Sundry Observations on the Nature of Capital

by John Maynard Keynes Icon

4 minutes • 835 words

Table of contents

Keynes Overturns the Classical Productive and Unproductive Capital in Favor of Money-Returns

AN act of individual saving is a decision not to have dinner today. But it does lead to a spending of that saving to buy dinner at a later date.

Thus, it depresses the food service business or other consumption businesses. It is a net reduction of such demand.

The expectation of future consumption is based on present consumption. A reduction in present consumption will likely depress future consumption. This will result in the act of saving:

depressing the price of consumption-goods
leaving the marginal efficiency of existing capital unaffected.

It might depress the latter also by present investment-demand and present consumption-demand.

It will be different if the saving was meant for a future spending. In this case, the expectation of some future yield from investment would be improved. The resources saved could be used for preparing for that future consumption.

The expectation of consumption is the only raison d’être of employment.

A reduced propensity to consume depresses employment.

The act of saving implies a desire for “wealth” for a future time. It does guarantee a future consumption.

The idea that individual saving* is just as good for effective demand as an act of individual consumption is false.

Superphysics Note

Here, Keynes confuses ‘saving’ with ‘abstaining’ or putting money under a pillow. Classical savings always implies saving money in a bank. Thus, the correct Classical phrase is: ‘Individual saving IN A BANK is just as good for effective demand’

Classical Economics has a fallacy that an increased desire to hold wealth is the same thing as an increased desire to hold investments.

This desire:
- increases the demand for investments
- stimulates their production.
In this way, current investment is promoted by individual saving just as present consumption is reduced.

These are fallacies coming from the idea that the owner of wealth wants a capital-asset for the sake of that asset* instead for its prospective yield.

Superphysics Note

This desire is actually the desire for security which Keynes called ‘precautionary-motive’ in Chapter 13. Adam Smith mentions this as kings hoarding treasure (massive treasure-saving) for the sake of security. How could Keynes forget his own principles? Here, he is strangely imposing the ’transactions-motive’ on capital-owners, like telling an apple to be an orange.

Prospective yield wholly depends on the expectation of future effective demand in relation to future conditions of supply.

If an act of saving does nothing to improve prospective yield, it does not stimulate investment.
For an individual saver to attain his desired goal of owning wealth, a new capital-asset is not needed to be produced to satisfy him.

The creation of new wealth wholly depends on the prospective yield of the new wealth reaching the standard set by the current interest rate*.

The prospective yield of the marginal new investment is not increased by someone wanting to increase his wealth. This is because the prospective yield of the marginal new investment depends on the expectation of a demand.

Superphysics Note

Here Keynes imposes investments to mean money-investments

I impose that the owner of wealth wants the best available prospective yield.

In this way, an increased desire to have wealth now reduces the prospective future yield.
Debt and money markets are also capital-assets, and so the prospective yield cannot fall below the current interest rate.

Interest rate depends on the strengths of the desires to hold wealth in liquid and in illiquid forms relative to the supply of wealth .

If the quantity of money is unchanged, a fresh act of saving reduces the liquid money.

Keynes Overturns the Classical Productive and Unproductive Capital in Favor of Money-Returns

Instead of calling capital as “productive” it would be better to say that capital has a yield over the course of its life in excess of its original cost.

An asset’s scarcity gives it a higher aggregate value greater than its initial supply price. It is kept scarce because of the competition of the interest rate on money.

If capital becomes less scarce, the excess yield will diminish. Yet it will stay as productive at least in the physical sense*.

Superphysics Note

Here, Keynes applies sophistry. If everyone has access to a capital equipment, then the old capital equipment will not be used as much, rendering it less productive per equipment-unit. For example, 4G in mobile phones has made wifi routers unnecessary and therefore less productive to the eyes of society.

We should regard labour*, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of:

technique
natural resources
capital equipment
effective demand.

Superphysics Note

Here, Keynes makes land and stock subservient to labor, different from the Classical notion that puts all three as equal. Under Keynes’ reasoning, money can be eased as to employ humans to make Antartica or the Sahara productive. This is absurd.

This is why I used the unit of labour [common-labour] as the sole physical unit needed in my economic system, apart from units of money [money-wage] and time [hour].