As politicians argue back and forth about how to stimulate the economy with government spending the Republicans are beginning to challenge some of the basic assumptions of Keynesian economics. The most basic assumption is whether government spending actually does stimulate the economy. One assumption Keynes made about economic growth was the fact it could occur without a profit. We know this since he stated government spending would stimulate economic growth. Governments do not have profits. In N Theory economic growth requires a profit event. N Theory states an entity that spends money without making a profit does not contribute to economic growth.
The argument in N Theory is that spending without making a profit is equivalent to a barter transaction. It is simply moving the current money supply from one hand to another. Economic historian Robert Higgs noted this is equivalent to taking water out of the deep end and pouring it into the shallow end. Would more buckets of water moved from end of the pool increase the amount of water? Would a line of people stretching from one end of the pool moving water from the deep end to the shallow end rapidly increase the amount of water in the pool? Economists believed in just such an absurdity for over 100 years. In fact, the U.S. Federal reserve still abides by this theory. These examples are an adequate description of the theory of the Velocity of Money (MV=PQ) upon which our understanding of the supply of money rests. The speed upon which this transfer is made is suppose to increase the wealth in the economy. Without disparaging the work of Irving Fisher and Alfred Marshall (mentor to Keynes) it amazes me anyone would accept such nonsense.
Such absurd concepts also underlie the idea of redistributing the wealth of the rich. The Democratic party in the United States does not understand taking money from the hands of people who know how to make a profit and putting it into the hands of people who will spend it, does nothing to expand the Money Supply of the country. It is just a transfer. It is barter level economics. A barter economy never grows. It simply stagnates as profit making economies grow and inflate the value of their money. A redistribution economy is doomed to failure.
This brings us to the absurdity of government investment. N Theory states government investment is an acronysm, because the government does not make a profit. Without a profit making possibility an investment cannot increase in value. By definition purchasing something that does not grow in value is not an investment. Infrastructure investment is always pointed out a bright star of government investment, but even that is not valid unless the investment helps a Private Sector business earn a profit. Some infrastructure investment do in fact enhance the profit making potential of the Private Sector. Some do not like new police cars, public building parking lots, school construction, parks, improvement government buildings, new computer systems for public agencies, etc. This is one of the strongest arguments for privatization since all these capital investments do have value in the Private Sector since they make profitability possible.
