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How Mises Dismissed that Whole Keynesian Thing with a Decisive One Liner.

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I was wondering. Should I refer to Ludwig von Mises as “von Mises”, instead of “Mises”? Should I change my name to Smiling von Dave?

We know that Keynes popularized an old blunder [one picked up by the Money Dis. crowd], one that was around for ages, the so called lack of Aggregate Demand. Say wrote his famous law to refute it, and I’m sure a little research will find it mentioned in the Stone Age cave drawings.

We’ve written many times about how wrong it is, in theory and reality. Now it’s time to see how Mises took care of it. Genius that he was, all he needed was one line to expose the key flaw in Keynes’s theory.

Unfortunately, when he wrote the one liner, he didn’t mention Keynes by name. He also wrote it in technical language, because he wasn’t addressing a lay crowd, but experienced economists. This may be why Mises’ argument is not well known. Luckily for our generation, and for mankind in general, Smiling von Dave is here to spell it all out.

What is Keynes’s argument? Over the years, the first step had to be revised constantly, but the second step is always that people hoard their money instead of spending it. That first step, the explanation why they hoard, had to be changed over and over, as every explanation offered has been exposed as true of Bizzaro World only. But that is not our concern now. We will accept that for some reason, people hoard. Massive Hoarding is also called a General Glut [of products that people aren’t buying], and Lack of Aggregate Demand, and by the Monetary Dis. crowd, as Excess Demand for Money, or a Money Shortage.

So what’s so terrible if people don’t spend their money? Everything, says Keynes. It means money won’t get back to the manufacturers. Meaning they will lose money. Meaning they will fire people. Meaning even less spending, meaning a vicious circle, until we have a Depression with massive unemployment. Furthermore, there is no reason to assume people will spend ever again, so this situation may well be permanent.

Keynes goes on to propose various solutions that are even worse for the economy than the problem he raised, but that is not the topic of discussion right now.

[von] Mises claimed the problem is not a problem in the first place. Sure we have depressions, but they aren’t a result of General Glut. Kaptain Keynes has it all wrong.

To understand why, let’s imagine that a bunch of Aliens came down from Mars to Earth. They are from the Planet of War, and have admired the way mankind has been killing itself more and more bloodily for less and less reason. Out of sheer respect for our murderous ways, they volunteer to be our slaves. They go out and pick the cotton, wait on tables, and do a lot of things for us, all for free. Being Martians, they don’t eat Earthly food or consume any Earthly products.

And here comes Devil’s Advocate, again. Just when I was warming to my topic.

DA: von Dave, are you saying von Mises wrote about Martian slaves?

SD: No, von Devil, it’s me. I’m describing a thought experiment. You know, like Einstein did for physics.

DA: Oh, I see. von Einstein made this up.

SD: Whatever. Since you’re here, Devil, tell me. What effect will these Martians have on the economy?

DA: They will be great for the economy. Economists of all schools agree that if you increase production, as these loyal slaves are doing, that’s good. More goods, more capital accumulation, it’s great.

SD: What about the fact that they aren’t eating or consuming anything at all?

DA: Are you kidding? That’s what makes them so good for the economy. They produce and produce, making us all richer, and take nothing back in return.

SD: But they aren’t contributing to Aggregate Demand. Isn’t that a problem?

DA: Dave, how foolish can you be? You know what they call demand in the movies? “Another Mouth to Feed”. If those Martians start consuming, there will be less for us Earthlings.

SD: OK, Dev, thank you. You just disproved Keynes.

DA: What?

SD: Keynes is describing a situation exactly like the Martians coming here to be our slaves. He says that for some reason or other, a lot of Earthlings have decided to become Martians and work for free. They are producing but not consuming. Instead of spending their money [=consuming] they are hoarding it [= not being mouths to feed]. Just like the Martians, they are making us all richer. They produce, but don’t consume. They increase our Capital Accumulation by working, and don’t decrease it by spending.

DA: von Dave, you are losing your touch, no offense. The Martians did not eat, but they did not get money either. The Earthlings aren’t eating, but they are getting money. That’s the problem. Money is magic. It is the gasoline that makes the automobile called the Economy run smoothly. By hoarding their money, they are clogging up the works.

SD: They aren’t clogging anything. Say the money has disappeared, never to be seen again. So what? The nation is neither richer or poorer by that. The wealth of a nation is its goods and services. Money is just a measuring stick for that.

