[I line-by-lined the entire post for Aaron pointing out some things, and it came out really, really long. By far my longest comment here - Aaron and others, I hope you find some value in this. I'm exhausted, and I've not edited this with tremendous rigor, but I hope there is value here]

I actually know a lot of Keynes. He was a very smart man and had some interesting ideas, but there were a lot of problems too. The original piece had some problems with it, so I'm going to comment here and let Aaron know via email. If it suits him, I would be happy to be republished, or to contribute to his site so as to spread knowledge. I consider myself in the service of humanity, as I believe he does, so the more we can fight ignorance, the better. Last time I made a commentary like this he asked that I email him with it, so I'm doing so this time at me@aaronsw.com, and I do so humbly this time.

In the article, there is a mix of interesting ideas, some not-so-good ideas, and some ethical judgments. I think he and I have several of the same end goals, so I'm just going to point out a few points that I think could be tweaked so as to account for secondary effects and make the best world possible.

> But they’re typically forced back to the fundamental conclusion of the textbook: that people are just demanding to be paid too much.

One thing to remember is that an employee's "fully loaded cost" is more than his take-home pay. There's employer-side social security tax tax and unemployment insurance, benefits, and administrative costs on the business side. On the employee side, they pay income tax and social security tax. So a business might pay $107,000 to an employee in annual salary and expenses, but the employee gets $50,000 after taxes. Generally, a gap between fully-loaded costs and takehome compensation increases unemployment.

> But if lots of people are out of a job, they’re doing their best to save money, which means cutting back on purchases.

> Everyone knows why: put some money away today and it’ll be worth more tomorrow.

Okay - why is money worth more tomorrow? Because, the theory goes, by putting it in the bank, you're asking the bank to lend it out for you. The bank guarantees an interest rate to the saver while charging a higher rate to the borrower. The borrower puts down collateral that the bank can sell if they don't pay. So, when people save more, the banks immediately have more to lend, so people who want to do interesting things can take the money and do the interesting things. These interesting things - building computers, cars, producing medicine, improving the quality of circuits, rennovating and improving real estate, building new real estate, and so on - makes the world "wealthier" - that is, there's new cool stuff, and better old stuff in the world. With this new and better stuff, the borrower makes more money. They pay the bank back plus interest, the bank pays the saver their money with interest, and all is good. The saver's money is worth more tomorrow (the money saved comes back, plus the interest) because it was used to better the world, and someone paid for that privilege.

That's the theory anyway - in practice, banks don't actually do that any more. Which brings us to our next point:

> Money isn’t worth anything on its own, it’s only useful because it can buy things.

Kind of true, yes - but what you're talking about is what's called, "Money as a fiat currency". Anything can, and has been, money in the past. If I wrote a certificate that said, "Sebastian guarantees he'll work ten hours for you in the future on any legal project of your choice", and you trust me, I'll have just created "money". That's money backed by my labor. In the past, to standardize money, a few things have been done: It's been made into coins made out of precious metals that are of uniform values. It's been a result of trustworthy warehouses issuing certificates about the quality of goods in their warehouse, such as wheat or tobacco. Then people can exchange those certificates instead of carrying bushels of their crops around.

Fiat money (paper money, backed by nothing) is an illusion. And actually, if you look at history, every paper currency eventually goes to zero, because every government eventually ends. And when governments start to end, they tend to get desperate and what's called "debase" their currency by creating more of it. Debase: "to reduce the intrinsic value of (a coin) by increasing the base-metal contents" (from Merriam-Webster online). So that'd be mixing brass in with gold or iron in with silver. Looks like good stuff, but it's not. Governments do this to try to stay alive - from a war, or riots, or going bankrupt, or whatever. You can read about how it happened in Argentina recently, or any Soviet country as it was falling apart, or various African regimes, or the Confederacy during the U.S. civil war. Printing more paper debases a paper currency like mixing iron with silver debases a precious metals currency.

> But if everyone’s saving, that means people aren’t buying.

In normal banking, you can't save and get interest unless the bank is loaning the money out for people to use. If no one takes the money that the bank is getting in deposits, there can be no interest paid. The bank adjusts rates naturally to a small spread between what people are willing to deposit at and what people are willing to borrow at. It is possible for people to panic and put their money in a mattress and not use it for anything, but this goes against human nature: We like progress. Eventually, people stop panicking and put their resources to use. This is a fundamentally human thing to do.

> This is the multiplier: each dollar that gets spent provides even more than one dollar’s worth of boost to the economy.

