The Keynesian Liturgy

Oscar B. Johannsen

[Reprinted from The Gargoyle, June 1965]

If anyone has ever been inducted to the rites of the Keynesian theology as this writer has, he will begin to understand George Orwell's world in Which truth is falsity, wisdom is stupidity, and right is wrong.

In 1936, Sir Maynard Keynes published a book, The General Theory of Employment, Interest and Money, which has become the bible of the Keynesian votaries. So effective was he in capturing the imagination of academicians that his concepts not only rule the economic theorists today but have been translated into practical action.

His book is written in an erudite, but abstract fashion, so difficult to understand that some of his disciples have written books to explain him. At the risk of having over-simplified his ideas, the following will give the reader some understanding of the basis of the recommendations which the economic thinkers give to practical politicians, which effect all of us.

Out of his work, the high priests of this cult have distilled a magic formula. It is an equation: C + I + G = Y

This means that (C) consumption spending plus (I) investment spending plus (G) government spending equal (Y) national income.

It is important to remember this formula for the manipulation of any of the factors can increase or decrease Y (national income) and thereby affect employment and our standard of living.

As a first step in understanding it, we will assume there is no government so the formula reduces to C + I = Y -- that is, consumption plus investment spending, equals national income. C is very important for the difference between national income and what is consumed constitutes the people's savings. Thus C + S = Y (Consumption plus Savings equals National Income). Inspection of these two equations points up the obvious fact that (S) savings necessarily equals (I) investment spending. Because of this Keynes said savings equals investment. Actually this amounts to defining savings as being investment spending. But he goes on to state that savings and investment must be made equal to one another, which is contradictory. If they are equal why do you have to do something to make them equal? His disciples have translated this into meaning that planned savings may not equal planned investment as savers and investors are ordinarily different sets of people, if people consume less and plan to save more and this planned savings is greater than planned investment of businessmen, then the economy automatically takes corrective action to preserve the equality. C, S, I, or Y must change. Consumption may decrease, thereby cutting down savings, or investment may increase to equal savings, or Y may drop so savings is less and thus equal investment. But this correction may mean depression for if T drops, it means unemployment, decreasing prices and trouble.

The reverse might happen if planned I was greater than planned S, which would mean that Y would increase. But if the economy was operating at full employment, then as they could not increase production as the economy is operating at capacity, it means that prices must rise, or inflation. For Keynesians the devil in their religion is Savings. They feel it has a tendency to be too great for planned investment, and therefore there is a tendency for depression to occur, Keynesians rarely worry about inflation, which is not surprising. After all, Keynes wrote his work during the depths of the depression and his concern was to cure it.

But note the Orwellian twist, Savings that is, thrift is evil. The saver is a devil -- the wastral is a saint, for the more he consumes the less he saves and then planned savings will probably equal planned investment. Black is white and white is black.

Now, of course, government does exist so we now must put G back into the equation to put it into its proper esoteric form. C + I + G = Y.

As you can see, now, this means that if you wish to increase national income, if C and I remain the same, all you need to do is to increase G, that is, increase government spending. Is it any wonder that Keynes was the politicians' own boy. What politician doesn't want to increase spending? And here is a "scientific" formula justifying it in order to increase the nation's income.

Space does not permit discussion of all the interesting ramifications involved in this formula. One may interest you, however.

With government in the picture, instead of savings equaling investment spending, it is expanded into S + T = I + G (Savings plus taxes equals investment and government spending). Now, if you know a little_ math, you know this can be rearranged into S = I + (G -T).

But (G - T) government spending minus taxes is the budget and if G is greater than Y, that is spending is more than taxes we have a deficit. So S = I plus Deficit.

A surplus in the budget becomes negative. That is, it takes away from investment spending and reduces savings. We have the interesting result then that if you want to increase savings you have the government create a deficit. Despite the Keynesians, people still feel savings is a worthwhile action, but that being the case, they then should be in favor of deficits as this increases savings. Again we have common sense turned around. A deficit is good, a surplus is bad.

Now, you know why economists are not concerned that in 29 of the last 35 years the government has had deficits. They have proved to their own satisfaction it is a good thing.

This gives you some clue to the fact that basically all Keynesian economics is inflationary economics. Just as Marx appeared to have put socialism on a scientific basis so Keynes appeared to have put inflation on a scientific basis. But Just as events are proving Marx to be wrong so events will prove Keynes to be wrong.