23. Monetary policy or rational utopia

after Germán Bernácer wrote his monetary theory, his body of work on monetary policy still needed to be developed. If his analytical style is similar to that of Keynes, one may think that his monetary or fiscal formula would have to be similar as well. Both advanced with their analytical scalpels into the organic depths of an economic being that was dying from anaemia. The blood of demand lacked energy; this was their basic proposal and it was logical to think that their medicine or surgery would also be similar.

There is no similarity at all, as will be seen. Keynes, with a capacity for political leadership and the chance to use it, was tormented by an economic reality –of the British Empire and the United States– with greater political and economic significance, which collapsed. To Bernácer, involved in the emergency of sickness, which slipped from his hands into another world, and to really understand what was happening, the solution was glimpsed and this solution was violent and traumatic: fiscal policy. Over time, others, monetarists, mistrusted this solution, which was nothing but buying crutches for sick men, and trusted in intravenous monetary injections.

Bernácer demonstrated the errors of the concept and practice of the Keynesians and the monetarists. They did not know the economic body and, if perhaps they did know it, they did not know anything about monetary physiology. This physiology explained how nourishment or supplies are transformed into new organic matter in the economic body and, in this task that is incessantly executed by the ordinary market, the monetary blood flow originated for circulating income. Up to here, the classicists and Keynes himself would have agreed. What happens is that this hydrographic basin was not circular but split into two rivers: the monetary one and the monetary-financial one. They were both respectively driven by the discipline of two valves: ordinary interest and financial interest. And troubles, crises specifically, were caused by asynchrony between these two valves, above all when the financial stream acquired more force than the ordinary one.

Understanding this mechanism meant understanding the solution. This solution would be economic policy. I understand that Bernácer did not understand the drama of a body that suddenly died in the eternal seconds of the thirties. To him, the disease was like an epidemic that secularly devastated humanity. His book Society and Happiness was written after a crisis and thirteen years before another. It was written in appeasement and calm, illuminated by the sun of Alicante and the heat of meditation. And he was there when he tried to cure the epidemic.

For this reason, there are two execution disciplines in economics. One that is born from the concept of natural dynamic equilibrium: Savings, which is the part of income that is unspent, must demand something in the end and this something is capital goods. Like how the economic body creates new money, it must finance working capital. If savings finances working capital, two products will appear on the market: capital goods, which haven’t been demanded because savings went elsewhere, and the new product formed by new demand and the productive application of working capital. But since anti-wealth or dead wealth exists in this system, growing and multiplying like germs on the financial market, the solution will be to eliminate the pool. In other words: eliminate the financial market!

These rules from the economic community must always be fulfilled. This was its monetary policy. And how odd! But monetarists say almost the same thing as Bernácer:

‘Monetary supply must grow at a constant rate… monotonously constant.’ If Bernácer were alive, he would finish it as follows: ‘… monetary supply must grow to finance new working capital and a community’s working capital is national product…’

The other economic policy was that for emergencies. This involved an emergency surgical technique when the organism declined intensively in its last moments. This solution is very similar to the Keynesian one ¹³¹.

He would have said that the first and peaceful discipline would manage to make savings demand fixed capital, new money demand working capital and make the financial market disappear. In this way, there would be only a single monetary blood circuit: national income. The other involved transporting a new organ helped by new blood injections. This would be the new and powerful demand of the public sector.

23.1. The natural sanctity of work &divine punishment ¹³²

Economic nature has its own laws that must be respected. This law states that each individual and the system as a whole should enjoy and receive the fruits of work contributed. There is no whiff of classicism or Marxism in this statement that reminds us of the labour theory of value, since Bernácer blessed and found fair the profits of business owners. The only thing he stated was that, after expelling human beings from heaven on earth, a date placed at the birth of economic activity, we have all been obliged to work and thus collect the fruits of labour.

If an entrepreneur has an idea and gathers workers together and guides them through the north star of his imagination, daring, audacity, intelligent and hard work, then he deserves his share. As I have already stated: income is born from labour. In the ordinary market, one is called wages and salaries and they are received by workers; another is called interest and is the reward for savings and may disappear; and the last is called profit. David Ricardo and Carl Marx would not agree here.

It is a violation of economic and even divine law that someone can live from others’ labour, owing to the sorcery of strange economics. What is this sorcery? Speculative operations that occur on the financial market, which let some rescue monetary surpluses greater than they initially placed, and for others to accrue interest from the money placed there. Never forget that this market’s sterile wealth must be explained.

Since this operation is not natural, the overall system is punished, the system that permitted it. Part of the income that was born from and for labour doesn’t return to it and, therefore, demand is frustrated and supply as well, whose mission is to disappear. They are economic crises.

23.2. The perfection of the system via the disappearance of the sin ¹³³

Bernácer said: ‘Above all, everything that induces savings to be separated from their natural objective of creating real capital must be excluded…’ (A Free Market Economy…, page 183). The existence of a stock market is the reason why capitalisation becomes an issue of speculation. This is how unplaced cash savings are formed (or disposable funds) with a subsequent mountain of unsold products piling up. The cause and effect, the effect and cause of the stock market are liquidity preference. Other times these disposable funds deflate and return to the ordinary market, with the monetary tides forming in this ebb and flow resulting in economic cycles.

Thus, the income or financial market will have to be eliminated, what Robertson called the income-yielding market, modulating Bernácer’s original term.

This is where I believe Bernácer’s common sense went up in smoke. The disappearance of the financial market is practically impossible for several reasons. One of them is because it is necessary and unavoidable in many ways. In principle, savings travel fluidly towards investment by arterial routes in the stock market. Investors, even admitting their intelligence and goodwill, do not think in macroeconomic terms, but as individuals, worried about their portfolios. They buy financial assets with their savings to resell them and then buy others.

Another reason is the enormous variety of classes of actual secondary financial assets, which may exceed the number of stars in the heavens. They are so varied that they may not even exist. Indeed, non-existent lands were sold in the United States before the 1929 crisis and then, their ephemeral buyers sold them on to others. If they wanted to, they could sell lots on Mars or the Moon. In modern financial economies, things so invisible and so lacking in wealth are bought and sold, such as purchase option rights, which are then bought and sold numerous times above their initial value.

Used houses also entered into this market and other real assets such as building sites, postage stamps, etc. How did Bernácer think this ancient market could be eliminated?

By prohibiting their transmissibility, the financial market would be annulled. If selling was prohibited, nobody could buy and, if nobody could buy or sell, the market –which is defined by the coming together of supply and demand– would disappear.

Given the case that these assets have been acquired with the fruit of their labour, or spent income or savings, it would be unjust to deprive subjects of their enjoyment. Bernácer accepted their ownership and possession and cash recovery via sale to the state. What he wanted to prohibit was transmissibility.

And to eliminate their transmissibility, proprietary requirements would be more guaranteed, extending property registers to include even personal property. Paradoxically, the right to inheritance, donations, usage, rental or hire, mortgages and pledges would all be assured; in other words, all the manifestations of ownership, usage and enjoyment, which completely agrees with the idea of private ownership that Bernácer firmly believed in, as well as market economy. Capitalist market economy has no reason in itself to bear the stigma of the financial market.

With transmissibility and the financial market eliminated, savings could go only to the ordinary market, its initial starting point. But economies are not stationary, since they grow. And savings, which must return to where they started, must be helped by new money that finances working capital.

23.3. The recovery of savings ¹³⁴

Economic agents should deposit their earnings in bank accounts. Then they would need to differentiate between earnings needed for ordinary consumption and earnings needed for business, from the part of net savings. This is set forth with already-familiar terms in his doctrine, disposable funds that disappear as such, those of first and second-degree, from the last or properly-speaking disposable funds.

None of these accounts would accrue interest! There is no reason to do so, since interest originated on the financial market, now gone for our purposes. Let’s stop at this very delicate point for a moment. Interest originates on the financial market and if someone abandons keeping it on that market, he is renouncing interest and, therefore, he would ask the banking entity for interest. But if this market stopped existing, the cost of opportunity would disappear and the interest it represents as well.

If interest disappeared, would savings no longer be formed? No. Savings will grow, as mentioned, for several reasons. Due to the need of financing capital, due to postponing an unnecessary present consumption, etc.

And above all, invested savings that do not accrue interest would not stop from obtaining their genuine compensation. Since workers and business owners will participate in the end product, a part of profits will be used to indulge savings.

Savings will have all the advantages wished. Firstly, it can be recovered whenever you want and spent on consumer goods. Bernácer knew that this wasn’t likely given that the probable spending of savings would entail company savings via undistributed profits.

23.4. Capitalist socialisation ¹³⁵

The recovery of savings is a form of productive socialisation of the system in a general sense. In a demographic or employment sense, the connection of savings to the saver and the saver with his job could not be more optimal. The best scenario would be that employees dumped their savings into their companies and then companies could be self-capitalised.

Labourers’ control over companies is dangerous, he said, but there is the difficulty of maintaining outside capitals. Thus, Bernácer said: ‘this difficulty would disappear when the worker had his savings or part of them in the company and decisions involved their own interests…’ (A Free Market Economy…, page 104).

And since there will probably be excess savings above companies’ investment needs, a bank or banking system would cede them to large companies that needed them for their investment needs. What is missing from Bernácer’s explanation is what secret reason would lead someone to cede his savings to others. I have no idea.

The way or percentage that savings participates in profits is still floating in the air and whether this marginal or percent participation is interest or is not interest. It is not interest. It will be the percent productivity of the investment, a term I prefer over marginal efficiency or productivity of investment. Why? Because system net savings reverts to capitalisation and is thus a consequence or emanation of capital, which is indeed real and effectively (and socially also) productive. Machines produce goods and not the house of illusions of financial assets.

