Monday, January 31, 2011

Poverty Creates Wealth and Wealth Creates Poverty

Toward the end of Ch. 3, section II of The General Theory, Keynes brings up "the paradox of poverty in the midst of plenty" (30). This is hardly the beginning of the false belief that it is poverty rather than wealth which needs to be explained. It goes much farther back than that, farther back than Marx, even, for whom this was a concern. Yet, here it is in Keynes, driving in no small part his general theory. Well, if you start from false premises, where can you possibly go from there?

Among his immediate conclusions, we find the argument that "the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system." And why is this? Because

a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be comparible with the employment of its poorer members (31)
such that if the wealthy for some reason won't invest but, rather, save, we end up with an increase in poverty. He further argues that the wealthy have less of an incentive to invest. Why? Who knows? Apparently Keynes believes that the wealthy are happy resting on their laurels. This does not match reality in the least.

But more than this, look at what he has claimed. He has claimed that the richer a community, the worse the market economy works. He claims a "gap between its actual and its potential production." But how could he possibly know what its actual production is? Why would business owners not try to maximize production? Why would the rich just up and quit trying to make more money? And what are they doing with that money? If they are not investing it, they are saving it. Where are they saving it? Are they stuffing it into mattresses? If we assume that they are putting it into savings accounts, then Keynes' concern that "the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate" makes little sense, for if there is a high level of savings, the interest rates will fall. And if interest rates fall, then of course investments will be more attractive. Of course, in either case you are going to have investment, for if the money is in the bank, it is available to be lent out by the bank for purchases, including the purchase of captial goods, and if the money is not in the bank, it is likely it is being invested (since any rate of interest is better than that one can gain under the mattress). So in either case, the money will be available for capital investment, either directly or indirectly.

But this doesn't even address his first claim that "the marginal propensity to consume [is] weaker in a wealthy community" than in a poor one, which results in the bizarre conclusion that poor communities are more likely to be at full employment and, thus, wealthier (in aggregate?) than are wealthy communities. Why? Because the rich aren't spending all their money. Now, if Keynes is merely implying that poor communities have a faster rate of growth than wealthy communities, then his conclusion that there is a problem with this doesn't make much sense beyond the typical complaints about the rich-poor gap that are based on no economic principles to speak of -- and typically do not address the fact that the poor have gotten richer as the rich have gotten richer. But this does not seem to be what he's arguing. No, he argues that the poor communities, because they spend all their money, create the conditions of full employment, while rich communities, because they don't spend all their money, are below the full employment equilibrium. Thus, there is more poverty in wealthy communities than in poor ones. He states that it's a paradox. Somehow the wealthier a community is, the poorer the poor in that community is. Wealth creates poverty. This isn't a paradox; it's a contradiction. Further, this contradicts the evidence, and violates the fact that the economy is not a zero sum game. So, why call it a paradox, then? Well, a paradox is a possibility; a contradiction is logically impossible. One has to reject logic itself to come to Keynes' conclusions in this section.
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