KEYNES, his legacy

Written by Carlos Bondone

Whether in favor or against, it is not wise to deny the influence of Keynes in the daily life economy of the 20th century and the present, both national and/or international.

Aware of the fact that this year it commemorates 70 years since the appearance of his most important work, “The General Theory of Employment, Interest and Money”, and 60 years since his death, it is an opportunity to take care of the most relevant questions about his legacy.

Are there diverse interpretations of Keynes’ theory?
It is important to start rejecting the idea that several forms exist to interpret Keynes, or to apply his theories. For it is enough to us with refreshing the central concepts of his “general theory”:

Unemployment by underconsumption or overproduction
The center of his concern was around the fact that at certain moments businesses enter a depressive cycle (“unemployment”) as a result of output saturation or consumption insufficiency (demand). Scientific explanation: with the definition of economic good (scarce goods: useful things to human beings whose supply is inferior related to their demand), it is untenable to speak either of unemployment, underconsumption or overproduction, since goods are or are not economic goods. Given the opposite case we would be in front of an absurd: an economic good which is not an economic good. It was not Keynes who introduced the concepts subjected to critique, there existed since long before the businessmen who made use of people’s effort (by means of the government) to save their own business inability.

Keynes was a monetarist
It is usual to read or listen that Keynes was not a monetarist, or that he did not give importance to money. Scientific explanation: this expression implies: a total ignorance of Keynes’ work and his ultimate goal, which was to replace the expensive currency that was bringing “unemployment- popular poverty” (it was necessary to finish with the “barbarous relic” – reference to gold -); or to try to place him as an opponent to the other economic schools (monetarists), but all the schools have (in regard to currency matters) the same theoretical foundations that “Keynesians” have (its demonstration in the book “Theory of economic relativity – The Solution to the monetary [currency] crises – A critique to present economic theories: Austrians, Keynesians and Quantitativists”).

Keynes and the economic equilibrium
Keynes was an advocate of the equilibrium theory, there is not doubt about it. Scientific explanation: all his intellectual effort was to bring rationality to what the governments were already doing (as Mises said) in order to justify their intervention. An example of it was all the scaffolding developed around the idea that the markets are in equilibrium when S (saving) = I (investment), something which he believes to achieve by introducing the idea that the problem is that the interest of the money is expensive (barbarous relic), but then he “discovers” that it was possible to make it cheaper by means of the financial system. To sum up, Keynes sought to equilibrate the “real” and “currency” worlds (that evidently appears to him to be “virtual” or not economic). The inconsistency of the concept of equilibrium in economy is clear (that not only is defended by Keynes but by all schools) since the very moment in which we are in front of an economic world and a non-economic one, both which we have to equilibrate, instead of considering only one world, that in society is doubtlessly a “currency world”. Apart from mentioning that in this Keynes was not original either, I am going to undress the equilibrium theory (which major expression is S = I), with two basic considerations:

1) Interest is the price of the economic time (which when exchanged interpersonally becomes credit), not of money. But as he did not notice the Theory of Economic Relativity (TER): economic time is the only economic good that inevitably materializes only in another present economic good, it does not have existence on its own like the other economic goods, he assigns interest to money (present economic good) as well as to credit (interpersonal exchange of present economic goods for future economic goods); in other words, he does not realize that the function of currency is accomplished by both money and credit, but that they are different entities. In chapter XVII of the “General Theory”, Keynes shows his total confusion and desperate attempts (very praiseworthy) to decipher the question concretely, declaring that he does not find the answer (situation unnoticed either by his opponents and followers), when he writes that “if it was possible to find a good that could satisfy these conditions there is no doubt that it would be considered like a rival of money. Thus, from a strictly logical point of view, it is not impossible that a merchandise may exist for which the value of the production expressed in reference to it would be more stable than if it we express it in money, but it is not probable (and take note that Keynes was very bright at probability theory) that this kind of good exists” , without realizing that human beings were already using it: credit. I believe that he did not notice the situation that credit would displace money as currency, because it was dressed of “irregularity” (I define irregular credit -among others- as the one which does not express at the moment of its appearance the quality and amount of present economic goods which it will be cancelled with).

2) What I define as total wealth equation leads us to express saving as the aggregate of all the economic goods produced by man from the beginnings of time, and not consumed until the present. This way we can say that accumulated wealth is the aggregate of net savings (stock of present economic goods), or that savings are wealth variations (wealth flow), it takes us to the accounting equation in which S (accumulated saving or wealth) = Consumption + Investment (capital) + Hoarding + Money + Goods of exchange + (Cr-Dd: net credits and debts), which is equivalent to Say’s Law on stocks, as well as the accounting results chart is equivalent to the flow aspect of the same law. This equation makes untenable to think about S=I “equilibrium” (from which derives all the scaffolding constructed around the concept of equilibrium), since all the other components, except I, of the right term of the equation would have to be zero.

