s profit theory, she announced

for the “superiority of socialist rules over capitalist rules in ensuring rapid capital

accumulation,” largely because of capitalist consumption. “The situation under socialism,”

she concluded, “would be different.”137 As it proved, though at precisely 1800 to her

expectations.

And at the time (1950-83) Robinson was enthusiastically visiting communist states to

despatch glowing eulogies on them for the Marxist Monthly Review. Her “pilgrimage to

Moscow [was]in quest of Marxian hope,” wrote a student of Robinson’s, “Mrs. Robinson was

able to find the ‘hope,’ originally released by Marx, amply implemented and fulfilled in

Stalin’s Moscow.” Mao’s China and its murderous Cultural Revolution (“it was deflating to be

told,” she said later, “that the Cultural Revolution is over”) excited her with “new

revelations … and Marx-Leninism gets the credit since it was the medium through which the

revelation came.” Cuba less so, because “foresight, exactitude, and steady slogging [she

said] do not come easily to them.” (So much for Marx’s New Man.) But North Korea for her

was “The Korean Miracle,” with Kim Il Sung “a messiah rather than a dictator” and,

presumably, the stolid North Korean stock providing more malleable human clay than the

Central American.138

So while Robinson was celebrating the “controlled experiment for social scientists” in the

divided Korea, because “[o]bviously, sooner or later the country must be reunited by

absorbing the South into socialism” and Kalecki was trying one more vain attempt to

136

Most prominently in 1989 at ‘The Intellectual Foundations of a Free Society’ conference under the auspices of his and his psychologist wife Edith Packer’s Jefferson School of Philosophy, Economics and Psychology.’ (Reisman, 'Capital, the Productive Process, and the rate of Profit', 1989) This included a 30-page lecture supplement and 6 recorded lectures, to which I have referred in preparing this paper. 137

Quoted from (Harcourt & Kerr, 2009, pp. 146-147) 138

All quotes and the two following are from (Turner, 1989, pp. 85-92), which references the specific copies of the Monthly Review should readers wish to enjoy her despatches in their entirety.

36

disprove Mises’s Economic Calculation in the Socialist Commonwealth,139 it is hard to know

how much value there would have been in any contact between Reisman and either of the

two.

We can only wonder.140

139

Kalecki’s colleague and predecessor at the board, Oskar Lange, engaged in a decades-long debate with Ludwig von Mises over what Mises argued is the impossibility of socialism to calculate. The collapse of the Soviet Union and its satellites should be the final nail in the coffin of Lange’s position. (Rothbard M. , 'The End of Socialism and the Calculation Debate Revisited', 1991) (Salerno, 1990 (1920)) 140

We can at least read Reisman’s response to discovering the equivalence in form of their theories. (801-803)

37

38

APPENDIX ONE: “Course of Prices in New Zealand, 1861-1910,”

Fig. 6, Course of Prices in NZ and UK, 1861-1914

from (Lloyd Prichard, 1970)

39

APPENDIX TWO: Adapted Hayekian Triangle

“The great wheel of circulation is altogether different from the goods which are circulated by means of it. The

revenue of the society consists altogether in those goods, and not in the wheel which circulates them.”

- Adam Smith, Wealth of Nations; Bk II, Ch. II

Fig. 6. The ‘Great Wheel’ of Production and Circulation

Above is a schema abstracting out the major elements of a dynamic capitalist economy. The schema

is a little more complicated than I would like, but the more abstracted version below might be simpler.

This “great wheel of circulation” is bathed in a universal set of Mengerian free goods, in which

capitalists advance production towards the creation of new consumer goods.

Adapted from the Hayekian ‘structure of production,’ the “great wheel” indicates both monetary and

real circulation. In that sense, it is a union of Smith and Hayek.

40

Fig. 7, From Hayek’s Triangle to Capitalist Horn of Plenty…

…to the Great Centripetal Wheel of Production and Circulation

Employees are advanced their wages (L) by capitalists in advance of production. Each order of

production of inchoate wealth (KC) uses capital goods accumulated from previous production periods,

on which labour ‘surfs.’ The more capital advanced towards employees, the higher are total payrolls.

(This is the monetary face of the wages fund.) The more capital goods (KF) are accumulated, the

more labour can produce. (Better techniques allowing even greater productivity, albeit with ‘fossils’ in

the structure.)

The end of production is consumption. Consumer goods form a pool of real goods constituting a

subsistence fund on which employees and employers can draw in the present while producing for the

future. (Neglecting capitalist consumption, this is the real face of the wages fund.) Money wages and

capitalist income grant access to the pool of real goods, payment for which comes straight out of the

hip pocket, and are generally directed perpendicularly, towards the present. (The implicit subclause is

that to be a consumer one must first be a producer, or have been granted access by a producer).

