If We Want to Recover from a Depression, We Need to Restore Genuine Profits, NOT the Phony Profits of a Bubble

Keynesian analysis tells us that what is lacking during a depression is demand. Since private savings (in this view) will lie fallow, will not be invested, the only effective demand comes from consumer or government spending. But what really drives an economy is not demand; it is production. And what really drives production is profits. If we want to restore the economy, we need to restore profits, genuine profits, not the phony profits of a bubble.

A collapse of profits tells us that the price and profit system of the market has been damaged, usually by government interventions to reduce interest rates, increase wages, increase consumption, subsidize some sectors and enforce cartels in others. It is not the savers who have wrecked the economy, it is government interventions that have penalized savers and ultimately destroyed profits.

Even Keynes must have known how important profits are. In his Treatise on Money, he acknowledged that

the engine which drives enterprise is . . . profit.

By the time he wrote The General Theory, Keynes often used jargonish circumlocutions to sidestep the word profit, terms such as “the marginal efficiency of capital.” But the inescapable truth is that profit is the key to prosperity. And the way to rebuild genuine profit is to allow all prices, including interest rates and currencies, to tell the truth about the economy. In an environment of free prices, hard work, production, and saving will do all that is required, just as John Stuart Mill said they would almost two hundred years ago.

—Hunter Lewis, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Bust (Edinburg, VA: Axios Press, 2011), Kindle e-book.