After obtaining profits as a consequence of the sale of obtained products, part of these profits will be distributed and the profits will affect production agents. Part will belong to the entrepreneur as a worker and the other in proportion to the savings formed. But, real wealth would be distributed and not monetary wealth without a counterpart in actual wealth. In macroeconomic terms, savings will receive the equivalent wealth or percentage profit of the investment, while in an unimproved economy and, the one we live in, savings split partly into actual wealth and partly into monetary and false wealth.

23.5. The role of the state in capital formation

There is a little indicated profile in Bernácer’s opinion about the financial role of the state or Public Treasury.

It’s a shame that the elder Bernácer did not develop this topic more extensively in the fifties, specifically his criticism of Keynesian Public Treasury and the real need of state investment activity.

About monetary reforms, he stated that since there will normally be excess savings over investment, someone must return them to the system. But if, according to the functional design of correct macroeconomic physiology, savings must return to the capital market (capitals as factors of production), someone –the state– must capitalise these savings.

Two conclusions can be obtained from this interesting statement, both of them very important. One makes it possible for demand not to lose energy and have the capacity to take supplied production from the market. If savings exist, it is because consumption has been renounced and this savings will have to demand part of unsold production via investment. We know that investment is the acquisition by the system of capital increases and this activity that is assumed by the state will mean strengthened demand.

The second conclusion is that of finding out how the state can capitalise these excess savings. Normally this capital equipment is basic, fundamental and necessary for the functioning of the entire economic system. It has been generally agreed to call this public social capital (not a name established by Bernácer). They are public buildings, dams, ports, parks, hospitals, clinics, public recreation spaces, schools, universities, and I could go on to include roads, research, public companies, etc. What is interesting to know is that these investments are truly investments; although universities or roads are not factories or installations or tools, they do shape a type of invisible and visible infrastructure over which the trees of private capital equipment settle and put down roots. Private investment is complementary to public investment and in the end, relies on it.

This is how the idea is brought into line of returning surplus savings to the system via authentic investment, only that state investment, in the sense of capital equipment, is more indirect in production than the first.

It is a shame that this does not always happen, since the spending of savings is born from the agitated womb of political tensions at the time. Conveniences weigh more than the system’s public investment needs, making the state spend this excess savings, spending it badly and spending more than investing.

Bernácer was very disturbed that a collectivity that is yearning for savings to invest, delivers its savings to a public sector that threatens and blackmails it, causing a scarcity in this savings, which then causes interest to rise. Far from helping investment, it actually reduces it. This is a simple economic argument with elementary math that had already deeply concerned classical economists. Via its deficit, the state can decapitalise the private economy, absorbing savings that, according to Bernácer, must be used to capitalise the private economy.

The elimination of the financial market would not do anything if the state collects savings that are, furthermore, not excess from the system but imposed by aggressive fiscal policy.

23.6. Property trade ¹³⁶

Income assets or income-yielding assets or financial assets, being negative for the system, do not stop being the manifestation of savings of past and present generations. It would be unfair to strip it of these savings that are placed there. Thus, an intermediate solution must be sought or, better yet, one that is fair and economically healthy.

One could argue that part of this savings or increase in value of financial assets took place due to speculative drives, although it would not be possible or even practical to establish these differences.

Since we have eliminated the financial market, there will be no way to sell these assets, with the state fulfilling the task of replacing this market in the liquidation and return of the value of these assets. As stated in the section entitled ‘The Recovery of Savings’, the state must monetarily return the value of financial assets to their owners. In this way, their trade is prevented, trade that is done with part of the system’s noncapitalised savings. How would this operation be done? Bernácer stated:

‘Payment would consist simply in making them pay the amount into an available account at the bank in favour of the seller, charged to state credit, for the surplus of fresh savings. The accountholder could draw on all or part of the balance for consumption and capitalisation aims. In all cases, the amounts used represent a decrease in savings disposable for public investment. These accounts, as well as normal savings accounts, would enter into the computation to calculate the increase of the acquisition fund since, like the others, they entail a right to future products and continue to die out by the progressive usage of this right…’ (A Free Market Economy, page 186).

This disposal of savings (excess savings over capitalisation) decreases state disposable funds for public investment, although the state obtains the following benefits in exchange:

1) If public debt is in question, it is annulled without the need of a net disbursement by the state, which thus decreases its spending on debt services.

2) If an actual secondary asset is in question, like a rented land or a rental home, it is added to communal property and can pass to common use or represent income for Public Treasury.

These clear benefits, basically those of disposition, are achieved without prejudice to them, since the current owners of these savings, with which they made payments to past savers, do not lose the right to enjoy this savings. The enjoyment of this savings is made possible with the constant flow of present savings.

The argument set forth in this section is so logical and clear that it seems impossible to me. And it also seems impossible because I do not know if there will be desires to place our unconsumed wealth in financial assets, knowing that neither the market nor the price exists and, furthermore, the possibilities of obtaining free and liquid income from these savings. In short, due to interest not existing.

In my opinion, there is a serious fundamental problem, one that Bernácer did not explain, at least not extensively. If effectively no market exists, how will the real financial assets of savers be valued?

23.7. Private property in the new regime

One could mistakenly conclude that the elimination of the possibility to freely trade with financial assets, due to eliminating the financial market, would entail a limitation to private property. If an asset, for example financial, belongs to any individual, he can sell it to whoever he wants, and any individual will have the freedom to acquire it in exchange for his money. This proof may lead us to believe that Bernácer’s reform is totalitarian and socialising. But it is exactly the opposite. Private property dignifies mankind, so much so that without it individuals are slaves, whether the master is an individual or the state. What is being dealt with here is changing the meaning of ownership, not suppressing it. And the best way to achieve that property has a just and noble meaning is that it is obtained via labour.

Bernácer said: ‘The only property cession title is labour and savings, and the only form of property is capital or, in other words, that which is the product of labour…’ (A Free Market Economy…, page 187). I will give a similar interpretation that is inspired in Bernácer. Income (production income Y) is born from production (work), which gives us the right to reclaim the ownership of what is produced and nothing more. The acquisition of capital equipment gives us the right to reclaim the potential and present fruits, because in the end this is also labour.

Therefore, what is in question is protecting ownership, perfecting access to it, through the legitimate routes of accession that can only be work, initiative and imagination.

To readers, scholars, scientists, men on the street and also the historic consciousness of the economy, a nervous and sensitive feeling would be with us and endure in our brains when faced with the amputation of interest. They would all ask how the absence of interest will be filled. How can the economy more forward with the savage existence of an institution at which interest has been cut off? It is not filled with anything and will work better since it was an obstruction.

Savings is formed for a wide range of reasons, as mentioned, and one knows that it does not depend so much on interest as income and, even in the absence of the first; it will be necessary and essential to form it.

Since all vacuums tend to be filled and all meaning compensated by another that strengthens it, interest will be compensated for by a percent income that increases. In effect, system savings, when the useless and infertile financial market doesn’t exist, will be channelled (and obligated to do so) towards investment and will receive the prize of a part of profits. This profit will be individual in a macroeconomic sense, as well as authentic and social.

If savings has entailed the recovery of income that was received by working, when it is added to production through investment, the original value will remain plus an additional compensation. This prize, part of the profits, is the fruit and consequence of work. Ownership will be accessed through savings, but this ownership that is accessed will belong to work and nothing more.

In an initial phase, only the property titles will be expropriated that their owners wish to sell. In a second phase, other cases will be considered like inheritance, donation, etc., making them liquid immediately via the public sector in collaboration with banks. In exchange, the state will eliminate taxes on inheritance.

Industrial private property must principally turn to its production agents, employees and business owners. Moreover, the private property that Bernácer respected and proposed and even wanted to strengthen would be extended to consumer and usage goods, like private homes. It would never consist of the speculative possession of goods that entail monetary incomes that were not earned and even less the possibility of increasing them via speculation.

And I insist on the fantastical and unrealistic nature of what our economist proposed. How did he want to eliminate the buying and selling of assets for usage, of sales of businesses, of repurchasing of durable goods like cars, etc.?

On the other hand, Bernácer’s sense of justice was very odd, after reaching the homeland of labour. I say it was odd because he not only defended the right of inheritance but even said that it should not be discouraged in any rational economic system, even suggesting that taxes on them be eliminated. The dominant ideology in capitalist regimes (leaving out communist ones) that influences doctrinal concepts of theory that are not native to Public Treasury is that inheritance must be taxed in order to cause, among other aims, equal opportunity.

Productivist Bernácer admitted that one of the most powerful stimuli in the community for production and particularly for saving is the possibility of transferring the assets of inheritance. And if this asset has been earned through legitimate and non-speculative work, then the taxes on inheritance have no raison d’être.

23.8. Companies’ financial techniques ¹³⁷

Companies must comply with some minimum principles of financial health. Savings, coming from production and income, must return to production and income. Thus, companies must capture savings via the issuance of securities that, whenever possible, must be placed among their production agents: employees.

The products from these issuances must be collected in a special account called: disposable income accounts for fixed capital. I understand that company savings must also enter here, which will be increased by the savings of agents that helped to spend it. These accounts will also receive the amount necessary to form reserves and amortisations.

This disposable income account for fixed capital must also finance gross fixed capital, which has been created by new capital goods and for the maintenance of present goods where, as you know, the latter expense is technical amortisation or replacement amortisation. I will now set forth a few sentences that fit exactly into the complex Bernacerian analysis. He was deeply concerned that this disposable income account for fixed capital financed gross fixed capital: net capital and net amortisation. He stated clearly that this means that at no time will this fixed capital account finance working capital.

