A Dilemma of Contemporary Keynesism
Harry Gunnison Brown
[Reprinted from the American Journal of Economics
Vol. 10, No. 3 (Apr., 1951), pp. 237-246]
JUST A FEW YEARS ago I received from a United States Senate committee
an outline of a proposal for new legislation to promote "full
employment," and a Senator's printed speech on the subject,
together with a number of mimeographed questions and the suggestion,
in a form letter, that replies would be welcomed. I endeavored to
reply to the questions, as well as I could. In doing so I found myself
considering the contention that government might promote employment by
spending, in the hiring of labor, funds secured by borrowing from or
by taxing its citizens. I tried to make the point that such
borrowing-or taxing-and spending was unlikely to increase employment;
that the citizens from whom the money was taken by government would in
most cases spend or invest it them- selves as quickly as and perhaps
more quickly than it would be spent by government after its transfer
to government; and that employment could be promoted, if at all, only
when the individuals from whom government was drawing the funds for
spending would themselves have a tendency to hoard rather than to
spend or invest them. Of course even hoarding of money-or bank
deposits subject to check-would have no tendency to bring dull
business and unemployment, if it were not for the inertia or rigidity
or "stickiness" of prices, wages, rentals, etc., which
prevents quick adjustments to changes in the amount or in the velocity
of circulation of money.
I did not anticipate that any great attention would be paid to my
remarks by the Committee; and still less did I expect attention from
anyone else. However, an enterprising reporter of an
anti-administration newspaper apparently thought it worth while to
seek access to this part of the Committee's files and to comment on
the fact that not all of the replies to the Committee supported its
original proposals one hundred per cent. And shortly after this
comment was published I received a card from Chicago, signed "Dr.
Thompson." The card contained only the following:
"What kind of an (sic) educator are you who will
raise your voice for Big Business against the little man's jobs for
all? Were you ever out of work? Or hungry for days? Or saw your
The above implied sentiments seemed to me, when I received them, to
indicate that the writer had no comprehension of what it was I was
seeking to show. But now it looks as if many contemporary professors
of economics who have been influenced by and towards the Keynesian
economic philosophy, hold a view not so greatly different (even though
somewhat more sophisticated in its formal expression) from that of "Dr.
Thompson." Probably many of the young enthusiasts of this
persuasion regard some of the rest of us as wholly out of date
pre-Keynesians who have little idea of what is meant by the new terms
they bandy about so fluently and no real understanding of the economic
significance of "the propensity to consume," "liquidity
preference" or "the propensity to hoard," etc.
The 'Transfer' of Purchasing Power
WITH SOME of these "modern" economists there has come to be
special emphasis on the promoting of prosperity and employment through
the "transfer" of purchasing power from the classes having
larger incomes to those with smaller ones. The thought appears to be
that those with smaller incomes, the comparatively poor, have greater
"propensity to consume"; that the well-to-do have generally
less "propensity to consume' and, much of the time, an
insufficient tendency or willingness to invest; that, in consequence,
money (including bank deposits subject to check) is spent too slowly
and demand for goods and labor declines, thereby bringing dull
business and unemployment. So these "modern" economists tend
to favor one or another device for getting a considerable part of the
larger incomes "transferred" for spending to the recipients
of the smaller incomes, or "transferred" for spending to the
Thus, economists of this persuasion are likely to look with
equanimity on heavy government borrowing, if the funds borrowed are to
be used to hire labor or to loan to purchasers of modest homes or to
subsidize, in one way or another, persons whom these economists
visualize as relatively poor. Such economists may feel it
unobjectionable to increase government debt, especially if they
confidently hope to bring it about that future interest on the debt
will be paid from taxation of the larger incomes.
But after all, government debt, if the interest is ever to be paid,
does finally require taxation. So why should not taxation be used, at
the very beginning, to effect the desired "transfer" of
purchasing power? One would expect to find some of the "modern"
economists urging this, and such an expectation would not be
Professor H. Gordon Hayes is one of those who have developed this
viewpoint most elaborately. Emphasizing the supposed effect on
spending and, therefore, on business activity and employment, he
expresses sympathy for free lunches to school children, relief for the
aged, health services on a no-charge basis with more of the costs of
such services put on the more well-to-do, minimum wage laws, etc.