There is only left to add to the right of the expressed equation, that S = A (Active) = NP (Net Patrimony), that is no more than the patrimonial or ‘accounting equilibrium’ equation. Luca Pacioli said already 500 years ago that accounting was the best model to develop economics’ theory and practice from; having disobeyed this led to the deviation of economic-currency science developed in the 20th century. I must conclude this section by saying that economics should not forget the axiom or primitive term of property: There is no economic good without proprietor, neither a proprietor without an economic good, origin of the double entry that we, accountants, dominate so well (the reader will find the subject in greater depth in the mentioned work).

Keynes and the exchange rate
It is usual to label as a “Keynesian model” to any economy with a high exchange rate (expensive dollar). Scientific explanation: although the reader will notice that I am a critic of the Keynesian theories (I am a critic of all the currency theory developed until now, of the “non Keynesian” ones also, since they are all fed from the same quarry, in currency terms, in spite of pronouncing themselves as belonging to “different schools”), I do not think it is convenient to attribute the idea of a high exchange rate to Keynes. It only takes to remember that the origin of his theory is to avoid expensive money (“barbarous relic”), cause of unemployment and/or poverty of people.

Keynes did not come to save Capitalism
Another thing we often hear is that Keynes saved Capitalism from totalitarianism. Scientific explanation: his mistake in defending irregular currency systems like the current ones is the true culture fluid of worldwide (and national) inequalities in the distribution of wealth. What is called currency policy is no more than improper appropriation of other people’s economic time (effort), especially of the less knowledgeable of the economic affairs. I believe that instead of calling ‘inflation’ to the consequences of the current (national and international) financial systems, it is better to label them as speculative-financial appropriation of the other people’s effort needed to produce present economic goods. The TER indicates with clarity that in irregular financial systems it can be confirmed the general feeling that speculation deteriorates production; that there is no fairness in the distribution of wealth; that it is impossible the independence of the central bank (and of banking in general) from the political power; etc. To sum up, Keynes attacked any system that would advocate an equitable distribution of wealth based on freedom, solidarity, individual differences, legal equality, ethics, private property, etc, this is: the values of the West. Thus, that the western civilization is called capitalism makes evident that Keynes did quite a skinny favor to it.

To close this section, I think it is suitable to mention the introductory note of chapter IX from “Theory of Economic Relativity” that states: “irregular credits are an infiltrated totalitarian tool in democracy”.

Keynesian structures and models
It is evident that if the underlying scientific primitive terms in Keynes fall apart, all the “models” derived from them will also fall: IS/LM curves, curves of aggregate demand and supply, Samuelson’s 45° curve, Phillips’ financial curves, as well as concepts such as currency] versus real interest, financial versus real markets, Patinkin’s dichotomy of prices, Gresham’s Law (as exclusive of currency), indirect transmission mechanism (currency, prices and interest), quantitative theory, etc, that is: all the macroeconomic theoretical-practical scaffolding developed in the 20th century.

Given this, it is worth saying of Keynes that:

  • He was not original
  • He was a scientist (against what is thought when it is said that all about him was based on his marketing charisma). As an example, it only takes reading in depth the intellectual effort he displayed in chapter XVII of his “General Theory” (that instead of being “very abstract” and of “unnecessary reading” as many of his own disciples said, it is a clear manifestation of his intellect, and it left him very close to discovering what I call the Theory of Economic Relativity, and to completely clean currency theory from all the theoretical framework it has always been involved in).
  • It is not adequate to think about “several Keynes”, but about only one who saw in the “suffocating shortage” of money the central cause of the economic problems (bad business), opening the door to the political-businessmen connivance that takes control of other people’s wealth (guaranteed by current science), especially of their work (the most defenseless element in economy).
  • He tried to bring theories to “save” mankind from the Malthusian-currency “Apocalypse”. In the TER book (p 362, Spanish edition) I say: “1) Keynes the brilliant is the one who declares, somehow, the problem that macroeconomic theory is in: how to make compatible the “necessary” S = I axiom with the interest rate that arises from the market? This question puts in evidence a fatal incongruence… that we can call “the equilibrium solution” and 2) Keynes the misled is the one who looks for a solution to a problem which does not exist…” . In other words, the diagnosis he made on macroeconomic and currency theory is remarkable, but he did not know how to solve it, as it happened to the rest of the theoretical arc.

Finally, I wish to express very concretely that, even though Keynes did not achieve a satisfactory currency theory (center of all his effort), something he himself admitted, he was not the only one caught in that situation, as “his rivals” did not make it either (situation his main “opponent”, Friederich von Hayek, admitted).

To sum up, the whole current financial system (national and international), is based on the foundations of the currency theory in effect — fed by Keynesians, Austrians (disciples of Menger, not himself) and Quantitativists –, the differences (in currency terms) are not substantial, since they all participate in which I call currency reductionism (to focus economy in the study of currency) and virtualism (virtual currency).

Note: a summary of this article was published in FACPCE’s magazine (Federación Argentina de Consejos Profesionales en Ciencias) in October 2006.

Buenos Aires, September 2006  


Translator Note: The distinction between money and currency is essential in this work. The author places the term “currency” as a more general categorization than that implied in “money” . Thus, currency can acquire whether the form of money or of credit, and this last can be regular or irregular.

To read the full article, please click on the PDF or Word icon: