John Maynard Keynes

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Keynes doesn't distinguish between between classical economy and neoclassical economy, because both share the same misleading ideas about capital, interest rates, savings and money.

The keynesian theory is reduced in public debate to expansive fiscal policy. That means, that in a situation of recession or depression the government has to increase demand. However this interpretation of keynesian theory is completely missleading. This is a possible CONSEQUENCE that can be drawn from the keynesian theory, but it is not the keynesian theory. It seems that only few people has actually read the book and seems that there is a widespread reluctance to accept the title of the book: General Theory on Employment, Interest and money. A book with this title is about apples, strawberries and peaches, that's obvious.

Keynesian theory is not kitchen receipt to resolve all kind economic problems and was never intended to be that. But it is the framework under which any kind of economic problem has to be discussed.

Seems trivial at first glance, but is useful to mention that if someone writes a book with the title "General Theory on Employment, Interest and money" he refutes the existing ideas about interest rates and money and that he establishes a relationship between interest rates and employment.

In the neoclassical theory the production is defined by the labour market. Production is increased until workers become scarce and are paid with the (monetary) marginal output. If the wage is fixed on a level higher above the wage that would lead to full employment, the result is unemployment. At the full employment level workers have power. They are not going to be paid more than the (monetary) marginal output, because in this case the employer would lose money, but they are not going to be paid less either, because by not employing more workers the employer would lose money as well.

[Concerning the classical theory, the situation is a little bit different. They assume that there will be always an exceed of people looking for a job over the jobs offered by the employers and wages will therefore always remain at subsistence level, see David Ricardo.]

The neoclassical theory implies that all the national income, deriving from labour, capital or land, is either consumed or invested. If this is not the case the monetary value of the output decreases what leads to a reduction of demand, because less workers will be employed and that will lead to an even bigger decrease of demand with the effect that still less people are employed, what would lead.... We have a downward spiral.

This scenario is not plausible in the neoclassical theory, see Say's Law. In the classical theory the whole national income is either consumed or saved and invested. If the interest rates are high enough to induce people to save, then they will invest their 'capital', conceived as not consumed income of the past. If not, they will consume it. If demand decreases, interest rates will fall, because nobody has any interest to invest, if there is no demand. Consumption will increase again until the equilibrium is reached.

Keynes sees it completely different. In a situation of insecurity investors will nor consume nor invest, they will speculate on the stock and similar markets. Stock, government bonds, any kind of effects etc. are almost as liquid as money, but yield some profit, although the speculation with these assets doesn't produce anything nor creates jobs and high profits are needed, to induce them to invest in real projects and the profits they demand, can be unrealistically high.

To put it otherwise: In the neoclassical theory high interest rates stimulates the economy, because high interest rates increase savings and therefore investments. In the keynesian theory, interest rates are just a hindrance for investments and 'capital', conceived as not consumed income of the past, is not needed, because investment are financed with money and the amount of money disposable depends on the politics of the monetarian authorities and not on the preferences of the savers.

We can deduce from the title as well that he wanted do write a general theory, in other worlds a theory that explains all scenarios and not only a scenario of full employment. In case of full employment the keynesian theory and the classical theory get to the same results. In this case it is necessary that consumption is reduced in order to produce more capital goods. In other words, savings are needed. In a situation of unemployment, there is no need to reduce consumption, because there is no trade off between the production of capital goods and consumption goods. Therefore we need a theory that explains both cases.

In the classical theory both savings and investments depend on the same parameter, the interest rate, and can therefore be balanced by the interest rate. The interest rate is a price in the sense of the market economy. It equalizes demand and supply.

In the keynesian theory savings depend on the income and the interest rate from the politics of the monetary authorities. There is therefore nothing that balances savings and investments.

But let's beginn from start. In contrary to what we can read everywhere keynesian theory is not a pure cycle theory. It is a complete new theory which refutes all the basic concepts of the classical / neoclassical theory which are the basis of all other lines of thinking we know.

What we can read everywhere, that Keynes wanted to increase aggregate demand in case of recession, is a minimal part of his theory and most of all it is not the central topic.

In the classical theory the interest rates balances investments and savings. The logic is simple. The interest rate is a price as just any price for instance for potatoes, sugar, socks and balances the supply and demand. If there is good price for savings, if the price or the interest rates is high, a lot of savings will be offered. If the interest rates are low, few savings will be offered. At the other hand there are more investments the lower the price for 'capital', conceived as not consumed income of the past, and the higher the price for 'capital' the less investments are profitable and will be realised.

[Actually there is a serious problem in the keynesian theory as well as in the neoclassical theory. The interest rate is only one factor, the time the loan has to be paid back another. For investments which amortizes only in a very long period, like houses for instance whose real amortization can take more than 100 years, the period of time the credit has to be paid back is as important as the interest rate. A very low interest rate is worth nothing if the loan has to be paid back in let's say ten years. Over the 100 years it would be perhaps a very profitable business, but under these conditions it is difficult to construct it, because in the first ten year the money has to come from somewhere else.]

As in the case of any other commodity the price depends on the preferences. The classical theory assumes a preference for consumption in the present. That has the consequence that only in the case that there is a compensation for the sacrifice, a compensation for foregoing consumption in the present, people will forgo consumtion. At the side of the supply side the type of interests are just costs. The investment has to be sufficiently profitable to cover theses costs. If an entrepreneur believes that he can't cover these costs he will not invest.

[By the way, there is another problem with the classical theory. If the investments depended exclusively on the preferences of the potencial savers and the savings, conceived as not consumed income of the past is the condition of investments, there is little that can be done to promote economic development but give a sermon. That's why Adam Smith complains so often about the propensity to consumption of the people. Beside giving a sermon there is little that can be done. The picture changes, as we will see later on, if investments are not financed with 'capital', conceived as a scarce thing in the classical theory, but with money, that is not scarce at all.]

The concept that 'capital', understood as not consumed income of the past, is already misleading at a low level. Most investments are financed by loans and with money generated by the banking system, see interest rates. Investors will save in the FUTURE, when they pay back the loan and the loans don't depend on prior savings. Actually 'save in the future' is not the right term. The right term would be they destroy the money previously created. The fact that common sense shares the classical concept is due to the erroneous belief that the money lent by institutional investors, normally banks, has been saved previously by others and the bank is only an intermediary of the good 'money'.

Another reason why this erroneous idea is so persistent is the fact that in private live it is actually possible to save now and consume later. Someone who put aside every month a certain amount of money in order to buy a car can actually buy a car after a while. However if at a certain day X everybody would start to save the double, we would have a radical reduction of demand. In a case of unemployment and provided that this doesn't lead to negative balance of payment, imports that exceeds exports, in other words in a situation where the national economy can satisfy the demand, it would be better if people buy first what they want by taking a loan and destroy the money generated later.

[It is therefore clear that the famous equation we find in any textbook is wrong.

Y = C + I
Y = C + S

With Y = national income, C = consumption, I = investment, S = saving.

This leads to the famous equation I = S, investments equals savings. This equation describes an equilibrium, but not the proces, that leads to this equilibrium, because it can be interpreted in two different ways. First people save money, and then this money is invested. Equally the equation could be interpreted like that. First people invest and they pay back the loan with the income generated from the investment. This is something completely different from an economic point of view. In the first case, the amount of money is not increased. In the second scenario the amount of money is increased for a while, until the credit is paid back. To put it otherwise: In the second scenario there are no savings needed.

To put it more clearly. If S is zero, if we have therefore simply Y = C the equation suggests, if interpreted in a classical way, savings as not consumed income of the past, that no investment is possible. The truth is, that even in this case investments are possible with money generated by the banking system. The question is not whether there is enough 'capital' or not, the question is, whether the production structure can produce marketable product for which exists a real demand.]

In the classical and neoclassical world 'capital' is something scarce, because a sacrifice is required to obtain it. Something that can only be obtained by a sacrifice doesn't exist in any amount and has therefore a price in the sense of the market economy. The price of money, as any other price, has in this case the function to signal scarcity and guarantees that the factor 'capital' is used in the most efficient way, in other words, the most profitable investments will be realised, but not all investments.

This is obvious. If someone lives in the desert water is scarce. One can drink it, one can cook with it, one can water the plants, wash his clothes or the car and he will do the most important things first. If someone lives on a lake the situation is different. He can use water for any use.

The difference between the classical theory and the keynesian theory is therefore this. In the classical theory 'capital' is scarce, because a sacrifice is needed to obtain it, in the keynesian theory not.

In keynesian theory it is the other way round. Savings are the RESULT of investments, but not the CONDITION. Investments are financed with money and the amount of money disposable for investments doesn't depend on savings but on the policy of the monetary authorities. In other words, it is not scarce and no sacrifice is needed to obtain it. Due to the fact that is not scarce, it can't have a price in the meaning of a market economy. The interest rate is not a price and allocates nothing. The more profitable investments can attract the really scarce productive factors, for instance qualified labour, raw materials etc. anyway, because they can pay a higher remuneration. It is often said, that the interest rate has an impact on the allocation of 'capital'. This is not true, because 'capital' is just money, is not scarce by nature and there is no need to allocate it in the most profitable way, because something that is not scarce can be used in just any way. It is enough that it is allocated in a way that it can be destroyed later, when the loan is paid back, otherwise we would get an eternal increase in the amount of money and finally inflation.

All that leads to a fatal consequence. In the classical and neoclassical theory part of the productive potential can't be used, because interest rate is so high, that some investments are not profitable.

[Or the time the loan has to paid back too short.]

In the keynesian theory any investment that allows to pay off the loan is realizable, because the interest rates only have to be high enough to cover the administration costs of the banks and the risk.

[Cover the risks means, that the interest rate has to be enough that it is guaranteed that the whole amount of money is destroyed. If 10 people borrow 1000 dollars and one goes bankrupt, the missing 1000 dollars has to be paid back by the others.]

A market for 'capital', conceived as not consumed income of the past, doesn't exist in the keynesian theory and was substituted by the money market and given a certain amount of money, that obviously can be changed at any moment by the monetary authorities, the interest rate depends on the preference for liquidity.

We will return on this topic later on, but to put it short. Investors have always the choice between liquid investments, for instance investments on the stock markets, which can be reconverted at any moment in the most liquid existing asset, money, and is therefore sure o real investments that are risqui, because they can't be reconverted at any moment in money.

This means that the interest rate is not the price paid to induce other people to forgo present consumption, but the price paid to induce the investors the save harbour of security. Simplifying: If the rentability of an financial asset is only 4 percent, but with little risque, and the investment in a real project is 8 percent, but very risky, it is possible that investors prefer the financial asset and the more insecure is the situation, the more they will opt for the first version.

To put it otherwise the whole economy depends on speculation, on a casino. The money market dominates the market of goods and the market of goods dominates the labour market and therefore the labour market depends on the money market. Money is not any more a pure veil with no real impact on the economy, but a decisive factor.

Those who have read the previous chapters has already seen a lot of examples that illustrates that it is important to understand the difference between classical theory and the keynesian theory. We have for instance talked already about a pension system based on an individual capital stock. The idea is that people save money during their working live and they live from this capital stock, when they have retired.

This is somthing that won't work if everybody does it. First of all with savings it is impossible to secure an undefined consumption in an undefined future. The consumption in the future has to be supplied in the future. Only in the case of, at least in industrialised countries, irrelevant goods like rice, which can be stored for a long time, saving can be secure the consumption in the future. In general the products consumed in the future has to be produced in the future. It is completely unclear how saving in the present can improve the production of consumer goods in the future. A possible relationship, perhaps this is assumed, could be that entrepreneur invest now in order to satisfy a demand in thirty years. However that is not very plausible. It is more plausible that entrepreneurs will reduce investments in the present if people save more.

Second: Savings for investment purposes are nothing else than money. This is the case as well in the classical theory. They use the term 'capital' and money as synonyms, although the classical authors make a distinction. 'Capital' is something that derived from further savings and can be used for investments and money is just a commodity that serves only for transaction purposes. If there is more of it, the price for this commodity decreases, in other words, we get inflation.

However in real live 'capital' for investment purposes is nothing else but money and there is no difference between a 100 dollar note that derives from saving and a 100 dollar note that has been freshly printed by the central bank. For an potential investor it doesn't make any difference where the 100 dollar note comes from.

Classical theory has therefore a missleading interpretation of the term saving. The definition of the classical theory, savings as not consumed income of the past, is meaningless. The right definition is this: Savings are the production of capital goods instead of consumer goods. With this definition we get right to the point. Savings are needed in a situation of full employment, because in that situation an extension of productive potential, in other words the production of capital goods, is only possible at the expense of consumer goods. In a case of unemployment we can substitute 'capital' by money freshly printed by the central banks. Nobody needs in this situation the savings of the people and people cant expect that they get a good price for something that is only scarce if it is kept artificially scarce. In the time of writiing, 2015, the savers complain about the central banks who inject money in the market and make the interest rates fall. They assume that central banks has to keep money scarce and interest rates high, even at the price of stalling the economy.

Third: The adepts of classical thinking state that there would be no excessive debt burden if people saved more money. This is obviously true, but it is unclear why the same people who complain about low interest rates due to the fact that the central banks inject money complain about the public debt burden. Public debt burden keeps interest rates high. Without public debt the interest rates would be much lower and even at this low interest rate it is doubtful that the savings could be absorbed. There is a clear preference for secure harbours and federal obligations or similar effects are a secure harbour. To put it otherwise: If we talk about the cost of debt burden, we have to talk as well about the costs of no debt burden and there is a strong evidence that the costs of no debt burden would be very high.

The argument that the fact that debt burden has dramatically increased and keynesian theory has therefore proved to be wrong is misleading. The author assumes, that without this increase of debt burden most industrialised countries would have already collapsed and we would have seen social unrest of any kind.

In classical theory and marxism, actually marxism is only a variation of the classical theory, or to be more precise, what was correct in the classical theory is disregarded in marxism, but all the errors were accepted, savings are kind of battery. Savings have charged energy and this energy can be used to do something else. In the classical theory, if we put aside Jean Baptiste Say, the battery is not charged with electricity, but with trabajo. Adam Smith (and Karl Marx) are very explicit concerning this point. The value of an item depends on the amount of work incorporated in this item. If one possess for instance a pair of trousers with 10 hours of work incorporated he can buy with this pair of trousers something that has as well 10 hours of work incorporated. In this logic someone only can buy labour, if he possesses labour. This logic is so abstrus, that a further discussion in not needed.

However even in this abstruse concept there is some truth. In the classical theory there are three productive factors, labour, capital and land. But if 'capital' used for new investments, in other words not machines, builduings, raw materials etc. is just money, land is irrelevant, there is only one productive factor left. At first glance one is stunned a little bit by the affirmation of Keynes that labour is the only productive factor, but from a keynesian perspective the affirmation is right.

Alfred Marshall at the other hand states that know how is the most important productive factor. The space of time between money and real capital, machines, tools, building etc.. depends on know how.

Let's repeat: The Error doesn't consist only in the fact that the interest rate doesn't balance savings and investments, about this problem we will talk later. The error is more fundamental. Savings has nothing to do with investments. In the context of the keynesian theory it would be better to talk about credit amortization.

Due to the fact that money is only a veil and the same thing as 'capital', there is no distinction in the classical theory between profit rate and interest rate, because both have the same denominator, the equation 'profit rate or interest rate = (earning / capital) * 100'. If however the interest rate is fixed by the monetary authorities the situation changes completely.

It is stunning that this distinction was only made in 1898 by Knut Wicksell in his book Interest and Prices, that had no impact. Wicksel distinguish between the natural rate of interest and the market rate of interest. The natural rate of interest is what we would call the profit rate in the context of real investments and the market rate of interest the interest rate money can be borrowed. The theory of Knut Wicksell and especiality the 'naturalness' of the natural interest rate can be questioned, because it is based on the same wrong assumption about 'savings'. The natural interest rate is the interest rate that balances the savings, not consumed income of the past, and investments. The problem is, that there is nothing to balance. As long a there is a productive potential that can be really used, in other words that can be produce something for which exists a real demand, the market interest rate can decrease until full employment is reached.

[The underlying problem is always the same. Knut Wicksell assumes full employment. In case of full employment we have actually something like a natural interest rate. People can decide whether they want to produce more capital goods and can therefore consume more in the future or if they want to consume all they have in the present. In this case, and only in this case, there is something like a natural interest rate that depends on peoples choice and preferences between consumption in the present and higher consumption in the future.]

Actually the first who saw clearly that investments are financed with money and not with not consumed income of the past was Joseph Schumpeter in his book 'Theory about Economic Development', first published in 1911. He saw very clearly that money could be created "out of nothing". This is actually the central and relevant message. However that 's not the message Schumpeter became famous with. He became famous for his creative destruction, an actually vague and poorly illustrated concept. Furthermore Joseph Schumpeter sticked to the classical theory and assumed full employment. Although the charismatic destructive - creative entrepreneur cand attract by an increase in the amount of money his innovations, the amount of money will lead to an inflation. It was unthinkable for Schumpeter that an increase of money would lead to higher employment, because there was no unemployment before.

The classical theory considers saving as a kind of battery. In the case of Adam Smith the value of capital depends on the amount of work incorporated in this capital. The owner of the capital can buy with his capital as much work as is incorporated in this capital. For Karl Marx the price of an item is the crystallisation of the labour incorporated in this item. However it is unclear how we can increase with savings or accumulation of capital our consumption in the future.

[The following scenario is a little bit theoretical, but it describes actually what is assumed in the the case of a pension system based on an individual capital stocks.]

Let's assume that we have an item for which exists a normal demand of X and this demand is supplied. For an unknown reason 10 000 people start to save money in order to buy this item and let's say that on a sunny day X, after having saved enough money, they all go to the shop who sells this item to buy it. The result is obvious. They would get it only for a higher price because the shop would immediately realize that demand has increased and they will sell it to those who has the highest preference for this item and are therefore willing a higher price and who can afford to pay it. In other words, it the day they want to buy the item the supply doesn't meet the demand, they will see their savings melting away like butter in the sun.

Money is pretension to a part of the productive potential, but it is completely irrelevant where it comes from. Obviously there is no labour incorporated in a 100 dollar note freshly printed by the central bank, but the shop owner don't care about the amount of money incorporated in the 100 dollar note. What Karl Marx called fetichism, is actually kind of a psychosis. Karl Marx saw incorporated labour everywhere.

A pension system based on individual capital stocks can only work if the future pensioners get by this way a bigger part of the means of production. However it is hard to imagine that this is going to happen. First because it is not allowed to the insurance companies, at least in Germany, who manage this stocks to invest in the private sector, because that is risky. Second, because keeping money scarce, only under these conditions companies depend on private savings, would weaken the possibilities of the monetary authority to do something against recession. The interest of the savers are high interest rates and they care little, as savers, but not as people who are looking for a job, about unemployment. The interest of investors are low interest rates and for them high interest rates are a hindrance for investments.

A pension system based on individual capital stocks is a fatal way. The more people attempt to save money for their individual capital stock, the greater the supply for savings, the lower the interest rates, the more they have to save to get a sufficiently hight capital stock, the lower is the national demand and the more the lack of national demand has to be substituted by exports.This may explain in part the dependency of Germany on exports.

From a macroeconomic perspective savings, conceived as not consumed income of the past, is useless. There is only one exception of this rule, most of the irrelevant in practice and one very relevant. Goods that can be stored, like rice, can be saved in the present and consumed in 30 years. If we buy every month a kilo of rice and store it, we have a lot of rice in thirty year and enough to eat for a long time. This is, at least in developed country, an irrelevant example.

However housing can be 'stored' as well in a certain way. If we built a house now it can be used in thirty years. In the case that a product can be stored, we can produce it now and consume it thirty years later. In this case we can even transfer savings to the future. In other words, instead of subsidizing the building of an individual capital stock, as it happens in Germany, it would be much more intelligent to subsidize the building of houses. The actual system will lead to a catastrophe.

We can deduce from that something very simple, however important for the comprehension of the keynesian theory. Crucial for the economic development is the actual PRODUCTIVE POTENTIAL not SAVINGS. If there is a productive potential, it can be activated with money, but if there is none, it can't be activitated with savings.

By productive potential we mean the real capacity to produce marketable products for which exists a real demand. We don't understand by productive potential for instance the 'work' of economists, in other words the production on never discussed discussion papers published in 'cientific' journals. This kind of work is 'more' kind of a social transfer than real productive work.

It is not possible furthermore to transfer with savings present consumption to the future and there is, in a situation of unemployment, no sacrifice needed in order to get 'capital'. 'Capital' is furthermore not scarce and interest rates are not a price in the meaning of a market economy. 'Capital' is not the same thing as money and money plays a crucial role in economic development.

In other words: For this and many other reasons the classical and neoclassical theory is completely is wrong and wrong is as well the theory of Karl Marx. Karl Marx assumes that the 'capitalists' accumulate something, labour to be more precise. In reality this 'accumulated' labour becomes money and competes therefore with any type of money. The proletarian of the world can therefore abbreviate the process. Instead of expropriating the 'capitalists' they can go to a bank, take a loan and become 'capitalist' themselves and that what happens every day in reality. People found companies with borrowed money or with the participation of venture capitalists. The problem is not the money, the problem is the know how. By the way: Institutional investors have no interest in 'capitalist' system as the one described by Karl Marx. The live from granting loans, something not needed in the marxist theory. For the banks it is much more interesting to borrow the money from the central bank for lower interest rates than taking it from the 'capitalists' for higher interest rates.

The clasical / neoclassical theory seen very logical to the common sense, that explains its perserverance. It seems logical to many people, if the save today, they can consume more in the future, something that is even true at a microeconomic level. However even at the common sense level it is not so evident and contradicted by quotidian experience. Family houses for instance are normally financed by loans and people pay back the loan by "saving" in the future. A possible interpretation for the fact that people don't understand anyway that classical saving doesn't work can be that they think that other people have saved the money before and that is was not freshly printed by the central bank.

If the house is build with previous savings or future savings is completely irrelevant. The question is whether there are enough resources to construct houses at the moment people want construct them. If that is not the case, prices will rise.

This point is crucial for the understanding of the keynesian theory. Who doesn't understand that, doesn't understand keynesian theory and most books of macroeconomics gives an erroneous description of the keynesian theory. They suggest that the equation I = S is true in both cases, what is actually true, because the equation describes only an equilibrium, but doesn't describe how this equilibrium was reached. I = S can be the result of a previous saving that leads to a corresponding investment, the classical theory, or to an investment that triggered a corresponding saving, the keynesian theory. However the differences between these two categories are so important that this equation is misleading and a lot of people interpret the equation in a classical sense.

This has consequences as well for all kind of theories about economic development. In most of these theories "savings" play a role. It is supposed that developing countries have to "save" more in order to increase their productive potential. The truth is, that no saving is needed, but know how.

This explains as well why it doesn't make any sense to send 'capital' or 'money' to underdeveloped countries, because the 'capital' is not the problem. Any amount of money can be send to these countries. If they are not able to produce what they need, the only thing they can do with this money is to buy from foreign countries what they need and the story starts again.

For the same reason everything what has been said about Taiwan, Singapour, Maylasia, China etc.. fourty years ago, especially that they have to save more and that it is going to take ages until they reach the same living standard than developed countries, proved to be wrong. They were able to get the same level of training in a much shorter time than expected and very soon the will have the same living standard as the industrialised countries.

The fact that savings, conceived as an amount of money, otherwise the definition doesn't make any sense, because 'capital' can only be invested in its most liquid form, money, play such a big role in economic thinking is due to the fact that it can be modelized in a mathematical way, what gives a somehow "cientific" looking to this theory.

The production of know how is something much more complex and not at all a mechanical process like the accumulation of labour in products or similar theories. If we talk about the production of know how we are confronted with very dynamic processes that happen in a formal or informal way, we talk about changes in the didactic, about new methods of teaching, for instance e-learning, innovations etc.. We talk about unpredictible and chaotic processes that can be analized the way economists normally analyse economic issues.

To make this point clear: The term "savings" make sense if we don't understand by this term something monetary. The term make sense if we understand by it the production of 'capital' goods instead of consumer goods. This is indeed saving in the classical sense. People make a sacrifice in order to be able to consume more in the future. In this case the often mentioned Robinson Crusoe example fits. Robinson Crusoe can go fishing with his hands or starve some days, make a fishing net and then and eat more fishes in the future.

The situation is completely different if Robinson Crusoe can get as much fish as he can eat in half an hour. In this case he can spent the rest of the day in something that would correspond to consumption, swimming, taking a sunbath or whatever.

In developed economies a trade off between the production of consumption goods and the production of 'capital' goods doesn't exist. (At least not inside a realistic framework.) An increase in the aggreagate demand through an increase in public spending does not lead to a decrease in the production of capital goods, but to an increase in public debt burden. This is the problem.

In the classical / neoclassical theory saving is always closely connected to investment. Income is either consumed or saved to be invested. Income that is not consumed will be invested. In public debate the term 'saving' is very often used in another way. In this case it just means a reduction of consumption without any relationship with investments. This is meant when in public debate it is claimed that the greece should save more. The meaning is not in this case that the greece should save more in order to invest more. What is claimed is a simple reduction of consumption in order to get a balanced national budget.

A situation where consumption exceeds income is rarely discussed in the classical theory and is considered as the destruction of 'capital', see productive and unproductive activities. Something is obviously wrong with this theory, because public debt burden increased dramatically in the last 10 years but nobody has the impression that nations got poorer or that 'capital' got destroyed.

The adepts of the classic theory would ague that the nations would be better off as well without that increase of government spending and the demand triggered that way and that the government attract resources that would have been used in a more profitable way otherwise. However it is difficult to prove this theory. This is only plausible, if public debt burden impeded someone to realise the more profitable investments as well, a scenario not very plausible in a situation of unemployment.

The belief that governmental spending leads to a distortion of prices is based on missleading ideas about keynesian theory. It is for instance believed that increased government spending is financed by higher taxes. In this case it would be true indeed that 'keyensian' politics would distort prices, but this wouldn't be keynesian policy or more precisely a possible conclusion that can be drawn from keynesian theory, because in this case aggregate demand wouldn't be increased at all. The government would take something from one group and would give it to another group and the result would be zero.

In this case we would have indeed the problem that the government takes away money from profitable sectors and put it in less profitable sectors. Something like that happens for instance after the fall of the wall of Berlin in 1989. Due to the big economic problems in the former East - Germany there was a big need of social transfers and an extra tax was introduced in order to finance these social transfers. In other words, money that could have been used in a productive way was used to buy clothes, food, improving the basic infrastructure and so on.

It can be argued furthermore that in the long run the increased public dept burden would increase to higher taxes because in the long run this will lead to higher taxes. People who argue like this forget that Keynes talkes about investments and not consumption.

In other words: If 'capital' for investive purposes is not the result of a sacrifice and most of all if it is not scarce, the price for capital, the interest rate, is not a price in the sense of a market price. It has no impact on allocation, see interest rates and is simply, together with the amortization time, a hindrance for investments. If consumption is financed by an increase of public debt burden it will indeed in the long run lead to higher taxes and to a reduction of consumption in the future or to less investments in the future. But any investment that can pay off the loan and that leads to higher employment, even if the profitability is very low, is positive, because public debt burden wouldn't increase and unproductive resources would be activated.

Although we can read that everywhere, Keynes never argued in favor of consumption financed by a public deficit. The famous multiplier effect works as well, at least in a mathematical modell, with consumption as well, but practice shows the opposite and furthermore there is no need to increase aggregate demand through an increase in consumption if it is always posible to increase aggregate demand by creatin real fortunge (roads, bridges, buildings, schools, hospitals, investments in research and development etc. etc..) In this case the next generation inherits perhaps debts, but they inherit fortunes as well and will therefore not complain.

Another argument that is often put forward and that it is suggested by the IS-LM model, is the idea that an increase in public spending would lead to an increase of the interest rates and would therefore 'knock out' private investments. This is for several reasons a completely missleading presentation of the keynesian theory.

The first point is, that we have seen in the last ten year, we are still in the year 2015, a dramatic increase in public debt and a dramatic DECREASE of the interest rate. It seems that the scenario of the IS-LM model has little or nothing to do with reality.

Second: One crucial statement of the keynesian theory is that interest rates has to fall to a level that is just enough to cover the administration costs of the banks and the risk. It makes therefore very little little sense to assume a scenario where the monetary authorities keep interest rates high by restricting the amount of money.

[By the way: In a classical scenario the government can only increase spending by taking away money from the private sector. This has obviously an immediate impact on the interest rates. Only if he pays higher interest rates, he can induce lenders to borrow money to the government instead to the private sector. There is no impact on the national income, beside the negative effect on allocation. In the keynesian scenario things are more complicated and more realistic. An increase in public spending would trigger an increase of national income and that would lead to a bigger need of money for transaction purposes. Given a fixed amount of money, a not very realistic scenario, some people who invested in financial assets would be obliged to sell them, their prices would fall. That would induce other people to buy this assets and interest rates would rise. In other words, in the keynesian theory money exists always in abundance and only if government spending leads to an increase in income and therefore to a bigger need of money used for transaction purposes the interest rates rise. We will discuss this topic later again. ]

Keynesian theory is often reduced to lack of demand. It is assumed that the government hast to increase aggregate demand in order to get the economy back on track. That is not the relevant point. From a theoretical point of view it has to be explained WHY Keynes assumes a lack of demand, because in the classical / neoclassical theory that is something that can't happen.

In the classical theory a lack of demand is impossible for several reasons.

First income is either consumed or saved and invested. There is no rational reason to put "money under the pillow". If interest rates are low, people will consume their income, because consumption in the present is preferred to consumption in the future. A high interest rates that guarentees a much higher consumption in the future is needed to induce them to save and invest. The interest rate balances savings and consumptions and nothing is left.

The problem with this theory is, that there is no guarantee that there is enough capital to employ all the resources. In order to put people to work in the theory of Adam Smith or David Ricardo 'capital' is needed and capital derives from previous production. If the capital produced in the past is not enough to put all people to work, we get to a situation of unemployment, see as well productive and unproductive labour. In classical theory a lack of demand is not only inexistent, but consumption in general is viewed more as destruction of capital.

In the keynesian theory 'capital' is not even needed. Investments can be realized with money and the amount of money available doesn't depend on previous production, but on the policy of the monetary authorities.

Therefore rises the next question. If 'capital', that is nothing else than money, is actually available in just any amount, why we have unemployment? The keynesian explanation is this. In the classical theory a situation of insecurity would lead to higher interest rates and if the potential savers don't find investors willing and able to pay these high interest rates, they consume their money and in both cases we get an increase in demand. In keynesian theory, as realistic as bad, there is a third possibility beside consumption and investment in real assets. The investment in financial assets, for instance speculation on the stock markets.

Financial assets are almost as liquid as money itself, can be reconverted in money at just any moment, but yield some profit. In case of insecurity we have a preference for liquidity. Liquidity means actually security. If we can reverse a decision at just any moment, in this case, if we can sell a financial asset at any moment, there is obviously little risk, at least as long as not all the shareholders want to sell their assets at the same moment.

However the term 'insecurity' is not well defined in the keynesian theory. Classical and neoclassical theory assumes that investing money, directly or through an middleman like a banc, is not very complicated and if any investment seems to risky, people will consume their income, something that creates demand as well.

This is actually a completely irrealistic view. Very few people have the knowledge to invest directly. (This perhaps is going to change with initiatives like "crowd funding", but at the moment it is like that.) People only invest through financial intermediary like banks, insurances, pension funds etc.. and they expect that these institutional inverstors are able to detect profitable investments. This is a missleading idea. Institutional investors invest most of all in financial assets and in real assets only if the borrower can supply securities.

Insecurity is a lack of information, that's obvious. The lack of information can be objective, in other words the needed information are not objectivly not available or subjective, in other words someone is not able to get the needed information and / or is not able to inteprete them. A change in the study of economics could reduce this problem, see preliminaries.

Institutional investors, banks, insurances, pension funds etc., prefere to invest in the stock market, because stocks and similar financial effects are a homogeneous product. There is no need to know anything about the chemistry industrie, the car industry, the pharmaceutical industry, internet companies etc. etc. in order to invest in shares of these companies and the more complex reality, the more they will invest in financial assets.

At the other side they are obliged to earn money with money, that's their unique business modell. They have therefore a strong incentive to collect money from savers by guaranteeing a certain interest rate and to speculate with this money on the stock and similar markets, for instance on the markets for stocks, bonds, governmental loans etc.. Without the almost sure governmental loans most of them would be already bankrupt.

To put it short: The question is not whether the whole income is consumed or saved and invested, because savings are irrelevant for investments. The problem is, that in a situation of insecurity there is a strong liquidity preference and that leads to investments that have no, at least directly, impact on employment or economic growth.

Second: Against the keynesian theory very often is put forward Say's law. The problems are similar to the problems mentioned before. Say's law states that any offer creates its own demand. The idea is simple: People only work if they want to spent the income they earn, either by consuming it or by saving and investing it. That means, that the whole national income will be spent and a lack of demand is impossible.

[This is the interpretation we find in textbook. The original version is somehow different. Say actually only wants to demonstrate that money is only used for transactional purposes, see Say's law.]

The problem is, beside the fact that Say's law is wrong itself, see Say's law, that the fact that people spent all their income doesn't guarantee that we have full employment. It is neither guaranteed that the demand is enough to insure full employement, nor that there is enough 'capital' to employ all people. Say's law is perfectly compatible with an equilibrium at a level of underemployment.

[What is actually a possible scenario of keynesian theory. We have an equilibrium on the capital and the markets for good, but at a level not high enough to reach full employment.]

We have to distinguish very clearly between keynesian theory, that is about the function of interest rate and money and their relationship to employement and possible consequences that can be drawn from this theory and that some people actually draw. One possible conclusion is that in case of underemployment the goverment should increase aggregate demand, actually Keynes speaks only about investments and not about consumption, by deficit spending. (Not by higher taxes as the Haavelmo theorem suggest.)

This expansive fiscal police is questioned for several reasons. It is argued that prices where this way distorted and we get therefore a missallocation, that government debt burden increases and that inflation will rise.

Most of the people who put forward these arguments didn't really understand what keynesianism is about and they don't distinguish between a situation of full-employment and underemployment and they don't see that keynesian theory gets to the exact same result, although in a different way, as the classical theory in case of full-employment. In the case of full employment expansive fiscal policy would to missalocation, inflation and a rise in public debt. Keynes himself wouldn't had denied that.

Keynes assumes underemployment, the historically normal situation, and in this situation everything is different. The maximal missallocation is already reached: unemployment. Productive factors that are not used, represents the maximal missallocation. Keynes assumes that the interest rates, which depends on speculation on the money market, can reach a level that impedes the use of less profitabel, although profitabel variables.

[By the way: This is a situation that can even happen in the classical theory. Adam Smith preaches in favour of less consumption and that the resources should be used in a productive way and in his world there is little that can be done but preaching. If investment would really depend on 'capital', conceived as not consumed income of the past, there is little that can be done. Acquiring knowledge by the way wouldn't be very helpful, because even highly qualified people would have to wait until enough 'capital' is accumulated. Fortunately it is the other way round. If there qualified people who can produce marketable product, they can be activated with money and money is available in any amount.]

The same mistake makes the austrian school. The austrian school assumes that low interest rates induce entrepreneurs to expand the productive potential, if interest rates are too low. Due to the fact that he assumes full employment, the productuion of consumer products will decrease and inflation will rise. To stop inflation the banking system will rise interest rates and the some investments that had been undertaken under the assumption that interest rates will remain low, will become unprofitable and are therefore useless. Some companies will became bankrupt and unemployment increases. The theory is somehow weird and very similar to the cicle theory of Wicksel, but the error is obvious. In case of unemployment investors can produce at the same time consumer products and capital goods. The only thing that prevent them from doing it are high interest rates and a amortization time that is too short.

[Actually the amortization time is critical as well, although never mentioned nowhere. This is especially critical in the context of the construction of houses. If the amortization time would be as long as the period of use a lot of houses could be built and that would be a better solution for the problems with the pension system than subsidizing individual capital stocks, see Müller-Armack.]

The next argument very often put forward is inflation. It is argued that an increase of aggregate demand will exceed the productive potential and therefore lead to inflation. The problem is the same as before. In a situation of unemployment that is not going to happen. What actually can happen are what Keynes calls bottlenecks. A general increase in aggregate demand can lead to a situation where demand exceeds supply in some sectors of the economy. This can lead, in theory, to an inflation.

However in a global economy this is not a realistic scenario. Any demand can be satisfied in somewhere in the world, even a dramatic increase in some days. After the fall of the wall in Berlin in 1989 the demand increased dramatically and suddenly. Actually the whole East - Germany was supplied suddenly by West - Germany. In other words, from one day to another 62 million people supplied 17 million people more and no inflation happened. What happened was this: The balance of payement turned negative for a short period, an unsusual situation for Germany, but without any inflation. Inflation is not the problem of an expansive fiscal policy. The problem is the balance of payement.

It can happen that a government who makes an expansive fiscal policy triggers demand and employment, but in a foreign country, with the result that the government increases its debt burden and the jobs are created in a foreign country.

The serious problem is an increase in government debt burden. Concerning this problem we have to distinguish between an expansive fiscal policy that increases consumption and an expansive fiscal policy that increases investments.

We see the problem easily if we assume two extreme scenarios. In one scenario the government takes a loan, increases that way the amount of money and increases social transfer. If the people who get the money spent 100 percent of these social transfers in consumer products, electronic devices, food, cars whatever, coming from abroad the government will increase its debt burden by 100 percent and trigger economic development in foreign countries. This is the greece version. We are still in 2015.

The other extreme is a scenario where investments in the infrastructure are financed by increasing the amount of money and all the surplus in consumption is supplied by the national economy. In this case the picture is completely different. First there is an increase in public debts and a corresponding increase in public fortune, something that is never a problem. A problem only arises if the time the loan has to be paid back is shorter than the time of use. Public fortune and public debt would be balanced, but there would be a problem of liquidity.

That explains why governmental institutions very often rent buildings instead of constructing them. If we calculate that the time of use is 150 years and the loan has to be paid back in 150 years, that's how it works in the private economy, the monthly financial burden would be lower than the rent. If we assume that the loan has to be paid off in 10 years, than the rent is lower.

For the further generations that would be fair. Nobody complains if he inherits a house worth 1 million that has still a mortage of half a million. He would inherit half a million.

Those who say that governmental investments will always result in an increase of public burden has to say clearly what he means. He means that the government is never as efficient as a private company and governmental investments are therefore never profitable not even in the long run.

An increase in investments will trigger an increase in consumption, that is obvious. If this consumption is supplied by the national economy the financial burden is obviously lower, because through the different kind of taxation, plus value tax, income tax etc. the government will get back part of this money. Furthermore the initial stimulus would trigger more employment in the consumption industry.

To put it short: If an expansive fiscal policy leads to sustainible economic growth or is just a flash in the pan depends on how it is done. The nearer it is to investments which are at least profitable in the long run, the better the chances that it is sustainable and that public debt burden will not increase.

The fact that public debt burden increased over the years and is still increasing has to do with how the money is spent. Social transfers are regulated by laws and are therefore a simply administrative act. Investing requires some kind of intelligence and that is always a difficult issues in public administrations. Another problem is, that if the government invests, there is a big chance that the project will be much more expensive than necessary.

The argument that keynesian policy leads to misallocation is still more absurd in the case of expanisve monetary policy. If the monetary authorities increases the amount of money through open market operations interest rates fall. Until here the money market works like the potatoe market. If the supply rises and nothing else changes, the prices, in this case the interest rates, fall.

However in this case we don't have any impact on allocation in both situations, nor in a situation of full employment nor in a situation of underemployment, because the interest rate, on the contrary what is often believed, has no impact on allocation, because money is not a productive factor itself. Even at low interest rates the more profitable investment will kick out the less profitable investments, because the more profitable investment can attract the scarce resources anyway by paying a higher remuneration. This is true in both cases. In the case of full employment and in the case of underemployment.

In a situation of full employment an expansive monetary policy is the best solution. It has no impact on allocation of resources and the fundamental pillars of a market economy, decentral information processing through prices and the incentive to reduce scarcity, see homo oeconomicus, are not at stake. The interest rates have to decrease until full employment is reached.

The biggest opponents of keynesian theory are all the adept of the austrian school, that nobody actually takes seriously. The problem is, that they have completely missleading ideas about basic economic concepts. Their argumentation is as wrong as fun. They want to prove for instance that hoarding money can be a rational behaviour. That was not even a rational behaviour for the classics. Hoarding means, that people put their money under the pillow and don't spent it all, nor for consumption nor for investments. The scenario they assume to 'prove' this is that. They assume that people expect a big earthquake that would destroy all buildings. In this case it would be absurd, that's what they assume, to construct houses, because these houses will be destroyed. They assume that people are better off if they hoard the money, wait until the earthquake is over and then start to build houses with the money hoarded.

The problem is, that they don't need any hoarded money to construct the houses after the earthquake. They need real resources, qualified labour, machines, raw materials to build the houses, but not hoarded money. It doesn't make any difference if they activate the needed resources with money freshly printed by the central banks or with the money they found under their pillows. In both cases they have the same problem. Part of productive potential has to be used to construct houses and is not available for the production of other goods. There is exactly no difference at all concerning this issue. The only difference is that in the case people put money under their pillow, they forgo consumption before the earthquake as well. They suffer two times. Before the earthquake and after the earthquake. A possible consequence of financing the reconstruction of houses with the hoarded money alone can be that the interest rate are high and only few houses will be constructed.

That people are not going to construct houses if they now that this houses are going to be destructed shortly after is obvious. If they know exactly when the earthquake is going to happen, it is a good idea to use their money for the production of construction machines. This may be helpful, because it extends the productive potential. Otherwise the construction of houses is going to be expensive and will last a long time. But actually there is no need to discuss all these absurde scenarios.

The error is always the same, although the austrian school is an extreme variation of this missleading concept. The idea is, that money stores some kind of 'energy' that can be used later. It is the same strange concept that we find as well in marxism and its concept that labour is incorporated in the commodity of the goods and prices signals the amount of money incorporated. If we want to consume eggs in the future, we have to produce them in the future. We will not get anything in the future with money, if nobody produces in the future what we want.

It is not possible, beside in the cases where we can really 'store' something, for instance rice, corn etc. to transfer by saving present consumption to the future.

Furthermore the adepts of the austrian school argues that 'hoarding' money is a result of the fact that the companies doesn't produce the products people want or that these product are to expensive. This is a strange kind of interpretation. At any time and of course today, there are thousand of products people want to buy. A nice car, the newest smartphone, new furniture, etc. etc.. The assumption that people don't find on the market something that would like to have is absurd. The problem is, that they can't afford buying it and the solution proposed by the adepts of the austrian school is foolish. Their solution is to lower wages and therefore the production costs. By doing that, things get cheaper and people get more. The problem is, that the purchasing power will decrease that way. This is the actual problem of Germany. The purchasing power is to weak and the gap between demand and supply can only be closed by export, what is a serious problem for the foreign countries. A single country can resolve its problems by lowering the wages, but if all countries do that, there will be a downward spiral. It is to assume that Germany will pay a high price for this policy.

A realistic scenario where low interest rates can indeed become a problem is this. Low interest rates and an increase in the amount of money fuel speculation. Every time the central banks injects money in the market, the price of the stocks rise. For different reasons, because they fear a bubble or because the fear that the distribution of wealth becomse very unequal, it is a relatively small group that benefits from the rise of stocks and similar assets, the central banks may be induced to rise the interest rates again what is a problem for real investments. However the solution is simple. The central banks should provide the banks only with money, if the banks prove that the money is used for real investments.

The adepts of the austrian school assumes that demand is infinitive and that the companies are simply not able to produce what people want or that they cannot produce it for the price people want. The author is an entrepreneur. If the austrians beliefe that it is no problem to produce what people want, the best thing they can do is to become entrepreneurs themselves. They will discover that finding out what people want is a risky enterprise and in case that the situation is very insecure, they do just nothing. The problem with academic economists is, that they have no real working experience and still less as entrepreneurs.

Beside that to a certain extent it is reasonable as well in keynesian theory to 'hoard' money in order to get protected against eventual calamities. Keynes distinguishs between three different needs for money: transaction, principle of caution and speculation. In the classical theory money has only one use, it serves exclusively to simplify the exchange of commodities, see Say's law. Keynes assumes that people will hoard some money as well to be protectected against eventual calamities, even if this use doesn't play any role in the keynesian theory. The crucial point of keynesian theory is the money used for speculation purposes. Speculation means that even in keynesian theory it can be a rational behaviour to "hoard" money, in other words to use it neither for consumption nor for real investments. They will do that in case of general insecurity and in a common effort they will produce exactly the problem they tried to avoid. In this case only the government can invest and lead the economy back on track, because the government is the only entity that benefits from all positive secundary effects.

Why most people find it so hard to understand that money doesn't have the function they assume? In part that can be explained by the fact on a private level it is actually possible to transfer with savings, not consumed income of the past, consumption to the future. In part that can be explained by the fact that a lot of people, for instance banks, insurance companies, pension fonds make a living from earning money with money. That only works, if money is kept scarce, something most central banks are nowadays, we are still in 2015, are, for macroeconomic reasons, nor longer willing to do.

In order to understand the keynesian theory it is crucial to understand that there is only one meaningful interpretation of saving. Saving is the production of capital goods instead of consumer goods. That is useful and necessary in the case of full employment and in case of full employment keynesian theory and classical theory gets, although the argumentation is very different, to the same results. That is way Keynes called his theory a GENERAL theory (General Theory of Employment, Interest and Mony). If explains both cases, underemployment and full employment. All the other theories simply assume full employment. Underemployment is simply something that cannot happen, although we know that underemployment is the rule and full employement the exception. Full employment we have only if the gap between the production potential, limited by know how, and the actual production is very big. In this case there is obviously no insecurity. People knows exactly what to do. A situation like that we have for instance after war, when people just have to reconstruct what they had before.

In the case of full employment government intervention would lead indead to all the problems described in literature. Missallocation, distorsion of prices, inflation, increase government debt burden, negative balance of payment and so on. If there is no productive potential left, there is nothing to activate and and the aggregate demand hast to be reduced by rising the interest rates, as Keynes himself states. Keynes doesn't argue in favour of an endless decrease in interest rates. He argues in favour of decreasing the interest rates until full employment is reached.

The refutation of the classical / neoclassical theory by Keynes is much more radical than the adepts of the austrian school assumes. The problem is not only that people 'hoard' money. The problem is, that the money hoarded is not even needed, but in a situation of insecurity, entrepreneurs will stop investing in real projects.

Even if the classical theory were true, what is not even the case, it would be irrelvant. If we assume that 'capital' for investive purposes is not consumed income of the past, the rest of the theory would be more or less correct. 'Capital', actually money, because only in its most liquid form, in the form of money, it can be invested, would be scarce, being scarce, it would have a price and if it were a necessary condition for investments, it would even be a productive factor. The market for 'capital', the market were savings and investments are balanced by the interest rate, would be relevant. The problem is, that this market is completely irrelevant. Relevant is the money market.

The interest rates that balances savings and investment can have just any level. It depends on the preferences of the people for the people of consumption in the present. It can remain eternally on a level above what it needed for full employment and the amortization time can be too short for investments. If by chance the interest rate is at a level that leads to full employment, the world is in order, but there is no guarantee that this is going to happen. This will only happen if there are a lot of highly profitable and sure investments are available that guarantees the payment of high interest rates. The only thing we can take for granted is that in a situation of full employment, in a situation where new investments are only possible by deducting resources from other uses, only very profitable investments can be realized. This is the Schumpeter scenario. In this scenario, full employment, Keynes get to the same results. There is no money for money for speculation purposes left, any money is used for transactions and any new investment would lead to a rise and interest rates that would kick out other investments (see below).

The capital market is subsituted by Keynes by the money market. Given a certain amount of money the interest rate is as arbitrary as in the classical capital market and can have any level, even one that is above what is needed to reach full employment, but the interest rate is no longer the price to be paid to induce somenone to undergo consumption in the present in order to consume more in the future, but the price to be paid to induce someone to leave the save harbour of liquidity.

In the case of the classical 'capital' market little can be done but sit and wait. In the case of the money market the amount of money can be increased and interest rates lowered allowing this way to realize more investments and creating more jobs.

It is argued that the todays scenario, low interest rates and high unemployment, contradicts the keynesian theory. This is strange, because it is a scenario exhaustively discussed by Keynes himself. If investors are not sure that they can at least pay back the loan, they are not going to invest even in a case where interest rates are zero. That's obvious. In this case, the so called liquidity trap, expanisve fiscal policy is needed. The government can invest for instance in meritory and public goods that in any case can only be offered by the government.

By the way: Even if we assume that the somehow absurd assumptions of the classical theory are correct, what we have no intention to do, investments would lead to savings and not savings to investments as assumed by the classical theory, at least if we try to figure out how it will happen in practice. Investors FIRST decide how much they will invest for which interest rate and THEN the savers decide if they are willing to save the money demanded by the investors. The savers can't take any decision independently from the investors. They can't say "well 5 percent of interest rate is alright for me, given this interest rate, I will save the amount of money X", if the investors are not willing to pay that.

From a practical point of view and in real live things are completely different. Most saving is done through institutional investors, banks, insurance companies, pension funds and are organised by long term contracts, in other words people save monthly a certain sum of money in the hope that the institutional investor can find the an investment that allows him to pay the interest rate granted at the moment of making the contract. That's the way how for instance life insurances work or more precise, that's the way it should work, because life insurances have serious problems to comply the contract and in Germany some companies stopped offering them because they are unable to comply the contract.

This kind of "capital" market has nothing to do with the classical idea. Savings are a fix amount of money that has nothing to do with the actual interest rate. A live insurance contract can last 30 years and nobody can predict the interest rate for the next thirty years. This can lead to funny results. Home savings banks for instance guarantee a loan for a certain interest rate if people have saved before a certain amount of money. The problem they have nowadays is, for instance in Germany, that loans on the free market are CHEAPER than the loans granted to people who have already saved the money required by the home loan saving contract. People don't want their money any more, because they can get it cheaper somewhere else.

The classical concept that people save money depending on their preferences for consumption in the present is completely absurd. Normal people are not able to invest themselves, they need someone who reduces insecurity and who guarantees a fix interest rate. The only investment accesible for normal people is accomodation for personal use. This is similar to store rice or other products that can be stored. The consumption in the future is predictable.

For an unknown reason it is expected that institutional inverstors are always able to find an investment for an incidentally built amount of savings. That is not the case. What institutional investors do is to speculate on the stock markets or to buy government bonds or similar effects. In this case it is the government that takes the risk. Without an increase of the public debt burden most insurance companies would be already bankrupt. They wouldn't be apply to comply their contracts.

There is a much bigger chance that the loans financed by credit extension, an increase of the amount of money, are paid back than that the savers see their expectations fullfilled. In the first case there is a concrete project with a concrete calculation and the entrepreneur will ask for a credit that he actually needs and he believes to be able to pay back. In the second case we have the vague expectation that an investor is going to show up in the future, something that normally doesn't happen.

In a situation of unemployment it is a good idea to save less and to finance investments by credit extension, an increase in the amount of money. That why there is bigger chance that investments will find the needed demand.

It can be argued that the means of production will be more and more concentrated in a few hands, if private savings become irrelevant. That may be true, but than it would be better to resolve this problem by reinvesting part of the wages in the company. In other words, the wage is not fully handed out to the workers, but a part is invested in the company and the workers get a corresponding share.

Against keynesian theory it is often argued that it doesn't take into account structural problems. It is argued, that keynesian theory cannot work if the economy is not able to produce the products people want. This is really funny. In the classical and neoclassical theory structural problems are EXPLICETELY denied and not only disregarded. It is assumed that the productive factors, especially labour, are homogeneous and that they flow without any effort to the most profitable use, see methodological approach.

Keynes take the know how, productive structure, technical standard for given, because it can't be changed in the short run and in the short run productivity can't be increased. But instead of waiting that the productivity adapt itself to the interest rates it is better to adapt the interest rates to productivity. With lower interest rates and longer amortization times it is possible to activate as well less productive resources.

Againt the keynesian theory is often put forward Say's law. Say wanted to show, what is actually true, that the more people produce, the more they can buy. If there is a lack of demand, it is actually due to a lack of production. We will not discuss this issue here again and refer the reader to the corresponding chapter.

However there is a more fundamental problem with Say's law. What Say actually want to prove is that money is not the problem, that is, following Say, the business man affirms. They affirm that they don't sell enough because there is a lack of money. Say wants to prove, that money is actually only the vehicle, like a carriage, that facilitates the exchange of products. In other words, for Say money has only one function, it facilitates transactions. People get money if they produce something and with that money they can buy something. That sound trivial and is trivial, but the crucial question is not even mentioned.

For the seller it doesn't make any difference if the money is the result of a previous production or if the buyer took a loan, by credit extension, from a central bank who printed the money. (Something only possible with a bank as intermediary, but this is irrelevant.) In the first case he has already produced something before he buys something with its money and in the other case he still has to produce something, otherwise he will increase his debt burden. This is obviously equally trivial.

But if someone can buy something with money and has to pay back the loan only afterwards, it is crystal clear that money is more than just a means that facilitates transactions. It is possible to activate idle resources with money. To illustrate that with a trivial example: The government can lend money to a fishermen for a boat. The fishermen goes fishing, earns money and pays back the credit. This is trivial and happens everyday, but nevertheless people are obsessed by the idea savings, not consumed income of the past, are needed to activate idle resources.

A one hundred dollar note is a duty of the owner to produce something for one hundred dollar in the future or a confirmation that he has already produced something for one hundred dollar in the past. All that is very trivial, but throughout history we have seen strange opinions about the role of money.

The opposite, equally missleading, are the spaniards of the 17th century. The spaniards believed that it is enough to get the means of payment, gold at that time, in order to get rich. That's why they conquered South America. The same idea induced the gold diggers to look for gold. From an individual perspective, and it seems that this is only perspective that really counts for the people, that is correct. If gold is the means of payment and someone has more gold than the others, than he can pay more. But if production is not increased, in other words if competition is not intense enough, prices will rise and at the end everybody is at the same situation as before. The inflow of gold triggered an increase in production, but in England and France, not in Spain. The inflow of gold was the beginning of the decline of Spain.

We see therefore that common sense sometimes is missleading. Common sense tells us, that we can transfer by saving present consumption to the future. A reduction of consumption in the present will therefore lead to higher consumption in the future. We can therefore improve our situation if we save part of the income we earned from previous production. This works perfectly at a microeconomic level.

Common sense tells us as well, that we get in the possession of the means of payment, we can buy what we want. In the ideal case we find the means of payment in a remote goldmine in a remote continent without any endebtment. This works as well perfectly at a microeconomic level.

The two common sense conclusion are however in contradiction with each other.

A similar problem we have with the famous microcredits. The idea is, that people who normally would not have any access to loans get a credit in order to start their own business. It is supposed that this it the crucial point. However if the lack of money were the problem, the problem could be resolved easily. The government of Bangladesh, India, etc. should print money and give it to the people as start capital. The truth is, and that is the real problem, that these people very seldom can offer a product at cometitive prices. It can be argued that the interest rates of these microcredits are lower and it is therefore easier to start a business, but the better solution would be an interest rate of zero and a large amortization time. Microcredits shares the missleading concept of the classical theory.

Many people don't understand what does the keynesian statement that the investment induces savings and not the other way round mean. However this is equally trivial. If someone takes a loan of let's say 100 000 dollars to start a business he has to pay back this loan. That means that part of the income he has to 'save', can't be used for consumption because he has to pay back the credit. However there is no sacrifice nowhere as assumed by the classical theory. If he generates an income of 200 000 dollars and has to pay back half of this sum he will be happy. It will be very hard to explain him that he sacrifices something.

The same way the multiplier effect can be demistified. It is crystal clear that an investment, at least if it works as expected, will not only allow to pay back the loan, but generate a bigger income, otherwise the investor wouldn't invest and the longer the money created by credit extension remains in circulation, in other words the longer it takes to pay back the credit, the stronger will be the secondary effects.

The ordoliberalism, the social market economy, the austrian school are actually nothing else than annotations to Adam Smith. There is no debate about the underlying economic assumptions of the classical theory.

With the "General Theory of Employment, Interest and Money" starts in 1936 start in a new era in economic thinking as well as in politics. This work is as well the beginning of macroeconomics.

It is often said that microeconomics focuses on individual entities, companies, households, individuums and macroeconomics on aggregates size, the whole supply, the whole demand, national income etc.. That is true, but not the point. The point is that a a behaviour that can be rational at a microeconomic level, can be very unrational at a macroeconomic level. Saving for instance is always a good idea at them microeconomic level, but only as long as not everybody does it.

From a microeconomic perspective all the assumption of the classic theory are true, because single entities can't create money. For the individuum saving, to give an example, makes sense and in general, provided that not everybody increases savings suddenly, he can transfer by savings consumption to the future. From an individual point of view it is as well true that higher interest rates lead to higher savings, because the bigger the incentive, in other words the more future consumption is increased by savings, the more people will save. It is equally true from a microeconomic point of view, that capital is scarce, because a sacrifice is needed in order to produce it. In other words, the classical and neoclassical theory is pure microeconomics and what we find in modern textbooks about microeconomics is nothing else than Principles of Economics from Alfred Marshall.

From a macroeconomic perspective nothing of all that is true. Capital is actually money and the amount of money depends on the policy of the monetary authorities. Due to the fact that 'capital', actually money, is not scarce, the price for money depends on the politics of the central banks and has nothing to do with the potatoe market where the price balances supply and demand. No previous sacrifice is needed to get it and if a loan generated by credit extension is a 'sacrifice' nobody will invest, because people only invest if the investment is profitable.

Some academics affirms that their "research" focuses on the microeconomic foundation of macroeconomics. This in nonsense. Microeconomics and macroeconomics are incompatible. The only thing we can say is that an economic order has to put the incentives in a way that the individual interest is compatible with the general interest. The most famous example for this is the baker of Adam Smith, who doesn't make breads to make us happy, but because it is in his own interest to make breads, see homo oeconomicus.

If a rational behaviour at a microeconomic level would lead automatically to a rational behaviour at the macroeconomic level, economics as a science wouldn't be necessary. It is to assume that people will do what fits best their interests and if this serves as well the general interest there is little need to do something. This is actually what the classical / neoclassical theory and all the lines of thinking based on these concepts affirm. Economics would have no practical use and would be a purely theoretical science like astronomy. Astronomy attempts to understand how the universe works, but has obviously no intention to change the course of the planet.

At least in academic studies, especially in microeconomics, the neoclassical theory is dominant. Some people even believe that the world is dominated by a neoclassical mainstream. That is somehow strange, because the same people who sticks to the neoclassical theory emphasizes on the role of economics as an advisor of politics. However in the classical / neoclassical theory there is nothing for the government to do and therefore the advise is very short: Do nothing! It is hard to see why people have to study four years just to be able to give this simple advice.

This illustrates very well a microeconomic problem we can find in any bureaucracy. A bureaucracy has an incentive to be kept alive, although nobody understands what they are doing the whole day and everyone has the impression that the work they do can be done in half of the time. People earn their living there, although from a macroeconomic perspective that doesn't make any sense.

Sometimes this is really funny. Almost all the libertarians from the austrian school type, who are complaining the whole day about the government and how the government prevents companies from working are public employees. One can wonder why they don't became entrepreneurs and enjoy the freedom they are so fond off.

A little google research is enough to find hundred of thousand of articles that affirms that the crucial message of Keynes is the anticyclical policy. In a situation of recession the government has to increase the aggregate demand by credit extension and in a situation of boom it has to reduce the aggregate demand to cool down the economy.

The problem is, that this statement contains no analysis of the keynesian theory and a adept of the classical / neoclassical would simply deny that governmental intervention is necessary, because the economy tends to equilibrium and no governmental intervention is needed. The crucial point of the keynesian theory are no the possible consequences that be drawn from the keynesian theory, but the theory itself. No need to talk about the consequences to be drawn from a theory if already the theory is wrong.

The possibility that underconsumption lead to unemployment is not only denied by the classical / neoclassical theory, the problem is, if we put aside Say's law, simply disregarded or if taken into account explained by a lack of capital that impedes to employ all the workers. This problem can't be resolved, because in the classical theory 'capital', actually money, is scarce. In the classical theory high interest rates are positive, because they trigger higher savings and therefore the capital needed to employ more people. In the keynesian theory it is not scarce at all, can be produced at any amount and the interest rates, that a determined on the money market, are a hindrance for real investments. The interest rates determined on the money market are the result of speculation. In other words: The whole economy depends on a casino.

The important difference between the classical / neoclassical theory and keynesianism is therefore not that the first ones feel no need for an increase in public spending and Keynes assumes that this can be necessary. This is only the result of a difference in the theory. The crucial point is, that the classical / neoclassical theory has missleading ideas about the function, character and provenience of 'capital'.

The classical theory is only true in a situation of full employment, that is actually always assumed in the classical theory. The classical theory describes therefore a special situation, full employment, and the keynesian theory explains both situations, full employment and unemployment, and is therefore a general theory. In a case of full empoyment both theories, although by different ways, gets to the same results.

In a situation of full employment the production of more capital goods is only possible, if the interest rates increase. This will induce more savings and therefore the reduction of consumer products. The resourcers previously used for the production of consumer products can be used for the production of capital goods.

In the keynesian theory interest rates will increase as well when we reach full employment and national income increases. The higher the interest rates, the higher the need for money for transaction purposes. Some people have to sell financial assets to get this money, the value of the financial assets will decrease, the return increase. (2 dollars for an financial asset that costs 100 dollar is not a lot, but 2 dollars for an financial asset that cost 50 dollars is a lot.) Given the fact that with an increase of national income risk free financial assets become more and more profitable, it is going to be hard to find real investments that can beat them. (The argumentation obviously is only true if the monetary authorities don't increase the amount of money. We will return on this issue later on. The keynesian monetary transfer mechanisms are somehow sophisticated.)

In both scenarios higher interest rates will stop further economic growth, although the underlying assumed causal chaines are different.

In the keynesian theory the interest rates can't balance savings and investments, because savings depend on INCOME and the interest rates depend on speculation. The interest rate doesn't establish a direct connection between savings and investments and can't therefore balance them.

To make this point clear: In the classical / neoclassical theory the capital market is organised like the potatoe market. The price for money is the interest rate. If this price is high, we will have a lot of supply, savings, and less demand, investments. If the interest rates are low, it is the other way round and at a certain level of the interest rates the supply will be as high as the demand.

In the keynesian theory the capital market doesn't exist, because capital, in the classical definition not consumed income of the past, is irrelevant in a situation of unemployment. To put it easy: The interest rate is fixed by the monetary authorities. That means as well that the classical discussion about the effects of usurious interest rates is superfluos. The montetary authorities can fix the interest rates at any level. No private lender has any chance to pretend usurious interest rates if the monetary authorities offers money at a lower price. The monetary authorities, central banks to be more concrete, can offer any amount of money at just any price. They produce it.

However it is chrystal clear as well that the loans has to be paid back and that therefore the income generated by the investment has to be high enough to pay back the loan and we can take it for granted that the income is a multiple of the investment, because otherwise the investor wouldn't invest. Nobody invests if he expects that the investment will only allow him to pay back the loan and nothing else. That's a simple way to understand the affirmation that the investment triggers the savings and not the other way round. We can deduce from that furthermore that the higher the consumption, the higher the increase of income necessary to pay back the loan.

If an investment of 1000 dollars triggers an income of 10 000 dollars, the investors accepts that he can consume 90 percent of the income. If he wants to consume 95 percent, the investment has to trigger 20 000 dollars. In other words. The higher the consumption rate, the higher the impact on national income. This is obviously a conclusion diametrically opposed to the classic conclusion.

It is often said that the classical theory assumes that savings and investments are balanced by the interest rate. Idle capital can't therefoe exist. If there is no need for capital, if nobody wants to invest, interest rates were low and people would consume their money. If we look at the original text that is only half of truth. Independently from the interest rates saving is considered a virtue. This is explicetely expressed by David Ricardo, see interest rates, but mentioned several times by Adam Smith as well. For an unknown reason they assume that 'capital', actually money, that derives from a prior production can always be used in a productive way, but that this is not the case if the money is just printed by a central bank. Adam Smith very often was on the right way, see balance of payment, but didn't realized that the acknowledgment that investments are financed with money, wherever this money comes from, is incompatible with the rest of his theory.

It is often said that keynesian politics leads to higher government debt burden. However this is kind of a circular argument. It is obvious that the conditions under which the loans are granted have an impact on the development of the debt burden. It is obvious that it depends on the conditions under which the loans have been granted whether the debt burden can be managed or not.

Economic theory focuses on the interest rates, but this is only part of the problem. Equally important is the amortization time of the loan.

What has been said at an individual level, the investor only invests if the income generated by the investments is higher than the investment, is true as well as a macroeconomic level. (This is actually the focus of Keynes. The example before served only as an illustration.)

At a macroeconomic level it is true as well that savings depends on investments and not the other way round. And a macroeconomic level it can work, at least in theory, with pure consumption. (Although that is not the way to go. The way to go are investments that creates real fortune.)

Lets say that the government increases aggregrate demand by 100 dollars and the saving rate is 20 percent. In this case we will reach an equilibrium if the national income increases by 500 dollars (0,2 * 500 = 100; for the sake of simplicity we assume that the 'saving rate' are taxes used by the government to pay back the loan. Kind of "saving in the future" we have already discussed very often.) To illustrate this: The government increases the aggregate demand through credit extension by 100 dollar. People consume 80 percent of this newly created income and pay 20 percent taxes, what is 'saving' in our example, because it reduces consumption and is used to pay back the loan. The people who got this money, supermarkets and other retailers, will spent this 80 dollars minus the taxes, in other words 64 dollars, this people will spent the money as well, in other words 51,2 dollars and so on. The process stops if 500 dollars are reached (100, 80, 64, etc. etc.). The government collected 100 dollars, can pay back the loan and the story is finished.

[Without any kind of savings the process would obviously end up in an 'explosion'. Everybody would spent 100 dollars more and we would get this way to an infinite increase of aggregate demand until inflation would stop the process.]

If full employment is only reached if national income increases by 500 dollars, than the government has to do that again and again.

It is clear, that the reader wonders why this doesn't happen in reality. In reality the public debt burden increases every year. There are several problems with this logic. First of all the trick doesn't work if the purchasing power triggered by the government runs off to foreign countries. This will happen if foreign countries can offer the products cheaper, at a better quality or if the national econoym can't offer the products at all. The balance of payment will turn negative and the government will increase it's public debt and the positive effects on national income will be happen somewhere else. Increasing public debt burden is almost always connected to a negative balance of payment.

In this case it can even be better to impose customer duties on luxury consumer products. People would buy their national products and strengthen the position of their national industry. It is often said that keynesian policy doesn't work if an economy is not competitive. That is not true. Even a less competitive economy can activate their productive resources, but they had to impose customer duties.

If Spain, Greece, Portugal etc. would have imposed customer duties, we would have a very different discussion in Germany. People would complain about the fact that these countries doesn't accept the free market economy and prevent their people from buying german luxury cars, but nobody would complain about their "laziness". We are still in the year 2015.

Another problem is that the process is stopped because people start to hoard or speculate with the money. If the government increases social transfers by the mentioned previously 100 dollars it is only sure that the recipients of this money, poor people, will spent it on the next supermarket. The owner of the supermarket will see his turnover increase by 100 dollars and his earnings will increase as well. But these people are in general richt, at least if we talk about the supermarket chains and instead of consume this money they speculate with it on the stock market. It is possible in a scenario that the government gets back 20 dollars and the story is finished. In this case the public debt burden would increase by 80 dollars.

There is a point we have to understand. The problem is not only that capital is actually money, something not scarce, something that doesn't have a price in the sense of a market economy, something that can be obtained without any sacrifice. The problem is, that even if capital, actually money, is not scarce, there is no guarantee that it circulates in a productive way.

Let's repeat that: In the classical / neoclassical theory the national income is either consumed or invested. It may happen that even if the investors expect high profits they don't invest, because the investment is too risky. But this is not a big problem in the classical theory, because in this case they will consume and both things, consumption or investment, increases the national income and create jobs.

In other words: Investments compete only with consumption and both are useful. (Although there is no guarantee under the classical assumptions that a balance on the capital market leads to full employment, because capital is assumed to be scarce and if there is not enough capital, it is not possible to activate all idle resources. That is what we can learn from David Ricardo. Based on the classical concept about capital David Ricardo argues against anything that is contraproductive for the accumulation of capital,
see effects of taxes.)

However one should not believe that all problems are resolved if only capital, something scarce, is substituted by money, something that is not scarce. Even if interest rates are very low and the hindrance for investments therefore low, insecurity can lead to a situation where money is taken out from a useful circulation. Beside consumption and real investments there is a third option: Speculation withe stocks, bonds and other kinds of financial assets. That increases the pressure on real investments. Even if real investments yield the same profit as financial investments, the later are preferred, because they are more liquid and liquidity means security. A decision that can be reversed at any moment by selling it on a regulated market is more secure than a real investment that can be reversed. If someone has put money in a machine and the business doesn't work the machine normally can't be sold without losing a lot of money.

That explains as well why some formerly considered underdeveloped countries have higher growth rates than developed countries. If there is an existing economic model, an existing technology, existing products, existing organisation etc.. the risk is reduced. It is more or less clear what has to be done. Sometimes even concrete data are available. If it is known what a certain type of bicycle costs, one have to know only whether it is possible to produce it at the market price or not. That explains as well the high growth rates after world war II in all countries. It was a simple question of redoing again what has been done before. That is not a very risky business. More general: If there is a big gap between the real productive potential, the know how, and the actual level, there is little insecurity. The more new products are needed, the more risky are investments.

The adept of the autrian school say that a lack of demand it due to the fact the companies doesn't produce what people want. That may be true, but very little adepts of the austrian school are entrepreneurs and the lonesome heroes, disposed to go bankrupt in order to find out what people want are rare, especially if they don't get a decoration for having tried it, but scorn and misery.

Beside that insecurtiy is a lack of information. Instead of philosophizing about insecurity in an abstract way, it should be much better to try reducing it by making informations more accessible. If a business modell works in one country, it is highly plausible that it works in other countries as well. In this case a lack of knowlegde impedes the transfer of this business modells to other countries.

It is a stunning phenomenon that even somehow sophisticated techniques like the infrastructure that is the bases of the internet and similar services needed very, but very little time, actually only twenty year, to get implemented world wide. If the advantages are very clear and the risks therefore very low, the transfer of know how happens in ligthning speed and there is no capital, in the sense of the classical theory, needed to implement it.

We can read every day on the newspapers and on the internet, hear on the radio and on tv, in hundred of thousand of "scientific" discussion paper that expansive fiscal policy is the core of keynesian theory. This is not the case, definitely not. Expansive fiscal policy is a possible conclusion that can be drawn from the keynesian theory, but it is not at all the core of keynesian theory.

Expansive fiscal policy, an increase in aggregate demand by credit expansion, can work, but only under certain conditions. First of all the draining away of the primary impulse to foreign countries has to be low. In other words, the country must be able to satisfy the increase of demand, in other words, the balance of payment has to remain balanced. In this case it should even be allowed to impose customer duties on consumption goods, but not on capital goods that helps to improve efficiency.

[That's one of the most critical errors of Cuba, in 2015. There are a lot of people disposed to send computers to Cuba for free, the author of these lines for instance, but the customer duties would be as high as the price for a new computer. That prevents cubanians from having computer. In other words, Cuba will have a generation of illiterates.]

This is obviously the opposite from what is stated by Adam Smith and David Ricardo, however their basic assumption is wrong. They argue that capital accumulation is easier if products that can be bought in foreign countries at a lower price are imported. The import of corn for instance allows a reduction of wages, see effects on taxes, and therefore higher profits and therefore an increase in the accumulation of capital that can be used to employ more labour. The argumentation is somehow weird, but the error is more fundamental. The error is, that there is no capital accumulation needed to employ more labour. Freshly printed money does the job as well.

The real problem is a completely other one. If the government increases aggregate demand and the primary impulse flow off to foreing countries, the government is left with an increased debt burden an no impact on employment.

The keynesian multiplier effect, see above, only works if the saving rate is LOW. It is crystal clear that in a situation where we have already to much 'capital' that cannot be used in a productive way and is used for speculations it doesn't make any sense to produce more of it. If the government increases social transfer by 100 dollar and the people buy things in the supermarkets for 100 dollar and increase this way, we simplify a bit, the earnings of the owner of the supermarket by 100 dollar and these earnings are used to speculate on the stock markets the government has no chance to get its money back.

The government can as well increase the tax rate. That would have the effect that a lower increase of national income is needed to pay back the taxes. If the tax rate is for instance 50 percent, only 200 dollars of increase of national income would be needed to pay back the loan, to stick with our examples, insteas of 500. However paying back a loan is nothing else than destroying money. If a loan is granted by credit espansion new money is created and if the loan is paid back, money is destroyed and under this perspective the classical theory is a little bit weird.

Adam Smith and David Ricardo are totally opposed to burning money and normal people would say that it is indeed a bad idea. The underlying error is always the same. Adam Smith for instance believed that a country that has saved money and whose national productivity declined can for sometime maintain its living standard by buying things from abroad. This is only true if gold is a means of payment as well in foreign countries and these foreign countries don't understand that gold can be substituted by printed paper, usually called money. In this case it is theoretically possible that the foreign country can make a keynesian expansive monetary policy and that its idle resources are activated by the inflow of gold, but they could had done it as well with any other means of payment.

In any case for the classical theory money that derives from previous production always serves for something and should never be destroyed. But with money freshly printed by a central bank the situation is, for whatever reason, completely different.

The classical theory assumes that money is backed by prior production. That is completely wrong and a very missleading idea. Money is backed by FUTURE production. Money is a pretension to a part of the future production and not a pretend to a part of the past production because the past production is normally already consumed. It doesn't make therefore any difference where the money comes from, provided it is backed by future production.

Under this perspective it is a bad idea to pay back a loan, before full employment is reached. Only in the case of full employment, when the money is not backed any more by a future production, the loan should be paid back.

The question that arises is obvious and is discussed every day in some newspaper, in most cases to prove that keynesian theory doesn't work is this: The public debt increased in the last twenty year dramatically but in most countries unemployment increased. The short answer could be this: Without deficit spending unemployment would be even higher and second that keynesian theory is a method to discuss economic issues and the core of the keynesian theory, his concepts about savings, money, capital, interest rates are correct.

The classical theory assumes that the problem could be resolved by lowering the wages. This was actually true for Germany. By cutting down the social transfers, people were obliged to accept even lower paid jobs. But this only worked, because Germany became more competitive and was therefore able to export its problem with the lack of demand. Germany has an exceed of the exports over the imports of 200 billion euros. That's a lot of money. However if every country does the same, the trick doesn't work any more.

The companies has always the possibility to lower the wages if there is enough demand, because in this case they can increase the prices. The fact that prices for consumer products, in relationship to the income, are always DECREASING, we can assume that there is a problem with the demand. The neoclassical theory that wages will reach the (monetary) marginal output because the companies will extend production until labour becomes scarce and that therefore the workers have enough power to impose these wages is a circular reasoning, because (monetary) marginal output depends on the demand. In other words, it the marginal output is irrelevant. Everything depends on the price it can be actually sold. Under the assumptions of the classical theory, income is either consumed or saved and invested, it is plausible that the product produced by the workers will be spent or invested, but that is no longer true if part of the income is used for speculations. Furthermore the rule wage equals (monetary) marginal output doesn't guarantee full employment, because the 'capitalists' need capital to employ the workers. A extreme position that illustrate the problem is David Ricardo, see the effect of taxation.

But let's discuss the question why the dramatic increase in public debt burden didn't lead to full employment. We should distinguish between deficit spending that increased consumption and deficit spending that increased investments. Let's start with the first.

[Expansive fiscal policy, in other words a direct government intervention in the economy is obviously the last means to get the economy back on track. If it is possible to stimulate the economy with an expansive monetary policy, this is the way to go, because it is easier to plan and has no impact on allocation.]

The first problem is crystal clear. Deficit spending and a negative balance of payment are something that never works and can't work. Most countries with an unsustainable hight budget deficit have as well a negative balance of payment. If deficit spending increases consumption and the secondary effects flow off to foreign countries, deficit spending doesn't work.

The second effect is that deficit spending changes the distribution, the rich get richter and spures therefore speculation. For the companies a public financed increase in consumption leads to higher profits and saving rates of rich people are higher. Second if the government issues more bonds and similar papers the market for speculation increases. Both effects will reduce the multiplier effect.

Let's illustrate the issue with an extreme example. Let's say that the government increases social transfers and people go therefore more to the cinemas. The impact on the cost structure is zero, because all the costs, the loan charge of the film, the cost of the film projector, the cost of the light, the costs of the cinema auditorium etc. doesn't change and are the same whether in the auditorium are 100 people or 150 people. That means that the owner of the cinema earns more money. If he consumes this money or invests it in a real project the keynesian politics works, if he speculates with this money on the stock market, it doesn't work.

The reader will think that most of the people will consume or invest the money, but the author is almost sure that the reader of these lines knows a lot of people who have money and are seeking desperately for an investment where they can make use of it. Normally people do two things in a situation like that: They build or buy a house or they hand the money over to an institutional inverstor, insurance company, pension funds, banks who guarantee a fixed interest rate or something that at least resemble two a fixed interest rate. This institutional investors in general do the same thing with his money as what he could have done himself. They speculate with it.

The situation becomes even worse and reveals that a lot of politicians have very strange ideas about economics if the government subsidizes saving, as it is the case in Germany. Due to a crisis in the pension system the government tried to promote private savings. The idea was, that everybody can in part live from his private capital stock when becoming a pensioner. People made a contract with an institutional investor, in most cases an insurance company and paid a monthly contribution creating this way a private capital stock.

This is actually a very strange system and it was obvious that it is not going to work. There is not even any need to understand keynesian theory in order to know that this cannot work, because it wouldn't work under the assumptions of the classical theory neither. In this case savings were not balanced by the interest rates. Some people save in the vague hope that someone needs their money and investors will be motivated to invest if saving increases and the present demand decreasis in the hope that in thirty years people will demand more. That is crazy.

It is actually unclear what deficit spending means in practice. Deficit spending can mean that taxes remain at the same level, but expenditures were increased or that the expenditures remains the same and taxes are lowered. That makes it a little bit complicated to test the theory against reality, because in the first scenario the income of the people remains unchanged and in the second scenario they have more money. We have two different scenarios.

In the case that the government increases its expenditure to realise investments the evaluation is much easier. In this case we have the same situation as we have in any private investment. The simple question is whether the market price of the investments corresponds to the sum invested. No company is bankrupt if the fixed assets covers the long-term liabilities. (We simplify a bit, a company has to be able to comply as well with its short term liabilities, but this is, except very unusual situations, never a problem for a government, because it has always access to the credit market.) Viewed this way no industrialised country is overindebted, although we can read the opposite every day.

It is well possible that even in the case that the government creates fortune the next generation inherits debts, but that is not a big problem, if it inherits assets as well. At least the author wouldn't complain if he inherits a house for 2 million and debts of 1 million. Those who find that unfair, can sell the house, pay the loan off and keep 1 million.

[Beside that: The NEXT GENERATION NEVER EVER inherits debts. The debts of a part of the next generation are the assets of another part of the next generation. One part inherits the debts and the other part the assets, government bonds for instance. We have a REDISTRIBUTION OF INCOME in the next generation, but not a transfer of debts to the next generation.]

We get therefore to much more relevant conclusion than deficit spending that can be drawn from the keynesian theory and one can wonder why this obvious conclusion is never drawn in public.

Let's start from the beginning: If someone possesses a diamond for 1 million dollar, that exists, see most expensive diamond, and 1 million of debts he is not overindebted in the terms of the commercial law, but he has a problem any way if he can't pay the interest rates. The diamond yields no profit, unless he don't make it available for high society ladies who need it for a dinner gala and are willig to pay for having it for one night. Simplifying we can say that he has to sell his diamond.

The situation changes completely if the investments yields some profit and as long as the investment can pay off the loan during his function time, there is actually no problem. Even a complete useless investment like the pyramids of Egypt which probably consumed most of the budget of the pharaos has turned out to be a very, very profitable business. To take a more realistic example: Some university buildings of Germany are 500 years old. If every student had paid only pays 1 dollar a month or the corresponding value at his time of studying, these buildings would have been very profitable.

A problem only arises if the amortization time, the time the loan has to be paid off, is shorter than the time of use. In this case the future generation would indeed inherit debts, but no assets. To illustrate that with an example. If the university buildung had been destroyed by a war, germans are champions in this kind of projects, and the university building hadn't been already paid, it would had been necessary to build a new one before the old one would have been paid.

The error is therefore obvious. Many industrialised countries, for instance the USA and Germany, have serious problems with their basic infrastructure, roads, bridges, railways etc.. At the same time they spend a lot of money in social transfers. It would have been much more intelligent to train unemployed people and to invest in the infrastructure. The effects on consumption would have been the same, but beside that concrete assets would have been created. As long as improvement in the infrastrurctue are possible, a government shouldn't NEVER increase consumption by deficit spending. Keynes only talks about INVESTMENTS. With the famous example of the money that should be burried in abandoned mines in order to promote economic activities Keynes only wanted to illustrate that in case of recession even that is more useful than just doing nothing.

We see therefore that the keynesian theory allows a different view on many issues: organisation of the pension system, profitability of investments, the role played by capital, etc. etc.. If we reduce the keynesian theory to deficit spending the analytical value is very restricted, actually there is none.

We have to understand that the world changes completely if capital doesn't play the role assumed in the classical and neoclassical theory. In a situation of unemployment it doesn't have actually any function, because it is just money. It has a function only if kept scarce by a central bank and the access is denied to most people. Money only has a price if it is kept scarce.

In a lot of branches know how is the crucial point, although some capital is needed. A restrictive access to capital, actually money, helps company already in place to get rid of potential competitors. Where this protection doesn't exist, where ONLY or very few 'capital' is needed and know how plays a crucial role, as it is the case with all kind of internet services, advertising, e-learning, communication, online shops, print on demand, money transfer, news industry etc. etc.. traditional business concepts have no chance against these new competitors. Traditional textbooks are substituted by websites, universities are put under pressure by online universties, newspapers have serious financial problems become they lose number of copies as well as income from advertising, banks are put under pressure by services like pay pal or money bookers, phone companies have to compete with skype etc. etc..

Furthermore the financial industry has little or no interest in taking away the restriction to the access to the 'capital' market. The keynesian idea that until full employment is reached the interest rates shouldn't exceed the administration costs of the banks and the risk won't fascinate them, although this would be the ideal of a market economy. The price of a product should correspond to its marginal costs and the marginal costs of money are very low.

The classical theory is somehow schizophrenic. It assumes that the lender will take higher interest rates in the case that the investment is risky and it find that normal. For an unknown reason it find it less logical if the investor want lower interest rates, if the investment is risky. Both want to earn the highest profit possible, but a very different strategy is assumed. Normally one would say if the profits are higher, the risk is higher, but that in the classical theory this is only true for the investor. The lender wants his money back anyway and the investor in most cases is liable as well with his private property. Classical theory underestimates completely the problem of insecurity.

For the classical theory that is not a big problem for the lender, because in case that he doesn't get enough profit for the risk, he consumes his money. That is only true, if money is kept scarce. If it is not kept scarce artificially by the central bank, he can consume all his money, because nobody needs it. That is what we see at the moment, we are still in 2015.

It is often said, see for instance above the logic of the austrian school, that low interest rates induce people to take higher risks. Theoretically this thesis can be tested against reality. The thesis would be true, if low interest rates leads to an increase of bankruptcy.

However what we have seen in reality is somehow different. An increase in venture capital leads indeed to an increase of bankruptcy, we have seen that in 2001 when the so called 'new market' vanished away from one day to another, but at the same time we have seen the appeareance of very successful companies, google for instance. Venture capitalists have a completely different approach, They take high risks, but one success can be enough to recompensate for all the failures. In the 'normal' business, where investments are backed by securities, we have no difference between times of high interest rates and times of low interest rates.

Some people would argue that the subprime crisis is an example for low interest rates that leads to bankruptcy. It can be argued the other way round. The amortization time of the loans was to short and interest rates to high. A loan has to be paid back in the time the asset can be used and in case of houses this is a very long period. If people can pay the rent for a house / flat, they can pay as well the redemption rate. Over the whole time of use the redemption rate is lower than the rent, because the owner of the house want to make profit.

The thesis that too low interest rates led to the subprime crises is apart from that not very plausible, because what actually triggered the crises was an increase in the interest rates to 5.25 percent in 2006.

In public discussion there is a big confusion concerning the keynesian theory because people doesn't distinguish between a situation of unemployment and a situation of full employment. It is crucial to understand that in a situation of full employment the keynesian theory gets to the exactly same results as the classical theory. Interest rate has to rise, otherwise the economy runs into inflation. In a situation of full employment an increase in saving is necessary, because consumption has to be reduced if more capital goods should be produced.

Keynesian theory leads as well to completely different conclusions concerning the politics to be followed by underdeveloped countries. Classical theory suggests that an increase in 'capital' is needed, in other words a higher saving rate. Keynesian theory suggests that this is in the best case not harmfull, but in any case useless. The problem of underdeveloped countries is a lack of know how. If the know how exists, the 'capital' is a minor problem. That means as well that it is almost useless to transfer more money to these countries, because money is not the problem. The problem is know how and an access to the markets. A very good idea would be for instance to remove all customer duties on choclate and coffee. That would allow these countries to export more elaborated product instead of only exporting choclate and coffee beans. The earnings are made with the elaboration, not with the raw material. A keynesian perspective would also suggest that the "economic miracle" of post war II in Germany and other countries had to do with the know how of these countries and very little with the ERP or "savings". If the recovery of the european economy had depended on prior savings the recovery would had taken ages.

Opponents as well as a lot of people who stick to keynesian theory believe that the central message of Keynes is that with increasing the aggregate demand through deficit spending it is always possible to get the economy back on track.

Actually the message is this: Without the real and concrete possibility to produce something for which exists a real demand money is worthless, but keeping money scarce and interest rates high hinders low profitable investments to be realised.

Nor the opponents nor modern textbooks about macroeconomics distinguish clearly between deficit spending used for consumption and deficiti spending used for investments, although this is a big difference. The reason for this is, that a possible consequence of the keynesian theory is taken for the theory itself. The central message of Keynes is a completely different thing. The crucial message is that the classical / neoclassical concepts about capital are fundamentally wrong and therefore the concept about interest rates, savings and money are wrong as well and this has an impact on a lot of economic issues.

The classical theory assumes furthermore that money is a commodity as any other commodity that serves only for transactions. This is not true. Any other commodity has to be produced, it requires a sacrifice to produce it, is therefore scarce and has a price. Money can be produced at any amount, there is no sacrifice needed to produce it and the price for money, the interest rates, doesn't depend on its scarcity. Money is a means to control basic macroeconomic parameters and its price follows completely other rules as the ones who determines the price for potatoes.

A money economy can't therefore be compared with a non money economy as the classical or neoclassical theory assumes. The idea, that we can abstract from money, as Vilfredo Pareto and Léon Walras do, it completely missleading. If commodities are changed for commodities the commodities have to be exist.

[To be concrete: In theory two people can make a deal of the type "I give you next week on kilo of potatoes if you give me half a kilo of apples" are thinkable, but a normal market, for instance a super market, can't work like that.]

The case of money is completely different. It is completely irrelevant, if the commodities already exists at the moment someone gets the money. The only relevant question is whether the commodity can be produced at the moment people want to buy it. It is therefore not true, as Say's law affirms, that a production triggers demand, because money triggers demand as well.

In case of unempolyment it is completely irrelevant if we have a chain of the type 'production of commodities => money => purchase power => demand for commodities' or 'money => purchase power => demand for commodities => production of commodities'.

Money is a pretension to a part of the productive potential and not a pretension to things already produced. The crucial question therefore is not if things ARE already produced, but if they CAN be produced.

Money is not scarce, as Say assumes, because the production is insufficient. Money is scarce, because it is kept scarce.

All that is obviously completely trivial, but certain political measures, for instance the idea to change the pension system in a system based on prior savings, show that people don't understand that. It is not possible to transfer present consumption to the future by putting aside money. If in the future the needed goods can be produced, the previously saved money is not needed and if the things can't be produced, the previously saved money is worth nothing. The fact that the pension funds are in serious trouble at the moment, we are still in the year 2015, was predictible. It is to assume that things will get worse in the future, because it increases speculation.

Another phenomenon that induces people to believe that previously saved money can guarantee future consumption is the fact that at least in the short run the relationship between the prices remains the same. If people get 100 dollar they know more or less what they can buy for it. This induced them to believe that the products are already produced. The truth is, that the production structure remains the same, at least for a while. They can therefore assume that their experiences of the past will be confirmed in the future. In the long run, that is not true at all and there are dramatic changes in the relationships of prices in the long run. The price for food for instance has, in relationship to the income, dramatically decreased in the last fifty years and the price for health insurance has dramatically increased.

Keynes made clear with no space for doubts what was his intention. His intention was not to give a cooking recipe that can be used automatically to resolve all problems on earth. His intention was not to present deficit spending as a solution for all problems as we can read and hear everyday. His intention was to create a framework of analysis that can be used to analyse a lot of economic issues.

To take a possible consequence of the keynesian theory for the keynesian theory itself is a completely missleading idea, although any book about macroeconomics does exactly that.

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error. It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, [...], that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed;

John Maynard Keynes, Te general Theory on Employement, Interest and Money, page 148 (chapter 21, III)

With modern textbook about macroeconomics we have three problems. First the presentation of the keynesian theory is wrong, as we will see later on, see IS-LM model. Second the focus is put on deficit spending, there is almost no discussion about the keynesian theory itself. Third, they use a "symbolic pseudo-mathematical methods of formalising a system of economic analysis, [...], that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed". With a mathematical modelling that assumes certain independence between economic parameters one can prouve almost everything.

Even the most basic economic equation Y = C + S with Y = national income, C = consumption and S = savings is already wrong. That would mean, that if S = 0 we investment is imposssible. That is wrong, completely wrong. Even if all the national income is consumed investments are perfectly possible, given that there is a productive potential. Idle resources can be activated with money, provided that they can produce something for which exists a real demand. See also mathematical modelization. Even the most simple equation everybody agrees with at first glance, is actually nonsense. A relationship is assumed that does not exist.

There is a strong tendency in economics to abstract from everything that is not predictible, spontaneous, incidental and that therefore can't be modelled mathametically. This approach is incompatible with a market economy. A market economy is discovery journey and works by trial and error. If it could be mathematically modelled, if the journey were predictible, there would be no need for trial and error. It would be possible to do it without trial and error by central planning, see homo oeconimicus.

Changes in the technological structure, improvements in the transfer of know how, innovations cannot be predicted and are difficult to promote, see research and development by the goverment, but can have an heavy impact on the economy. Nobody predicted the interenet and even after it was born in the first years nobody saw the potential. But in the last 20 years it had a deep impact on the whole economy. Nobody can say if we don't have in 20 years big zeppelins floating around the earth without pilot and propulsed by solar energy, who found their way by gps and are able to avoid by themselves any hindrance they eventually found on their way. That what have a dramatic impact on the transportation costs. Nobody can say if in twenty years it will not be possible to reproduce just any organ from stells and still less the impact that would have on the economy. Perhaps in the future the water problem is resolved because it will be possible to desalinate water with solar energy.

However for the sake of his analysis Keynes excludes any change in technology, productive structure, know how etc.. The question is what can be done if there is no way to influence directly these parameters.

[It is crystal clear that there would be no unemployment if it were possible to produce every year something like the smartphone and if for every problem would be invented immediately a technical solution. If the advantage of a new product in comparison to existing ones is obvious, the risk for an investor is low or inexistent.]

For the sake of his anaylsis Keynes excludes any change.

We take as given the existing skill and quantity of available labour, the existing quality an quantity of available equipement, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organisation, as well as the social structure including the forces, other than our variables set forth below, which determine the distribution of the national income. This does not mean that we assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them.

John Maynard Keynes, The general Theory on Employement, Interest and Money, page 122 (chapter 18, I)

One crucial point in the keynesian theory is that apart from consuming or saving and investing there is a third use for the income: speculation. Let's repeat briefly the whole classical theory in order to get this point clear. We will not discuss all the other missleading concepts of the classical / neoclassical theory but focus on the essential issues.

In the classical / neoclassical theory the dominant market is the labour market. The market for goods and the capital market depends on the labour market. As long as the wages are not higher that the (monetary) marginal output of labour the 'capitalists' will employ more people. If the demand is infinite, what is actually the case if we consider all the markets for good, we will reach full employment or if the (monetary) marginal output of labour is below the subsistence level the people will die and dead people are not unemployed. Therefore we get always full employment. Due to the fact that under these assumptions labour becomes scarce, the workers have the power to impose a wage that corresponds to the (monetary) marginal output, because until this point it is profitable for the 'capitalists' to employ more people. At the other hand beyond this point they will not employ more people, because they would lose money. This implicates as well that (monetary) marginal output of labour decreases, because otherwise the the 'capitalists' would employ an infinite number of workers. To explain this: It may be possible, that the physical output doesn't change, but the monetary output decreases with the supply.

[However this scenario is possible in reality. It is even possible and happened in reality that wages increases and employment as well. If productivity increases and a wide range of produts is offered, we can reach a situation where the capitalists have to compete for the scare workers.

The case of David Ricardo is different. David Ricardo assumes that there are always more people seeking a job than can be employed with a given amount of capital and the 'capitalist' therefore never has to pay more than the subsistence level.]

It is furthermore assumed that all the income is either consumed or saved and invested. That means, that the national income of the next period will be at least as high as the national income of the previous period and that everything that is produced is spent in consumption or investment. The market for goods will therefore be in equilibrium.

Remains the question how much of the national income will be consumed and how much invested. This is balanced by the interest rates, that works like the potatoe market. The higher the interest rate, the higher the saving rate and the lower the investment rate and the other way round. It is therefore clear, that there is an interest rate where the savings correspond to the investment. The capital market is balanced as well.

That sounds all fine, but is only true, beside a lot of other problems, if the whole income is either consumed or saved and then invested. The problem is, that there is a third possibility, speculation with stocks and similar financial assets. The description given by Keynes of this market is funny and we can learn by the way that the famous Tobin tax was not invented by Tobin, but by Keynes.

The next paragraph is the truth, nothing but the truth. With this paragraph should start any textbook about macroeconomics.

These tendencies are a scarcely avoidable outcome of our having successfully organised 'liquid' investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber's 'turn', the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transaction characteristic of Wall Street.

The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.

But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk.

If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money.

The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him.

It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment. But that would avoid the disastrous, cumulative and farreaching repercussions of its being open to him, when thus assailed by doubts, to spend his income neither on the one nor on the other.

Those who have emphasised the social dangers of the hoarding of money have, of course, had something similar to the above in mind.

John Maynard Keynes, The General Theory of Employement, Interest and Money, Chapter 12, page 80

The last annotation (Those who have emphasised the social dangers...) refers to Silvio Gesell (1862 - 1930) refers to Silvio Gesell, who advocated for a systematic devaluation of money if people hoard it. That way they would be obliged to spend it.

To illustrate the problem with an example. Due to the problems with the traditional pension system based on the contract of generations, the active generations pays for the pensions of the pensioners and at the moment they become pensioners their pensions will be paid by the then active generation and so on, a lot of nations tried to convert it in a system based on individual capital stocks. This lead to an increase of savings. In this case we have two problems. The first problem is that demand decreased, what explains in part that some countries, for instance Germany had to compensate their lack of demand by increasing the exports. The second problem is, that the institutional investors, most of all insurances, who were instructed to administer the savings find it more and more difficult to find profitable investments and engaged therefore more and more in speculative investments, with the results we have seen in 2008 and will see in the future. We are still in the year 2015.

Speculation on the stock markets or similar markets has nothing to do with rational economic behaviour. It is what Keynes called a beauty contest, referring to competition organised by a newspaper. People had to decide what they believed to be the most attractive women for the OTHERS. They had to guess therefore what the others believed to be the most attractive women for the others. That's how the stock market works. People try to guess what other people believe. Only if a lot of them believe that the others believe that a certain stock will rise, it will rise.

Although the TV puts a lot of effort to convince the people that the up and down of the stock market, that's the market they focus on for an unknown reason, can be explained by real economic phenomenon, the truth is, that it has nothing to do with the real world. It's pure speculation.

This kind of speculation has no impact on the real economy, doesn't create a single job and doesn't lead to sustainable growth. However it has an impact on the interest rate: "This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money." That means that only in the case that a real investment is much more profitable than speculation, people will invest in real projects, because an investment on the stock market can be reversed at any moment and presents therefore a lower risk. Furthermore a real investment requires are very good understanding of the respective market and very few people have that.

We have therefore a very strange situation. If a real investor wants money to invest in a market he knows very well, he has to provide securities, because the institutional investor, banks, insurance companies, pension funds, is not able to evaluate its project and takes no risks. But the institutional investors invest large amount of money in highly speculative investments, because this is a business they know much better.

We get to the strange situation in which those, who have the knowledge, the ideas and the innovations don't get the money and those who have the money, don't have the knowledge.

Furthermore the saver who let his savings administer by an institutional investor want security and the institutional investor guarantees him this security by a contract. That means, that the institutional investor, most of all insurances, invest a large part of the collected savings in secure financial assets and the only secure financial assets are government bonds.

Some countries, for instance Germany, wants to increase private savings and decrease governmental debt burden. It is hard to see how this can work. Why increase private savings if there is no need for this money?

A possible solution for the problem would be what we call today the Tobin tax: "The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States."

The idea is simple. For people who are no experts on the market they want to invest, 99 percent of the population, speculating on the stock market is as risky as a real investment, but an investment on the stock market at least can be reversed at any moment. If people expect let's say five percent on both markets, people will therefore prefer the stock market. (Or the institutional investor will do that for him.)

If a Tobin tax reduces the rentability of speculations, real investments become more competitive. Following the classical theory this would lead to either an increase of consumption or to an increase of investments, because hoarding money is irrational in the classical theory.

The question is whether this would work or not. First of all a general tax on financial transactios would be imposed as well on financial transaction that are triggered by real investments. Second it depends on how the speculation is financed. As long as the banks can get cheap money from the central banks, they will continue to speculate and perhaps very low interest rates are needed to induce them to invest in real projects and it can even be doubted that they care about the interest rates, because the profit depends on an increase of the financial asset itself and not on the dividend.

At first glance a much easier solution would be this: The central bank provide money to the banks only in the case that they use it for real investments. The fact that central banks don't do that, or better said only with a very reduced sum, in the case of ECB 400 billions last year, in 2014, see tltro program, suggests that the ECB doesn't believe that banks are able to identifie profitable investments even if interest rate are low and beside that, the banks doesn't need more liquidity. The real question is whether banks are really interested to grant small credits to companies. It is to assume that for them it is much more interesting to move hundred of billions of dollars even it the marginal profit rate is very low instead of administering small credit and the competition between banks doesn't work. The low interest rates of the central banks is not passed to the customer of the banks.

The roles of the banks can be questioned. The argument for private banks is the same as for private companies in general. It is said that the allocation of resources, especially 'capital' in this case, is more efficient if organised by the market mechanisms, see homo oeconomicus. However 'capital' is nothing but money, printed paper, and not a productive factor itself. It serves to activate productive resources, but is not a productive factor itself, see Joseph Schumpeter. The most profitable investment will attract the scarce resources independently of the price for money, the interest rate, because he can pay a higher remuneration and at the other side there is no need to kick out of the market the less profitable investment if that would lead to the unemployment of the less productive resources.

Some people who advocates in favour of private banks have the strange idea that higher interest rates would trigger a move from the production of potatoes to the production of sophisticated computer chips. That is nonsense. We have two different groups and if the potatoe farmer needs a loan and the chip producer we can grant this loan to both, provided they pay it back. High interest rates would perhaps oblige the potatoe producer to give up their farms, but that doesn't mean that more computer chips are produced.

High interest rates have only the effect that the less profitable, although profitable, companies disappear, but the more profitable don't benefit from that. The opposite is true. With the disappearance of the less profitable companies, demand decreases and the computer chip producer will run into problems as well.

To make this point clear: In the classical / neoclassical theory 'capital', not consumed income of the past, is needed to activate the needed resources. In order to employ people for instance the 'capitalist' needs 'capital', not consumed income of the past.

This capital can only be used, to stick with our example, to produce potatoes or computer chips. Due to the fact that the computer chip producer can pay a higher interest rate, he will get the money. A sacrifice is needed to get this 'capital' and the person who forgo consumption in the present wants the highest recompensation possible. If the interest rates were fixed at a certain level, the lender of the capital wouldn't care whether his capital is used to produce potatoes or computer chips. We would have a missallocation. In other words: If 'capital' were actually scarce, the interest rate would have an impact on allocation. If this is not the case, and it is not the case, because money is only scarce if the monetary authority make it scarce to reach some macroeconomic goals, for instance to stabilise the value of the currency.

Beside that the theory, that the interest rate is a price in the sens of a market price would not even be true if 'capital' were the result of a prior sacrifice, because the allocation would depend on the availability of securities and not on profitability.

In the case of unemployment, by unemployment we understand a situation where there are idle resources that are able to produce products for which exists a real demand, although the rentability is low. The fact that there are people who have no jobs, doesn't mean necessarily that they can produce anything useful. In this case no keynesian politics works, that's obvious.

The banks and the financial industry in general have an interest in high interest rates, but the only useful function of interest rates are their impact on certain macroeconomic parameters, for instance the value of the currency, inflation etc.. There is therefore no guarantee that the intentions of the central banks, responsible for the general interest, are compatible with the interest of the banks.

If the interest rates have no impact on allocation, the question arises why we need private banks. The actual system seems strange to many people. The central banks give money to private banks and the private banks lends the money to the government. They make therefore a good profit for almost nothing. It could be argued that it would be much more intelligent if the government gets its money directly from the central bank and in case that the central bank is an independent institution, it can refuse to lend money to the government if it assumes that their primarily goals, stability of the currency, is at stake.

However this is missleading. This would have the effect that the government receives always money at lower costs than the private economy. If the government competes with private companies, for instance in the construction of houses, the government would always win and more and more power would pass to the hands of the government.

If we want to change the system, everybody has to have the possibility to borrow money directly from the central bank to the interest rates the central bank considers necessary in order to reach its goals. In this case the central banks wouldn't depend any longer on the private banks and their willingness to cooperate with the central bank. Nowadays the central bank can lower the interest rates, but there is no guarantee that the private banks pass these low interest rates to the customers. Furthermore the interests of the private banks are not compatible with the interests of the economy as a whole. The fundamental idea of a free market economy, the individual interests and the general interest are compatible, see homo oeconomicus, is not valid for private banks.

Concerning credits to companies banks do something very simple. They grant a loan if the borrower can provide securities. This is something that can be done by any governmental clerk, there is not a lot of creativity needed.

The argument that public runned banks performed even worse in the financial crises of 2008 is not very convincing, because they did the same thing as private banks. The situation would be completely different if a public runned bank would do just one thing. Grant credits to the interest rates fixed by the central bank + administration costs + risk and these costs must be the same for the government and for private company.

Actually the problem, that the government gets loans as lower costs as private companies exists already under the present system. Banks are more willing to grant loans to the government than to private entities, because the risk is zero. The lender of last resort is not the central bank, but the tax payer.

It is often said, that high interest rate and clear responsabilities with concrete consequences to be beared by individuals will lead to less risk taking and less bancruptcy, whose consequences are to be beared by third parties. This may even be true. If the interest rates are very high and the amortization time very short nobody will take any risk, pero there are no profitable investments. However this perspective is wrong. Economies suffer more from people who don't take any risk than from people who takes to much risks. There is no risk, if we are dead, but only very religious people want to be dead as soon as possible.

Concerning the investments in stocks and shares Keynes distinguishes between two very different situations. In the first case the investment in stocks has a real economic function and in the second case it doesn't have any useful function.

In the case that a company goes public the first time, it actually gets money through the issuance of stocks and this money can be used in a productive way, that is at least the hope of the investors. If these share is traded afterwards on the stock market, no further funds flows to the company. The share price is only relevant if the company want to issue more stocks or if the company risks to be bought by someone else, in the worst case scenario by a competitor.

If the stock market wouldn't exist only investors willing and able to bind themselves for a long time can invest. If they can buy stocks, they can sell these stocks if the need the capital invested.

The author would say that the half sentence "...especially to the man who does not manage the capital assets and knows very little about them..." contains a lot of truth. It precises the term insecurity. Insecurity is a lack of information and knowledge.

The stock market are most of all a reduction of complexity. We can assume that anywhere in the world there is a more profitable investment than for instance buying shares of facebook, because the rentability of a facebook share is not even 1 percent. For an interest rate of 1 percent there are millions of investments and hundred of millions of people who would take a loan for that interest rate and start a business, but they don't get a loan for 1 percent, because that is to complicated for investors.

The problem could be in part resolved if the study of economics were changed. Right now we get people who are able to move curves around, very often without really understanding what they are doing. What we actually need are people who are able to evaluate real investments.

Summarizing: Keynes distinguishes three different functions of money. The first function is trivial. Money serves as a means of payment. In the classical / neoclassical theory this is the only function of money. The second one is almost as trivial as the first one. People save a certain amount of money to protect themselves against possible calamities. The third one, and this is at the core of his theory, is money for speculative use.

