Wednesday, 11 May 2016

Quote of the Day: Turgot v Keynes on the “circular flow”


When you compare the Classical Economists with Keynes on virtually any subject, it’s like comparing adult talk with the mewling of children.

For Keynes, and Keynsesians, the key ingredient of an economic system is the “circular flow” of money between business organisations, in their capacity as employers, and employees, in their capacity as consumers. Roger Garrison’s diagram indicates the facile folly:


The key to the Keynesian scheme is consumerism: his entire conception of a healthy economy fixated upon consumer spending.

But this is just baby talk. It focusses only on consumption. It ignores entirely how the goods got here in the first place.

Unfortunately, you see, Keynes was not an economist.1 He had never read the classical economists. If he had, he may have realised that consumption is only the final cause of economic activity. The efficient cause is production – and this is the circulation of money that Turgot explained so well way back in 1766:

The True Idea of the Circulation of Money
…it can be seen that the cultivation of estates, manufactures of all kinds, and all the branches of trade, depend upon the mass of capitals, or of moveable, accumulated wealth, which, having been first advanced by the entrepreneurs in each of these different classes of work, must return to them again every year with a steady profit; that is, the capital to be again invested and advanced in the continuation of the same enterprises, and the profits for the more or less comfortable living of the entrepreneurs. It is this advance and this continual return which constitutes what ought to be called the circulation of money; this useful and fruitful circulation, which gives life to all the labour of society, which maintains all the movement and life of the body politic, and which is correctly compared to the circulation of the blood in the animal body. For if, by any disorder whatsoever in the sequence of expenditure of the different classes of society, the entrepreneurs cease to get back their advances with such profit as they have a right to expect, it is evident that they will be obliged to reduce their enterprises; that the amount of labour, of the consumption of the fruits of the earth, of the production and of the revenue would be equally diminished; that poverty will take the place of wealth, and that the common workman, ceasing to find employment, will fall into the deepest misery. [Emphasis in the original.]

That is adult talk compared to Keynes’s mewling.

If Keynes had only read and digested the classical economists, he may have realised (with Turgot) that the important circulation of money was that advanced by capital owners into production, and returned to them as profits – this “fund” steadily accumulating over generations and “giving life to all the labour of society.”

Instead, in his ignorance, his life’s work became set upon destroying it.


1. Keynes will be remembered as "a man with a great many ideas that knew very little economics," Friedrich Hayek notes in this brief interview. Hayek, who knew Keynes well, explained:

ROSTEN: I’m interested in your earlier comment about the fact that here is a man of immense intelligence, great imagination, wide learning, and so on, and yet was not an economist. I’m not clear whether you mean he didn’t have the kind of mind that excels in economics — just as in mathematics, say, you can find people who are brilliant but who, given mathematics, are just hopeless — or do you mean he didn’t have the kind of mind that makes for first-rate economists?
HAYEK: Oh, yes, he had. If he had given his whole mind to economics, he could have become a master of economics, of the existing body. But there were certain parts of economic theory which he had never been interested in. He had never thought about the theory of capital; he was very shaky even on the theory of international trade; he was well informed on contemporary monetary theory, but even there he did not know such things as Henry Thornton or Wicksell; and of course his great defect was he didn’t read any foreign language except French. The whole German literature was inaccessible to him. He did, curiously enough, review Mises’s book on money, but later admitting that in German he could only understand what he knew already. [laughter]


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