(no subject)

[GGard97342@xxxxxx]

20000401 from Geoffrey Gardiner

In a message dated 17/03/2000 16:16:41 GMT Standard Time,
matthew.johnson@xxxxxxxxxxxxxxxxxxxxxxxxxxxx writes:

> i have an interest in the response of unemployment to a unit increase in
>  investment.

A set of examinations in economics is likely to have at least one question on
the investment multiplier, and to pass one will have to refer with approval
to Richard Kahn's "investment multiplier" and its associated maths. I had to
learn it by rote as I could not understand it. It was years before I
discovered that neither did Maynard Keynes. Schumpeter took the view that we
should credit what we call Keynesianism to Kahn, not Keynes. Kahn seems to
have been the one man who had Keynes at an intellectual disadvantage. Later
in life I had some business dealings with Kahn (in connection with the Keynes
estate) and I could not for the life of me detect why that was so. Probably
it was because Keynes mathematical skill was not quite up to the mark.
Although he was twelfth wrangler in his finals in Maths at Cambridge, he
needed a lot of coaching from his father, who was a very competent
mathematician, we are told. Kahn, a physicist by training seems to have had
the upper hand when it came to maths.

That a reduction in unemployment does not follow real investment like day
follows night is best illustrated by example. Let us follow the details of
one of the most important investment actions in the history of industry, the
financial and employment aspects of which have fortunately survived.

IN 1801 a Mr. Kingdom visited Mr. Samuel Taylor in Portsmouth, England.
Taylor was one of the partners in the firm of Fox and Taylor. The firm`s
business was the making of wooden rigging blocks for the Royal Navy. It
employed 110 skilled men in the manufacture of the blocks, 100,000 of which
were required by the Navy every year.
    Kingdom made the visit as a result of a meeting between his
brother-in-law, Marc Isambard Brunel, and Brigadier General Sir Samuel
Bentham, the Inspector General of Naval Works. Marc Brunel was born in France
in 1769 and served as an officer in the French Navy, but the French
Revolution had caused him to settle in America and become an American
citizen. In 1798 he went to England to marry Miss Sophia Kingdom. Her brother
was Under-Secretary to the Navy Board.
    While still in America Brunel had developed an interest in block-making
machinery. In 1801 he took out British patent number 2478 for a suite of
machines designed to make rigging blocks automatically. Bentham was very
interested in Brunel`s ideas but Taylor was not. A letter to Kingdom survives
in which Samuel Taylor flatly refused the machinery.
    Bentham therefore persuaded the Navy to set up its own block making
factory and to use Brunel`s machines. By 1808 130,000 blocks were being made
by just ten unskilled operatives. The increase in production may have been
induced by the losses at the Battle of Trafalgar.
    It is claimed that this was the first time that machine tools made
entirely of metal were used for mass production. Brunel`s reward was one
year`s savings in costs. That was calculated at £17,663.95. The cost of
making the machines was three times as much.
    100 men had lost their jobs as a result of the invention, but before that
happened perhaps three times as many got one year`s work from making the
machines.  They included the employees of the engineer, Henry Maudslay, who
made the machines.  So there may have been a temporary increase in employment
from 110 to 410, followed by a reduction to ten.  The final effect was highly
deflationary.  The capital investment in new productive equipment had the
effect of lowering the incomes of the factors of production.  This must be a
common result of capital investment in more cost effective means of
production.

    The investment in the making of the machinery was financed by new credit
creation. That we can deduce that from the fact that the British Government
at that time was running huge deficit and this investment must have been
marginal expenditure. If it had been financed from saving, by which I mean
members of the public reducing their consumer expenditure to lend the money
to the government, the investment would have had no immediate effect on
employment whatsoever, because there would merely have been a diversion of
demand from one set of products to another.

    There is however a fourth dimension to the effects of credit. Once a debt
has been created, and therefore a tradable debt which we loosely call "money"
is in being, it may circulate or not circulate at any rate from nil to hourly
or even faster. The frequency of circulation of money is not predictable but
will depend on circumstances. The government will have little control over
those circumstances.

    Given a stable frequency of circulation (like all assumptions a dubious
one) one can say that no investment in more productive capital equipment can
cause an increase in physical "real" production of goods and services unless
there is also NEW credit creation to make further investment in additional
production and thereby mop up the resources made idle by the first investment.

    Regrettably we do not know what happened to the hundred employees of Fox
and Taylor who were made redundant. We have a clue as to what happened to the
Fox family. They appear to have become a naval and church family. One
descendant was commander of the HMS Mary Rose, and perished when it was sunk
in battle in World War One. His brother, Adam Fox, was archdeacon of
Westminster and was also a famous philosopher. He is remembered as the
biographer of the philosopher Dean Inge, known as "the gloomy Dean". Fox was
buried in Westminster Abbey but the Abbey authorities rejected the epitaph he
had composed which read, "A Fox: Gone to Earth."

    Brunel's invention had the most profound effects, and featured in the
encyclopaedias for over a century as a turning point in industrial history.
The machinery has been preserved in working order in a museum in Portsmouth.
As the use of automatic machinery increased, deflation became stronger.
Deflation has been the norm in peacetime throughout most economic history for
the obvious reason that men and women are always improving their production
skills. A three hundred year graph of inflation shows that the saecular trend
of deflation of prices accelerated after 1801, and only turned to inflation
when the use of high interest rates to control inflation was introduced. In
Britain the graph changes direction sharply after November 1951 when the
first rise in Bank Rate for 20 years took place. Interest rate policy
subsequently ensured the relentless rise in inflation.

    Naturally Brunel's invention spawned Luddism. The Luddites had a case.
Fortunately to compensate there was also a vast increase in the credit supply
despite the stubborn opposition of the Bank of England. This was largely
achieved by the use of bills of exchange. We have the figures for one of the
periods of explosive economic growth, 1833 to 1839, during which the supply
of bills increased by 37 per cent, and there were 3,000,000 transections
cleared by bills every day.

    As new credit (not savings; they appear automatically after such
investment) is required to expand an economy we should talk about "the credit
multiplier", not the "investment multiplier". Credit advanced to consumers is
equally effective, and indeed is essential, for the expansion of an economy
as investment purely for fixed capital formation.

    Keynes was working towards these conclusions at the end of his life,
though I would withdraw that remark if Gunnar Tomasson challenged it as I
accept his guidance on such matters. We have not yet ascertained the exact
input of Keynes into the "Borrowing (Control and Guarantees) Act 1946" which
became law on 12th July, three months after Keynes' death. If we can
establish the connection we would have a cast iron case. We have only made a
start in examining the Keynes files in the Public Record Office. There are
130 of them and one is allowed only three at a time to look at. The most
startling discovery among them so far was a statement by Ernest Bevin that he
reluctantly called the General Strike of 1926 solely to get the exchange rate
down.

    For me true "post Keynesian Thought" is the study of the importance of
credit, all credit, not just the money supply, and it should be the same
thing as what we have termed "Creditary Economics." Monetarism on the other
hand is a primitive simplified theory of credit which concerns itself only
with one segment of the credit supply, what creditary economists call the
"intermediated" or "indirect" credit supply.

Geoffrey Gardiner
Written 18th March 2000
Sent 1 April 2000