The first one doesn't depend on the interest rate, but on the size of the national income and increases if it increases. Concerning the second one we can assume that it increases as well with the national income, because the richer people are, the greater can be the calamities, car accident for instance, and besides that there are more possibilities in rich countries to remedy a calamity if someone have the means to pay for it.

We can disregard the function of preventing against calamities. Keynes mentiones it, but it doesn't play any role in his theory. Simplifiying we can say that this money corresponds to the monthly contributions to any kind of risk insurances.

Money for speculative purposes is not used in any way. This point is a little bit complicated. If the national income is low, very little money is used for transaction purposes, because few goods are changed. That means, we put aside the money saved to prevent against calamities, that there is a lot of money people can let on their bank account, where they get almost no interest rates, or put under their pillow, where they get definitely no interest rates. We assume for the sake of simplicity that the amount of money is fixed. The money on the bank account or under the pillow that doesn't yield any profit is amount of money used for speculation.

That means the lower the national income, the more people we have who are willing to invest in the stock markets or similar financial products, because everybody who wants to take some risks and doesn't need all his money for transaction purposes, have the possibility to do it. That means, that people who are more risk-averse will invest in the stock market as well as the people who are venturesome. That means, that the demand for stocks, bonds and other financial assets are high. At the other side there will be people prefer to stay in the secure harbour of liquidity, because at this low rentability, they prefer liquidity.

[If the stocks are expensive the rentability is low. If the dividend is 5 dollars and the stock cost 200 dollars, the rentability is low. If the the stock costs 100 dollar the rentability is high.]

[Instead of buying government bond of Greece the institutional investors could had for instance as well invested in real projects. That would have increased the need for money for transaction purposes, the national income of Greece would have been higher, and the government of Greece would have been obliged to pay higher interest rates in order to get money. We can say that the less economic growth, the less possibilities investors have, objectively or subjectively ot invest in real project, the more speculation. The real economy is completely decoupled from the financial markets. This article discusses the present situation, but has some general remarks as well, that illustrates the keynesian theory: Warren Buffett Predicting Upcoming Stock Market Crash?]

If the national income increases the need for money for transaction purposes increases as well. Some people will be obliged to sell their stocks and therefore the share prices will decrease and the rentability increase. In the average we will have a higher risk aversity, because some of the venturesome will have sold their stocks, the stock prices have lowered, dividends increased and some people with a higher risk aversity will have bought stocks.

[To put is simpler. People who have kept their money on a bank account for almost no interest rates, will make an effort to buy stocks, if the dividends are higher.]

The more the national income increases, the more money is used for transaction purposes in general and for realising real investments in special. More and more people will be obliged to sell their stocks with the effect that stock prices decreases, dividends increases and more peopel buy stocks. At the end we get to a situation where there is no money for speculation left, in other words, there is no more money hoarded on banks or 'under the pillow'. (The last option is a little bit theorectical, because only very, but very risk avers people keep their money at home. On a bank account they get at least some interest rate, although this may be very low.) If now money is hoarded, if any money is used for transaction purposes, we reach the classical situation.

Any further increase of national income can only happen if prices decreases and therefore the money for transaction purposes is reduced, a situation not discussed by Keynes and not very plausible, or if the interest rates increases, in other words if an investment 'kicks out' another investment.

What does that mean in plain words: That means that the stock markets increases if economic growth is low. What actually happens is the exact opposite from what is told every day on TV. On TV it is assumed that some positive signals of the real economy pushes the stock market. The truth is, that an increase of the prices of stocks is a sign for a crises. People are not able any more to use their capital in a productive way.

If the average growth of the real economy is 2 percent a year and the average growth of the stock prices is 14 percent something is going wrong. It is crystal clear that nobody would invest on the stock market, if he has the possibility to put his money in more profitable and secure real investments. The problem ist, there are none or the investors are not able to detect them.

It can be argued that the keynesian theory is not very convincing, because his 'animal spirit', people follow a tendency, can happen as well in the real world. If one company starts to produce smarthpones, thousand of others will do the same and institutional investors will invest in that business. This is a missleading idea. It is not so easy to understand how the market for smartphones work, to organise the production of smartphones, to detect the companies who can do that etc.. Investing on the stock market is much easier.

With the same arguments it can be argued that nobody will take part in a lottery. It is obvious that a lottery is only a redistribution of income. A lot will lose money and some few will earn money. From a logical point of view it doesn't make any sense to participate in a lottery. Nevertheless there are millions of people doing it.

On the stock markets only the dividends are 'real' earnings. The profits made by a change of the prices for stocks is pure speculation. Some earn money and a lot lose money.

Only on the stock market we can find the 'animal spirit'. On the stock market there is only one question. What do the others believe. To be more precise. The only question is what the other believe the rest of the world believes. On the real market the questions are always much more complex. To stick with our example of the smartphone, one must guess the impact that smartphones are going to have for entertaining, communication, e-learning, culture, in the medical sector, their impact on the controls of electric devices etc. etc.., because from that depends the demand.

Absurd speculations happens only in the financial sector and the construction sector and for similar reasons. In both sectors speculation plays an important role, because they are simple products. In all other sectors the 'animal spirit' is irrelevant, that's why there is no speculation there. The crisis of 2001 and 2008 started in the financial sector and in the construction sector and the next crises will start their as well.

In others sector we can have an exceed of supply over the demand that is slowly corrected. But if a bubble bursts, we have a correction in a few days and sometimes in one day.

We see therefore that the keynesian theory is completely opposed to the classical theory and only in the case of full employment the get to the same results. In the case of full employment in both theories further growth is only possible if more capital goods are produced at the expense of consumer goods. If people want to consume more bread than can be produced with a certain amount of oven, the only way to increase the productive potential is to reduce the production of breads for a while and produce more ovens. To put it simple.

People has therefore reduce consumption, that means they have to save, and produce ovens in the hope to produce more breads in the future. In a situation like that, if the economy has reached the limits of its productive potential, investors can be sure that the investments in ovens is profitable and the risk is low. They will be willing to pay high interest rates and at high interest rates and in the case of high interest rates people will forgo consumption and save the money needed for investments.

Injecting money in the market would lead to the same result, although in a different way. More money would lead to an increase of demand and in the case of full employment this demand cannot be satisfied, but if the sellers realise that demand has increased they will prefer to sell to the people willing to pay a higher price. The higher prices will lead to an increase in earnings and given eonough intensity of competetion to an increase in investments, in our example ovens. This is kind of compulsory saving, but the result is the same as in the classical theory.

[Another transfer mecanism could be this. Due to the fact, that there is no money for speculation left and all the money is needed for transaction purposes, any further investment will lead to a rise of interest rates and 'kick out' another investment. More investment is only possible if people undergo more consumption, something only possible, if higher interest rates are paid and this will 'kick out' the less profitable investments. This is the scenario of Schumpeter.]

In the case of unemployment none of the classical concept is true. Saving is not the condition for investment, it is even a hindrance for investments. Savings are not the result of not consumed in income of the past, because savings, in the context of investments, are just money and money can be printed. Investments can be financed with loans and if the loan is paid back, we have some kind of 'saving', because the money needed to pay back the loan cannot be consumed. The interest rate is not a recompensation for a sacrifice, forgoing present consumption, but the incentive to leave the secure harbour of absolute liquidity, in other words money.

'Capital', understood as not consumed income of the past, is never a hindrance for further investments, because it exists in abundance, however that doesn't mean that any investment can be realised. How money is used, for real investments or for speculation, depends on the MONEY MARKET and that is bad luck for real investments, because they are less liquid. Real investments has to be much more profitable in order to be prefered to financial assets, because real investments are not liquid, a decision can't be reversed.

To put it short: It doesn't make any difference if an investment is financed by 'saved money', something scarce, or by a loan, something that only is kept scarce, but exists in abundance, although the first version is more critical in a situation of unemployment. However in times of insecurity people will not take loans for real investments. That would be perhaps an heroic action, but nobody would be grateful to the hero.

In times of crises it is more plausible that people invests in the stock and similar markets with borrowed money than in real investments who has an impact on employment and national income. People who earn money with money, like the financial indurstry, have little possibilities if there are few profitable and secure real investments. In the logic of the classical theory they should simply disappear in this case.

If nobody wants to invest, interest rates are low, people consume their money creating this way demand and everything is fine. Hard to see how the financial industry can follow the advice of the financial industry. This would mean that all the investment bankers and traders should be fired in this case. Furthermore some institutional investors has guaranteed a certain fix interest rates to their customers. They are obliged to continue with the casino. Even in the case that there are really no profitable investments, a somehow hypothetical scenario, the authors would say that there are always a lot of profitable investments if only people are competent enough to detect them, we would have a finance industry and the finance industry can to nothing but speculate. In other words, the classical / neoclassical theory disregard completely a very important sector of the economy and is therefore, concerning its concepto of 'capital', interest rates and money complete nonsense from the beginning to the end.

In the classical theory, especially in the theory of David Ricardo, the capital market is the problem, because the capitalist can only employ more workers, if he has more capital, see effect on taxes. This is nonsense because the 'capitalist' need someone who gives him money, wherever this money comes from, but no 'capital'.

In the neoclassical theory workers are employed until their (monetary) marginal output corresponds to the wage. (For details see above). If we assume that they only work to spend the money afterwords, the economy would eternally reproduce itself in a condition of full employment. This would not even be true under the neoclassical assumptions, see Say's law, but it is still less true, under the institutional framework of our days. Savings are more or less fixed by contracts with insurance companies, home saving banks, pension funds etc.. The saving rate depends more on income than on the interest rate and people continue saving even if it becomes completely useless.

A strong point of the classical theory is the allocation of resources through the signals of the market, see natural price / market price. It is often argued that keynesian politics, expansive fiscal policy and expansive monetary policy, or an interest rate arbitrarily set by the central banks suspends this mechanism. This would be true, if capital were a productive factor and if it would be scarce. However none of that is true. 'Capital' for investive purposes is actually money and not a productive factor and furthermore it is kept scarce for macroeconomic reasons, but is not scarce by nature.

Even if the interest rate were zero, the really scarce and relevant productive factors would be allocated in an optimal way, because the more profitable investment can pay a higher remuneration. Only in the case of full employment the interest rate has an impact on allocation, because in this case high interest rates reduces consumption, something necessary in a situation of full employment. In a situation of underemployment the interest rates can have an impact on relevant macroeconomic parameters, for instance on the value of the currency, the higher the interest rates, the stronger the currency, because that leads to an inflow of foreign capital, but it has no impact on the allocation of resources. Concerning investments interest rates are just costs and a hindrance for investments.

It is often argued that flooding the market with money leads to a bubble on the stock markets and that is what we actually see today, we are still in 2015. However it is unclear, whether a more restrictive monetary policy would lead to more real investments. It is possible that a restrictive monetary policy would simply lead to bankruptcy of the financial sector. These people are not able to detect profitable real investments. The problem is, that the flooding of the market with money leads to an unbalanced distribution. Only the institutions with a direct access to this flood of money benefits. The share holders benefits from an increase of the prices of shares.

The austrian / wicksellian logic, that very low interest rates leads to overinvestment, is nonsense. The idea is that low interest rates induces investors to invest to much, in other words that the supply for capital goods can't satisfy the demand for capital goods, because the consumption is not reduced, what leads to an increase of prices for capital goods and the expectation of the investors will be disappointed, because the capital goods are going to be more expensive than what they though at the beginning and some of them will go bankrupt.

First of all there is a rather trivial argument. Any product on this earth has a price, fixed by a contract. The investor knows at the beginning of the investment how much the investment will cost. The producer of the capital good will not accept to produce it, if he knows that he will not able to provide it at the fixed price.

Second the theory can only be true in a situation of full-employment and full employment is a rather unusual situation. A more realistic scenario is this. The central bank keeps interest rates low and that leads to a bubble on the stock markets. At a certain moment the central bank fears the burst of the bubble and increases interest rates again. This is a problem for real investments who calculated with lower interest rates.

However what we see in practice is something completely different than what is assumed by the austrian school. Even at interest rates near zero, we are still in 2015, there are not enough real investments. If we had the austrian problems, everything would be fine. The problem is, that even at very low interest rates we have not an enough investments. Rising a little bit the interest rates is not a big problem. But if even at very low interest rates investments are low, we have a serious problem and in this case only an expansive fiscal policy can lead the economy back on track.

[Another possibility could be to train more people in order that they can detect profitabel real investments. Economists can move curves around on a sheet of paper, but that doesn't help in practice.]

The classical theory is only true for really scarce productive factors, most of all qualified work and raw materials. In order to induce people to qualify themselves, a higher remuneration for qualified work is needed. In order to qualify themselves people have to make a real sacrifice. It is hard work and during the qualification process they earn nothing. If they don't get a recompensation, they won't do it.

Fortunately the classical theory was never true, because if it were true, we would be very poor. Every day billions of capital are destroyed, because companies goes bankrupt and their highly specialised machines can only be sold for the scrap value. In the classical logic it would be necessary to save more in order to compensate that loss, something actually true from a microeconomic perspective. At a macroeconomic perspective fortunately it is not true. Some other company can start immediately with borrowed money generated by the banking system.

We can discuss about the consequences that can be drawn from the keynesian theory. For the reasons already mentioned expansive monetary policy as well as expansive fiscal policy can fail. But we can't discuss about the core of the keynesian theory. This theory is obviously true and confirmed every day.

One might think that the keynesian theory is not so difficult to understand and that everybody understands that the classical concept of capital is wrong. However that is not true, as it is revealed by the widespread rumour that the European Central Bank is 'expropriating' the savers.This rumour is so often repeated in TV, newspapers, internet, radio that the ECB considered it necessary to express itself on this issue, see Critique of accommodating central bank policies and the ‘expropriation of the saver'.

The people who argue that the ECB is 'expropriating' the savers didn't understand very well the function of money. The want the ECB to keep money artificially scarce in order to get a good price for it, high interest rates. However the role of the ECB and any other central bank is not to serve the savers, but to serve the economy as whole.

If we follow the argumentation of these people to the end, the ECB should restrict the amount of money in case that savings exceed investments and to keep this way interest rates high. This would lead to still less investments and they would ask the ECB to restrict the amount of money again. At the end there would be no investments at all.

What they don't understand is that 'savings' are actually money and money is not scarce. Nobody can ask the government or another institution to keep something artificially scarce in order to earn money with it.

With the same logic someone who filled his tube with water can ask the government to poison the water in order that the water he stored in his tube can be sold for a good price.

There are an endless number in error in thinking in public discussion about keynesian theory or to be more precise, there are an endless number of missleading ideas concerning the possible consequences that could be drawn from the keynesian theory, because the keynesian theory is actually never discussed. The whole public discussion is about the consequences that can possibly be drawn from the keynesian theory. We are not disussing them all, there are too much misleading ideas to discuss them all. This is just an example: 3 Reasons why Keynesian Economics does NOT Work, no need to say that without any effort half a millon of this kind can be found.

[Most of the topics we have already discussed. We just repeat what has been said before using a concrete example.]

The first argument is, that expansive fiscal policy doesn't work, because governments won't pay back the loans and public debt burden increases. The Problem is obvious. He doesn't distinguish between consumption and investment. (A very typical error by the way.) In the case of investments, Keynes only speaks about investments, it is no problem that the public dept burden increases as long as it is balances by real assets. If the amortization time of the loan is as long as the time of use of the real asset, there is no problem at all.

In the case that the government increased aggregate demand by consumption things are more complicated. If the balance of payment turns negative, keynesian theory will work perfectly, but in FOREIGN countries and not in the country that increased aggregate demand by deficit spending. Keynes assumes that through the multiplier effect it is possible that the increase of national income triggered by the primary impulse increases tax revenue to a level that allows to pay the credit back. (Obviously only if all the secondary effects remain in the country.)

However those who say that an increased government debt burden is the problem, has to prove first that the situation would be better without that increase of government debt burden, that there is a better solution to get the economy back on track.

That countries like Greece, Spain and Portugal, the countries mentioned in the video, had a debt problem is unquestionable, but this countries gathered as well a high deficit in their balance of payment. Increased public spending and a negative balance of payment is something that obviously doesn't work, but has nothing to do with a policy inspired by the keynesian theory.

His next thesis is equally strange. He assumes that social transfers lowers the innovation rate. The author would say, that wealthy people produce more innovations, but beside that, social transfers has nothing to do with keynesian politics. Even the social market economy, that is based completely on classical / neoclassical concepts, advocates in favour of social transfers, see social market economy.

The only new idea in the keynesian theory concerning this point is that Keynes mentions the possibility that even social transfers refinance themselves. The increase in income triggered by the initial impuls is a multiple of the intitial impulse. And even if that is only true under ideal conditions, it is quite clear that the impact on government debt burden is much lower than what can be deduced by the figures. In the government budget we see what is spent for social transfer, but we don't see the tax revenue triggered by these social transfers.

Furthermore we can deduce from the keynesian theory that social transfer will have no impact on allocation and will not lead to inflation. The problem is an increase in government debt burden and not inflation or missallocation as assumed by the classical theory.

Next he mentions the problem of 'crowding out'. Unfortunately this missleading concept is divulgated through the academic sphere, we find it in any textbook about macroeconomics. That's why it is crucial to understand the core of the keynesian theory. He assumes that in the case the government increases its expenditures through deficit spending it kicks out private investors. He assumes that deficit spending would lead to an increase of interest rates and that would reduce private investments.

There are several errors in this argumentation and in part these widespread errors are due to the IS-LM modell. The first problem is, that is doesn't fit with the data. Government dept burden increased indeed dramatically in the last 20 years, because every collaps of the financial sector leads to a situation where the government has to assume the depts. However the interest rates didn't increased. The opposite is true. They are historically low.

The second point is, that he has something like the classical "saving" in mind. He presumes that the amount of 'capital' is fixed and if the government takes part of it, there is less left for the private sector. First of all, the private banking system can generate money itself and second the central bank can poduce it at any amount. It is indeed true that the IS-LM modell discusses crowding out, but this phenomenon is irrelevant in the keynesian theory, but induces many people to believe that keynesian 'saving' has something to do with classical saving.

However there is a still more fundamental problem. In the situation that keynes assumes, there are no private investors. That is the problem and therefore the government won't kick out any investor. He assumes that if the government borrows less money, the potential lenders would lend it to private companies. That is unfortunately wrong under the conditions assumed by Keynes and unfortunately the situation that Keynes assumed is more typical.

It must be understood that keynesian politics is about what to do in case of recession. Recession means that the national income was higher before. In this case it is clear, that the productive potential is not fully employed. This is condition for keynesian economy.

If a government spends all its money to maintain an inefficient bureaucracy that produces actually nothing it is crystal clear that keynesian politics will not work. If the government increases its expenditures by employing still more public employee and these public employee buy the things they need in foreign countries, because nothing of what they need or want is produced in the country, the government debt burden will increase until it is finally bankrupt, as it happened in Greece. Greece was not in recession, because their productive potential was never higher. They had a structural problem.

Something similar happens if the competivity of the foreign countries increases. If people can buy what they want cheaper and / or better in a foreign country, they will do that. A policy inspired by the keynesian theory can do nothing against that. In this case deficit spending will work, but in the foreign countries.

To put it simple: Some people refute the keynesian theory because deficit spending doesn't have the effect that smartphone are produced in South Korea instead of Greece. That is actually true, but something Keynes never claimed.

Politics inspired by keynesian theory can work if there is a real productive potential that is not used. And that is a situation that can't be explained by the classical theory. In the year 2013 the turn over on the stock markets alone was almost 14 trillions dollars. If that money would have been consumed, all the problems on earth would be resolved.

(To get an idea what this is: The GDP of the USA was about 16 trillions dollars. That means that the turnover on the stock markets alone is almost as high as the GDP of the USA.)

It is clear that the classical theory, where exists only consumption or savings and investments, is wrong. Completely wrong. There is an obvious preference for speculation. If all the money circulating around the glob would be invested or consumed, as the classical theory assumes, there would be a lot of opportunities for profitable investments, but a single institutional investor has no choice. If consumption is low, there are only few and risky real investments and these investments compete with the stock and similar markets.

The problem could be resolved by imposing a financial transaction tax. A financial transaction tax would make real investments and even consumption more attractive. This would have a positive impact if purely speculative transactions with no impact on the real economy would be stopped or at least reduced. For some financial investments, for instance in shares at the IPO, exceptions are needed.

Keynes mentions this possibility, but considered it unrealizable, although beneficial. The first problem is that it only works if all nations implements it, otherwise the transactions would move to a country where this tax is not imposed.

Another possibility would be not to tax the transaction itself, but the result, in other words the earnings of these transactions. (This already happens in most countries, but the tax can be increased in order to make useless transactions less attractive and real investments more attractive.) In this case it would be more difficult to avoid the tax, because a change in residence would be necessary.

Since the financial crisis of 2008 the financial transaction tax is in the center of public debate, however with different arguments than the ones put forward by Keynes. Keynes argued that a financial transcaction tax would have the effect that consumption or real investments would become more interesting. Today the financial transaction tax is considered "a tax for the poor". It is argued that tax revenue can be used for social transfer. This argument is less logical, because any tax can be used for this goal and the question to be answered is which tax is less harmful or more beneficial. If it were possible with a financial transaction tax to promote consumption or investment this tax would be very useful. That the money can be used to help the poor is a nice secondary effect, that can be achieved with any tax.