Indeed, Professor Hayes even recommends, by implication, or so it
appears, the system of providing support prices for farm crops. For he
We are likewise extending the propensity to consume by aid to
farmers. The whole array of support prices and payments for conserving
soil fertility are directly in line with the broad recommendations of
Keynes, and are apparently a fixed part of our public policy.
Here, surely, is a philosophy greatly different from that which
supports consistently the principles of a free private enterprise
system and free markets. Here is no confidence that freedom of
entrance into and exit from any line of production protects those in
each line from having to suffer, permanently, incomes far below those
received for equal skill and efficiency in other lines. Here is
essentially a philosophy of regimentation and socialization,
superficially disguised as a theory of unemployment and its cure.
In practice, when such a system of "transfer" is
established, the purchasing power is not always transferred from the
rich to the poor. Some of it is transferred from the poor to the rich,
-- for example, from workers in the cities, where the cost of living
is relatively high, and who, because of this "transfer,"
find it more difficult to feed, clothe and comfortably house their
children, to such persons as bonanza farmers and other well- to-do
farmers enjoying crop loans, support prices and subsidies.
A System of Compulsion
WITH SUPPORT PRICES, our government has instituted a system of
compelling consumers to buy what they do not want to buy and would not
buy except under compulsion. It is true that the citizen is not
personally driven to market by the lash or by a policeman's club and
he does not personally do the buying. The federal government both acts
as his agent in buying the unwanted goods (unwanted, certainly, at the
price paid) and compels him to provide it with the funds for this
buying, under the guise of paying taxes. But it is nevertheless
compulsory buying. The policy is certainly, in essence, one of telling
the citizen he must purchase goods he doesn't want and, often, cannot
properly afford. These things our leaders do to us, in addition to
telling many farmers what they must not produce (when quotas are
fixed), while all the time insisting that they are opposed to
socialistic regimentation and the "police state."
Just how far, indeed, can our purchases be made a matter of
compulsion (and the lives of some producers ordered and regimented)
for the benefit of pressure groups, before we can be said to have
completely abandoned the principles of Jefferson-and under the
direction, in part, of men who represent themselves as followers of
Jefferson!-for the principles of Marx, Lenin and Stalin?
These are the results of the attempts of our representatives, under
the influence of pressure groups, to help members of these groups take
vast sums of money from other citizens, which they could not take as
individuals without violating the laws against theft. For, as I have
elsewhere expressed it:
When individuals or small groups succeed by burglary, picking pockets
or holdups, in abstracting wealth from others, those who are robbed at
least have law on their side. But what if a larger and politically
powerful selfishly interested group succeeds, by . . . sophistical
arguments . . . or by legislative bargaining with other groups seeking
privileges at the expense of the general public, or merely by gaining
the support of legislators who are more afraid of losing the votes of
an active and well organized privilege-seeking minority than of an
unorganized and comparatively unaware and inert majority,-what if such
a group thus succeeds in using the tax system and the legislative
appropriation machinery to abstract wealth from the rest of the
people! In such a case, those from whom the wealth is being abstracted
find that even the law is against them and that, if they refuse to
make the required tax contribution, it is they, and not those
profiting at their expense, who are considered the criminals.
What if there should be a continued and progressive extension of
governmental interference, regimentation and control in the interest
of such privilege-seeking groups! Might we not finally discover, as we
approached the end of this unhappy journey, that men's incomes
depended mostly on their skill in political bargaining, threats and
chicanery, and scarcely at all on their productive efficiency? And
would it not then be widely argued that the voluntary price system
('Capitalism') had failed, and that the state must henceforth control
all those economic activities which were previously guided, in a
regime of economic freedom, by the market and by the lure of price?
