Sunday, March 29, 2015

Keynes On The Euthanasia Of The Rentier

Few of Keynes' critics have read his General Theory but some his critics have read Keynes very carefully and they have rejected his theory because it is incompatible with their political economy.  The General Theory is not easy read but Brad DeLong has posted some its most powerful arguments.  For those who have not read or understood Keynes, his posts may help you to better understand his political economy.  You will also understand why there is so much opposition to his political economy.

The General Theory was written in troubled times.  The world economy was depressed and many wondered whether there were superior alternatives to capitalism.  The General Theory made a case for a more enlightened capitalism that could provide for full employment, and maintain some of the positive features of capitalism that were superior to totalitarian economic systems.  Keynes saw functionless investors, or the rentier class, as an obstacle to a full employment economy.  Moreover, the maldistribution of wealth and income, that characterized the interests of the rentier class, was seen as an impediment to the growth of capital.  Keynes argued that a more progressive tax system would facilitate economic growth by redistributing income from those who saved much of their income to those who spent most of their income.  He believed that progressive taxation was a better alternative than revolution.  In other words, euthanasia was better than the warfare against the rentier class.

Keynes was also familiar with the arguments against progressive taxation.  Clearly, it would inspire tax evasion schemes, but it also might diminish the motivation for risk taking, and it might reduce the level of savings that were consistent with a full employment level of investment.  We should be familiar with these criticisms because they are still with us today.  Ronald Reagan made the same arguments in defense of his tax policies which rolled back the progressive tax policies that were legislated during the New Deal.  Reagan claimed that we needed a higher level of savings to stimulate investment, and that progressive taxes were a disincentive to risk taking and hard work.  In other words, a properly functioning capitalist system is dependent upon a high level of savings that could only be obtained from the rentier class.  Keynes believed that retained earnings provided enough capital to maintain business investment.  That is pretty clear in our current economy.  Corporations are only investing a small portion of their retained earnings.  They are using the majority of their retained earnings to provide dividends to shareholders, and to repurchase their own stock.  Keynes also believed that we needed an incentive system to reward hard work and risk taking.  He felt, however, that the system would operate just fine with a less substantial reward system.  Keynes could not even imagine the reward system available to corporate executives in our current era. 

Keynes also believed that the rentier class preferred high interest rates on their savings as well as high dividends.  Of course, high interest rates encourage savings, and they retard investment.  He believed that recessions occur when the pool of savings are greater than the level of business investment. He favored lower interest rates to encourage investment and to reduce the incentive to save.  Implicit in his analysis is the idea that there is an interest rate that is consistent with a full employment economy.  Ordinarily, monetary policy can be used to maintain a full employment economy.  The exception, of course, is when interest rates are close to zero and cannot be reduced far enough to stimulate investment and consumption.  Under those conditions, fiscal policy has more leverage than monetary policy.


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