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.

Keynes Tells Us to Praise the Mercantilist “Army of Heretics and Cranks” Who Argued for Lower Interest Rates

We should pay our respects to the “army of heretics and cranks” who in earlier periods argued for lower interest rates.

In The General Theory, Keynes acknowledged that he was refurbishing and updating

sixteenth and seventeenth century . . . [economic writers generally known as] Mercantilists.

This was ironic, because Keynes’s teachers in Britain, and Keynes himself early in his career, had regarded Mercantilist thought as a “fallacy” long since exploded.

Now Keynes saw an

element of scientific truth in Mercantilist doctrine, [especially in their view] that an unduly high rate of interest was the main obstacle to the growth of wealth [and in their] preoccupation . . . [to] increase . . . the quantity of money [in order to] . . . diminish the rate of interest.

In addition to the Mercantilists, Keynes acknowledged his debt to the economist Thomas Malthus (1766–1834), a few other economists, and even some 20th century figures, Sylvio Gesell and Major C. H. Douglas, whom he had previously dismissed as

no better than . . . crank[s].

In The General Theory, he described Gesell, best known for advocating stamped money whose value would expire if not spent by a certain date, as

an unduly neglected prophet . . . [with] flashes of deep insight.

Douglas, another proponent of what is sometimes called easy money, he somewhat backhandedly praised as

at least . . . not wholly oblivious of the outstanding problem of our economic system.

These people together Keynes called his

brave army of heretics

in which classification he happily included himself.

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