J M Keynes on the Enemies of Capitalism: The Internal, Endogenous Threat to the Macro Economy from Wall Street Stock Market Speculators and Rentiers

Abstract

J M Keynes carefully read Adam Smith’s The Wealth of Nations (1776) before he was 28. Of extreme importance to Keynes was Smith’s categorization of a group of upper income class citizens, whose speculative and financial interactions with the private banking industry created a very severe danger to the society as a whole, as being projectors, imprudent risk takers, and prodigals. Keynes’s description of Smith’s projectors, imprudent risk takers, and prodigals in the General Theory, as well as Keynes’s extremely important, early 1937 papers in the Eugenics Review and Quarterly Journal of Economics, is that Smith’s projectors, imprudent risk takers, and prodigals are Keynes’s Wall Street speculators and rentiers. It is the speculators and rentiers who are mainly responsible for the problems of inflation and deflation in the macro economy. Keynes realized that this destructive, casino-gambling type behavior that is so damaging to the macro economy is facilitated and financed by the “…forces of banking and finance”. Keynes’s Chapter Twelve analysis on pages 147-162 in the General Theory of the speculative dangers resulting from the financial behavior of Wall Street speculators and rentiers is identical to Smith’s pages 114-115, 279-341 discussions in the Wealth of Nations of the dangers from projectors, imprudent risk takers, and prodigals. Both Smith’s and Keynes’s analysis complements each other. Both Smith and Keynes could have given the exact, same, vastly superior analysis and policy advice to government officials facing the 2007-2009 Great Recession that would have been greatly superior to the type of very poor policy analysis provided by DSGE macroeconomists in the period 2006-2010. Both Smith and Keynes explicitly point out and analyze the malign impacts(see Kennedy, 2008) on the macro economy perpetrated by either Smithian projectors, imprudent risk takers, or prodigals or Keynesian speculators and rentiers. The role of government is to impose constraints on these categories of upper income class members so as to prevent them from harming the sober people by proactive laws, rules, and regulations. The obvious reason that DSGE macro models failed so egregiously is that there are no variables in their models representing the impacts of these types of decision makers on the macro economy over time. The reason for this misspecification modeling error by DSGE proponents is that they accept Bentham’s critique of Smith that there are no such individuals in the economy as Smith’s projectors, imprudent risk takers, or prodigals.