Why Oh Why Can't Jamie Galbraith Be More Like His Dad?

by the Sandwichman

Back in May, John Kay wrote on "A boom based on little more than a bezzle" in his Financial Times column:

Modern accountants... have been taught modern finance theory in which markets are efficient. They handle uncertainty by assuming that the market has already discovered and assessed all relevant information. They have also been taught the skills of pleasing clients....

If a question has no right answer in principle, then people will argue for the answer they want in practice.

"The 'bezzle'," Kay explained, "is one of John Kenneth Galbraith’s best inventions." Here is what Galbraith pere wrote,

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle. It also varies in size with the business cycle.

Karl Denninger also offered further definition of the bezzle in a March blog post. Note especially that in Galbraith's discussion that there is a period of time in which there is a net increase in psychic wealth. During this time, the bezzle is the measure of this (temporary) increase in (psychic) wealth. Might not even an imaginary increase of temporary wealth be a good thing?

John Maynard Keynes certainly thought so. His view had to do with "animal spirits" and the notion that too much uncertainty leads people to hoard money and thus depress economic activity. So if people thought they were wealthier, perhaps they would spend as if they were wealthier and... voila... they would become so! This is also sometimes known as the Coué method or "the power of positive thinking".

But Keynes wouldn't have been so blunt as to call it embezzlement, would he? Yup. True, he didn't use the word "embezzlement", but he explained his prescription in terms of telling people that green cheese is "practically" the same thing as the moon and using the central bank as a green cheese factory. But let's let JMK tell it:

Unemployment develops, that is to say, because people want the moon;--men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.

What do you call it when you sell people green cheese and tell them its the moon? In Keynes's defense, he elsewhere explained that this green cheese prescription was meant to be a temporary fix, "first aid". Modern "post-Keynesians" simply don't acknowledge this limitation on the stimulus idea. It is as if the bezzle can go on for ever and when it gets discovered, can simply be replaced with a new and larger bezzle. The second and third applications of Keynes's intellectual theorem -- that is to say income redistribution and work time reduction -- don't exist for thick-as-a-post-Keynesianism.

The moral to this story is that when economic growth is fueled exclusively by debt expansion -- as it has been for the last 30 years -- that growth itself IS the bezzle. Why oh why can't Jamie Galbraith be more like his dad?