3.2.5 Comments and Summary of the Direct Methods
By using of any of these four straight-forward techniques, the Keynesian School of economics claims that the resulting initial increase in demand causes more macro-economic activity to follow. There is supposed to be a multiplier-effect on growth, so that in the case of reduced taxation and greater personal income, it is thought that the consumers have more money to spend or invest and that consequently the total demand grows. But these claims do not consider the need to take money from one part of the system in order to supply it to another. The newly increased demand and its opportunities are balanced by the smaller number of jobs that the Government now continues to maintain. Reduced taxation of the productive process cannot affect the total numbers employed.
The producer/worker/consumer/saver model on which Keynesian Theory is based is over-simplified and limited in its scope. It fails to properly represent the whole social system and also (incidentally) the implied time interval of this model is uncertain. With the inclusion of the negative multiplier-effect of the lost Government jobs, the overall benefit is zero. The writer (and others) has built a more comprehensive simulation-model of the system, where the overall multiplier is a few percent per annum and not the few hundred that was originally reckoned. Thus the Keynesian Theory does not work in practice.
The same situation arises when the Government borrows money from the public. Some of the money that the investors lend would otherwise be available for use in industry. With the new bonds issue, the industrialists do not obtain the same encouragement for their activity as when the investor's choice was limited to the stock-market. The Government investment results in more employment there, but this advantage is in one place only and there is an equivalent reduction of investment and employment in the rest of industry.
Credit having been obtained by a bonds issue, the Government necessarily returns the interest to the investors on an annual basis, until the bonds are redeemed. Although the prime-rate of this interest is now reduced (see below), the coverage of this deficit raises the tax burden unless the money is loaned to the banks with the return of interest. The national budget must be balanced and the Treasury should explain where and how its new income is being spent. Money that is used for providing the new jobs cannot also be taken for servicing the loan.
Governmental short-sighted policies of creating new jobs do not consider the corresponding loss of work places elsewhere. Once Governments cease taking this myopic attitude, they will find that the overall effect is no different than without this policy being applied. The only way that jobs can really be created is by making available greater opportunities to produce and to earn (see below).
Even with the deliberate introduction of inflation and Governmental spending, the overall result is similar. In a remedial manner inflation weakens the monetary strength of certain parts of the system in order to strengthen others. After summing the total influence on both credits and savings, the true effect can be seen, although it now includes some time-dependency. The early effective gains by the creditors equal the later losses by the savers. Thus inflation does not help the whole system to regain strength over the long-term, although it defers some of the adverse effects of the slump to a time when recovery has hopefully begun. And it achieves this by a socially unjust redistribution of the purchasing-power.
A more-remote observer of the macro-economy at large would find that it has a natural means of autonomous control, where the real factor of influence in its operation is the value of goods being produced and traded and not the face-value of the money itself. Money is a medium of exchange that represents value, whilst intrinsically having none. After credit is given, it must subsequently be returned. With deliberate inflation, the purchasing-power of the cheapening money being circulated first rises and then falls back, whilst the overall rate of progress of the whole macro-economy is better maintained with a smaller short-term fluctuation resulting from the first shock of the collapse.
Consequently, after giving due consideration to a comprehensive model of the whole system, the direct methods are found to be incapable of overcoming the problems caused by the slump. This is with the exception of inflation, which is temporally effective, but it results in an unethical means of delaying some of the adverse consequences.
3.4 Indirect Ways of Helping the Macro-Economy
To have some lasting effect here a more profound Governmental policy is needed, of which the following are possible methods (with the comments being included here):
#1 to control the reserve-ratio of cash deposits held in banks,
#2 to reduce the prime rate of interest and
#3 to stimulate production by the proper use of the land.
3.4.1 The Control of the Reserve-Ratio of Cash Deposits Held in Banks
It is easy to blame the banks for allowing their reserves to become so low and (as collaborators with the land-owning investors and speculators) for being unable to determine when the land-value bubble is about to burst. Had the analysis been done properly and the degree of lending curtailed in enough time, the damage due to bank insolvency would not have occurred and the recession not progressed far beyond the real-estate business. But banks are too close to the action to be able to see the full picture. Their chief business-aim is to provide the investors with as much credit as possible without raising their reserves very far above the minimum, so it is difficult for them to decide how much money to store at any particular time. Some banks even find ways to disregard the minimum sum that they should be storing in their vaults and they are in big trouble at slump time. But even when the banks conform to this proportion, a "run on the bank" can still cause them financial embarrassment.
