The Optimum Proportionate Flow Condition

To repeat in another way a point discussed earlier, there is an achievable optimum flow of money through the aggregate income (wages plus social welfare) channel in relation to the flow through other channels. The optimum state is characterised in two ways: (i) full employment, that is no involuntary employment of able people, prevails; (ii) economic activity, the wealth throughput rate, is at the maximum possible within the constraints imposed by other factors.

The optimum point cannot be determined by calculation or theoretical prediction; it can only be found by careful practical policies that change the proportionate flows in the right direction. Initially of course there must be a correct assumption as to the sense in which the proprtions are distorted.

The pumping of money into the aggregate income channel was the right thing in the Great Depression – right in terms of the conditions in which it was proposed and the practical effect of the proposal as it eventually took shape as practical policy.

The false assumption made by many is that it was the increase in the money supply generally sustained over a long period and the increase in consumer spending money as such that led to the increased economic activity and reduced unemployment. The erroneous inference drawn from this assumption was that any time unemployment rose and economic activity was apparently not increasing as fast as it could, the answer was to “boost the economy” with deficit spending aimed at increasing the money flow through the aggregate income channel. The assumption and the inference are referred to by too many supporters and opponents as “Keynesian”. This label is unfair.

The prolonged success of deficit spending policies was due not simply to the fact that the money supply or consumer spending money were increased, but to the change in the proportionate flows which such increases brought about.

J.M.Keynes’ proposals for lifting the Great Depression were not his theory as such; they were the particular treatments which his general theory showed to be appropriate for a particular type of economic malaise. The fact that these treatments don’t cure our modern economic problems doesn’t disprove the general theory. Rather it suggests that we must find other treatments, which could still be consistent with Keynes’ Theory and would address modern problems.

This was discussed further in the post “The idea of Proportionate Flows Applied to Wages; the Great Depression”.

Due to global resource limit factors, of which Keynes took no account, the answer is not that simple. This does not mean that Keynes’ theory was wrong as far as it went, any more than Isaac Newton’s laws of mechanics were wrong as far as they went. These theories, and theories in general, need to be modified to accommodate knowledge and insights not previously available.

That last paragraph raises an issue that will be discussed in a digression, before dealing with the application of the idea of Proportionate Flows to modern economic problems.

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