Collective Conscious

Karl Smith:

I want to pick this thread up from Paul Krug­man because I think some of my read­ers might be dis­in­clined to accept Paul’s cur­sory treat­ment. How­ever, its an impor­tant point.

In The Gen­eral The­ory of Employ­ment, Inter­est and Money, Keynes writes

If the Trea­sury were to fill old bot­tles with ban­knotes, bury them at suit­able depths in dis­used coalmines which are then filled up to the sur­face with town rub­bish, and leave it to pri­vate enter­prise on well-​​tried prin­ci­ples of laissez-​​faire to dig the notes up again (the right to do so being obtained, of course, by ten­der­ing for leases of the note-​​bearing ter­ri­tory),there need be no more unem­ploy­ment and, with the help of the reper­cus­sions, the real income of the com­mu­nity, and its cap­i­tal wealth also, would prob­a­bly become a good deal greater than it actu­ally is. It would, indeed, be more sen­si­ble to build houses and the like; but if there are polit­i­cal and prac­ti­cal dif­fi­cul­ties in the way of this, the above would be bet­ter than nothing.

This leads a lot of econ­o­mists and thought­ful peo­ple to the con­clu­sion that Keynes is either igno­rant of or ignor­ing the role of pro­duc­tive activ­ity and trade. How is it that peo­ple are to become wealth­ier in an activ­ity which is clearly wealth destroying?

You can see the point though if you look at why Keynes choose this par­tic­u­lar exam­ple. It’s because, it is exactly how a Gold Stan­dard econ­omy works. Keynes phrases it as this:

It is curi­ous how com­mon sense, wrig­gling for an escape from absurd con­clu­sions, has been apt to reach a pref­er­ence for wholly ‘waste­ful’ forms of loan expen­di­ture rather than for partly waste­ful forms, which, because they are not wholly waste­ful, tend to be judged on strict ‘busi­ness’ prin­ci­ples. For exam­ple, unem­ploy­ment relief financed by loans is more read­ily accepted than the financ­ing of improve­ments at a charge below the cur­rent rate of inter­est;whilst the form of dig­ging holes in the ground known as gold-​​mining, which not only adds noth­ing what­ever to the real wealth of the world but involves the disu­til­ity of labour, is the most accept­able of all solutions.

Though all of this might sound crazy. It actu­ally extends from obser­va­tions I think we all accept. Let me just through in one more of my favorite quotes and then get to the meatier expla­na­tion. I am going to place the whole thing in, though it is usu­ally cut down. SourceEcon­Lib:

In my opin­ion, it is only in this inter­val or inter­me­di­ate sit­u­a­tion, between the acqui­si­tion of money and rise of prices, that the encreas­ing quan­tity of gold and sil­ver is favourable to indus­try. When any quan­tity of money is imported into a nation, it is not at first dis­persed into many hands; but is con­fined to the cof­fers of a few per­sons, who imme­di­ately seek to employ it to advan­tage. Here are a set of man­u­fac­tur­ers or mer­chants, we shall sup­pose, who have received returns of gold and sil­ver for goods which they sent to CADIZ.*27 They are thereby enabled to employ more work­men than for­merly, who never dream of demand­ing higher wages, but are glad of employ­ment from such good pay­mas­ters. If work­men become scarce, the man­u­fac­turer gives higher wages, but at first requires an encrease of labour; and this is will­ingly sub­mit­ted to by the arti­san, who can now eat and drink bet­ter, to com­pen­sate his addi­tional toil and fatigue. He car­ries his money to mar­ket, where he finds every thing at the same price as for­merly, but returns with greater quan­tity and of bet­ter kinds, for the use of his fam­ily. The farmer and gar­dener, find­ing, that all their com­modi­ties are taken off, apply them­selves with alacrity to the rais­ing more; and at the same time can afford to take bet­ter and more cloths from their trades­men, whose price is the same as for­merly, and their indus­try only whet­ted by so much new gain. It is easy to trace the money in its progress through the whole com­mon­wealth; where we shall find, that it must first quicken the dili­gence of every indi­vid­ual, before it encrease the price of labour.

This con­tains the cen­tral “Key­ne­sian” obser­va­tion, that sticky prices are the source of the non-​​neutrality of money.

Its par­tic­u­larly inter­est­ing to pull out the quote from Hume because he is not dis­cussing the deci­sion of a Cen­tral Bank to print more money but an increase in actual gold and silver.

Keynes is agree­ing with this point and say­ing yes, if peo­ple were to dis­cover more gold that would indeed boost employ­ment through the same means that Hume describes.

How­ever, the way one dis­cov­ers gold is by dig­ging holes in the ground. Which, in Keynes words, have no pur­pose other than the accu­mu­la­tion of gold which peo­ple intend to use a back­ing for money.

Why not then just bury money in the ground and let peo­ple dig that up?

This would have the same effect as the dis­cov­ery of new gold deposits and would alle­vi­ate unem­ploy­ment though the same means.

But, wait then he says. What in the world is the point of bury­ing money in the ground just to dig it back up again?

Why not have peo­ple do some­thing pro­duc­tive like build roads and schools rather than dig holes in the ground. In exchange you can give them money. It will work just like gold min­ing will but instead of hav­ing a whole in the ground to show for it, you have a road or a school.

This is not to say that the gov­ern­ment knows bet­ter than pri­vate mar­kets what money should be used for. Its say­ing the tra­di­tional means of get­ting money into the pri­vate mar­ket involves min­ing purely for the sake of get­ting money.

Why not do some­thing pro­duc­tive for the sake of get­ting money into the pri­vate mar­kets and then once its there let peo­ple use it for what­ever they think best.