I do not think it is pointless to repeat the Bernacerian argument that savings that finance working capital has depressive consequences for the economy. This statement may appear fantastic to most economists, but not as I will explain Bernácer here.

Savings that finances working capital has obviously stopped demanding consumer goods and also fixed capital. The demand for working capital or investment in working capital entails the incorporation of flows from new supplies (which is also final working capital). But investment in working capital has generated income in the system for the exact amount of its value. In this way, there are two supplies in the system that are added together and generate a demand that is monetarily lower than the supply. The computation of supply involves capital equipment K_t, in the period when it stopped demanding, plus the new working capital Q_t and a single demand capacity, the resulting Y_tI, derived from investment in working capital. It is elementary that this income Y_{t + 1} = Q_{t + 1} can demand Q_{t + I} or period production T + 1 or X_t, which is capital equipment, but not both productions at the same time.

The new load of swelling supply must be alleviated with new money and leave period savings free to finance fixed capital (which was born in this production).

If companies have the disposable-income account for fixed capital available for specific aims, then where will the funds be obtained for working capital? Bernácer said: ‘Companies will have a working fund whose origin will be bank credits that the banking system will assure is new money. In other words, these credits will entail an increase in working capital and are therefore not granted at the expense of real savings deposited in banks for clients. This will be how equilibrium is obtained between the real and the monetary. Savings will demand production in the form of fixed capital and/or will help create it, while new money will acquire working capital, helping to create new production.

The ideal financial regime is Bernácer’s proposal for company financing.

This system has strategic importance since it is used to measure whether there are excess savings or too little savings at any time, as well as the system’s need for new financing to finance working capital.

If business increases, the creation of new money will also be increased and it will contract due to a decrease in money. The banking system must follow uniform accounting standards that in each period, specifically each month, can objectively calculate the balances remaining for fixed capitalisations, including reserves and sinking funds, as well as the resources needed for working capital. Banks in turn will be connected to their issuing banks to meet needs for the creation of new money.

The following graph summarises these proposals:

The creation of money will match the national product. The reason is found in the fact that national product is made up of the sum of intermediate working capitals and this financing is executed with payments between entrepreneurs and merchants with the same monetary mass. This means that, equally to the calculation of national product, the cost of intermediate products are not added twice (or more) but rather their added values. Money will not be missing to add up all the working capitals, but only the added ones.

Note: Bernácer did not explain why new money must be created to increase fixed capital. It is possible that its intense demand would make period savings insufficient. We must also think about how it is possible that known economic systems do not follow Bernácer’s proposal but, nonetheless, are not suffering from crisis. The same thing has happened to past systems that enjoyed good economic health.

What happens is that the economic system, like any living organism, tends to generate its own defences and its own means of survival. I want to add that private banks also happily create money. Furthermore and almost perfectly, economic systems do indeed carry out Bernácer’s proposal, just in another way. Savings that economic agents leave in the bank (S_k) are carried to final investors by banks, with which investment needs are satisfied. However, the banking system simultaneously transforms this deposit-savings into money in a multiple amount (banking multiplier), with which financing needs for working capital are also satisfied. The financial market, which exists and has existed in economies, has absorbed part of this savings and, along with it, has seen the possibilities of creating money diminished. Of course, the opposite has happened when the financial market has drained excess disposable funds in this regard, and there will be excess savings and excess creation of money. This explains economic growth, but also depressions and the calm stability of economies in coming to a halt in equilibrium.

23.9. Marshalling the monetary system ¹³⁸

Monetary marshalling, which will let currency be regulated and stabilised, must follow the standards hereafter, which turn around two large accounts: debtors and creditors on the one hand, and Treasury accounts.

1) Firstly, credit accounts will be placed in two different categories:

a) Those that contain new savings that have been paid with a series of deliveries and periodically debited with repayments to accountholders.

b) Those that originate in the liquidation of private assets and move into the public domain. These will be paid with the liquid amount of those sold and will be debited via the removal of funds.

The total of all these balances will represent final cash savings since the beginning and its positive or negative difference from one month to another.

2) Company debit accounts for credit for fixed capital. These accounts have been debited with what was drawn down from them, within the credits given for fixed capital. They will have been paid with the allocations for reserve funds and sinking funds, so that the balance expresses the value of fund immobilisations of each company. These immobilisations, which will finance total or gross investment (net + amortisation) will come partly or totally from private contributions. But, Bernácer said, which I liberally repeat here, they will be eliminated from this computation by the corresponding debit or payment.

Until now, I have said nothing more than insisting on the thorough possibility that savings returns to the system (a) and that the sale of wealth created is only liquidated by the state (b) and that this savings finances fixed capital (2). Now we need to look at financing for working capital.

3) Treasury accounts for current spending and deposits that, depending on whether they are debits or credits, will respectively appear in sections 1) and 2). By establishing the difference between 1) and 2) and comparing it to previous money, we will obtain the increase or decrease in disposable savings ¹³⁹. This disposable savings will move to the account of extraordinary public investments.

With respect to financing working capital, there will be a banking balance sheet in at banks to measure and finance company working capital. The balance of these accounts, decreased in the preceding period, must equal the increase or decrease of bills in circulation. In other words, depending on whether the banks gave credit for working capital or the credits were repaid, there will have been more or less bills in circulation. In a progressive economy, the general tonic will normally be an increase in bills. Bernácer could have simply said variation of money without specifically using the word bills.

Deflationist or inflationist situations can occur depending on monetary twists of the following types:

A) Deflationary actions:

1) Hoarding

2) The employment of savings or credits, assigned in principle

3) For fixed capital, in working capital

B) Inflationary actions:

1) De-hoarding, applying these hoarded resources to consumption or fixed capital

2) The investment of these resources, credits for example, allocated for working capital, in fixed capital

C) And actions without either effect:

1) De-hoarding, using the hoarded money for working capital

2) The hoarding of resources obtained for working capital

These simple statements set forth in the last section of his last book will be understandable to whoever has read and comprehended his body of work, but set forth on their own; they are not so easy to comprehend, given that they require many accompanying premises to give them greater precision. Thus, for example, when he stated the requirements for inflation, he could have cited full employment; and when he stated that the hoarding of money employed for working capital is harmless, the matter is not so simple. If this happened, there could be deflation.

Perversely-binary monetary circulation has become unique, owing to these reforms and this circulation has a path and a specific dynamic usage. Any infraction is punished by monetary destabilisation, either via deflation or via inflation.

He did not support outside auxiliary measures to help the system if emergency measures are not required. Since he supported low interest or, rather, no interest, he did not support the central bank continually and discretionally collaborating in managing monetary supply. It is the system itself that must generate its own monetary flow according to its own needs. How would this be obtained? And above all, how will monetary needs be coordinated with new money? Well, by private banking activity. To do so, Bernácer stated that:

‘Favouring the usage of current and checking accounts for all payments possible, providing every facility possible for payments by transfers and imposing periodic changes of bills by using new issuances that would also entail the annulment of the old bills, imposing a discount for the exchange of old for new bills.’

The utilisation of current accounts and transfers would make greater creation of money by the banking system possible, which has a close relationship to national product or income, which in turn tautens needs for money for transaction motives.

23.10. Private payments in the new system ¹⁴⁰

In street and even economist slang, especially for classical economists, capital is money. So, the absence of the existence of interest does not prevent capital from having a percent profitability if we continue with the idea that capital is money or, better, savings. And if we believe capital is a factor of production, I continue to state that it will receive its recompense for the simple reason that this latter idea of capital has been financed with the first, which is savings. This is what I have been saying.

Savings finances or should finance capital equipment. Its productivity is equal to the payments of savers; if this payment of capital is for example B_k, and the savings created by capital goods is S_k, nomenclature used consistently until now, the percent profit would be:

B_k/S_k = r_k

and expressed as a percent would be r_k%, which seems like interest, but isn’t happily in this position. And since savings (capital to some) helps take the whole of capital equipment, it is the same to speak of one or the other in Bernácer’s reformed economy, when speaking of its payment; conceptually it is clear that capital and savings are different things.

There will be companies in the economic system that obtain small profits, but obviously positive, which is the important thing. With the existence of interest, these companies would be expelled from the market, but not expelled due to the greater efficiency of others, but due to the greater monetary efficiency of the phantom wealth of the financial market. Inefficient companies must be eliminated from the market due to the competition of other better ones. If a company obtains profits, albeit small ones, it is because it has managed to survive and if it has done this, there is no reason for the company to disappear. Only technological innovations made by groups of intelligent men and women, by brave and daring people, will make capital goods increase efficiency and the weakest would be eliminated from the market.

There is not the slightest concession in Bernácer’s words to a bland or bureaucratised socialism.

His final words could not be blunter:

‘After interest has disappeared as a way as a way for capital to access the fruits of other’s labour, labour will obtain the entire product.’ A word was missing in his writings, which should have been: …their entire product.

23.11. Marx and Bernácer ¹⁴¹

I have not set forth all of Bernácer’s work yet, especially if readers do not know his central body of work, including his criticism of Carl Marx. He said that Marx was in a vicious circle: The value of merchandise is measured by the labour it costs to obtain it and, on the other hand, the cost of labour is determined by the merchandise that workers consume. This is not the point I am most anxious to emphasise, but rather the similarities and differences between Marx and Bernácer. Deep down, they both had a moral concern based directly on the cold analysis of the economic mechanism and indirectly on a type of biblical mental relic.