I was going to just point out errors originally, but this line is incredibly important and a very important contribution Keynes made so I wanted to highlight it. Basically, every hour someone works on something valuable creates new wealth, which creates an incentive for other people to work, so they're willing to work another hour to build new stuff. It's a good thing. Very good.

> How do you decide how many trucks to make? Obviously, you make as many as you think you can profitably sell. But there’s no way to calculate something like that — it’s a question about what customers will do in the future. There’s literally no way to know. And yet, obviously, trucks get made.

There is very little certainty about the world, but "There's literally no way to know" is a bit strong. There are many ways people work to figure things out, and people have a decent but inexact idea about demand all the time. Yes, people do make bad decisions (too many trucks) and then sell them at a loss at times. Then companies with bad judgment die and their trucks are sold very cheap to recoup as much of the loss as possible, while only the most foresighted/lucky/skilled trucking companies remain. If all trucking companies go under, and people still need more trucks, then new trucking companies will be formed as the prices of older trucks start rising. One of the biggest misconceptions about capitalism is that it's "smooth" - it's not. There's bumps and breaks in the cycle, just like in humanity in general. Under all economic or governmental systems, people are prone to bad judgment. Under general freedom of action, these problems correct themselves over time though it can be really unpleasant. That opens the door to thinking about whether there's any general responsibility for people who make bad decisions or get hit with bad luck - personal ethical judgment, I think there is. The next question becomes where that responsibility, if any, might lie - I tend to think at a smaller level, because it's more prone to reciprocity and good will and less prone to corruption, but people can agree to disagree there. But that's ethics which I'll generally refrain from whilst discussing economics.

> But they don’t make rich people like that anymore. Nowadays, they put their money in the stock market. Instead of boldly picking one great enterprise to invest in, they shift their money around from week to week (or hire someone else to do it for them). So these days, it’s the stock market that stimulates most new investment.

Whenever someone buys stock, one of two things happens:

1. The company is selling the stock, and it gets the money put in. It hires people, buys equipment (say, trucks), or does other things companies do with money, all of which opportunities for work in aggregate. ("in aggregate" is a fancy word meaning "in total" - one truck purchase might be an unused truck somewhere, but all the truck buying in the world creates a demand for more trucks, mechanics, etc)

2. The buyer of stock buys it from another guy, who gets the money. There's still the same mix of money in the world. Before, Charles had 10,000 shares and 0 dollars. Paul had $10,000 and 0 shares. After, Charles has 0 shares and $10,000. Paul has 10,000 shares and 0 dollars.

So it's impossible for "all the rich to buy stock", thus running out the cash in the world. For every buyer there's a seller than now has the cash, or a company that now has the cash with which to build trucks, railroads, hire a marketing person, or whatever. Actually, it's funny, there's no way to create wealth without actually building stuff. Many of Paul Graham's essays cover this. (Fake paper wealth is eventually destroyed, and is unpleasant when it happens. Whether society has an obligation to people unskilled/unlucky enough to be holding fake paper wealth when it is destroyed is back to the earlier ethical question. Ethically, I have less sympathy for people with fake paper wealth than people whose routine of working is disrupted, but they probably deserve a bit of help too)

> But how does the stock market figure out what profits are supposed to be? In truth, it has no more clue than you do.

This is akin to asking, "How does an eggplant figure out what dish it should be cooked in? In truth, it has no more clue than you do." I'm NOT joking or being snarky. The stock market is not designed to, and never can, make judgments about what profits should be. The stock market ONLY matches the lowest asking price of a stock to the higher buying price of a stock until they even out and become the same (with people continuously selling if someone is willing to buy for more than what they want, and someone continuously buying if people are willing to sell for what they want). People say, "The stock market reflects value, and people's trust, and blah blah blah..." This is nonsense. The stock market is not smart. It mixes buyers and sellers. The rest is propaganda spread by finance people. If people are buying and selling at stupid prices, then the stock market will be stupid. It doesn't figure out prices. It can't. It just lets people buy and sell to each other at the prices they want to. But...

> We forget about the most basic fact: that nobody has any clue what the stock price should be to begin with.