We have seen in the last 8 years, we are still in 2015, that the central banks are almost powerless. They can inject as much money as they want in the market, it has no impact on the real economy. Any amount of money is aborbed by the financial industry and speculation. If the ECB anounces on monday that the will inject 60 billion each month through an open market economy, the stock prices rise on tuesday and that's all.

However in a keynesian perspective it can be questioned if the add value tax is a genious idea. It is said that the add value tax has a positive impact on savings, because the only way to avoid this tax is to consume less and if people consume less, they save more. This may be a good idea in case of full employment, but in case of underemployment, where saving has to be reduced and consumption increased, it is less intelligent.

An increase in the income tax rate and a decrease of the add value tax would decrease private savings, because consumption would be more attractive and the lower the income the lower the saving rate. Furthermore the add value tax doesn't take into account the individual situation and is therefore critical, but what is still more problematic is the fact that proportionally poor people pay more, because they spent all their money.

The problem is, that laws are generally made by people who studied law and it is not to be expected that the result is something logically coherent. In some countries, for instance in Germany, there are laws inspired by the keynesian theory, but these laws doesn't fit with the rest.

Keynesian theory seems very abstract to most people, that's why it rarely understood. The classical theory seems to correspond more to common sense. However 99 percent of the readers of this lines behave exactly like it is predicted by the keynesian theory and nobody reacts like it is predicted by the classical theory.

If the reader of these lines wins 1000000 dollars in the lottery he will buy a house or construct one. This is a more or less secure investment in both cases, in the case that he lives in it himself and in the case that he rents it to other people. It is a more or less secure investment, because its use is predictible even for the very remote future.

(That's at least what people believe. Normally people forget that the value of the house depends on the availability of jobs in the region where the house is located.)

With the rest of his money the reader will buy what he always wanted to have. A nice car, nice clothes, jewelry, etc. etc.. And what is left he will give to an institutional investor, an insurance company, a bank, a pension fondn etc.. In some cases he will perhaps invest directly on the stock market, but he will almost never invest directly in a company or founding one himself. Very profitable and very secure investment possibilities are needed to induce ordinary people to leave the save harbour of liquidity.

In other words, if the reader wants to understand keynesian theory, he just has to think a little bit about himself and he will immediately see that Keynes is right. He can ask as well his friends what they will do with 1000000 dollars won in the lottery. He will get answers similar to the mentioned before. For an unknown reason there is a widespread belief that institutional investors are able to detect profitable investments and they behave in a different way, although we learn every day that this is not the case.

That leads to the strange situation that the amount of money has to be increased because the people are not willing to put money in circulation in the real world. The keynesian answer, or a possible conclusion that can be drawn from its theory, is that the government increases the amount of money through deficit spending because people store to much money. That sounds weird at first glance, but this is the reality.

The author would say, that a more intelligent solution would be this: Sometimes, for instance today, we are still in the year 2015, radical changes in the production structure are needed in order to cope with certain challenges like scarcity of petrol, climatic changes, need for cheep energy etc.. Investments in these sectors are secure and in the long run profitable. There is not even an alternative in the long run.

Some governments, for instance in Germany, invests massively in these new technologies, for instance in power lines. (In Germany we have the unconfortable situation that there is a lot of wind in the north of Germany, but the energy is needed in the south of Germany.) Instead of financing these investment itself and increase the debt burden, the government could as well found a stock company who built this power lines and normal citizens can buy shares. This would be almost as secure as building a house, at least in the long run and the citizens would not only be charged by higher costs, but would profit as well from the benefits of the company. Projects like that would induce people to leave the safe harbour of liquidity. The same can be done with energy plants of any kind, windmills, solar power systems etc..

Actually the same system would work with any kind of infrastructure, even with roads and highways. At the moment it is the government who finances that or the tax payer, if we want to be more precise, but first the government takes a loan, increases the amount of money. If it were financed by shares offered in an easy way to the wide public and if any owner of a car would be obliged to pay something for the use of it, in the ideal case proportional to the amount of miles driven, it would be a profitable and secure business and even more compatible with a market economy. Private institutions, the stock companies, would be the owner and not the government.

The keynesian idea, we repeat, this is a possible consequence that could be drawn from the keynesian theory, but not the keynesian theory itself, that deficit spending could refinance itself by the multiplier, see above, is perhaps not very realistic, because high unemployment rates almost every time are bundled with low competitiveness. If the government increases the consumption through deficit spending the secondary effects necessary for the multiplier effect to work will happen in foreign countries, because these countries offer the product cheaper and / or in a better quality.

If the multiplier effect would work, and under certain conditions it can work, public debt burden wouldn't increase.

If it doesn't work, and this scenario makes only sense in the case that the deficit is used for investments, there are two options. The first option is that the government tries to direct the savings of the people to something useful. That can be achieved by inducing people to buy shares of a stock company founded by the government, for instance to build houses. People would be the owners of the houses, but the amortization period would be very long and / or the rentability low, although perhaps better than most of the investments on the stock markets, at least in the long run, or hording the money, because buying shares has no impact on the real economy.

It can be said that this can as well be done on a private basis, for instance by an open-ended real estate fund or similar constructions, but experience shows that constructions of this kind are not able to aborb all the money, because the rentability they demand is to high to reach full employment.

The second option is that the government takes a loan and absorb this way part of the hoarded money. In this case the tax payer will pay the money back. That would mean that for the investors the rentability is higher and the investment is more secure, because the government is always the last one who goes bankrupt, but there would be more coercion on the tax payer, because the time the loan has to be paid back would be shorter, if we take the construction service as an example, than the time of use. The owner of a house, that would be the case if the construction of houses would be financed by a government founde stock company, would get his money back during the time-of-use.

The classical theory would say that the coercion described is not necessary, because nobody would hoard money or keep it in a form that yields almost no profit. The truth it, that this happens.

Adepts to the classical theory would say as well that it is not true that people hoard money, the opposite is true. People spend too much, that leads to bankruptcy and this leads to recession. However the total endebtment of the housholds is a ridiculous sum compared to the financial assets. (220 billions of endebtment of private households, but 5,5 trillions of financial assets to take the example of Germany.) It is more plausible that private endebtment is an effect of unemployment than the cause.

The paragraph below shows the explanation of the multiplier given by Keynes himself. However it is easier to understand the keynesian idea with a more simple model. Let's assume that the government take a loan of 1 million dollars. Let's assume as well, for the sake of simplicity, that the banks grant him this loas and that the banks get this money from the central bank. We assume therefore that 1 million of fresh money is printed and that the government spend this money.

We start with a somehow unrealistic scenario. The government spend the money for a new computer programm that allows to retrieve any kind of data under any kind of perspective from the governmental budget. A very usefull software. This programm will be written by ten programmers and there are no extra costs, because all what they need, computers and software, the already have. They do a very good job and the government pays them 100 000 dollar each and in total one million.

No we get to the interesting point and to the unrealistic scenario. If the tax rate is 100 percent the ten programmars pay 1 million of taxes, kind of "saving". The government takes this money, pays back the loan of the banks, the banks pay back the money to the central bank and the central bank puts the money in the chimney and burns it. This is the end of the story. The GDP would have grown ONE time by one million, the government would have a nice software, but beside that nothing would have happen and now new jobs would be created. (However, this is obvious, that woudn't work, because under these conditions the programmers wouldn't work.)

No lets say that the tax rate is only 20 percent. What would happen than? Our programmers would get once again 1 million dollar and 200 000 dollar they would pay on taxes. Given the fact that they are smart and understand the keynesian theory, they won't save anything, enjoy their lives and consume the remaining 800 000 dollars, for instance in going to holidays. We assume that they pass their holidays on an island and just eat what there is anyway. Therefore their hosts, kind of a farm that hosts guests on summer with out any further expenditure, earn 800 000 dollars and pay 160 000 dollars taxes, so they can consume 640 000 dollars. We assume that the farmers consume this money as well etc.. The result will be, that national income will increase by 5 million dollars, because 5 million dollars are needed to pay back the loan (0,2 * 5 = 1). The multiplier is therfore 5. It is obvious that the higher the tax rate, kind of compulsory 'saving', the higher the multiplier.

But if the tax rate is zero, the system would 'explode'. It the productive potential is fully employed, the prices would rise.

[To put it still more simple: If an investor takes a loan for an investment the more he wants to consume from the income triggered by this investment, the higher has to be the income triggered by the investment. If the loan is 1000 dollars and he wants to consume 90 percent of the triggered income, the triggered income has to be 10 000 dollars. If he only want to consume 50 percent, 2000 dollars is enough.]

This works if people really consume their money and don't save, if there is no drain off of the secondary effects to foreign countries and that there are no bottlenecks that leads to an increase of prices, in other words if the production structure allows an increase of the GDP of 5 million dollars.

Ordinarily speaking, the public will not do this unless their aggregate income in terms of wage-units is increasing. Thus their effort to consume a part of their increased incomes will stimulate output until the new level (and distribution) of incomes provides a margin of saving sufficient to correspond to the increased investment. The multiplier tells us by how much their employment has to be increased to yield an increase in real income sufficient to induce them to do the necessary extra saving, and is a function of their psychological propensities. If saving is the pill and consumption is the jam, the extra jam has to be proportioned to the size of the additional pill. Unless the psychological propensities of the public are different from what we are supposing, we have here established the law that increased employment for investment must necessarily stimulate the industries producing for consumption and thus lead to a total increase of employment which is a multiple of the primary employment required by the investment itself. It follows from the above that, if the marginal propensity to consume is not far short of unity, small fluctuations in investment will lead to wide fluctuations in employment; but, at the same time, a comparatively small increment of investment will lead to full employment. If, on the other hand, the marginal propensity to consume is not much above zero, small fluctuations in investment will lead to correspondingly small fluctuations in employment; but, at the same time, it may require a large increment of investment to produce full employment. In the former case involuntary unemployment would be an easily remedied malady, though liable to be troublesome if it is allowed to develop. In the latter case, employment may be less variable but liable to settle down at a low level and to prove recalcitrant to any but the most drastic remedies.

John Maynard Keynes, The General Theory of Employement, Interest and Money, Book 3, Chapter 10, page 60

Those who didn't understand what keynesian theory is about understand it know. Keynes not only denies that prior savings, not consumed income of the past, is needed to activate idle resourcers. He even says that saving is contraproductive in a situation of unemployment. The lower the saving rate the better.

It complicates a little bit the comprehension of the keynesian theory that Keynes uses the classical term savings, although it is cristal clear, that savings are the RESULT of the investment and not the CAUSE or CONDITION: "Thus their effort to consume a part of their increased incomes will stimulate output until the new level (and distribution) OF INCOME PROVIDES a margin of saving sufficient to correspond to the increased investment."

In order to get to a new equilibrium the increase of national income triggered by the initial investment has to be high enough that the savings, that depends on the national income, equals investments.

However Keynes works here with the term 'savings' that sounds very classical, although it has nothing to do with that. In the keynesian theory the term 'savings' could be in two different ways, both of them correct.

The first meaning of the term 'saving' is to pay back a loan. Saving in this sens means, that the income generated by the prior investment has to be high enough to pay back the loan. In other word, part of generated income cannot be consumed and hast to be "saved".See example above.

The other meaning of 'saving' would be nearer to the classical definition. 'Saving' means can mean as well the production of capital goods instead of consumer goods. In order to conume more in the future, an economy has to increase its productive potential, in other words produce more capital goods. If people want to eat more cakes, they need more ovens. To put it simple.

However in both cases the investments PRECEDE saving and not the other way round. In the first case this is obvious.

If someone take a loan to finance an investment, he pays the lown back AFTERWARDS and in general the loan is granted because the amount of money is increased and does not derive from prior 'savings' in the classical meaning of the term, not consumed income of the PAST.

The second case is a little bit more complicated. If the amount of consumption is suddenly increased it can happen that the consumption industry needs to invest more. In other words there is always a relationship between the resources needed to produce the capital goods and the resources needed to produce the consumer goods. The resources needed to produce the capital goods derived from 'savings', in other words from foregoing consumption.

Lets say that we have a total income of 1000 and 10 percent of this income has to be used for the production of capital goods, in other words 10 percent of the resources has to be used for the production of capital goods. Expressed in an equation

Y = C + I
Y = C + S

with Y = national income, C = consumption, I = investments, S = savings.

That means in plain words that the whole national income is either consumed or saved to be invested. If we put our ficticious numbers into the equation we get

1000 = 900 + 100
1000 = 900 + 100

We get as well I = S and 100 = 100. The economy is in equilibrium.

[However we have to seen that this equation is problematic and has nothing to do with the keynesian theory. It is actually missleading. Following the logic of these equation, investments are impossible if S is zero. In the keynesian theory S is irrelevant. Investments are financed with money and money is something that exists in abundance.]

Let's say that the government increases the investments by 100 to 200. In this case we need 200 units of savings. If people continue to save the same percentage as before, we get an equilibrium only if the national income increases by 1000 units to 2000 units.

2000 = 1800 + 200

Any other national income is not an equilibrium. The numbers in brackets indicates how much is missing.

1500 = 1350 [0,9 * 1500] + 200 (-50)
1600 = 1440 [0,9 * 1600] + 200 (- 40)
1800 = 1620 [0,9 * 1800] + 200 ( -20)

That means the government invest 100 units, for instance in the construction of buildings. The workers will spend 90 units and save 10. Other people, for instance the super markets, get this 90 units and spend again 81 units. The supermarkets will buy things from the farmers. The farmers get 81 units and buy seed and fooder for 72,9 units and so on. The proces will stop if the national income is increased by 1000 units, but only if the people dont increase their saving rate. That for instance will happen if the distribution changes, because wealthier people save more than the less weatlhy.

Saving in this perspective is considered as a problem and the less people save, the better: "If, on the other hand, the marginal propensity to consume is not much above zero, small fluctuations in investment will lead to correspondingly small fluctuations in employment; but, at the same time, it may require a large increment of investment to produce full employment."

We get therefore to a conclusion radically opposed to the ideas of David Ricardo, see effects of taxes. For David Ricardo all kind of taxes that leads to an inferior accumulation of capital, for instance a tax imposed on wages that finally has to be paid by the capitalist, are negative, because they lead, due to the fact that the 'capitalist' can employ the more people the more 'capital' he has, to less employment. In the keynesian theory high taxes for rich people would have a positive impact, because it would reduce savings.

If we want to be precise, the equation I = S is even wrong (and doesn't appear in the Theory of Employment, Interest and Money), if interpreted as investments triggering savings (and not the other way round as assumed by the classical theory), because until full employment is reached, there is no need of any kind of savings. Only in the case of full employment the production of consumer products has to be reduced in order to produce more capital goods.

In other words. Giving a certain saving rate, we have a lot of equilibriums

a) 1000 = 900 + 100
b) 2000 = 1800 + 200
c) 3000 = 2700 + 300

and so on, but only one equilibrium guarantees as well full employment. If this point is reached, savings become a real economic function. It reduces the production of consumption goods in favour of capital goods. Something that at this level is necessary, because otherwise we would run into inflation. Before this point savings are irrelevant at best and in most cases even harmful.

Reached this point a certain amount of resources can't be used for the production of consumer goods, because they must be used to produce and substitute depreciated capital goods.

Given a certain production structure, the relationship between the production of consumer products and the production of capital products is fixed. A certain amount of the national income has to be used to keep the machine alive. If a society saves less than what is needed to keep the production structure intact, this society will impoverish. That happens for instance if it doesn't keep its basic infrastucture, roads, highway, hospitals, universities etc.. intact.

If however the economy remains at level b) because the interest rate arbitraly determined by speculation on the MONEY MARKET hinders less profitable investments to be realised, the economy remains on level b). There are two options to get two level c), the level of full employment. Lowering the interest rates by injecting more money into the market or by increasing public expenditures financed by deficit spending.

[Actually there is a third possibility. If all the money is used for speculation and neither consumed nor invested, the government can as well change the distribution through social transfers and similar means. Even the people negatively affected by an increase of taxes would benefit. Most of these people profit from an increase of economic activity, because their income depends on demand.]

The keynesian theory is often criticised for not taking into account that in a globalised country it is possible that the secondary effects drain off to foreign countries. However this can happen as well under the assumption of the classical theory. If the classical savers invest their money in foreign countries, there is lack of demand and Say's law is not longer valid. (Apart from all the other arguments already mentioned, see Say's law.)

The classical approach to resolve this problem are flexible exchange rates. The currency of the nation with a negative balance of payment will lose value, exports will therefore cheaper and imports more expensive. This tendency will only, at least in theory and without taking into account the balance of capital transactions, stop if the the balance of payment is balanced again.

This mechanism obviously doesn't work with politics inspired by the keynesian theory, because every time the aggregate demand is pushed, the current account balance will turn negative again.

It is therefore questionable whether a country that has a governmental deficit, makes therefore a policy inspired by the keynesian theory, should not have the right to impose taxes on goods that doesn't improve its productivity, in other words on pure consumption goods.

Keynesian theory is easier to understand if we forget the whole story about savings, because savings are only relevant in a situation of full employment. The really relevant question is whether the loan is paid back or not, in other words if the increase of the tax revenue triggered by the primary impuls is high enough to pay the loan back. If all the money put in circulation is either invested or consumed it is secure that this is going to happen in a closed system, in other words if the balance of payment is balanced.

In the scenario mentioned above, tax rate of 100 percent and the government increases the aggregate demand the impact on the national income equals the primary impuls. Money is generated and immediately afterwards eliminated, when the loan is paid back. The other extreme is a tax rate of zero. In this case the loan would never paid back and the national income would 'explode' in other words, the process would only be stopped if the productive potential is fully employed. We would run into an inflation until the increase of prices would absorb all the money, in other words, the demand for money for transaction purposes would increase. In this case the classical quantity theory of money

M * V = Q * P

with M = the amount of money, V = velocity of money (how many times a coin goes from one hand to another in certain period of time), Q = the real GDP (the GDP fixed at an arbitrarily chosen period), P = inflation (the increase of prices since Q was fixed). If all the money is used for transaction purposes triggered by consumption or investments, this equation is true.

Between these two options we have any kind of effects. If there any needs a given production factore can satisfy, it is crystal clear that this would work in a closed system. At least in theory. The government would always be able to increase aggregate demand until full employment is reached. However we all now that in practice it doesn't work due to the problems mentioned before.

We will see later on, when talking about the IS-LM model, that it is not helpful to talk in the context of keynesian theory about savings, because that allways suggest that there is a classical concept behind.

The paragraph below is a summary of we have said until know in Keynes own words.

The trouble arises, therefore, because the act of saving implies, not a substitution for present consumption of some specific additional consumption which requires for its preparation just as much immediate economic activity as would have been required by present consumption equal in value to the sum saved, but a desire for 'wealth' as such, that is for a potentiality of consuming an unspecified article at an unspecified time.
The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished. It is of this fallacy that it is most difficult to disabuse men's minds. It comes from believing that the owner of wealth desires a capital-asset as such, whereas what he really desires is its prospective yield. Now, prospective yield wholly depends on the expectation of future effective demand in relation to future conditions of supply.
If, therefore, an act of saving does nothing to improve prospective yield, it does nothing to stimulate investment. Moreover, in order that an individual saver may attain his desired goal of the ownership of wealth, it is not necessary that a new capital asset should be produced wherewith to satisfy him. The mere act of saving by one individual, being two-sided as we have shown above, forces some other individual to transfer to him some article of wealth old or new. Every act of saving involves a 'forced' inevitable transfer of wealth to him who saves, though he in his turn may suffer from the saving of others. These transfers of wealth do not require the creation of new wealth—indeed, as we have seen, they may be actively inimical to it. The creation of new wealth wholly depends on the prospective yield of the new wealth reaching the standard set by the current rate of interest. The prospective yield of the marginal new investment is not increased by the fact that someone wishes to increase his wealth, since the prospective yield of the marginal new investment depends on the expectation of a demand for a specific article at a specific date.
Nor do we avoid this conclusion by arguing that what the owner of wealth desires is not a given prospective yield but the best available prospective yield, so that an increased desire to own wealth reduces the prospective yield with which the producers of new investment have to be content. For this overlooks the fact that there is always an alternative to the ownership of real capital-assets, namely the ownership of money and debts; so that the prospective yield with which the producers of new investment have to be content cannot fall below the standard set by the current rate of interest. And the current rate of interest depends, as we have seen, not on the strength of the desire to hold wealth, but on the strengths of the desires to hold it in liquid and in illiquid forms respectively, coupled with the amount of the supply of wealth in the one form relatively to the supply of it in the other.

John Maynard Keynes, The general Theory on Employement, Interest and Money, page 105 (chapter 16, I)

Let's summarize that: The classical and neoclassical theory, Keynes doesn't distinguish between them, because both share the same fundamental errors, assume the economic activity triggered by savings, investments equals savings, is as hight as the economic activity triggered if instead of saving people would have consumed their money. This is actually only true if the commodity could be stored for a long time. Someone who saves rice today in order to consume it in thirty years, triggers the same economic activity, as someone who eats the rice today. But these kind of commodities are irrelevant in practice.

The classical economy assumes that some entrepreneurs has a genious idea that allows to increase consumption in the future. Therefore the will pay high interest rates and high interests rates will induce people to save more. If nobody has a geniours idea, interest rates will be low or even zero and people will consume all their money.