DA: But if money disappears, then by the laws of supply and demand, the purchasing power of money will increase. Those guys who buried their money have made our money worth more.

SD: You say that like its a bad thing.

DA: But what about the fact that the earthlings who work for free aren’t buying anything? Won’t that mean that even though the nation as a whole is wealthier, because more capital has been accumulated, there will be one bad side effect? Doesn’t it mean manufacturers will lose money, because they aren’t selling to the Earthlings turned Martians?

SD: There may be an adjustment period, sure. No economy is static, anyway. What is produced, what jobs people have, has to change constantly, and does. But bottom line, there is only one thing that counts. If an economy increases its capital stock, it is richer. Its future is brighter than before. There will be more jobs, there will be higher wages, there will be a higher standard of living. That’s what capital accumulation does.

It is madness to call that a problem, and to brew some mad scheme to reduce the capital stock. If someone hoards money, that means he’s essentially working for free, and voluntarily to boot. Like the Martian, he is increasing the capital stock without being a mouth to feed who will reduce it by consumption.

Bottom line, a hoarder is basically doing two things. First, he is working for free, which benefits the economy. Second, he is decreasing the money supply, which is neutral to the economy, [merely shifting prices here and there, but otherwise not doing anything]. Those rich people who used to light their cigars with hundred dollar bills thought they were merely showing off. In reality they were also giving us free gifts by the very act of burning that cash.

DA: von Dave, you say von Mises wrote this. Show me Chapter and Verse.

SD: It’s the last section [Section 9] of Chapter 18 in Human Action. Let’s quote it in italics, with my comments in regular font:

In recent years economists have paid special attention to the role cash holding plays in the process of saving and capital accumulation. Many fallacious conclusions have been advanced about this role.

Translation: Keynesianism has taken over the world, and made a big deal about cash holding, aka hoarding.

If the individual saver employs his additional savings for increasing his cash holding because this is in his eyes the most advantageous mode of using them, he brings about a tendency toward a fall in commodity prices and a rise in the monetary unit’s purchasing power.

Translation: His hoarding does change the prices of things, of course.

If we assume that the supply of money in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its employment for an expansion of production.

Translation: But so what? The capital he created is all there. It hasn’t disappeared.

The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding.

Translation: Guys, this fellow is working for free. He’s a Martian who is producing and not consuming. The fact that he buried his money in the sand does not change that.

Just to make sure we get it. Mises repeats the salient point again. Hoarding changes prices. But it does not erase the capital accumulation that is a direct effect of the guy being a Martian:

The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings.

Knowing most people have to be told things three times before it sinks in, Mises says it yet again:

If nobody employs the goods—the nonconsumption of which brought about the additional saving—for an expansion of his consumptive spending, they remain as an increment in the amount of capital goods available, whatever their prices may be.

In other words, we owe a big thank you to this Earthling turned Martian. He has increased our capital stock by not consuming what he produced. Thank you hoarder, thank you.

Mises then points out the obvious, that the whole reason he is making us all richer is because he is not spending. He is not being a mouth to feed.

The two processes—increased cash holding [=hoarding] and increased capital accumulation [=making us all wealthier]—take place side by side.

Guys, the essential idea is so short and so simple that all Mises can do is repeat it in various ways again and again. I spotted two more times he restated it. I leave it as an exercise to the reader to find them.

DA: You’ve made your case when we look at things, commodities and capital, but when we look at the dollars, you were pretty vague. All you said was that prices will adjust. But the mighty Keynes crunched the numbers and showed decisively that those missing dollars that were stashed away will lead to recession.

SD: Have a look here: https://smilingdavesblog.wordpress.com/2013/06/24/where-will-the-money-come-from-to-replace-hoarded-money/

DA: I have to admit, that refutes of Keynes’s analysis. One last Parthian shot at you, Dave. What is the one liner?

SD: It’s the idea he keeps repeating over and over, frinstance this:

The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding.

DA: Curses! Zinged again!



  1. nometa1 says:

    Great – informative (logical) and very entertaining!

    I’m new to this blog and relatively new to Austrian economics. But what I was wondering: Doesn’t hoarding still have a very negative effect – concerning interest rates? What I think of is this: When normally people delay their consumption, they give their money to the banks. The banks have more loanable funds now, so interest rates fall, and entrepreneurs will engage in longer-term projects. Everything’s fine. But when people hoard, they also delay their consumption, but banks don’t have more loanable funds, so interest rates don’t fall (right?). Isn’t this a problem concerning the coordination of production across time?

