I want to pick this thread up from Paul Krugman because I think some of my readers might be disinclined to accept Paul’s cursory treatment. However, its an important point.

In The General Theory of Employment, Interest and Money, Keynes writes

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

This leads a lot of economists and thoughtful people to the conclusion that Keynes is either ignorant of or ignoring the role of productive activity and trade. How is it that people are to become wealthier in an activity which is clearly wealth destroying?

You can see the point though if you look at why Keynes choose this particular example. It’s because it is exactly how a Gold Standard economy works. Keynes phrases it as this:

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly ‘wasteful’ forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

Though all of this might sound crazy, it actually extends from observations I think we all accept. Let me just throw in one more of my favorite quotes from David Hume and then get to the meatier explanation. Because its my favorite I am going to place the whole thing in, though the quote is usually cut down. Excuse the crazy emphasis, but it is my favorite quote and I got carried away.  Source EconLib:

In my opinion, it is only in this interval or intermediate situation, between the acquisition of money and rise of prices, that the encreasing quantity of gold and silver is favourable to industry. When any quantity of money is imported into a nation, it is not at first dispersed into many hands; but is confined to the coffers of a few persons, who immediately seek to employ it to advantage. Here are a set of manufacturers or merchants, we shall suppose, who have received returns of gold and silver for goods which they sent to CADIZ.*27 They are thereby enabled to employ more workmen than formerly, who never dream of demanding higher wages, but are glad of employment from such good paymasters. If workmen become scarce, the manufacturer gives higher wages, but at first requires an encrease of labour; and this is willingly submitted to by the artisan, who can now eat and drink better, to compensate his additional toil and fatigue. He carries his money to market, where he finds every thing at the same price as formerly, but returns with greater quantity and of better kinds, for the use of his family. The farmer and gardener, finding, that all their commodities are taken off, apply themselves with alacrity to the raising more; and at the same time can afford to take better and more cloths from their tradesmen, whose price is the same as formerly, and their industry only whetted by so much new gain. It is easy to trace the money in its progress through the whole commonwealth; where we shall find, that it must first quicken the diligence of every individual, before it encrease the price of labour.

This contains the central “Keynesian” observation, that sticky prices are the source of the non-neutrality of money. 

Its particularly interesting to pull out the quote from Hume because he is not discussing the decision of a Central Bank to print more money but an increase in actual gold and silver.

Keynes is agreeing with this point and saying yes, if people were to discover more gold that would indeed boost employment through the same means that Hume describes.

However, the way one discovers gold is by digging holes in the ground. Which, in Keynes words, have no purpose other than the accumulation of gold which people intend to use a backing for money.

Why not then just bury money in the ground and let people dig that up?

This would have the same effect as the discovery of new gold deposits and would alleviate unemployment though the same means.

But, wait then he says. What in the world is the point of burying money in the ground just to dig it back up again?

Why not have people do something productive like build roads and schools rather than dig holes in the ground. In exchange you can give them money. It will work just like gold mining will but instead of having a hole in the ground to show for it, you have a road or a school.


This is not to say that the government knows better than private markets what money should be used for. Its saying the traditional means of getting money into the private market involves mining purely for the sake of getting money.

Why not do something productive for the sake of getting money into the private markets and then once its there let people use it for whatever they think best.

About these ads