This chapter is chock-full of fallacies; I shall do my best to unpack them all.
Section I: Keynes levels another attack at his least favorite activity, saving:
An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption.
We've had cause to mention Keynes's refusal to use terms in a consistent manner. Earlier in his book, he insists that savings and investment must be equal; here he laments that savings may not be invested; instead, they may be hoarded indefinitely.
The fact of the matter is that people do not often choose to forgo dinner so as to hoard money. However, people will often refrain from ordering the most lavish dinner possible, saving some money for future dinners. And Scrooge McDuck aside, most people will leave money in the bank, where it is lent out--that is, invested. So we see that usually an act of saving leads to future consumption.
Keynes points out that: "the owner of wealth [does not desire] a capital-asset as such... what he really desires is its prospective yield." In other words, we do not value a house for its house-ness as such, but because it provides us with value, to wit, by giving us shelter. This is true enough, but hardly worth pointing out.
There is also a bit in this section about "forced savings", but I confess that this concept makes no sense to me, so I'll refrain from offering comment.
Section II: In place of fallacy, Keynes offers us platitudes:
For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive — at least in the physical sense.
In short, things have value because they are scarce. Only Keynes could think that such a trite truism was somehow profound.
He goes on to discuss the "roundaboutness" of the productive process. If I pick an apple out of a tree, this is a short process. If I sharpen a stick so as to spear a fish, this is a slightly longer process, and requires the accumulation of capital--the stick. If I build a factory so as to produce automobiles, this is a longer process still, and requires a good deal of capital accumulation. Now, a process may be lengthy and still be inefficient; if I cannot produce a car for a price which the market will pay, my business will fail. Yet, in general, capital accumulation allows for the lengthening of the productive process, giving us higher order goods. Most of the amenities which we take for granted, require a good deal of investment in order to produce. This is plain.
Keynes will have none of this. His hatred of savings leads him to believe that he can shorten the productive process and still come out ahead.
In some phases of society it may be that we could get physically better dinners by dining later than we do; but it is equally conceivable in other phases that we could get better dinners by dining earlier.
This is tantamount to suggesting that if it takes three months to turn out a car, granting four months will do nothing to either improve the quality of the car or cheapen the cost of it. This conclusion is clearly illogical. The alternative, I suppose, is that in some circumstances producers should refrain from making cars, at least for a time. While true, this has little to do with the analysis of capital as such, the ostensible theme of this chapter.
Section III: He cavalierly supposes that laissez-faire leads to conditions "in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero." It is true that these conditions do apply in primitive societies--though these also possess full employment, whatever good it may do them. But these conditions do not apply in capitalist societies; Keynes is simply making an emotional appeal, unchecked by reason or theory.
He then offers worse:
The only alternative position of equilibrium would be given by a situation in which a stock of capital sufficiently great to have a marginal efficiency of zero also represents an amount of wealth sufficiently great to satiate to the full the aggregate desire on the part of the public to make provision for the future, even with full employment, in circumstances where no bonus is obtainable in the form of interest.
Economics is concerned with scarcity. Keynes blithely assumes it away; capital is magically sufficient enough that it has no value, i.e. it is no longer scarce. We need not concern ourselves with such visions of utopia.
This section offers one last absurdity:
“To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
Since holes dug in the ground provide no value, workers must be paid by the only entity foolish enough to employ persons so pointlessly: the government. This payment will either be paid through taxes or inflation--borrowing being a temporary form of payment which must eventually be financed through taxes or inflation. To pursue the reductio ad absurdum, if the government paid everyone to dig holes, we would be the richest nation on the planet. And yet, despite the money we might have, there would be fewer goods produced, so that it would take a good deal of money to afford anything. Digging holes in the ground is as stupid as it sounds.
Section IV: Our economist laments that the rich collect money by charging rent on their property. But when scarcity fades, so too will those who live thus: "Though the rentier would disappear, there would still be room, nevertheless, for enterprise and skill in the estimation of prospective yields about which opinions could differ."
Yet this is true of all prospective yields. It was not long ago that many assured us that housing prices do not fall; but fall they did. Economic goods have subjective value, imputed by consumers. Therefore, there is room for considerable disagreement over any and all economic goods. Hence the entrepreneur will always provide a valuable service in a free economy.