From the outset, Marx analysed capital, just like Bernácer, as it really is: factors of production that are, above all, accrued labour. It is the labour of others that is used by those who own it, capitalists, to their benefit. But it is the others who, owing to the strange curse of the capitalist system, make it possible for a small few to obtain profits and live off the labour of others. And Hebrew Marx, son of an ancient race born from rigid ideas and morals, felt extremely bad that, with men expelled from heaven on earth, there were some who did not earn their bread through sweat… their own sweat.

Bernácer was worried about the opposite, about the formation of capital that the speculative market makes impossible. Social morals pursued him. What is born from labour must return to labour. This is where morals and economics become threads in a single fabric. It is bad that some live from the work of others, but it is even worse that this singular fact leads to misery and poverty. Not only living without employment and living from the labour of others is bad, but what is worse is that this possibility leads to workers not finding employment in future periods. Here income-based theorists will belong to a bastard caste that, leaving heaven on earth, will steal from the gardens of the other caste, the workers, and will also throw salt onto their fields. The salt is the financial market.

Marx proposed revolution, workers attacking factories, Bernácer’s ordinary market, in order to take possession of the fruits of their labour. Bernácer wanted everybody to appropriate the fruits of their own labour and, to do so he did not suggest the collectivisation of the economic system, but rather the elimination of the financial market. When there is no salt to sterilise the productive garden of the economic system, he showed himself to be an enthusiast of the opposite of Marx’ idea: free competition in a free market economy without crisis and without unemployment.

23.12. The security of savings and capital

It is not enough that savings exist for the creation of capital and the existence of capital is not enough to assure prosperity, since while this capital exists in the hands of producers, it is nothing more than working capital. What securely clamps the economic apparatus into place is savings’ demand for capital equipment. When this happens, the part of working capital is then transformed into fixed capital in the hands of entrepreneurs, who put it to work. What a different conception of capital goods from the one that manufactures it, the producer, which is working capital, from the other (the very same capital) that is bought to put it to work.

Interest is not needed in the least for the system to operate. Without it, savings will seek profitability that need not be interest, but rather the productivity of capital that, with this savings, is acquired. The worthy compensation for savings, legitimately deserving and socially productive, survives without the existence of interest. This is because the savings that are created do not go to buy salt in the deceitful salt marshes of the financial market, but rather acquire capital goods, which help spread it like an enormous and prolific plough to harvest the production of national product. Through this procedure, savers will collect the monetary prize for their savings via the productivity of capital equipment, whose contribution helped gestate it. If you like, it is simple monetary remuneration via participation in profits. However, and in terms of real wealth, which is goods and services, society collects a greater quantity of goods and services whose initial consumption was renounced in order to save. This little magic trick is possible because capital equipment, which is accumulated labour, has been formed and financed by renouncing consumption.

Via this calm coming and going of savings, stability and peace are achieved that are free from the alarms that the gigantic casino of the financial market make possible.

The economic system and, in particular, savings will also need stability so that this free circulation is possible. Without this stability, which is monetary, savers will get scared and will take this savings to other activities, like greater consumption for example. Instability has a name, which is inflation, and destruction of savings has another name, which is decapitalisation.

Stability

Unlike life insurance policies, the economic system is not capable on its own of imposing an insurance policy on savings, in the sense that savers, during periods of inflation, recover their original savings and an additional part in real terms. The only life insurance policy is monetary stability. I will now explain the conditions established by Bernácer for achieving monetary stability and the procedures that violate it.

Due to its sunny clarity, one of Bernácer’s sentences seems blinding to me. He said that in the new system, savings will take the form of insurance. This is blinding to me because savings, followed by insurance, means that uncertainty is stripped away from this savings, which is one of the elements that most stops it from forming. And there are so many facets related to interest and savings, like the many sparkles of a diamond. I believe that scholastics established different explanations to justify a certain additional amount that must accompany the repayment of a loan, without this additional amount being called interest. One of them was the loan insurance policy. What did Bernácer mean when he spoke of a loan insurance policy?

To Bernácer, the loan itself is insurance that insures itself and this insurance is simply monetary stability. Thus he stated: ‘When all speculative elements disappear from capital, savings and insurance will have acquired a level of security that is unattainable today.’ (A Free Market Economy…, page 194) The fact that all savings is dumped into the system, demanding capital equipment, which is accrued labour, assures that it returns to the system and makes the system stabilise. Seen in this way, there would be no reason for the existence of monetary riots to scare off the natural destination of savings.

Keynesian fiscal policy and the accompanying monetary chaos, a disorder reflected in inflationary ardour, makes savers insecure and makes savings even more insecure, which will not be created. Thus, there will be more money in the system and possibly less capitalisation and less production. More money and less production is inflation.

Inflation¹⁴²

John Law had an ingenious idea that became fantastical to finally end up being tragic. The creation of money would not entail an increase in direct wealth, given that money (and gold itself at times) is not wealth, although there is no doubt that it helps create wealth and stimulate demand. This was an old mercantilist belief that was well founded. And it was also the idea of a projector (arbitrista), speculator and famous economist, John Maynard Keynes, who revived it. Bernácer said:

‘But the idea is so seductive (of creating money) that, despite it, it springs up now and again and this time it was not a projector, but a famous economist, who has returned to encourage this dreadful trick.’ (A Free Market Economy, page 195)

Bernácer wrote these lines on monetary marshalling on the other shore of the sea, in the serenity of his 72 years and the peacefulness of 1955, nearly twenty years after the appearance of The General Theory. These were the years when the skilful architects and agile bricklayers were finishing their task of creating the complex Keynesian labyrinth, pulling down walls, making this labyrinth stop being a labyrinth. To Bernácer, this complexity did not exist. He had a precise map of monetary flows where income circulated, splitting into two parts. This money is created by the system and is perhaps helped out by new money created to finance working capital.

The mechanism to crank the circular handle of the creation of money seemed like a barbaric measure to him, especially when the process for creating and distributing income is not known.

Even when the resources of the economy are unemployed and savings returns to investment, the result of the creation of money will be inflation. Starting here, Bernácer had to have imagined that readers did not know it so well. This may be the reason why he didn’t give a precise explanation of this inflation, given that if we continue with this same line of reasoning, the creation of money to finance working capital does not produce inflation, but rather stable economic growth.

I will now interpret the Bernacerian genealogy of inflation. This will happen in the setting of reality and will incorporate, or already has, the nest of the financial market.

23.13. The financial market

You may be tempted to think that the financial market, due to stealing resources from the ordinary market (net disposable funds), would relieve the ordinary market of inflationary tensions.

The first thing you may think is that, when monetary income multiplies (not necessarily real), an increase in income would go to the ordinary market and to the financial market. The two markets can grow simultaneously. But, when the financial papers sizzle when faced with the drive of the other paper, money, which are disposable funds, the advantages of the rising prices of these assets largely defeat the expectations derived from obtaining profitability or interest. What does it matter if profit is small, if it is compensated for by the incessant multiplication of prices, which make assets placed in speculation constantly increase? It is the era in which everybody earns, even the shoeshine boys on Wall Street, and everybody loses. Above all, stock exchange agents, brokers and real estate agents win and, to a lesser degree, entrepreneurs and other production agents.

What is clear is that if money is created easily and monetary income increases, the growth of the ordinary market will grow at a slower pace than its potential in full employment. Nonetheless, in the economic system as a whole, there will be more than enough money to occupy production, factors and income above full employment. Bernácer broke from quantitative theory a thousand times; everything is not a matter of the amount of money but where it is located. Neither is everything a matter of the speed of monetary circulation nor was his explanation of the variation of interest finished. He was truly interested in monetary flow between the two markets, the ordinary and the financial. Let’s see what happens in the latter case.

The unexpected increase of monetary profits, happening on the financial market, makes it possible for economic agents to increase consumption, who feel richer. Others will also believe that the wave of prosperity has come to an end. In any case, part of net disposable funds (D) will unfreeze and will be transferred to the ordinary market to be spent there. That is, they will transform into a demand for consumption.

And this is where inflation starts to be produced, as this greater consumption demand or greater amount of money in the hands of consumers, who want to exchange it for more consumer goods, are faced with insufficient supply. This means that there will be more demand for consumer goods than supply, with this disequilibrium compensated via rising prices.

We are forgetting that the ordinary market has grown below its full employment possibilities, even though there is money for everyone in the total system. When part of this money goes to the ordinary market, inflation is generated, which means more money running after less production.

23.14. War, demand and inflation ¹⁴³

The elder Bernácer approved of the young Bernácer from 1916. The experienced macroeconomist greeted the neophyte physicist from the Business Studies School in the province of Alicante. Since he was young, he acknowledged the conflict between the great technological capacity of economic systems, which he understood as a physics student, and the misery reigning in economic systems. Explanations derived from the unfair distribution of earnings were not enough. The first cold winds from Central Europe embarking upon war conflict reached Alicante in 1916. This was when human beings did not enthusiastically destroy and, oddly, the economic system was excited as well and recovered. War was a business. But it is a business and macroeconomic revival that is born sick, since it is accompanied by inflation. In several short and dense lines, Bernácer explained this pseudo fiscal policy and its consequences. It is a shame that he did not devote more lines to explaining this interesting process, and interesting to the economy, to his readers. These lines, albeit short, explained almost everything. The Bernácer who created his monetary theory in 1922 and looked upon the birth of The General Theory in 1936, with the Great Depression of the thirties in the middle, in 1955, some ten years after the explosion of the atomic bomb, was more than able to understand the sinister economics of war.