The much touted Brannan plan was, of course, merely another scheme to
enable one class of our citizens-and not just poverty-stricken ones
but some of great wealth-to milk other citizens, as well as each
other. Any significant political strength this plan may have had stems
from the fact that politicians who still feel they want to or must
vote for some scheme that enables groups of Americans to milk fellow
Americans, and who see that the current methods of making this
possible are more and more arousing revulsion among the victims (and
even among a few of the beneficiaries) of this exploitation, hope to
find a new method the scandalous nature of which is not so immediately
obvious and of which some present victims may be persuaded that they,
too, are beneficiaries.
Conceivably, this kind of pressure group politics could do more
toward causing us to lose the "cold war" -- or a hot war --
with Russia than all the conspiracies of all the communists and
communist sympathizers in the United States. For certainly the present
program is expensive. And the money is not being spent for national
defense but is being given as "hand- outs" to privileged
groups. Are we changing from the slogan of our Revolutionary days, "Millions
for defense but not one cent for tribute," to a new farm bloc
slogan, "Billions for tribute, even if this leaves too little for
How About the Evidence?
AS A MINIMUM PREREQUISITE to seeking the serious attention of others
for their views, it would seem that the sponsors of the "transfer"
of purchasing power might be expected to present cogent inductive
evidence that money is actually spent more quickly after its receipt
by those to whom it is thus "transferred" (presumably the
comparatively poor!) than it is spent and invested by those from whom
these economists contemplate having it taken, viz., the recipients of
the larger incomes. This may indeed be the case, but one would like to
see convincing data on the matter if it is available.
Nevertheless, even if this point were absolutely and completely
demonstrated, it would still not at all prove that inequality of money
income is the cause or even a cause of business depression and
unemployment. What if it should turn out to be demonstrably the fact
that the higher income classes hold their money (including too, of
course, bank checking accounts) a longer time than those of lower
income! If perchance this is the case, it probably has been the case
for a very long time. And if so, money has circulated less rapidly
(lower velocity) for all that time than if the higher income classes
habitually passed on their money (whether by spending or
investing-which may mean merely buying brick, structural steel,
lumber, trucks, etc., instead of personal apparel, cut flowers and the
like -- or both) as quickly as the comparatively poor. But this does
not necessarily mean that the velocity of circulation of money is
continually declining. Conceivably, some of the transfer-sponsoring
economists visualize a steady increase in the proportion of the income
of the rich to that of the poor, with a progressive decrease in the
average velocity of circulation of money. Indeed, the velocity of
circulation of money might gradually decrease-or increase-for some
other reason. But such a decline of average velocity of circulation --
even with wages, rentals and some prices comparatively rigid or "sticky"
-- need not occasion depression and unemployment if only there goes
with it a monetary policy (including, of course, central banking
policy) calculated to offset such decreasing velocity of circulation
of money by a sufficient increase of the total volume of money.
In fact this entire "stagnation" philosophy is shot through
with half truths and outright fallacies. It is, in its main emphases,
the doctrine of Rodbertus and Marx, more than a century old, that
industrial breakdowns in the form of business depression are the
result of capital's exploitation of the workers who, therefore, do not
have the means to "buy back the goods they have produced."
(Do "capitalists" never buy anything? And does buying trucks
or structural steel involve less demand for labor than buying "cokes"
and motion picture tickets?) This dogma of Rodbertus and Marx is the
basis of the communist propaganda that, under "capitalism,"
periodic breakdowns are "inevitable." Our modern "transfer"
economists have, indeed, elaborated the doctrine a bit, by introducing
references to "propensity to consume," "liquidity
preference," etc., but what they have proffered us is essentially
the same old symphony with the addition of a few Keynesian overtones.
Can it be that the principal cause of the rapid growth of the "stagnation"
philosophy is that, although not ostensibly "communistic"
and, therefore, not subject to sharp social disapprobation, it has
found a fertile soil in minds made receptive to it by years of
exposure to communist propaganda?
If perchance the economic philosophy we have been discussing stems in
any degree from sympathy for the comparatively poor, why is not
attention given to pointing out the unfair elements in our system-but
not at all essential to it or even consistent with the principles
commonly appealed to in its defense-through which many of these poor
are really exploited? In particular, why do the writers in question
consistently and persistently ignore the fact that some have to pay
others for permission to work on and live on the earth in those
locations where work is reasonably effective and life reasonably
tolerable? Why do these writers consistently and persistently ignore
the proposal that the privately unearned rental value of land, arising
from geological forces and community development, be used as a first
source of government revenue? Why do they always or practically always
turn their attention to heavy taxation of incomes that are not at all
exploitative but are fairly earned by service given? Why do they thus,
while stressing compulsory charity, insist on overlooking the
fundamental requirements of justice? Why must they forever stress
taxation that tends to weaken capitalist incentive or motivation and
so make the free private enterprise system work less effectively, even
if such taxation does not so far interfere with its successful
operation as to completely discredit it and cause its ultimate
Those supporters of the Rodbertus-Marx-Lenin-Stalin doctrine of
business depression who definitely favor a regimented socialist
economy seem to be more logical than the Keynesian advocates of "transfer,"
since, while urging policies that tend to destroy-or greatly
weaken-the incentives of private enterprise, they do not
simultaneously pretend that they want to maintain private enterprise!
The Problem of Idle Money
ALTHOUGH, IN THE KEYNESIAN economic philosophy, an increase in the
average "propensity to consume" tends to promote business
activity, so does an increase in the tendency to invest. We have been,
herein, considering particularly the transfer-of-purchasing-power
proposals of Keynesians who emphasize the assumed difference in the "propensity
to consume" of the higher and lower income classes, and who seek
such a redistribution of money incomes as will promote the "propensity
to consume." But others who have been influenced by Keynes stress
especially "liquidity preference" among potential investors.
This "liquidity preference" they would explain, following
the analysis of Keynes, by pointing out that yields on invested funds
may sometimes be a very low per cent, and by insisting that, with only
a low per cent in prospect, many potential investors will prefer to
keep their resources "liquid," i.e., will prefer to hold
their money idle rather than invest it.
Those professed admirers of Keynes who insist on "transferring"
purchasing power, through heavy taxes, from the recipients of large to
the recipients of smaller incomes, in order to promote prosperity by
increasing the "propensity to consume," seem, therefore, to
be ignoring the "liquidity preference" aspect of Keynesian
theory. For the taxation required would -- and must-if levied at all
on capital or the income from capital, lower the percent of income on
their capital received by investors. Hence, by the very essence of
Keynesian theory, such taxation must tend to accentuate "liquidity
preference," i.e., it must weaken any remaining desire or "propensity"
to invest and strengthen the "propensity to hoard." In so
far as it does this it must tend, according to Keynesian theory,
towards dull business and unemployment.
So here we come face to face with a seeming antithesis or
contradiction in the Keynesian economic philosophy. For since by that
philosophy the willingness or "propensity" to invest must be
decreased by the very increase of taxes for "transferring"
purchasing power, which is supposed to increase the average "propensity
to consume," the specific cure recommended for depression and
unemployment may have no stimulating effect at all! And indeed, on the
basis of the Keynesian assumptions themselves regarding "liquidity
preference," the proposed remedy might, under some circumstances,
have actually a net depressing effect! Here, then, we have what may be
appropriately termed the dilemma of Keynesism!
