Bill Gates.


Bill Gates, a man with a fortune valued at $106 billion, is no longer an entrepreneur. He is now a rentier (“60% of his assets invested in equities”), and, on the side, a philanthropist (“Gates added $16 billion to his net worth this year, despite giving away over $35 billion to charity”). In the popular imagination, the entrepreneur has the aspect of a hero. He or she takes risks. They make job-creating investments in the real world. They contribute to concrete capital formation. The entrepreneur is not a rentier. The former makes things. The latter’s income is derived from what the French call placements. Placements must not be confused with investments. The latter is primarily about speculation, or, put another way, making money from value fluctuations of the market.

Gates, in an interview with Quartz:

There’s so many factors including what [economist John Maynard] Keynes called ‘animal spirits’ in the economic equation that we don’t have predictability. Even today, people are still arguing about what happened in 2008.

Now, how can I be certain that Gates is reading my posts about economics? Because there is almost no other writer in the nation, let alone in Seattle (where Gates lives), who mentions the greatest economist after Karl Marx—John Maynard Keynes—on the regular. I write about Keynes as if he was still relevant to academic economists and business journalists. But the mainstream has almost completely forgotten the man and his key idea, which concerns the psychological motives that determine employment and investment in an economy.

What Gates now understands, and what I have repeatedly explained on Slog, and why so many academic economists failed to predict the crash of 2008, is that the activities of an individual can only make sense of the individual (microeconomics), not the economy as a whole (macroeconomics). For example, saving might be a great thing for one person (they have more cash in hand, they have made a buffer for the unexpected), but, if too many people are saving, it is catastrophic for the economy as the one-and-all. Too much saving removes lots of money out of circulation, and, as Keynes explained throughout his masterpiece, The General Theory, savings is not the same as investment. In a capitalist economy, what savings amounts to, to use mercantilist language, is a “fear of goods.” Investing is a love of goods (they may turn a profit).

For those who have not read my posts on Keynes, as Gates evidently has, some background on this thinker is needed. Keynes’s main mission in the 1930s (the Depression years) was to save capitalism, which was dangerously stuck in ideas formalized in the second half of the 19th century—and these ideas were formulated not to explain how capitalism actually worked, but simply to counter the labor theory of capitalist production that began with the fabulously rich stock-market speculator David Ricardo, and was extended by, one, Karl Marx, and, two, the Ricardian Socialists—the latter being the founders of a mode of unionism that is with us to this day (for example, the current strikes at General Motors).

To challenge the idea that labor was the source of a capitalist wealth, the academic economists of the 1860s and ’70s revived what’s called Say’s law and made it the foundation of a marginalist movement that is also still very much with us today. Say’s law (which is mystically described as “supply creates its own demand” but really comes down to “production necessarily increases aggregate demand by an equal amount”) is a version of what we now call supply side economics, or, the trickle-down theory. Say’s law says only this: Give the rich money and everything will be tight.

But Keynes was a very interesting fellow. He said a lot of queer things in The General Theory. Page after page, the master (as he was once called) made nonsense of what we now call orthodox economics. But back then, the 1930s, it was described as the classical school. His main goal was demolish the idea that unemployment was voluntary. The problem was not the system but the workers, the classical school argued. These men and women refuse lower wages and thereby establish a new market equilibrium. If they accepted lower wages, they would have work. If they didn’t, it was not because of flaws in the market but the disutility of labor (it wasn’t worth the trouble to get a job). With this reasoning, which is remote from reality, unemployment during the Great Depression was theorized as voluntary.

But the best thing about General Theory is how it explains the function of scarcity in a capitalist economy. The fact is, for capital to have any value, it needs capital to be scarce. Thinking along these lines is found in the fascinating chapter 16, “Sundry Observations of the Nature of Capital.”

Here are the Keynes’ words:

We have seen that capital has to be kept scarce enough in the long-period to have a marginal efficiency which is at least equal to the rate of interest for a period equal to the life of the capital, as determined by psychological and institutional conditions.

What does this mean? Marginal efficiency is the expected return on a real-world investment. But in capitalism, this return falls as the economy advances or grows. The more stuff entrepreneurs make, the lower the marginal efficiency. Some Marxists theorize this as the “tendency of the rate of profit to fall,” but identify the fall with a quantitative relationship between labor and machinery (“the organic composition of capital”). The British economist Andrew Glyn called it a profit squeeze, and identified it as the source of the crisis in the 1970s that led to the financialization of the US and UK. More recently, it has played role theories concerning secular stagnation, which was first described by Alvin Hansen and properly theorized by Paul Sweezy and school of economists at the Monthly Review. But with Keynes, it’s all about the relationship between marginal efficiency of capital (an investment in the real world), and prevailing interest rate.

It goes something like this: As a capitalist society becomes satiated (or over-developed), and investment opportunities with a high returns become scarce (profit squeeze), the capitalist economy has two choices. One, to simply accept the fact of low to no returns on investments and make the plenty of capital widely available. This would be a no-growth economy. A steady-state society. Socialism emerging from capitalism. The other choice is to make capital artificially scarce. This leads to what Keynes called “the paradox of poverty in the midst of plenty.”

During the 1940s and 1970s, this paradox was weakened because post-war rebuilding was profitable. But when that process came to an end, and profits began to fall, and capitalism was heading toward a steady state (stagnation) that eroded the marginal efficiency of capital, the paradox, by political means (the massive deregulation of finance), resurged. But how exactly do we make capital scarce in the 21st century? With billionaires. This is their ultimate function. The sole reason why they are politically permitted. They are the fantastic pyramids of capital that’s no longer scarce in reality.

To keep an increasing unproductive capitalism going, a few individuals suck terrific amounts of capital right out of the system, and thereby check the obvious development toward socialism, which is capital’s eventual negation of capital, which is lots and lots of capital as money (income) and real assets (homes) for all. And so the real poverty that millions were liberated from during the much-celebrated developmental period of capitalism (the period of the entrepreneurs, high yields on real-world investments—China has enjoyed this period for nearly 30 years), are returned to a poverty that is not real but made fictional by billionaires who, by abandoning entrepreneurship and becoming full-time rentiers, trap billions upon billions in their bank accounts, offshore accounts, and asset portfolios. I hope Gates is reading this post. His wealth is now closer to the madness of a pyramid than the usefulness of software.

I will close with Keynes:

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to ‘enrich’ an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

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