In war, the real economy, factors of production and the integrating zeal of technology are occupied with manufacturing wartime machinery. The ordinary market is occupied with producing boots for Thanatos and providing fodder for his horse. Logically, no consumer goods are produced. In terms of the well-known transformation curve (my contribution, not Bernácer’s), it changes direction in favour of wartime industries.

This untiring wartime oven is fed by monetary fuel. Through the issuing bank, the state obtains artificial means of purchasing power to allocate it to financing war supplies. Consumers are not renouncing consumer goods voluntarily, so that after the war they return them to the market via a consumption demand that was postponed. If this happened, inflation would not exist.

I want to stop here to distinguish spending on consumer goods from the consumer goods that are consumed. One can spend more and, despite this, demand and consume less if prices go up. With this distinction made, which greatly concerned Bernácer, I can continue by saying that consumers do not renounce spending less on consumer goods. And they may even spend more. But the ordinary market is very busy and exhausted and does not provide enough consumer goods, but even provides less, given that it is producing goods that can ironically be called wartime goods and not consumer goods.

Thus, there is a large monetary mass allocated for consumption that does not find the consumer goods it needs. The result is immediate and translates into inflation. I repeat, these two things are different, spending on consumer goods and the consumer goods themselves. If they are equal or matched, there is no inflation. In the first case or, in other words, spending is greater than consumer goods, they end up balancing out due to the increase in prices.

Wartime economy is established in the private economy that produces the resources demanded by the great war machine. But this private economy finds that consumption demands from the private economy attract it. This is when the ravenous and strong leviathan enters into competition, creating money to destroy private sector demand through its superior demand. And this greater amount of money and the rivalry between the two demands, public and private, is what produces inflation.

23.15. Taxes ¹⁴⁴

In wartime struggles, it is highly likely that all efforts will be little to be able to satisfy the needs of war. These needs, which are for death and the others that satisfy life, are not sated with money but with goods. The same capital is not money, but production goods. But money is the sign of wealth and consumer and production goods are demanded with money and savings are formed with which to demand the latter.

Bernácer asked himself about the meaning that taxes have as a complementary measure when savings were not enough to finance war.

The question does not rest only on the size of the financing sources, but also on their physiological meaning. Let’s see why. After a tax is created, individuals can decrease their consumption to pay the tax and keep the volume of savings the same size, a case which is unlikely. The financial needs of capital will not be altered; taxes will be paid, with the state finding means to be able to maintain its wartime capacity. Only the consumer goods industry will feel the effects but, as I said, this operation does not represent a great evil given that, on principle, the economic system is producing goods that are not for consumption during war.

But this does not happen, given that individuals do not stop demanding consumer goods and taxes are paid by decreasing the volume of savings. This drop dries up the springs that nourish the formation of capital. There is more. Savings are calculated by savers and they try to recover it in the future, since we all obviously save for the future. Part of their labour is delivered over time and space and, of course, in the economic system, so that it will later be returned. This is the payment of taxes that, coactively and reluctantly, is delivered to an impersonal entity without a direct and immediate compensation. This tax return that is much-touted by tax consultants is very indirect, hyperbolic, lacking stimulus for whoever paid the taxes, so much so that it seems like it is working for the devil.

And the question continues that has become a trench for bloody technical, economic and, above all, ideological fights… Does the state create capital goods? Is state spending productive? It is an astute and cynical fight, since theorists and fiscal engineers, who sport Keynesian muscles, say yes, confusing what should be with the reality. They fire blank cartridges. This is the difference from Bernácer, who believed in the market and its ability to create capital equipment. A tax, like public debt, decreases savings in the private economy, depriving it of stimuli and financing. The state disrupts the goods and services market, eliminating information, which is the great advantage of the market. The state also disrupts the money market and makes the economy lean towards collectivisation, like in community countries.

23.16. Gold and stability ¹⁴⁵

Like Keynes, the primary objective of Bernácer’s iconoclastic activities was the destruction of the golden calf. The theoretical destruction of this metal idol was necessary. Bernácer argued that economic stability is price stability. It is not the stability of a single price of a product, but of all of them, and stability is good because it eliminates the dense fog that hides the horizon of the future.

Gold is currency and represents the value of currency on the one hand and, on the other, it is a thing, a good or simply a commodity. And since it is a peculiar commodity, due to its constant production and supply, little variable consumption and demand, it is a commodity that is not suitable at all for establishing the value of currency. A commodity cannot be used as a reference to determine the value of currency that is conducive to being hoarded and whose value continually changes.

The antechamber for international transactions of wealth has another type of transactions, which are those derived from the traffic of currencies and foreign currencies. The determination of the national currency price by foreign currency affects the domestic price level that we try to stabilise. Similarly, domestic price variations affect the international exchange price of the currency. One way to avoid these perverse oscillations would consist of eliminating the gold standard and any institutional remainder of it, both nationally and internationally.

Domestic and international trade is nothing but the production and exchange of surplus production. The fluidity of exchange demands reciprocal clarity between what is bought and what is sold; the enemy of this clarity is uncertainty with regard to the future exchange rate of the currency. And it is strange that in order to assure monetary stability, they turned to a remedy, like customs duties, that eliminates the illness by killing the sick person. The control of import and export licenses, import taxes, trade limits, obstruct trade so much that they asphyxiate it. If uncertainty in currency exchange rates is an obstacle, among others, that makes trade difficult, like the tenuous fog that makes the ship of production move from port to port slowly, said artificial hindrances represent an anchor that drastically impedes the movement of trade.

Prices inform the market, producers and buyers of the abundance or scarcity of production. This information in turn reflects an endless amount of other information, such as needs, income, the market of factors, etc. The same market has the internal springs to provide, when there is scarcity, and eliminate when there is abundance, in a freely competitive market. This is how the ships of production, guided by the lighthouse of demand, supply the market with the intention of them using up their supplies. This activity, as old as humanity itself, is done via the trade route and the compass of prices. And bad trade can be assured when the anchor of the gold standard, albeit a beautiful golden anchor, drags the entire market to the bottom of the sea. The base of this anchor is gold that, through multiple efforts and all of them damaging, has assured a stable value. Price information was made possible by muzzling a slew of other prices, with which the market has lost its most precious value: information about prices.

Conditions in the world have changed, said Bernácer. One of the most noteworthy characteristics is the rigidity of costs, above all, those of wages that are stipulated by law. This inflexibility is transmitted to the economic system in general, placing different countries at competitive disadvantages. Then these countries try to defend themselves via obscure trade policies.

The great economic space ¹⁴⁶

One of Bernácer’s books entitled The Doctrine of the Great Economic Space has still not been mentioned. In reality, he was commissioned to write it and the book did not entail further developments in his work. It was a type of solitary island in the middle of his theory. Nonetheless, it did develop an idea that is already very old in economics. It was the idea of the great economic space that is so necessary for the specialisation of international labour, for production efficiency, for employment and for international wealth. Since before the mercantilists, this economic philosophy or doctrine has decisively proven its truth. The classicists theoretically sculpted it, until the agile and versatile genius of David Ricardo gave it an unsurpassable analytical precision. Bernácer said about technical progress:

‘Full fruits are not given without the advance of industry, of trade and of transport that, opening up the trade in each country to extensive zones of consumers, permit large-scale production, the only way that these technical advances can be applied with economies and true efficiency’ (A Free Market Economy, page 205).

This explains many aspects of the economy and of culture. With regard to the economy, this is because technical progress means production perfection, which translates into volume and quality in end production. If the artificial trade barriers establish economic mountain ranges that are impossible to cross by the caravans of trade, the beginning and end of this technical progress is frustrated. The opposite argument is worth considering. Without the great economic space, the world would turn into small kingdoms of factions or small pieces of a fragmented mosaic in which a multitude of economies coexist without relations. These limited markets lack monetary potential to finance technical progress. With respect to culture, this is because trade connections with other countries bring several goods that enliven cultural traffic. Economic wellbeing means an increase in material wellbeing, including leisure, which is a complementary good to cultural goods. And if a country is a large country, great in natural resources, population and in the density of purchasing power, it will be exposed to economic growth. This is the case that Bernácer cited in the United States, a country that, due to being an enormous market, demands production specialisation and mechanisation. Assembly line production implies that there is a great mass of consumers and each one of them brings their monetary ration to be able to demand these cars. Production, in turn, highly capitalised and technologically perfected, entails an increase in real wages. This is what Bernácer called: density of purchasing power. He was referring to the distribution of income that the industrial system brings along with certain homogeneity, without which the progress of Anglo-Saxon America would not have been possible. And I still have one question: How is this highly capitalised and technologically perfected production possible?

Due to savings and mass consumption. Regularly-distributed income spreads great purchasing power throughout the market, allowing for a great saving capacity in domestic economies. And this greater consumption involves high profits for companies, which increase their self-financing or saving capacities. By one route and another, savings is created in the system, permitting the great accrual of capital and technological improvements that are very necessary for mass production.

A small market involves less consumption, less savings, less accumulation of capital and less production. In other words: The sum of savings in two autarkic countries is significantly lower than the sum of savings of these two countries with trade. This idea was not original to Bernácer but, as mentioned, it is indeed a very old idea.

Summary of monetary regulation

The monetary policy or regulation expressed by Bernácer could be summarised in the following points:

1) All savings must be regularly employed in the formation of capital; in a regular period of time an amount of fixed capital must be formed that is equal to accrued savings. This capital must logically be equal to the difference between what is accrued through labour by economic agents and what is consumed.

2) There must be an amount of money in circulation equal to the total quantity of articles in stock or, stated differently, new money must strictly finance working capital and it will be eliminated after products are sold to users.

