Sunday Herald - Dollars & Sense

Cambridge University’s professor John Maynard Keynes and his so called “Circus”, which included professors, Joan Robinson, Austin Robinson, Pierro Sraffa, Richard “Lord” Kahn and James Meade, did path breaking work, which was published in the “General Theory of Employment Interest and Money in 1936.” In this path breaking publication, Keynes and his team achieved what classical economists such as Adam Smith, David Ricardo, Wesley Clair Mitchell and Jean Baptiste Say failed to.

In this landmark publication Keynes showed how the business cycle - that is to prevent economies from moving rapidly from boom to bust - could be tamed. Simply translated, this means preventing economies from oscillating between high levels of investment, employment and inflation to low levels of investment, unemployment and deflation.

The great economist and his team contended that this could be achieved by using discretionary fiscal policy-government regulation and income and expenditure policies to drive investment, employment and growth. Keynes also defined investment as the spending on new producer goods and net additions to stocks and raw materials and used Richard Kahn’s multiplier or marginal propensity to consumer theory to indicate that spending on these things would have an amplified effect on GDP. Simply put, a one dollar increase in investment spending would lead to a four dollar increase in GDP, if the amount of each extra dollar in income consumed was 80 per cent.

Aggregate Demand
The great economist therefore contended that fiscal policy was the most important tool in the manipulation of aggregate demand-total spending-and employment, therefore whenever the government wants to stimulate economic activity it could move to a budget deficit, or to a surplus if it wants to contract economic activity. Keynes also stressed that the government could also use it regulatory powers to determine the level of economic activity in a country.

It is therefore against this background that we call upon the government to use its powers to clamp down on all pyramid schemes just like the governments of the United States (US); United Kingdom (UK); Canada; Malaysia; Australia, Norway and New Zealand. A pyramid scheme is an unsustainable business model, which involves the exchange of money, primarily for enrolling other people into the scheme, usually without any underlying product or service.

It is important to note the definition of a pyramid scheme because many of the players behind these schemes and other connected parties, including the churches, have been contending that these schemes are here to help poor people get wealthy quickly. They are also positing that anybody who fights against these schemes do not want to see poor people make money.

Nothing could be further from the truth because while there are those who want to maintain the historical class divide, the point must be made here that pyramid schemes by definition do not create wealth, they transfer wealth. This is something with which Jamaica is familiar because the most massive transfer of wealth from the poor to the rich took place during the last 15 years with deleterious effects on the economy.

It is therefore very appealing for those who are supporting the pyramid schemes to contend that are carrying out a reverse transfer of wealth from the rich to the poor. But this is not supported by the current empirical evidence in relation to the bankrupt Cash Plus Group Limited from which no one has been getting any money, either principal or interest payments for the past three months.

This has led to the same erratic business cycle of high levels of consumption, investment and employment to the grinding halt, which Keynes sought to correct in his landmark publication. Remember that these schemes are said to be managing 20 to 25 per cent of GDP.

Additionally, professor Paul Samuelson of the famous Massachusetts Institute of Technology (MIT), contended that transfer payments create an illusion of wealth and distort investment decisions because of their impact on the marginal propensity to consume, investment, employment and growth. Transfer payments must also be subtracted when GDP calculations are being done because like gambling they involve a sterile transfer of resources for there is no value added. The government must therefore move swiftly to close down all pyramid schemes because of their distorting effects on interest rates, investment, employment, productivity and GDP. Why work if one can invest $100,000 and make $2 billion in five years through the transfers of resources from Peter and Paul.

Govt. must clamp down pyramid schemes