Thursday, December 11, 2008

Keynesian Irrelevance V: Distribution

Keynes didn't write much about the distribution of income and wealth.

But his heart was with the poor people. Poor people spend all that they have, because they do not have enough money. Their behaviour has a good stimulative effect on the economy that works through the multiplier. Keynes' General Theory can be seen as celebration of the poor people. The rich, with too much money, cannot spend all that they have and have to save some. It is the some of the money that is saved that causes the economy to get depressed.

The money that is left over after consumption is invested, either in cash, financial assets, real estate or businesses, or a combination of these.

As a result, the concept of the rate of return on investment is invented (way before Keynes was born). But according to Keynes, it is the relative rate of return that determines the type of investment.

Cash is held because it keeps its capital value (a dollar is always a dollar; a piece of gold is always a piece of gold).

Financial assets depend on the stock market - this is supposed to be akin to investing in businesses except that there is capital gains when everybody's hobby is to punt the market. (I am glad the stock market is down though not out, because this should force some people to do something tangible like working at a job.) The stock market is active only when there is a lot of excess liquidity, thanks in no small part to the efforts of greedy banking CEOs who want to cash out on their stock options.

Businesses are the best thing to be in because they mobilise resources - capital, people and ideas - to work for the specific purpose of serving society. If a business does not serve any purpose, it will die naturally. If it serves the common needs of people, it will survive for a long time but the margin is low and competition is intense (food stalls). If it serves the specialised needs of a few, then the volume is low, margin high, and it may still go on for a long time (Rolex).

Many years ago, to justify further studies to my father (I was interested in the Theory of Income Distribution at the time), I rephrased it as, "I want to study why people are poor." He replied, "No good. Study why people are rich."

Why are people poor? People are poor when they rely on their labour to do work. They get tired and they can get just enough for subsistence. When they are too young or too old, they become destitute.

Why are people rich? People are rich because they use non-labour assets to gain more non-labour assets. In simple English, they use money to make money. So, money is doing all the hard work, so that the rich people can enjoy their consumption at leisure (rather than eat to live like the poor people).

You find that all the things that we commonly associate the idea of an asset are all man-made objects that are pertinent mainly in urban society - including cash. Wealth, at the end of the day, is nothing but just man-made artefacts of value only to urbanites - valued only because commonly desired.

In a rural community, such as the kampung, you find that different things are deemed to be valuable - social ties, co-operation and the jungle. The basic things are provided by nature - the fish from the river, the fruits from the jungle. Because the environment is so user-friendly, rural folks do not worry too much. They take only what they need for the moment. They try to leave everything as natural as possible - because by keeping things natural the maintenance cost is the lowest, zero.

Wheresas in urban society, nothing is for free. Friendship is not free. So, urbanites must earn as much as they can when they are able, in order to save enough when they become unable as a result of age or health. The creation and accumulation of artificial man-made artefacts is the whole raison detre of urban existence - including even the type of education we pursue or wish our children pursue. Even the use of English in schools is argued on the basis of the need for survival in urban societies. In rural soceities, I suppose they are more concerned about preserving their own quaint little ways, endowed upon them by their foreparents.

But this does not mean that rural communities are perfect beings without envy. They may envy the wealth of the urbanites. That envy may be impressed upon them by would-be individuals who pretend to show them the way to immense pleasure without sweat (apart from golfing).

The path to wealth and prosperity and the removal of poverty in rural areas is to destroy rural societies and rural ways of life and the natural environment and transforming them into urban societies with their concrete blocks as shelters and space for all types of innovative human activities without the chance of placing their feet on the ground, in exchange for little pieces of paper called cash.

In this way, the Keynesian-type policy is used to transform society and redistribute wealth. Money newly printed on the basis of the budget deficit is therefore bestowed upon a select few in the hope of it being spread around but did not because of the inability to regenerate that wealth. So the multiplier effect of the wealth generating machinery failed to boot up.

Keynesian fiscal policy can be appealing on first encounter because it seems to be such common sense. However, on repeated usage and abusage, the fiscal policy has the nasty consequence of creating a ballooning budget deficit and an excess of liquidity that is at once inflationary at home and in terms of the constantly depreciating currency. If you are wondering why you feel poor while surrounding yourself with comfort blankets like financial assets and real estate, it is because of too much Keynesianism.

If our politicians claim to have made the country grown and become wealthy, ask them why the local currency has lost its libido and is always limpid. Where is the central bank?


de minimis said...


Another intriguing post, in depth, reach and vision.

There are so many issues that you have put together in a seamless holistic manner.

Your explanation on the rural-urban divide is very pertinent. Reading it makes me aspire to go back to the rural life. The values are true and honest.

Urban living is too extreme. So much pleasure sitting side-by-side with so much misery.

etheorist said...

de minimis

Exactly the picture of your blog.