If these two measures are fulfilled, there must necessarily be uniform and regular advancement generated. This means that there will be no backward movements or changes in acceleration in short-term economic progress. This advance is owed to the achievement that all merchandise will always have its equivalent purchasing power. Stated more precisely, there will be demand measured in money that will be equal to the value of the supplied merchandise. This merchandise will be comprised of consumer and capital goods.

There cannot be inflation because all the capacity created by the creation of production inevitably returns to the market. There cannot be depression because demand cannot acquire more goods than those from current production, due to having eliminated the financial market. If this happened, there will be no more liquidity preference than the preference for the purchase of goods and services.

23.17. Emergency fiscal policy ¹⁴⁷

Economic theories, like oral traditions in primitive peoples, have been warping over time until reaching a final state in which the last story has nothing to do with the first. This happened to Keynes, and I do not know for a fact if Bernácer made this same mistake of criticising what Keynes did not even say. Bernácer read Keynes’ original texts and quoted them, but he also read the work of his followers, who whimsically distorted his body of work.

A large part of Keynes’ thought was created by emergencies and anxiety caused by emergency situations and, possibly, his end policy paradoxically conditioned the first, which was his theory. Bernácer was not indifferent to these situations of economic drama, which are also moral and spiritual. Measures for monetary regulation are institutional measures that have the mission of permanence. These measures are not operative for a violent situation that demands the coming together of imagination and speed.

Spending generously is one solution he said, although it has specific risks. If one spends generously, this money can finance working capital and will leave savings free to finance fixed capital. Even this new money, which is abundantly created on purpose, will finance fixed capital. Savings proceeding from income, which during depression is meagre, will generate insignificant savings. It is highly likely that new money will be lacking with which to finance both working and fixed capital.

An emergency situation does not give you the time to require Herculean reforms of the financial market until it is eliminated. So one must be resigned to its company. The creation of new money can replace disposable funds (non-capitalised savings) for the financing of that market. This will lead to a rise in the market prices there and a drop in financial interest.

Two advantages are obtained in this way. Firstly, savings will not be dismembered or divided to finance capital (S_k) and, secondly, to finance the financial market (S = S – S_k) but instead, the new money will aid the financial market, leaving savings free for the formation of capital. Either savings will go to the financial market and the new money to the formation of capital or both will go to both markets at the same time. Another advantage would be the drop in financial interest that would make industrial and productive profitability more advantageous comparatively. Bernácer said:

‘The only effective solution is to spend generously; the least important is whether this spending is useful or useless. What is important is that it is something where profitability is not measured, for example, on war and on weapons, where people spend without thinking about it, because it is a matter of life or death or national honour. Public works also fulfil the condition of distributing new income and their products are not on the market, although unfortunately the securities that have been used to finance them are…’ (‘The Financial System and Crisis’, article 1953-55).

These are ideas born from the extensive breeding ground of Society and Happiness; fertilisation from the ashes of the 1930’s depression; from Kayn’s Multiplier, Keynes’ busy and metal multiplier; and the light of death from the economy of World War II.

Criticism of John Maynard Keynes’ emergency policy

Keynes and the Keynesians provide emergency solutions for combating depression. There is a rumour that Keynes’ ideas, even when difficult to understand, were absorbed by the economic system that, in this way, pragmatically and tragically understood that war would represent efficient fiscal policy. It is only a rumour that undoubtedly is a storybook rumour. The simplest explanation is that war tends to be good business. The pre-war years, above all those at the end of the thirties, are those that economists take great pains in explaining as the failure of monetary policy. If that policy were not in place, it would have been hard for it to have failed.

Bernácer emphasised the incongruence of Keynes’ fiscal policy with his own ideas.

Credit money is a central point of Keynesian economic policy. I will quote, one by one, Bernácer’s comments about this controversial aspect.

The creation of money for immobilisations and public works and other expenditures entailed an increase in actual demand. Keynes, who theoretically and empirically knew of Kahn’s Multiplier of Employment, brought this precious trophy for his doctrine and for the policy he proposed. He still needed to explain how this money is collected to finance public works that would multiply employment and income. He explained it. It would be new money that would finance them, given that if they were financed with taxes, this would do nothing more than take it from some to give it to others.

It was also true that, if it was taken from those who could save to give it to those who didn’t save through taxation, total spending on consumption would increase, which in Keynesian ideology was definitely a positive thing, just as frugality was negative. This was another aspect he didn’t understand very well. If savings has the uncontrollable task of capitalisation (which Keynes said is born capitalised), then if capitalisation is demand for capital goods, he didn’t understand anything of the cited paradox.

A second measure would be to issue public debt securities. Its effectiveness rested in that it involved collecting idle savings and putting it to work. He didn’t understand this statement at all, since as mentioned, savings is born capitalised according to Keynes. The equality savings equals investment is his starting point and his death. Thus savings is born capitalised and thus it disappears through capitalisation and, if this happens, it doesn’t make sense to collect idle savings.

‘From here his idea, which has taken root among his followers, that what must be done is deliberately provoke a budget deficit that, covered by new money, would determine the formation of more capital in order to maintain the basic equation that he considered an intrinsic principle of economics…’ (The Financial System and Crisis)

It does not support the deficit measure well because its natural accompaniment of public debt securities entails the arrival of one more rank in the numerous armies of financial assets, increasing their supply and reducing their market price. This reduction in price would increase their percent profitability, which is the same as increasing the interest rate. And this increase would discourage private investment. Sometimes I do not understand Bernácer, since if we have decided that this deficit was financed with new money, we have put the remedy and the remedy for the remedy. Granted that there will be more securities, but also more money, which would make up for the supply of new securities through greater financial demand (of a part of new money). However, forced capitalisation through Leviathan’s iron fist of this new money materialising in public works would undoubtedly entail an increase in system demand. Let me explain. Deficit financed with new money means that part of it is capitalised by force by means of demand from the public sector. One part will be distracted via non-capitalised savings, which as you know are called disposable funds (D), which would go to the financial market as new demand. It would pair up with the new supply of public debt securities on this market that concerned Bernácer, having no reason why security prices should become depressed and make interest drop.

The issue of the type of money and the type of credit remains. In effect, a large part of payments are not derived from or necessary for consumer purchases or for the payment of workers, but rather for authentic capitalisation. The first can be replaced by a short-term loan that is quickly recovered. The second requires money with a permanent macroeconomic connection, which involves a very slow recovery. And this Keynesian policy of give and take can never replace, with the necessary flexibility and speed, the disequilibrium derived from the absence of money owning to the existence of the financial market.

Indeed, the development of credit by private banks, joined with the creation of money by the national bank, has entailed large economic disequilibrium, explaining the nature of the cycles. Similarly, the magic of pulling money out of a hat has not spontaneously involved the heroic deed of pulling out national product. The financial market must be eliminated on the one hand and, on the other, the generation of new money, credits if you like, to strictly finance working capital. In this way there would not be cycles, but harmonious progress. Isn’t this solution the enemy of deficit, due to considering the financial market inexistent, of creating money slowly and monotonously, in the Bernacerian style, the same way as monetarists in their purest scientific manifestation?

In the end, I understand that the Bernacerian emergency measure for resolving a situation of quick depression would be generous spending of money. And if it is spent on public works, even better. He stated that you don’t have to worry about the profitability of this spending. War is a terrible example, but he didn’t suggest it as a definitive fiscal policy, but rather as an explanation of how the productive system is started up.

To both Bernácer and Keynes, new money involves the subsequent capitalisation of this new money. Of all savings for Keynes; of part of savings for Bernácer. Of capital goods for the Englishman; of working capital for the second, given that capital equipment is working capital while it is not demanded with savings, and not with new money, by companies. And for both economists in short, new money meant a drop in interest rates, which stimulates investment.

However, what Keynes, and especially his followers, believed was that it was a final measure that must remain in the system, like an engineering operation that changes the structure of the economy based on closing some reinforced-concrete doors and opening others, while for Bernácer it was only a temporary measure. Meanwhile, this change in structures of the reinforced concrete beams of the economy, called fiscal policy, like reinforced concrete aspires to eternal permanence; for Bernácer, should be temporary supporting beams to prop up the building until the inside of the house is fixed and they can be removed.

Keynesian thought has two mistakes that are more theoretical than practical. One is monetary disorder, which is a disorder in the stability of interest. The other is the replacement of public capitalisation for private, which can never happen in an economy, since capitalisation is born from precise calculations and needs that can never be determined by the state. Public capitalisation would be like state capitalisation, which is an open method of totalisator and socialising state intervention.

24. The method

24.1. Introduction

For economics scholars, it is normal to find a geometric boundary of fine and precise lines where readers roam. The hypotheses and security with which they walk are frequently false. Signs and posters that are overwhelmingly clear point out the road to follow and the unfaltering mathematical car takes us with impeccable security to their destination. This is the economic road or style, where magic and even superstition play a role. The impossible is proved and the elementary is scorned because anyone could understand it.

Bernácer is a man on the street who, standing before the useless Baroque style of economics, confronted it, corrected it and even mocked it. Mathematics does not create concepts; the psychological in psychology remains and what is interesting are the economic acts that psychology finds. On the contrary, physics is revived, as economic acts are developed over time and space. And we always find the calm, powerful and permanent light of an essential and overpowering common sense that guided all his work. This Mediterranean light falls onto Keynesian gibberish, onto the psychological complexity of the Swedes, on the apparent simplicity of monetarism, onto the perverse elegance of microeconomics and wiped away everything that was pointless in these theories. What are useless are useless scientific complexities.