...this is untrue. There's plenty of information that goes into it. The easiest is "price/earnings ratio", called P/E. That means, how much does one dollar of profit cost you to buy? I was going to go on to describe P/E and other things of "fundamental investing", but it's beyond the scope of what I'm trying to explain here. There's lots of literature on it. Suffice to say, P/E is rather unsubjective, but the judgments you make on it are. Here's literature for the curious (there is problems with it, it's not meant to be a complete answer, it's just a good jumping off point):

http://www.investopedia.com/terms/p/price-earningsratio.asp

http://en.wikipedia.org/wiki/P/E_ratio

When people are buying things for an idiot crazy P/E ratio, bad things will happen to them. There's few guarantees in life, but that's almost one of them. Idiot crazy P/E ratio, you're getting burned. That almost always happens. "Fundamental investors" - that's people who invest based on how much money a company is making, their sales, their debt, and other objective factors like that, combined with a little information about the industry and an opinion on the company's management - they have ways of valuing companies. They can usually figure out what a company is "worth" beyond the hype and fads and craziness. It is not random or unpredictable.

> It’s like a giant game of musical chairs — everybody’s rushing not to be the one left standing when the music stops.

These people are called speculators, as opposed to fundamental investors. They do provide some valuable roles to society (liquidity is the big one), but this is not all the stock market is. Not by a longshot (and I'm not even a huge fan of the stock market, by the way).

> Or, you could say, it’s like those newspaper competitions where you have to pick the six prettiest faces from a hundred photographs. The prize goes to the person who picks the faces that are most picked, so you don’t pick the faces you find prettiest, but instead the faces you think everyone else will find prettiest.

This is true for speculators - you just described speculating pretty well. But fundamental investing doesn't work like that - if other people don't like a great company, you buy it all up and distribute the profits every year in a dividend to the investors. Companies used to offer dividends a lot by the way, it's just our brave new world where people don't. Why they don't is a long topic, but suffice to say, there is an "out" for people who like good companies that other people don't like. It's getting lots of dividends (profits from the company, in cash). It works pretty well.

> Calculating expected profits is really quite hard.

In new fields, like Facebook's profit in 2011, yes. In volatile fields, like Exxon in 2011, yes. In semi-stable fields, you can usually make some pretty educated guesses.

> It’s in the fundamental nature of your strategy that your investments seem crazy to everyone else.

This doesn't matter. If the company turns a profit, you can get dividends. You don't need people to like your stock unless you want to sell it all, which you don't want to do too often if you're investing for the long term.

> And when your stocks aren’t doing well (which is most of the time — they’re long-term picks, remember), people will take this as evidence of your failures and pull their money out.

This is true. It's also exceedingly stupid. A stock's price isn't what it's worth - it's what someone's willing to pay you RIGHT NOW. That'd be like if someone walked up to you, said, "Hey, I'll give you $200 for your $1,000 watch", and you panicked and sold it to them. It's really crazy.

> And that’s scary because — recall — the whole point of the stock market is to decide the crucial question of what we, as a society, should build for the future.

You need to be really, really careful writing things like this. The stock market is not a sentient being and has no general sense of ethics. It is a place where people exchange stocks for money at the "clearing price" (where people will buy and sell). There is no value judgment. It does not tell society what to build. It's simply where stocks are all the stocks are sold at the highest price someone will pay, and sold at the lowest price someone will sell, until everyone is stable. There is no intelligence or value judgment. The stock doesn't tell you anything except what the price people are currently willing to buy and sell is at.

> The best solution is probably a small tax on each trade.

That's actually an interesting idea. I always wondered why a company didn't issue stock that said, "Trading this stock requires the buyer to pay the company $1 to gain official voting rights and become legitimate owner of the company. Trying to exchange ownership or control of this stock or otherwise circumvent this agreement consists breach of contract and forfeits the stock." That would slow down stock trading and all speculation would bring new capital to the company. I don't know why it doesn't happen (laws, I'm guessing?).

> Even more perversely, it means economic performance depends in no small part on keeping businessmen happy.

Everyone is a businessman. Anyone who interacts with humanity in any way is, seriously, a businessman. There is no gap between a businessman and the rest of society. It's a relatively recent phenomenon that large conglomerates provided so much of humanities needs and wants, but we're actually shifting away from that as small businesses can get large-business economies of scale from competing providers. In short, the above quote is false. If the businessmen give up and leave, as long as someone half competent is willing to do anything that others are willing to pay for, the economy will not halt. (Though, talented managers - as rare as they are - are actually woefully unappreciated, and an economy losing them would really take some blows. This happened to the USSR, Red China, Nazi Germany, and various other totalitarian places - when a place gets evil enough, the most talented, enterprising, smart, and resourceful people dedicate all their talent to getting the hell out of there, which does in fact hurt an economy's growth quite a bit - for fun, look at how many of the wealthy people in the USA, Hong Kong, Israel, and other havens came from direct immigrants or first generation resourceful people fleeing totalitarian places)

> Most costs are pretty clear — you need to buy equipment and hire people.

