The Fallacy of Liquidity Preference

The most common suffering imposed by Neoclassical Economics on the people, aside from recessions and financial crises, is inequality.

This inequality manifests as:

• underemployment where people have to work in 2 or more jobs
• lack of career growth
• bullshit jobs

How Neoclassical Economics Causes Inequality

The Marginal Revolution enshrined profit maximizatin in the 1870s. This doctrine favors the Business or Trader class over the Worker, Warrior, and Thinker.

As a result, the Business class gets a bigger share of its society’s productivity. This starves the rest:

• Workers (Worker class) find it harder to find good-paying jobs
• Governments (Warrior class) find themselves getting deeper into debt
• Researchers (Thinker class) find it more difficult to get research funding

This economic starvation finally manifested itself as the Great Depression of the 1930’s, when many people did become unemployed and subsequently went hungry.

The British Economist John Maynard Keynes had a chance to fix things by reversing the doctrine of profit maximization. However, instead of getting rid of profit maximization, he permanently cemented it through the doctrine of liquidity preference which we call the love of money*!

In a single book, The General Theory of Employment, Interest and Money , Keynes wrote down the principles that supported this love of money:

• quantitative easing and interest rate setting
  • This is the monetary part
• government spending and public debt
  • This is the fiscal part

All of these policies are mercantile and are the opposite to what Adam Smith advocated.

Keynes advocated to increase the money circulating until prices start increasing, a state which he calls true inflation.

Inflation is Free Work

The problem with this is that inflation* is worse for the worker than the business owner. This is because the owner can raise his prices at will, as “an increase in the cost-unit fully proportionate to the increase in effective demand.”

The worker, on the other hand, cannot ask for a proportional raise from his boss. As a result, inflation slowly eats up the the worker’s wages, giving the effect of him working for free.

For example, if last month I worked for 100 hours at $1 per hour, then at that month, I would be able to buy $100 worth of goods.

• But if this month, prices rise by 2%, then my $100 will be able to buy only $98 worth of goods based on last month’s prices. Inflation would have made me work 2 hours for free without me knowing it!
• If the company has 50 workers, then it gets 100 hours of free work or $100 savings which it can use to hire one new worker if the wages of the 50 were not increased.

Thus, inflation-driven employment really does increase employment quantity, but reduces employment quality. It does not strike at the root cause of the problem which is the profit maximization doctrine of capital-owners and investors.

Rather than break up big capital and force competition and innovation among businesses, Modern Economics rather protects big capital and even feeds its love for money through:

• monetary easing
• government projects wherein public taxes are given to private companies* to create roads, dams, and, more recently, green energy.

Worse is that Keynes wasn’t really sure if his theory could lead to stable money supply and prices:

This is why economists sometimes advocate for 0%, 2%, or 4% inflation – because the whole theory was uncertain to begin with!

Basing an economy on money or interest rates is to base the economy on an ever-changing effect instead of a known cause. This makes it naturally unstable, with solutions always lagging behind the problem, or even causing future problems. Nominal minimum wages might be adjusted to keep up with nominal price inflation, but real wages really lag behind as time passes, as seen in the productivity-wage gap.

Inflation-Driven Growth

To Keynesian economists, the love for money is the key driver of the economy. This is why they advocate the government to jumpstart sagging economies by driving interest rates down to add new money. This is then thought to push investment up which will increase effective demand, manifesting as inflation. This will then increase employment until true inflation is reached.

But as we have seen, this merely by gets the economy going by making wage-earners* work for free.

Thus, Keynesian economics solves recessions by making workers work for free bit by bit. Sooner or later, the low real-wages then become unbearable and become slave wages or what Keynes calls ‘marginal disutility of employment’.

At such a point, the worker gives too much free work and stops working by holding mutinous strikes and protests, which became so common in the 1970’s and 80’s. It also paralyzes governments which become mired in debt, and is seen in government shutdowns in the US and the increase in corporate lobbying which funds the pauper congressmen.

To prevent such high inflation, the sweet-spot became 2% – higher than the 0% that was advocated in the 1970s and what Supereconomics actually advocates, but lower than the 4+% that would bring instability. The focus on stability then became the job of central banks*.

Thus, while economists focus on growth to generate employment, central banks focus on price stability to keep that employment.

In the paradigm of Classical Economics, this is similar to a situation where the king is deposed by businessmen (Mercantilists) who then instruct the king’s advisers and bankers to impose mercantile policies on all. This would then create a modern economic feudalism with big capital as the feudal lords and employees as peasants.

The results of all this Keynesian monetary easing or pumping of money are:

• widespread inequality from the increase of low-quality jobs now known as bullshit jobs
• huge government debts
  • This passes the current problems (usually of the baby boomers who are the current policy-makers) to future generations* who are incapable of knowing of the burdens** dumped on them by fancy-worded policies such as ‘quantitative easing’ and ‘stimulus packages’.

Japan was the first country to implement aggressive quantitative easing and is also the country to realize its bad effects. Its Lost Generation represents the youth that grew up after the collapse of Japan’s asset-price bubble in the early ’90s and exactly matches the effects of the paragraph above. Japan is among the countries with the highest debts in the world.

If money is not the solution, then what is? The next post will explain economic social contracts as the alternative to money and svadharma as a replacement to liquidity preference.