    It would be great if you could answer! Thank you in advance.


  2. Smiling Dave says:

    Thanks for the kind words, nometa.

    Deep question there about interest rates. I think you’re right, that interest rates won’t fall, for the reason you mentioned.
    The fact there there is increased capital accumulation because this fellow produced but did not consume will show itself in reduced prices of commodities, [as Mises wrote in the section i linked to].
    I think that’s what gives the exact info needed to co-ordinate production across time. And it’s the appropriate way, as well. A drop in interest rates should show that there is a long range tendency to consume less and invest more. And if that were true, it would manifest by people putting their money in a bank, or in other ways lending to those who want to build up their business.


  3. nometa1 says:

    Thank you for your answer. Hmm, frankly, I don’t understand it yet. If the decline of commodity prices gives enough information to coordinate production across time, then why are market-set interest rates needed?

    I hope I don’t overwhelm you now, but just if you are interested: I have two other questions that bother me quite some time. Both seem ridiculously simple at first glance, but the first one I asked several libertarians, and nobody could really answer it…
    1. Why, actually, do banks have more funds if people spend less and less funds if people spend more? When I spend money, it just goes to another person who puts it on his bank account, so the total funds for the banks don’t decrease. Now, one could argue that much money is not immediately put on the bank account, and if overall spending increases, then there is more money that stays out of the banks. But nowadays? Where online banking and debit cards transfer the money immediately from one bank account to another? Assume, every transaction is made electronically within a fraction of a second (and I was told that online banking could exist under a gold standard). Then, actually, an increase in spending would not push up interest rates, would it? For overall funds to the banks remained practically the same…

    2. The ABCT states that – apart from the fact that there aren’t enough real resources, which is perfectly logical to me – one reason for the unsustainability of projects made in times of credit expansion is that people can’t buy the products at the time they are produced, because they have already spent their money. But is that true? Of course, when I spend more now, I am can only spend correspondingly less later. However, the money I spend doesn’t vanish. Someone else ownes it now, so the purchasing power I lose, another person gains, so he can spend it later for the products that are produced then. The key to that puzzle must lie in changing prices, i.e. changing real purchasing power of money, but somehow I don’t quite get it.

    I know it’s much, and these questions don’t have anything to do with your article. If you don’t have the time or aren’t in the mood, it’s no problem for me, I can ask someone else. But it would be very interesting to learn what your thoughts are on these questions.


  4. Smiling Dave says:

    Three very deep questions. Here’s what I got:

    Questions zero and one: Mises’ point of view in Human Action is that there is something called originary interest, meaning to what degree people value a hamburger today versus one in the future. If, given a choice, they will only agree to defer eating the burger tomorrow in exchange for a 5% bigger burger, then the originary interest is 5%. The rate changes from moment to moment, and from person to person. When people spend more today than they used to, meaning consume more resources today, they are making it more difficult to invest in the future. For one thing, the entrepreneur himself might not be interested in the future. For another, the pool of resources is reduced by the consumption. So something has to prod people to agree to defer consumption and use the pool of resources for improving the future. Only if people feel they will get the rate of originary interest in return for deferring consumption will they defer consumption. Since people have more of e tendency to consume now, a higher rate of originary interest will be needed to convince them. I admit I’m a bit shaky on the continuation, because it sounds to me that Mises is saying that the rate of originary interest influences both the banker and the borrower. I am not clear on that part. Have to read more of Chapter 19.

    At any rate, you see where I’m going here. The interest rate is not determined by the amount of money in the banks, but by the rate of originary interest, which depends on the psychology of the indivdual, not on what is or isn’t in the banks.

    Note that at the end of Chapter 18, when Mises talks about how hoarding [= not consuming] does not harm the economy, the basis of my article here, he talks about the influence of hoarding on money related things. He says the price of commodities goes down, and that the purchasing power of the currency goes up. He does not mention anything about interest rates.