Capitalists’ decisions to direct production in multi-period plans are central. The greatest amount of

spending in the economy circulates from business to business, represented here as sales revenues

41

paid by capitalists of lower orders of production to capitalists of higher orders. Each capitalist than

has the decision as to what proportion to direct towards production and accumulation (and to what

proportions towards employees and what towards fixed and circulating capital) and what towards

his/her own consumption.

Savings are at the ‘hub’ of this wheel, not as a widow’s cruse, but derived from capitalist and

employee saving. It can be seen however that ‘forced savings,’ a.k.a. the creation of new and

additional credit out of thin air, may serve to redirect the production of goods, but will do nothing to

expand the pool of real goods. Thus, every new tranche of new credit created out of thin air dilutes

the value of all existing money claims on the pool of real goods.

The small savings arrows, their lesser size reflecting the lesser overall role of individual savings,

emanate from the head of each decision-maker, and are directed towards the future.

It will also be seen that the most import amount of saving however is not saving out of money income,

but the saving that takes place out of business’ sales revenues directed towards capital formation

and, hence, to greater production: in other words, the capitalist’s advances.

Fig. 8, The Real Economy: Abstracted Economic Schema

Possible supplements and additions

Several ‘free body diagrams’ may be drawn from this to make apprehension of each sector and

participant easier to understand within the wider context. I have drawn an example below of the

capitalist, but similar diagrams may be drawn for the employee, for different orders of production, etc.

42

Fig. 9, Free Body Diagram Showing the Capitalist’s Real and Monetary Decisions

A further simple addition might be made to indicate the role of government. Based on Reisman’s

recognition that government is a consumer, not a producer, we might add among the pool of real

goods and future goods several independently moving figures similar to the famous figure in the game

Pacman which circulates the board while eating pies, a figure increasing in numbers as government

consumption increases, i.e.:

Fig. 10, Government as Pac-Man

The proportion distributed between real and future goods would be based on the proportion of taxes

on production and consumption; the total number on the total amount of taxes in relation to Gross

Output. The zombie-like figure is already conveniently formed for us in the shape of a ‘G,’ requiring

little further tailoring. Introducing this motif would allow us to see that capitalist production is

continually competing to stay in front of inexorable and largely parasitic government consumption.

We could also of course amend our diagrams to show the hollowed out form in which the

Keynesian/Kaleckian system sees the economy and capitalistic production, by largely ignoring

advances and the effect of business-to-business sales revenues.

Our Hayekian Triangle of Figure 2 would change thus:

43

Fig. 11, The Seen and the Unseen, 1:

The Hollowed-Out Keynesian/Kaleckian View of the Production Structure

And developing Figure 9 using the developed Kaleckian model, which ignores “rentier’ consumption

and privileges newly created credit…

Fig. 12, The Seen and the Unseen, 2:

The Free Body Diagram of the Developed Kaleckian Model,

44

APPENDIX THREE: George Reisman’s Schema of Savings and Capital Accumulation

Built on James Mill’s framework, with superstructure by Smith, Ricardo and J.S. Mill, George Reisman’s diagrams constitute, he says, “a virtual laboratory in which one captures the essential pattern of economic progress in a monetary economy in an intellectually manageable size, and is then able to look at it from every possible angle and, as it were, poke and prod it and see exactly how it responds.” (812) In this, he has similar though as-yet less developed goals for his diagrams as Nobel Prize-winning physicist Carl Weiman’s ingenious applets for “interactive physics simulations” [See http://phet.colorado.edu/ ]

I have selected two companion diagrams out of many from (Reisman, 1996), Reisman’s Figures 16.2 and 17.1, shown overleaf. “Figure 17.1 represents exactly the same kind of analysis of assets and spending and revenue as presented in Figure 16.2, but in combination with … rising capital accumulation and rising production” as a result of increased gross savings. (809-812)

Three-step analysis: opening assets of business every year, financial transactions all on the first day of the year, production over the rest of the year, followed by opening assets of the next year and fresh transactions and fresh production in the next year. (Reisman, 1989, p. 12)

Business is placed at the centre, with all cash either in the hands of business or heading back to it because, as the Advances Theory of Capital recognises, “money comes back to goods.” (Ibid.)

The source of profits can be easily recognised (in an economy with invariable money, its primary source is net consumption); most importantly, the importance and effect of the capitalist’s decision to consume or produce is easily understood, with the rise from 50% to 60% directed towards advances raising the schematic economy from a stationary to a progressing state.

45

Copyright © 1998, 1996 by George Reisman. This material is reprinted by permission of the author

46

Copyright © 1998, 1996 by George Reisman. This material is reprinted by permission of the author

47

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