24.2. Economics and psychology ¹⁴⁸

Human beings feel needs, try to satisfy them and, indeed, do satisfy them. There are three operations or, if you like, psychological realities. But out of the three, which is strictly economic? Or I could ask the following question: are economic matters always psychological, or are they something more or perhaps another thing altogether? Economics, specifically macroeconomics, is a social science that lacks meaning for a solitary man. And what is psychological is one thing and what is social is another. Macroeconomics falls within social attitudes. And in the end, economics is an activity and not psychology.

The most elementary of economics is economic action and the most ancient economic action is the buying and selling operation. It would be a methodological mistake to start performing a study by placing ourselves on the magic footpaths of human thought; on the mental crossbow that comes directly before the arrow of action is launched.

This section will clarify using the previous example of Walras’ desired cash balance, which may or may not coincide with the effective balance. The latter means the money that economic agents actually have. What they want, which is something happening in their minds, may be less or more than what they have. If it is less, they will instigate actions to get rid of the excess and, if it is more, they will undertake activities to take possession of what is missing. In the first case, it is obvious that they will not just throw money into the street and, in the second case, they probably won’t steal it. Purchase and sales operations are the only ones that make economic sense and that entail operations to get rid of and acquire money. And these operations are what concern economists, not the choices that people make.

Buying and selling bring reciprocal and inseparable operations of buying and selling money for buying and selling goods. And even bankers that think they have excess liquidity will undertake activities to decrease it and those with too little liquidity will undertake activities to increase it. If they have excess money or liquidity, they will try to grant loans or financial investments via the purchase of financial assets. If they are short of liquidity, the opposite operations. What leads them to action is not thinking about money or goods, but rather the belief that they need to employ the money.

What is the advantage, then, of this psychology so valued by the Swedish School, and even by Keynes via his famous propensities, and even Walras’ cash balance? In reality, there isn’t one.

Psychological factors are not economic facts, although the operations emanating from this thought are. The fact that they come from thought does not justify confusing it with its effects, which are economic operations.

24.3. Thoughts on ‘ex ante’ and ‘ex post’ ¹⁴⁹

The Stockholm School has cultivated a peculiar analysis style for a long time based on two phases of time that correspond to two situations; one that happens in the mind of subjects and the other that really happens. They are the concepts ‘ex ante’, meaning forecasts and not actual results, thus happening in subjects’ minds, although we don’t know how they know what happens in economic agents’ brains. The others are ‘ex post’ concepts and to find out about them, you just need to see what happens. So, economic phenomena are explained by the contraposition of ex ante and ex post ideas. It is the same as saying that economic movements and economic facts are explained by the contraposition between them, and another thing we don’t know if it exists or not and if it exists, it is lost in human minds.

Why do the Swedes execute this strange method? Bernácer responded:

‘With the aim of proving that, if disturbances occur in the working of the economy, it is because the economic plans of men do not adapt to reality nor what is written about what must happen nor, naturally, what men think must happen…’ (A Free Market Economy, page 256).

Expressed more simply, the economy undergoes cycles because men make mistakes in business plans. The simplicity of this statement is a sin, since it is so simple to blame the cycles on entrepreneurs or on chance, according to Bernácer. And it is simple because they didn’t think about why entrepreneurs make mistakes in making their plans, when this is an activity in which prudence, skill, intelligence and, above all, experience, all come together to study and execute the plan. The Swedish statement is simple for the simple reason that it is past experience that determines the future, because entrepreneurs extrapolate their experiences towards the future, like a hiker who, having used a mobile bridge, tries to use it again to cross another river. And if they use the information, passing, for example, over the level or tendency of demand and, depending on this, they make their plans and they fail, the cause must be investigated in the irregular operation of the economy.

It is not so much about knowing the consequence of the failure of business plans, but the opposite. Why is the functioning of the economy irregular? This irregularity that makes the plans not be fulfilled. The blame for this Swedish affirmation, which more than mistaken is anodyne, rests in making it float in the air, in what they suppose is happening in entrepreneurs’ minds.

The large part of companies, run by businessmen, are not the consequence of brainy plans made by qualified technicians, but rather the entrepreneurs’ instincts, of intelligent improvisation. To the contrary, large companies execute extensive and ambitious plans that, no matter what happens, are done like the elephant that starts walking and there is no one to stop it. Although he did not expressly state it, it seems like Bernácer referred here to what he understood as independent investment made by the large bureaucratised company and the induced investment of income carried out by businessmen. This is also an investment induced by business animal spirit (to use one of Keynes’ phrases).

And it has importance given that the first, although mistaken in its plans, its investments tend to be so large that they make the plans, despite everything, be fulfilled. They make the system itself. These investments create employment, income and production and make the system recover. The second responds to the echoes of the economy. The first is the ‘ex ante’, owing to the expanse of its plans, forcing things to happen; the ‘ex post’ in the second case. The difference between ex ante and ex post explains the irregularity in business operations.

As a whole, economic phenomena that occur, or ex post, as is logical, are born from psychological factors (Why not speak more simply of desires?). And the real result of what occurred is a net result of intentions, wills, etc. of the set of subjects that are set against each other. A group of people will want liquid cash balances and others will want it less. Similarly, some will have more liquidity preference than others. In Walras’ case, like Keynes, each group will execute operations to satisfy their preferences. Bernácer said that these operations are what he was interested in. They are purchase and sales operations of goods and/or financial assets and depending on whether these actual operations –not mental ones– are larger than others, we will interpret the economic facts. I will say that supply is greater than demand or that… etc.

Our economist said that the good road is found by applying good metrics to the concepts of supply and demand. Above all, it is about eliminating tautologies that are useless to economic lines of reasoning. What is the demand and what is the supply? Are they this at each of their points or only at the point of equilibrium where they coincide? And, thus, is there a concrete situation at which the sale and purchase have been made? And if this is true, what meaning do the other theoretical and infinite points have that define supply and demand?

As you can see, Bernácer belonged to a special caste of economists or scientists. I dare to think or intuit that he was very similar to the English empirical philosophers, Human and Bacon, and their predecessors like the Scots, Scoto and Ockam, from whom he satiated the sensuality of reality and the daily wonders of experiments. These philosophers fled from the doughy deceit of serious adjectives, of general terms and plurals and preferred to manoeuvre with simple words, the least vague words possible, which represented clear things or facts. In the economic arena, each thing has its precise term and each action has its functional explanation. Things and actions are developed in space and in time and are physical parameters.

Bernácer was deeply irritated by theories that rested on psychological facts, in useless playing with time, in pointless scientific essence. This is how he turned around against Keynes’ acolyte, Hansen, and quoted one of his sentences (A Guide to Keynes): ‘Sterile “ex post” equations that explain nothing’. Bernácer responded: ‘Ex post equations are equations that are related to facts and given the coincidence that all positive science has been built using these equations, and anything else doesn’t deserve to be called science; it could only be called metaphysics…’

So, the research method and conclusions were criticised, which means that he said they were pure imagination and only existed in the overhead cloud of pure research; but this is not science or reality. I think you will be able to see clearly that specific aspects of economic science are vulnerable to Bernácer’s criticisms.

What does not exist can be proven, but not that which is non-existent. I will continue with the reasoning of the curves or functional relationships between supply and demand. I will adopt the line of reasoning to savings and investment curves. According to conventional theory, equilibrium or equality between savings and investment is a truth. It carries the rigid and inviolable law of the simplest maths. It is a simple accounting matter. The savings-investment identity is a reality and a theory. Is there anything better for a theory than reality itself?

Since they are two functions that are each represented by their respective curves, there will be a point where they cross. Now, an identity is an equality where two quantities can never be different ever. However, if they need to be represented by two functions that are different, which is not only possible but necessary, since one represents savings and the other investment, then how can it be an identity? This means that if it is an identity, two functions cannot be established for the two sides of the equation. It would be a single function that would determine their point of equilibrium or equality at any point. As we will know the immediate response of economist readers, we will be safe from Bernácer’s irony when he said:

‘True that the pretension is set forth that they are imaginary at all their points, except one: at that point that is touched by the magic wand of the other, which can be any of them. This is incomprehensible to me at least.’

I will dare to expand upon Bernácer’s comment. If savings is a functional relationship, it is clear that there are different levels of savings for different levels of income. There will also be different levels of investment for different levels of interest. At any of the points at which savings and investment do not coincide, savings and investment both still exist, only they are not the same, so what happens then?

Incongruity is what happens. If I call investment effected demand (not demand to be effected) for capital goods made with savings, they clearly cannot differ, but they do differ, for example at point B, and savings exists at that level, then it is non-capitalised savings. It is clear that non-capitalised savings cannot be called investment. Figure A shows another graph with different relations, where the same reasoning can be applied.

But at that distance (figure B) located well to the left and to the right of point A, I will give it the name inventory investment, I_u, and they will be either negative or positive. The equation obviously fits, but badly. It is forcibly matched. Is it only a question of a name? No. Inventory investment is not that investment and what interests us, besides the familiar question of method, is to know at this moment –since the analysis is static– where savings is located when it is not capitalised? I also want to know the meaning of negative inventory investment and, furthermore, where the flow of income has gone that has made it possible. In the case of positive inventory investment (+ I_u), how do we know how to differentiate what has been intentionally caused by entrepreneurs from what has been due to weakness in demand? And it is not a whim to know this, since therein lays the short destiny of production and employment. Weakness in demand must be calculated by the entrepreneur, which means that he made an error in his plans.