What actually happens in reality is completely different. People who make a contract with an insurance company, the goal of some of these financial products, for instance life insurances, is to form a capital stock, don't have any concrete investment in mind nor does the insurance company have any concrete investment in mind and beside that, the investor doesn't depend on these savings. They have the somehow vague desire to increase their wealth. A direct relationship between savings and investments through interest rates doesn't exist and most of all the interest rates is fixed by the monetary authorities and follows a completely different logic with completely different goals.

The equations we find in any textbook about macroeconomics are missleading and together with the IS-LM model responsible in part responsible for the widespread missleading ideas about the keynesian theory.

Y = C + I
Y = C + S
from what we can deduce that I = S

In the keynesian context this equation is only true EX POST. Investment triggers savings and NOT the other way round and in contrary to what the classical theory assumes, high saving rates, forego consumption is a hindrance to economic growth.

There is actually no relationship between investments and savings, because investments don't require savings in the classical understanding of the term. The term savings can only be interpreted in a meaningful way in relationship to real resources and is therefore relevant only in a situation of full employment. In a situation of full employment the production of consumer goods has to decrease in order to make available rersources for the production of capital goods.

In other situation the question is simply whether the loan can be paid off or not. In other words, there is relationship between rentability and interest rates, but not between saving and investments. Concerning the question whether the loan is paid back or not the classical idea, that people 'save' in order to buy something is even true. An investor has a very concrete idea about the project he wants to invest in and only if this project allows him to pay back the credit, he will invest.

[It is not denied that there are people who save money for a concrete goal, buying a car, going on holidays, buy a computer etc.., but expansion investments are financed by loans, otherwise there would be very little need for banks and the banks don't depend on prior savings to grant loans.]

It is often said that Keynes was influenced by Knut Wicksel. That is true in the sense that Wicksel opposed the natural interest rate (the rentability of investments) to the market interest rate (determined by the money market, simplifying by the central banks). In this logic obviously prior savings are irrelevant. The central banks can supply any amount of money for investive purposes for the interest rates they want and they don't care about what people have saved previously.

However there is a logical error in the theory of Knut Wicksel. Something like a 'natural' interest rate only exists in the case of full employment. Natural interest rates means in this case that the preferences of the people to forego consumption in the present in favour of consumption in the future corresponds to the needs of the investors and if the market interest rates are too low, the investors will invest more than the production system is able to supply. The economy would run into an overinvestment. If the consumers are not willing to forego consumption in the present and to make available the needed resources, prices will rise, the need for money for transaction purposes will rise as well and that will trigger a rise in interest rates. Some investors who calculated with low interest rates will go bankrupt and that will lead to recession. The problem with this logic, similar to the cycle theory of the austrian school, is that in the case of unemployed resources there is no need to make resources available for further investments. They are available in any quantity. The interest rates can even be zero.

[For those who find that very abstract. After the fall of the wall in Berlin in 1989 the whole economy of East - Germany disappeared almost from one day to another and was East - Germany was supplied almost completely by West - Germany. Not after a long process of adaptation, but in a few weeks. That leads to no further inflation. The productive potential of modern economies is very, very elastic, what is actually a problem in the keynesian theory. We need a strong economic growth before the companies hire more people.]

The real problem is a completely different one. If an increase in aggregate demand leads to a more unequal distribution of national income, savings will increase and the government has no change to increase its tax revenue and pay back the loan. Government debt burden increases.

Aid to developing countries follows as well a classical pattern. The idea is that capital, actually money, is given to devoloping countries and they use this money to make their productive structure more efficient. The idea is that 'capital', conceived not consumed income of the past, can be substituted by foreign aid. That obviously doesn't work. If there is a productive structure, they can activate it with their own currency and if their is none, all money of the world would produce it. With foreign money these countries will buy foreign products and that will never lead to sustainable growth. (In any case if the money is not used to buy capital goods that improves the productivity.)

That's not difficult to understand. 99 percent of the people in developed countries would be unable to invest 1 million dollar in a productive way. The large majority would buy a house, another huge percentage would be used for consumption and the rest would be handed over to an institutional investor who would use it to speculate on the stock markets. The problem is not the availability of 'capital', the problem is the productive potential.

Microcredits are based on the same erroneous classical thinking. It is supposed, that the problem is the availability of 'capital'. That's no problem at all. The government or the monetary authorities can lend any amount of money. The question is whether the credits can be paid back or not and that means, that interest rates has to be low.

However aid to developing countries is obviously useful if used directly for the implementation of a working schooling system or to bring relief in critical situations. The discussion between Dambiso Moyo and Bill Gates, two obvioulsy very smart people, is a little bit useless, because they talk about different topics and different situations. (See r. Dambisa Moyo: Let My People Go and Bill Gates' shocking personal attacks on Dr. Dambisa Moyo and Dead Aid.)

In modern textbook about macroeconomics we find always the funny equation Δ Y = 1/(1-c) * Δ I. (Which is not used in The General Theory of Employment, Interest and Money.) That means that an increase in investment will lead to an increase in national income by 1/(1-c). That means the higher c, the consumption rate, the higher the multiplier effect, in other words the higher the increase on national income triggered by an increas in investment. The equation looks intelligent, the message is trivial. If the consumer rate is 4/5 of national income, the saving rate 1/5 of national income and savings has to equal investments, than an increase of investments of 100 has to increase by 5 in order to reach an equilibrium.

From a formal point of view the equation is correct, things become more tricky, if we wants to inprete it. Most people believe that this 100 units, the 1/5 of the 500 triggered by the initial impuls, in our example, correspond to the 100 units spent in the maintaining of the productive capital, machines, buildings etc. needed to produce the increase of national income by 500. The truth is, that it can be like that, but it is equally possible that the 100 units are hoarded or used to speculate. In other words, until full employment is reached, it is completely irrelevant what they are used for.

The classical / neoclassical theory supposes two things. First that savings lead to REAL investments and second that it is a NEW investment or an expansion investment. Only this one triggers an increase in national income. However if we assume that the national income can only be consumed or saved in order to be invested, it is as well possible that an asset is just change or in Keynes own words: "Moreover, in order that an individual saver may attain his desired goal of the ownership of wealth, it is not necessary that a new capital asset should be produced wherewith to satisfy him." This is what happens with real estate in big cities. They are more a subject of speculation

The classical / neoclassical theory assumes that the national income can only be spent for consumption and investments. Keynes states correctly: "For this overlooks the fact that there is always an alternative to the ownership of real capital-assets, namely the ownership of money and debts." By money we have to understand in this context everything that is nearly as liquid as money itself, for instance financial assets like stockes that can be sold and bought at any moment on the stock markets or debts like governmental bond. Consumption and investment has an impact on employement, to buy money or debts has no impact on employment. To be more precise: If these financial assets, stocks or governmental bond are issued for the first time, they have an impact on the economy because they will trigger investments or consumption. But it they are only changed on the stock markets or similar markets, they have no impact on the real economy. (To be more precise, they have only an indirect effect, like the Pigou effect. We will talk about this topic in the chapter about monestarism.)

It is useful to understand what Keynes understands by money used for speculative purposes. Money for speculative purposes is actually nothing but money, in other words the most liquid form of 'capital'. We can understand by this money hoarded 'under the pillow', something that very few people actually do, or money on the banc account. This is the most liquid form of wealth that exists. Any other financial assets, almost very close to 'money', because they can be reconverted in any moment to money, are kind of 'investments', although very useless ones from a macroeconomic point of view.

In the classical theory it is not plausible that people forego consumption. If every kind of investment is to risky, people will consume their income. In the classical theory there is even a recompensation needed to forego present consumption. Classical theory worries that people don't save enough, see for instance productive and unproductive activities. The possibility that people save too much is not even mentioned in the classical theory. The only author that at least mentioned this possibility is Jean Baptiste say, who finally refuted that this is possible.

In the keynesian theory hoarding as well as speculation with financial assets is a rational option in case of insecurity. The interest rates can't balance investment and savings, because savings depend completely on the national income, but not on the interest rates. Savings can't depend on interest rates, because in case of underemployment there is no need for savings. Savings are just hoarding money and speculate with financial assets, but they don't have any real economic function or in other words they have no positive impact on real parameters like employment and national income. We get to the paradoxical situation that an expansive monetary policy is needed because people hoard to much money. Money is needed to fight against an abundance of money. In other words, if people would stop to hoard money or to invest it in financial assets for purely speculative reasons, there would be no need for an expansive monetary policy. If people invested or consumed their income, how it is presumed by the classical and neoclassical theory, the economy would reach the point where the effective productive potential is fully employed. It would be still necessary to keep interest rates at a level that covers the administration costs of the banks and the risk, but their would be no superfluous money in the market.

Money is the most secure existing asset, because it is the most liquid and the more liquid the more secure. It can therefore never happen that hoarding money is more profitable than financial assets, that can only be reconverted in money. However if interest rates are very low, the price for stocks and similar financial assets therefore very high, people are afraid that they loose their money if the stock prices decreases. They will hord money.

In contrary to what we can hear and read every day, high prices for stocks are a signal that investors don't find profitable real investments. From a macroeconomic point of view, the speculation with stocks and similar bonds is irrational.

The problem is that real investments are always more risky than investments in financial assets. A real investment doesn't compete with a more profitable other real investment, as the classical theory assumes. Most of all it competes with an equally profitabel financial asset.

It is perfectly possible to have parallel casino economy that has little or nothing to do with the real world, but absorbs most of the money. In the casiono economy there are as well losers and winners, as in the real economy, but financial investors prefer the casino economy.

That most people never really understands the keynesian theory is due in part to IS-LM modell, we will talk about this topic later on in the corresponding chapter. This modell is composed by two curves, the IS curve and the LM curve.

The IS curve shows all the combinations between the national income and interest rates and can actually interpreted in a classical way as well, as we will see later on. Interpreted in a keynesian way at a given interest rate, we have a given amount of investments and due to the fact that saving depends on income, the income has to rise until the corresponding savings equals investments.

The LM curve at the other side shows all the combinations of interest rate and national income where people don't feel any need to reduce the hoarding of money in favour of speculating with money or the other way round. To a certain national income corresponds a certain need of money for transactional purposes it is therefore clear what amount of money is left that can be hoarded, in other words kept in its most liquid form, or invested in financial assets for speculation purposes. In times of crises, where people are unable to detect profitable investments, the prices for stocks and similar assets are high and the dividends, in comparison to the price, low. People don't buy more financial assets, because they are afraid that their prices decrease and that they will lose money.

In this logic the economy reached an equilibrium if both curves intersect. At this point savings equals investment, IS curve, and people hoards the amount of money in its most liquid form that corresponds to the given interest rates, but this doesn't mean that they intersect at a level that guarantees equilibrium.

The truth is much simpler than that. The truth is, that the central bancs fix the level of the interest rates and depending on the interest rates people invest in real projects or in financial assets. The more money the central banks inject into the markets, the lower the interest rates and the higher the prices for stocks. At a certain moment people can only hoard money or invest in real projects. Saving is completely irrelevant. The model suggest that saving have a real economic function in keynesian theory, but that is not the case in a situation of unemployment.

Actually the IS-LM model is kind of a circular reasoning. The IS curve supposes the interest rates as something independent, what is not the case. The interest rates are fixed by the central banks and the fact that people don't invest or consume their money entirely is only a problem, but doesn't have, in a situation of unemployment, a real economic function. We will discuss this topic again in the chapter about the IS-LM model.

[Even if we accept that the IS curve can interpreted as ex post saving, it is still wrong. In a situation of unemployment, the one supposed by Keynes, there are no savings needed. Not ex ante and not ex post.]

Beside that: It is indeed true that Keynes only discusses an increase of aggregate demand through an increase of investment, what is the opposite what is believed to today that any kind of increase of aggregate demand has the same effect. However under ideal circumstances the multiplier effect works as well with an increase of aggregate demand by pure consumption and in ideal circumstances it is even possible that the tax burden doesn't increase, see above. The IS curve suggests that the balance of saving and investments is relevant in this context, however this is not true. Saving is just a residual and the higher the saving rate, the more difficult it is to reach full-employment.

It is well known that there is one sector where speculation is almost as widespread as on the stock market: real estate. One can wonder why this is the case, because there is nothing on earth less liquid as a real estate. However that is not true. The real estate market is not a very dynamic market, it is almost as simple as the stock market, that's why the first thing people think of if it comes to investments is building a house or something like that. Buildings and houses may be difficult to reconvert in money, which has the advantage of being usable for just anything and therefore nobody is obliged to decide for something concrete, but it has a concrete use which will be wanted even in 100 years and is therefore an ideal object for speculation. A similar simple thing is gold, that is actually good for nothing, but it is scarce.

Actually gold is the most illustrative example for speculation. The price of gold has nothing to do with the real economy, it is something, almost completely useless. Its price depends only from what Keynes calls a beauty contest, see above. Those who still believe that the classical theory has to do anything with reality, have to think on gold. Ten tons of gold yield exactly zero profit on its own. The only reason to buy gold is the belief that other people believe that the price of gold will increase because other people buy more of it and the price will increase.

The classical argument that this changes nothing, because the seller will consume / invest its money doesn't help. The casino lives from speculative transactions. The money will be used immediately afterwards, often driven by computers, for other speculations.

The crisis of 2001 and 2008 taught us that this continuous until the bubble bursts and it seems that at the moment, we are still in 2015, we are approaching this moment again. The problem is, that this times the governments will not be able to subsidize with the money of the tax payer all the banks and insurance companies that will get into trouble.

One could believe that after the burst of a bubble the institutional investors will invest in real assets, but the only thing they perhaps do is invest in real estates, park their money for a while an restart the game.

Actually there are more effects than the one described by Keynes himself which at least in theory could induce the institutional investors to invest more in real projects. If the central banks inject money in the market through an open market policy there are two effects, both should induce institutional investors to invest in real projects, although this is not the case. First the interest rates decrease, directly and indirectly. If the central banks lowers the interest rates private banks can get money for less and can therefore lend it for less. Furthermore private savings would decrease, because saving becomes less attractive, something that can promote consumption. Second even if speculation increases, what is, as we can see nowadays, we are still in 2015, the case, they get healthier, because the prices for stocks increases. That allows them to undertake, at least in theory, more risky investments in the real economy. However it seems that the central banks can inject in the market as much money as they want, the ECB is injecting at the moment 60 billions each month, there is no way to trigger real investments. The only thing we can see is an increase of speculation. What they do is to buy government bonds, because there is almost, if we disregard phenomenons like the debt crisis in Greece, no risk.

A better choice would be to let the institutional investors go bankrupt after the next burst of the bubble. They need to learn that nobody will rescue them after they had lost money in speculations. That will induce them to invest more in real investments.

We have nowadays less banks than in 2008. The lucky ones left the casino at the right moment and earned a lot of money, the others went bankrupt. We have less banks today than before 2008. If the governments make clear that they will not rescue them, they will stop speculating.

The neoclassical theory assumes that companies offers a good until the marginal costs are inferior as the price they can get for it. Simplifying: No entrepreneur will sell something under the cost price, because in this case he would lose money. From this perspective an increase of demand through deficit spending would have no impact, because the supply would remain the same. The production structure is, that is assumed, not able to satisfy an increased demand.

However it is obvious that something doesn't work with this logic. We see that dramatically if we consider a period of more than 150 years, but we see it as well if we consider a period of let's say twenty year. Flour for instance was expensive in times of David Ricardo, its price is near zero nowadays, at least in industrialized countries. 60 years ago television was a luxury good, at least a colour television. Today everybody can buy one. Same thing for mobiles etc.. and in ten years a smarthpone will be as cheap as a mobile; in comparison to what people earn.

The first problem with the classical theory is, that it obvioulsy doesn't fit with the data. The capacity utilization of the economy inside the EU ist not even 80 percent and even in Germany it only reaches 85 percent. That's why strong and sudden increases in the demand, as for instance after the fall of the wall in Berlin in 1989 don't lead to inflation. It is to assume, given that the intensity of competition is strong enough, that prices will decrease if demand increases, because production can benefit from a fixed costs degression.

The neoclassical logic is only true in the short run. In the long run it is very untrue, see equilibrium in the short run and in the long run. The basic error of the theory that marginal costs = price is that only in the short run we can disregard the fix costs, because in the short run they won't obviously don't change, they are fixed. In the long run they are not fixed at all.

Beside that companies will provide capabilities allowing them to satisfy the maximum demand. An airline will not sell part of its airplanes in winter and buy them again in summer. They will try to get them fully employed the whole year and lower the prices in winter or follow similar strategies, but in any case they will be happy if the demand for spontaneous trips increase and the have their airplanes full the whole year. To give an example. The same is true for any sector of the economy.

However if in highly industrialised countries 'capital' is not scarce, because it is actually money and money is only kept scarce for macroeconomic reasons, the rentability of money is very low. If the really scarce factor is know how, as Alfred Marshall assumes, than the rentability of capital will inexorably fall, because this know how, in plain words qualified work, can impose the wage and decide therefore on the rentability of 'capital'.

This message of the keynesian theory still didn't reach public discussion. We can often read that lower wages could increase employment, but we never read that lower interest rates could do the same.

The famous Phillips curve establishes a relationship between unemployment and inflation. If wages increase slower than prices real wages decreases. If someone earns 1000 dollars and the price of its monthly basket is 1000 dollars he can buy what he wants. If the price of the basket increases to 1100 dollars he runs into problems. Until the wages didn't increase, the earnings of the companies increase, because costs remains the same but prices increase. The Phillips curve suggests therefore a relationship between inflation and interest rates. The higher the inflation the lower the unemployment rate, because real wages are lower. The Phillips curve suggests therefore that the neoclassic theory is right and a high unemployment rate is due to (too) high wages.

However even if we stick to the neoclassical theory, what we have actually no intention to do, it can be questioned that a decrease of wages is the consequence to be drawn. The Phillips curve suggests that some workers, in other words the qualified ones, get into a position where they have the power to impose higher wages because they are scarce. The author would say that in this case it would be a good idea to invest more in training. In some sense qualified labour has the same problem as capital. It is kept scarce. We will discuss again about this topic in the chapter about Milton Friedman.

Beside that the causal realtionship is a little bit different. The Phillips curve became famous in the in the 1970th, where a sudden increase in the price for petrol triggered a strong inflation. In the short run there is no way for the companies to counterskeer. Prices increased, supply was reduced and unemployment increased. This is a completely different scenario. The increase in prices was not triggered by increased demand, but by an increase in the cost structure.

Finally it seems almost imposible to trigger an inflation by an increased demand. Inside realistic margins, the global economy is able to satisfy almost any demand.

It is quite obvious that something is wrong with neoclassical concepts, in other words with all that we find in textbooks about microeconomics. Once the equilibrium is reached, it should be stable. However we see on a daily basis that this is not the case. Economies can remain for a long time beyond the productive possibilities. The question Keynes tries to answer is what can be done, if a change in the production structure is not possible, but the economy remains below its possibilities.

We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organisation, as well as the social structure including the forces, other than our variables set forth below, which determine the distribution of the national income. This does not mean that we assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them.

John Maynard Keynes, The General Theory of Employement, Interest and Money, Chapter 18, I page 122

The classical and neoclassical theory has actually no solution for the problem of unemployment beside an increase in competivity, more innovation and lowering the wages and that it what we found in public debate. Keynesian theory is about what can be done if all these parameters are given and cannot be changed.

We have seen that what is considered in public debate the core of the keynesian theory is actually nothing else than some possible consequences that can be drawn from the keynesian theory. The actual keynesian theory points to much more complex problems. If the concepts about capital, savings, interest rates and money of the classical / neoclassical theory are wrong, the whole classical / neoclassical theory that is based on these concepts is wrong. In the own words of Keynes.

There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment. [...]

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run [...].

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

John Maynard Keynes, The General Theory of Employement, Interest and Money, Chapter 24, II page 186

1. La afirmación "...The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save..." se refiere a la teoría clásica / neoclásica. El ahorro en la teoría clásica depende de las preferencias de la gente por un consumo mayor en el futuro envés de un consumo más bajo en el presente. La gente renuncia por lo tanto a algo en el presente, para tener más en el futuro.

Este concepto es discutible por centenares de razones que hemos ya mencionado a lo largo de este manual, pero el problema principal con esta teoría es que no se necesita este ahorro: "But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment." La lógica keynesiana es diametralmente opuesta a la lógica clásica: tipos de interes bajos => más volumen de inversión => aumento de la renta nacional hasta que el ahorro corresponda a la inversión. (Vea arriba). Si se reflexiona sobre ello un poco, se puede igualmente decir, que el "ahorro" clásico es simplemente superfluo en una situación de subempleo y ahorro es simplemente papel impreso, vea arriba.

2. De lo dicho anteriormente se puede sacar la conclusión que "This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment". En otras palabras, lo que hay que pagar es el trabajo necesario para substituir la máquina una vez gastada y la destreza / formación necesaria para construirla. Si el capital de hecho es dinero, y en la vida práctica es dinero, pierde su valor si deja de ser artificialmente mantenida escasa. Lo que realmente hay que pagar es el trabajo y la formación necesaria para hacer este trabajo.

3. Con lo cual llegamos a la tercera conclusión: "... yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital..." Si el dinero no es escaso, entonces los que lo poseen, tampoco pueden exigir que se les paga algo por esto. Es la muerte del rentista.

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