But even if economists of the Keynesian philosophy cannot be
persuaded either by theoretical considerations or by the significant
data assembled by Dr. Clark Warburton, that low or declining velocity
of circulation of money is not the principal effective cause of
business depression, and even if they will not admit that a sufficient
and properly timed increase in the volume of money could adequately
offset any untoward decline in its velocity, there is still a way of
escape from the dilemma with which they are confronted. Indeed, it is
so obviously an escape-at the very least a partial and temporary
escape-and has such clear advantages even apart from this fact, that
the refusal to consider it at all appears amazing. The way of escape
from the dilemma would be to urge the substitution of land value
taxation, to the extent of substantially all the revenue it can be
made to yield, for taxation that tends to lessen the motivation of
capitalism and, perhaps especially in the Keynesian philosophy, for
taxation of capital and the income from capital, which, Keynesians
must logically believe, promotes or accentuates "liquidity
The Advantages of Land Value Taxation
LAND VALUE TAXATION, as such, draws only from the geologically
produced and community produced annual rental value of land (including
sites, tracts and subsoil deposits). It is in no sense a tax on the
necessities of the poor. It does not penalize the efficient worker and
thereby lessen the incentive to efficiency. It does not penalize
saving and the construction of capital. It does not involve any burden
or penalty on so-called "venture capital." It does not
discourage-but encourages-the flow of savings and of capital from
other areas to the land-value-tax areas. It does not, through lowering
the net return on capital, discourage investment in new capital
construction and conduce to the hoarding of money rather than the
investing of it. That is to say, it does not bring about or accentuate
any "propensity to hoard" or "liquidity preference."
It does make unprofitable the speculative holding ("hoarding"?)
of good land from use, with consequent reduced effectiveness of both
capital and labor. A comparative study of areas in Australia where
land values are taxed rather than other property, appears to indicate
that the amount of good land held out of use is definitely less in the
first, that the amount of building is greater in proportion to
available land, that the number of residences constructed is greater
per 100 marriages, that the incomes of persons deriving their incomes
wholly from labor average higher, that the movement of population is
away from the other jurisdictions and into the land-value tax
The evidence, factual and theoretical, appears to indicate that,
within the limits of the amount of revenue it is capable of yielding,
a land-value tax system is more advantageous even to workers of low
incomes than a steeply graduated income tax, and that this is true
even though these workers are completely exempt from such income tax.
Furthermore, it can be argued most plausibly that the land-value tax
proposal is especially adapted to meeting the Keynesian dilemma. And
yet I have seen not the slightest evidence that it appeals at all to
any Keynesian. Why?
It must be said, however, that teachers of economics almost never
mention land value taxation in their professional papers on taxation
or tax reform or (except for a few words, ending on a derogatory note)
in economics textbooks prepared for the use of college-or high
school-students, or in their class lectures and discussions. Land
value taxation is the subject of the great silence. And so one hardly
expects any of the Keynes-Hansen-Hayes group to take it up favorably,
even if it does seem as if made especially for them.
On the contrary, my guess is that if I could pin advocacy of land
value taxation on them as the only way they could avoid inconsistency
and self stultification, and could make it stick, I would thereby do
more to get contemporary Keynesians to scurry apologetically away from
Keynesism than by the most cogent and convincing argument from
monetary theory and statistics!
FOOTNOTES AND REFERENCES
- See his paper, "Keynesism
and Public Policy," in Twentieth Century Economic Thought,
edited by Dr. Glenn E. Hoover, New York, The Philosophical
Library, 1950, Chapter VI.
- Ibid., p. 228.
- Basic Principles of
Economics, 2nd edition. Columbia, Mo., Lucas Bros., 1947, pp.
- See Clark Warburton, "Monetary
Velocity and Monetary Policy," in The Review of Economics
and Statistics, Vol. XXX, No. 4 (November, 1948); "Bank
Reserves and Business Fluctuations," in Journal of the
American Statistical Association, Vol. XLIII (December, 1948);
and "The Monetary Disequilibrium Hypothesis," in The
American Journal of Economics and Sociology, Vol. 10, No. 1
- In "The Challenge of
Australian Tax Policy," published in this Journal,
July, 1949 (Vol. VIII, No. 4), I summarized the significant
studies of the Land Values Research Group of Melbourne, of which
Mr. A. R. Hutchinson is Director of Research. In doing so, I
referred to a series of articles by Mr. Hutchinson in the
Australian magazine, Progress, and to a partial
republication of these in a thirty-two page booklet entitled "Public
Charges upon Land Values," Melbourne (published by the Henry
George Foundation of Australia), 1945.