This strikes me as a general flaw of Keynes - he doesn't recognize that buying and selling are always the same transaction. Any unclear demand is an unclear supply. A clear cost of equipment is a clear price of equipment. Whenever someone "puts their money in stocks", someone else has "taken their money out of stocks", or the company has gotten the money and will (presumably) start putting it to use.

> But since you need to make stuff now that you can only sell in the future, one of your big costs is going to be money to use in the meantime. And the cost of money is just the interest rate. (If you get a loan for a million dollars at 5% interest, you’re essentially paying $50,000 for the right to use the money now.)

Huge Keynes wrongness here - this one is ugly because it seems so correct on the surface. But this only applies to fiat, paper currency. The fake, illusion money you referenced earlier. You can't just "set" an interest rate, unless you're a government that doesn't mind debasing your currency. Debasing your currency makes the value of every bit of your currency go down. "And the cost of money is just the interest rate" - the interest rate is set by the same process everything else is: The price people are willing to sell (deposit) and buy (borrow) meet. Same as the stock market, same as the truck market, same as the labor market. Let's pretend for a moment that the government set the interest rate at zero percent - well, then people would borrow tons of money. But who would deposit it? Who would risk their money to get nothing back?

No one. So the government debases the currency by printing more. Again, "debase" is just the historical term from mixing the metals, it's not a value judgment. We could call it "making the value of all the currency that exists go down by printing more" instead, but the word already exists, and it's "debase". I'm not crazy about the word myself - it's just a historical throwback to people mixing base currencies (iron, brass) with precious metals (silver, gold) to create fake, lower quality, debased precious metal money.

Anyway, government manipulating the currency = debasing or inflating the currency artificially. The former leads to depression, the latter leads to inflation. (Why is complicated - in short, people stop using a kind of money if it gets debased too much - this is actually where ticking off rich people hurts - they stop signing and issuing contracts in USD, instead using something else. Remember, a paper currency always eventually loses all its value. Always, it's happened every time)

> Well, if the interest rate is the cost of money, the obvious answer is the amount of money in circulation. If there’s a lot of money lying around, you can get some pretty cheap.

The other things I've commented on are general details-based errors, whereas this is completely incorrect. Interest rates on non-fiat currencies in a free market are set at the rate where people are willing to sell (deposit) and buy (borrow) meeting, just like all other markets. The amount of money in existence does not matter - if someone has a gigantic pile of, say, gold or wheat or tobacco, but they're perfectly happy having a pile of it, they won't lend it out unless you blow them away. But most things have their price - someone credible starts offering 50%, 100%, 150%, maybe you lend your gold or wheat. Or put another way - how much money would you want back to lend a stranger your car? A hell of a lot more than 10%. What if they crash it? Break it? General wear and tear? Don't give it back? But if someone credible offered you, say, 100% of what your car is worth to borrow it for a year, you might just say yes to that. Maybe it's 1000%? Who knows? Yes, generally, more stuff unused will make people more willing to deposit (sell), but not always. Interest rates are set by people talking, negotiating, and where the buying price and selling price meet, just like everything else.

> Which means that, fundamentally, unemployment is caused by a lack of money: more money (assuming people don’t hoard it all) means lower interest rates, lower interest rates (assuming expected profits don’t crash) means higher investment, higher investment (assuming people don’t stop buying) means more employment, and more employment means higher prices, which means we’re going to need more money.

Keynes made a lot of good points. This part of his work - the "we can play with fiat currency to create wealth" part - is not some of his good stuff. Interest rates artificially low is what we had the last ten years - it meant people got stupid and crazy and wasteful with the free money. Interest rates artificially high means people develop less than they could and progress doesn't happen. With a non-fiat currency, based in real stuff, this balances naturally. Governments playing with fiat currency always - always - abuse it and bring it to zero.

Remember, it's not just the leaders that you like that are insightful that get to play with the currency. For every Thomas Jefferson or Marcus Aurelius, you get a George Bush or Nero. For every good Chancellor, you get a Hitler. These people get to play with the fiat currencies too. They make it go to zero to fund their warmongering and corruption and destruction. But inevitably, every government gets run by a bad person. Also inevitably, every fiat currency goes to zero.

> Money is created by the central bank (the Federal Reserve in the US), which decides what they want the interest rate to be and then prints new money (which they use to buy up government debt) until the interest rate is where they want.

Yes. They got us into this mess with their "low low rates!" of the last ten years. Now people are hoping they'll get us out of it. They've done so, so far, by lowering rates more. There's even talk of having a negative interest rate - paying people to take money! I could point out how crazy that is, and I will if the reason why is unclear, but suffice to say, the people at the Federal Reserve are just as prone to knuckleheadery as the rest of us, if not more so.