    Question two: If you provide a link to what you wrote it might help me out. Based on what you wrote, my take is that ordinarily, when there is no credit expansion, money has to pass from the consumers to the producers [in the form of loans] so that the producers can expand their businesses. The money has be used not for consumption but for improving production. When the timing is right, the loans are repaid just as the production increases. The consumers have their money back, and they buy the new widgets. But when there is credit expansion, and the producers get their money from the new money, not from the consumers consuming less and lending their money, then the consumers spend all their money. Five years later, when the loans are being repaid, they are repaid to the big banks who got the new money free, who are not mass consumers. The masses of consumers did not lend anybody anything, having blown their money on consumption.

    Now you can argue that the money is always there, it must be somewhere, right, but wherever it is, it is not going to suddenly rain down on the mass of consumers so they can buy the new product. It will circulate for the provision of the usual routine, but there will be no extra money coming in to spend on the new products. Only when the consumers themselves provided the loans was the machinery set up, so to speak, that will ensure they get the money back to spend when the time comes.


  5. nometa1 says:

    “The interest rate is not determined by the amount of money in the banks, but by the rate of originary interest, which depends on the psychology of the indivdual, not on what is or isn’t in the banks.”
    That’s a very interesting point, I’ve already thought of it once or twice but didn’t really attach importance to it because I thought, in the end, it’s supply and demand for loanable funds that counts. Obviously, it’s not that simple…

    “Question two: If you provide a link to what you wrote it might help me out.”
    This question came to my mind not long ago and you’re the first one I was asking it.

    “Now you can argue that the money is always there, it must be somewhere, right, but wherever it is, it is not going to suddenly rain down on the mass of consumers so they can buy the new product. It will circulate for the provision of the usual routine, but there will be no extra money coming in to spend on the new products. Only when the consumers themselves provided the loans was the machinery set up, so to speak, that will ensure they get the money back to spend when the time comes.”
    I haven’t thought of that yet, but I have the following objection: Correct me if I’m wrong, but as I see it, there is no extra money that comes in to spend on the new products – because: Where does that money come from? From the companies’ revenues, i.e. from other consumers…

    Maybe it’s a mistake to focus solely on the money. I have had the following thought: When consumers spend more, consumer-goods-prices rise. That will lead to a higher production of consumer goods. That means less capital goods. At the same time, credit expansion leads to a higher demand for capital goods. So capital-goods-prices rise. As a consequence, products produced by these expensive capital goods must have higher prices, too. Maybe that’s the reason people don’t have the purchasing power to buy the new products? However, then again, there isn’t only higher prices but also more money, so one could say everything’s fine again. But of course it’s not that simple because of the Cantillon Effect… Argh! The more I think it through, the more complex it gets!

    But thank you for your help! I’m going to reflect on that some more. Unfortunately, I don’t have that much time these days, yesterday was an exeption…


  6. Smiling Dave says:

    YW. It is indeed intricate stuff. Good luck with your further efforts.


  7. One thing to keep in mind with all these scenarios is that even if your base currency is considered to be a closed end thing for the purposes of demonstration, all the other trades in the economy are not necessarily. For example, labor can disappear or have more be added, commodities are consumed and not always recycled, exploration and extraction rates might go up and down, etc. Due to this, it is possible for a business or individual to achieve a rate of asset utilization which is greater than 100%, so long as the interest rates or your profit margin do not fluctuate you out of being able to sustain what you’re doing. This, and other nontrivial macroeconomic activity make these sorts of things incredibly complex to even know where to begin sometimes.


  8. Smiling Dave says:

    I agree, redscourge. I think Mises was using ceteris parebis in his scenario, in other words, as a thought experiment, to prove his point.


  9. Smiling Dave says:

    Thank you, Jay Edgar.


  10. Cal Engime says:

    To answer your question: no, “Mises” is correct. The “von” is a nobiliary particle, not part of the last name. Unlike many Austrian nobles, Mises did not change his name to include his title after it was abolished and banned when Austria became a republic in 1920 (it would be like legally changing your name to “Sir Smiling Dave” or “Smiling Dave Duke of Kent”), but he resumed its use when he came to America.


  11. Smiling Dave says:

    Thank you for the info, Cal.

    Sir Smiling Dave, Duke of Kent. I like.


  12. […] The same one Mises made, and Vickrey just admitted to. Nobody has money to save unless he works and earns money in the […]


  13. […] New Jersey Libertarian Party website has copied Smiling Dave’s most popular article, How Mises’ Dismissed that Whole Keynesian Thing with a Decisive One Liner. No money changed […]


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