> What do you do if the interest rate is zero and people are still out of work?

A very easy one would be to cut taxes, actually. Let's say currently, for every dollar an employer pays, the employee receives 50 cents. Well, now there's a big problem on your hands - the employee needs to be offered TWICE the money that makes it worth it for him to work to take a job. If the employee wants $3,000 after-tax per month, but the employer would have to pay $6,000 in employer-side taxes, employer-side insurance, administrative costs, employee-side taxes, employee-side insurance, etc, etc, well, you've got a problem. Now, there'll always be some gap - administrative costs, management, and so on. But cutting income taxes always reduces unemployment and fairly quickly. Actually, it's the only answer when the "debase the fiat currency" plan isn't working.

> The government has to step in.

Agreed.

> Instead of waiting for billionaires to build pleasure-domes, the government can hire people to build things we all need — roads, schools, houses, high-speed Internet connections. Although, honesty, it doesn’t have to be things we all need. They could hire people to do anything. This is why inspecting the stimulus money for waste is so ridiculous — waste is perfectly fine, the important thing is to get the money into circulation so that the economy can get back on track.

Okay, I was going to make a joke or be snarky, but I won't. This is a fallacy. Debasing the currency just moves the problems around. It means people won't want to hold U.S. currency, and won't want contracts written in U.S. currency. And remember, USD is "illusionary money", as you already mentioned and covered. Debasing it (making everything in existence already worth less) is a good way to get people to stop buying the illusion. Now, I didn't quote it, but you alluded to billionaires not wanting to buy pleasure domes and that being the problem. Actually, billionaires usually don't hold their billions in cash - they hold it in real estate, stocks (as already covered), and other assets. When a currency is debased, the price of everything rises pretty quickly. That means the billionaires get hurt less. You know who gets hurt the worst? That would be poor and middle class people who tend to keep much of their net worth in cash, and also people who have contracts that call for them to get paid a set rate in the future. Debasing the currency means the price of all their materials will rise, making their contracts not profitable at the rates they guaranteed to sell. So the break their contracts. It's a big mess. Debasing isn't the answer, especially past zero percent.

> Another good solution is redistributing income. Poor people are a lot more likely to spend money than billionaires. If we take some money from the billionaires and give it to the poor, the poor will use it to buy things they need and people will get jobs making those things.

1. This is a value judgment.

2. Wealth redistribution never hits the billionaires the hardest. EVER. Much of the stimulus went to already wealthy people. Wealthy people get better access to universities, police, parks, and public transit. The don't build public transit to very poor areas, and if they do, the areas become wealthy quickly with the poor people moving out. Poor areas aren't as well policed. And so on. It's very hard to redistribution involuntarily - by definition, you're creating a power vacuum that's supposed to take money and wealth from some people and give it to others. Who do you think is going to win in that arrangement - the most resourceful, educated, sophisticated, driven, ambitious people (the wealthy), or someone else? That's a serious question without any value judgment - I'd very much like to fight poverty. Personally, I fight children's cancers. I've run charity events for St. Jude's Children's Hospital in the USA and Great Ormond Street in London. But I'll tell you, I've seen some sickening things with laws that are meant to redistribute. I know some people that've gotten the money. Then they throw a "cash for clunkers" bone to poor people to get them stuck in more consumerism. A guy pays $10,000 in taxes, and they give him back $3,000 to buy a car he doesn't need or want. I know a guy that owns a bunch of unprofitable farmland and receives the subsidies. He just bought it on the math on government subsidies. But I digress - I'm with you ethically - raising the standard of living globally is important, and some people can have their standard of living go up faster. But "debase the currency" isn't the answer - it ruins nations. Other redistribution plans tend to make the wealthy get wealthier frequently. And if they're very, very successful, you get a USSR situation where your smartest people leave.

> Remember that money is just a kind of illusion.

Fiat money is an illusion, this is true. Debasing ("hey? what the hell? why does a cheeseburger meal cost $12 and a movie ticket cost $18?") breaks that illusion.

I apologize, I was going to go through the whole piece, but I've writing for a quite while and I'm getting tired. Aaron, I'm going to email you - if you'd like me to clean this up so it can be a formal post on your blog, or if I can otherwise be of service to you, please call on me. I'll shoot you an email now, and you have my best wishes. I think you're one of the most passionate, charismatic, and intelligent people I've seen write. I think you can be a tremendous difference maker in the world. I believe our goals are in line, so with the best methods, perhaps we can serve as champions of humanity.