And we return to the beginning, which should not be sought in ex ante analysis. Why did the entrepreneur err? This is the question to ask. Another question is the following. If investment is in working capital, we have an evolution of working capital that will have moved from primary supplies to others in process and very possibly to already-finished products. Is this planned investment called investment or not? And if there is a machine constructed with savings there, I know that to Bernácer this machine is not investment while the entrepreneur has not removed it. And it is not investment, as I never said it was. It is planned investment on the one hand –in working capital– and, on the other, it is an unplanned inventory investment, since it is in stock. The same thing is both calculated and not calculated. So what are ex ante and ex post methods good for? For almost nothing. Ex post, or reality, should be of interest, as well as facts and knowing monetary physiology in depth, which is also a fact, and the anatomy of the economic organism, which is a piece of information or, if you like, a fact. We want to know why disequilibrium is generated at each moment and at each moment, whether there is disequilibrium or not, when investment has not taken place, or when it has been excessive, where the fraction of income and savings is located, in default of this excess.

24.4. Mathematics ¹⁵⁰

Bernácer was a positive scientist. His education derived from physics made him disposed to a specific understanding of the economy. Physics came of age with the application of mathematics. It seemed as if God had created beautiful math formulas in his spare time and created the universe to fit them. This would undoubtedly be the thought of a Platonic physician. The science of physics took on the precision of certainty with Galileo, Newton and Laplace.

However, Bernácer, perhaps more concerned about knowing what was happening in the great arena of economics, was not so enthusiastic about mathematics. He wanted to know about the laws of economics and their mechanisms which were unclear, in his opinion. I don’t believe that Bernácer specifically renounced using maths, but rather the method. ‘First you have to know what is happening and then the formulations will come.’ In physics, things like weight, mass and movement are found out and then measured and finally expressed in laws. In economics, you first have to know what an economic action is, the role of money, what investment is, etc. and then the formulas will come.

24.5. The acceptance of mathematics

Bernácer could not escape the great currents of economic thought, including their prejudices and successes. Before 1950 and probably even before 1930, there was a bitter rejection by marginalists of the excessive use of mathematics. In this sense, Bernácer didn’t resist this criticism, which was also encouraged by the excessive psychological tendencies of the marginalists. However, in the mid-forties, when the floodgates of math and macroeconomic know-how had opened, when the crisis of the thirties had seen the awkward overcoming of the puberty of economic science, is when what happened to physics in the 15th-17th centuries now happened to economics. And what happened was that reality could be expressed mathematically.

Furthermore, it seemed like what was expressed mathematically is true and what is discovered with mathematical language was even truer. Bernácer knew from the beginning that mathematics could not create concepts or explain economic relationships. After grabbing onto the concept with a strong hand of understanding after discovering and comprehending the laws, then he would move on to the mathematical explanation. There is a lot of truth in Bernácer’s statement, above all during a scientific era like the last decade of the century, in which the math fantasy made it possible to do the impossible –creating concepts and discovering realities. However, it is also true that after discovering a truth and the forces that tie it together, they must be formulated in order to set forth the mathematical equation that explains it all. And if, as I believe, Bernácer made a wide-ranging and compact contribution to macroeconomics, I do not know why he did not establish the simple math ratios. He surely would have provided a solid scientific wrapping to his theory.

Bernácer did have some education in maths and his body of work, like Keynes’, was not lacking great feats of exact science. Thus, the formulation of his theory was not difficult. Proof of this was when Keynes expressed the mathematical relations of his concepts, Bernácer understood them almost instantly. So it was easy to explain demand and first-degree disposable funds as dependent on income, similarly to second-degree disposable funds. Maximum disposable funds, or authentic disposable funds, will depend on interest. Investment as dependent on interest, the financial calculation of interest and of infinite income, etc. are formulations that he could have easily expressed. And Bernácer, the business studies student that he was, did know about advanced business calculations, which are nothing more than slightly more complex maths, but elementary in the end. I do not know why he did not deign to give examples or concepts accompanied by specific formulas. It is as if he a priori ignored them.

In The Interest on Capital, he spoke repeatedly of calculating interest, of the present value of perpetual income, of Böhm-Bawerk’s calculation procedure, which he criticised, without thinking it might be polite to readers to give them a small formula in a footnote.

Furthermore, Bernácer’s body of work, page by page, written clearly and simply, is a crafty mathematical work. I dare to say that it is a math work written by a physicist, who in his task of simplification, didn’t even write numbers but letters, but not letters as symbols, but rather letters that formed words, sentences and orations. At other times, it seems like his words were written so that a secret mathematical friend could easily do the math formulas.

Bernácer’s theory did not lose its strength in the slightest due to the absence of mathematics; it just didn’t shine with the expository elegance that characterised advanced sciences.

24.6. Accounting and statistics ¹⁵¹

Bernácer’s future profession was in accounting. He studied for this and thought he would work in this field. Bernácer was not a physicist or an economist, which were major accidents of his life, just as accounting was a forced story of his existence. On small pieces of paper in his parents’ small shop, he saw them doing the accounts from the time he was a small child. His parents, wanting to see their son have a better life, wanted him to become an accountant. Thus he studied accounting and this field educated his scientific senses.

Accounting was a good companion because it provided him with a method of observation and, above all, it doesn’t lie.

Bernácer thought a statistical source in economics would have to come from the hand of accounting, which didn’t finish in dry maths. He believed the keys to economic information needed to be sought therein. And, since he didn’t start from falsities but rather from observed realities, the consequences obtained would give economists peace of mind.

Bernácer used accounting to criticise the fundamental equation of macroeconomics (S = I). Even the accountant, said Bernácer, must be asked for something more than accounting. He must be asked the origin and consequences that were accounting equalities. Accounting, the inseparable friend of order and harmony, is also a friend to names and the homogeneity of names. Every account is an account and a concept. Cash is cash, banks are banks and potatoes are potatoes. Investment is investment, and the account for unsold fabric or radios is something else and shouldn’t be called inventory investment. And economists, like accountants, must be asked in which account this part of liquid savings must be that has not been transformed into capital.

Bernácer would say that they are in another book at another company: the financial market.

Long before the first works on national accounts were published (40 years before the French publications, according to Savall), Bernácer had proposed the application of accounting to the country’s economy. In any case, Bernácer did not come to macroeconomics from accounting. He arrived by instinct and perhaps observation. He did not glimpse the macroeconomic city from the classrooms of the Business Studies School, but standing in front of the till in his parents’ shop, where he mechanically repeated an ancient operation: buying and selling, exchanging money for goods and services or the supply and demand of money. Accounting, that would later inhabit his mind, was a valuable statistical technique for him.

Bernácer, after spending several years in his scientific workshop cutting and polishing the pieces, concepts like investment, fixed capital, working capital, savings, disposable funds, etc., then gave them symbols: D, A, E, H, Z, z, M, etc. He also carried out the fine labour of assembling these pieces in that workshop. This assembly required a plan: the theory of disposable funds, which he had in his mind since he was young.

Bernácer’s theory, despite what I have just said, is a theory that is mathematically connected. However, it uses very simple algebra that does not go beyond addition and subtraction. Remember that income is equal to production and that the depletion of disposable funds in two periods entails their spending on one hand and, on the other, their equivalency in the decrease of sold production.

R = P      A – A’ E – E’ etc.

Bringing together Bernácer’s different works and harmonising their formulation, you can see that he faithfully followed the fundamental nomenclature and structure of his equations. However, sometimes it is difficult for me to execute an overall summary. He frequently explained this or that in few words and it was difficult even for a reader like myself to follow him, a student familiar with his works for many long years. This may be due to the fact that there was nobody following his work step by step and asking him to explain it. I am sure Bernácer would have taken the time in that case to create a manual of his body of work.

Henry Savall said that he applied maths more than the majority of economists between 1920 and 40. This is probably true. Savall also said that The Functional Theory of Money from 1945 could be considered econometric because of the technique displayed in the models. This is also true. The functional theory is a compact theory like a house of bricks. Each variable is related to another, with the type of relationship also explained. The Functional Doctrine of Money explained the variables and the plan for the construction of the model. The fact that Bernácer did not directly and formally perform the mathematical construction is not important, given that the structure is there. And it is certain that the skilful and precise intelligence of a mathematician could have created them.

24.7. On the mathematical method ¹⁵²

An article that will be cited in the following section about the metrics of the economy was published in the first issues of Arquímedes magazine. Now we are in the fifties and the waters of economic science are back. With the marginalism of the twenties overcome, criticism on the excessive usage of maths has also been overcome. These are the years of the green harvests of mathematical analysis, grown in the fertiliser of manure from the Great Depression, from Keynesian seeds and vigorous farmers like Samuelson, Hansen, Robinson, etc. Economic science demanded the use of mathematics. Its institutional usage was also demanded for managing the national macroeconomic Accountancy accounts, always one of Bernácer’s obsessions. And he could not resist this current. In the golden calm of old age, he understood it. This is also when the Spanish Society of Applied Mathematics was created along with other illustrious mathematicians like Pastor. Arquímedes magazine would echo the concerns of its founders. Bernácer’s article referred to the method and reflected, more than his longing to apply luxury mathematics, the need for cautious and precise realism in all formulas. You will soon realise this caution.

Maths were born from needs felt by humans and the children of practice. Satisfaction of human needs obligated the exchange of goods and also, subsequently, with the intervention of agriculture, the need to calculate areas. Hence, trading villages and peoples were the ones who first developed mathematical calculations.

Speculation for speculation’s sake appeared when the heavens of intelligence were free from the body’s bondage. Newly created mathematics was later energetically developed, outside of the true north of merchant calculations. And with maths, other sciences like astronomy, astrology, philosophy…, which were created and formulated by men who I could say were somewhat free.

Mathematical science, child of economics, had broken all types of empirical dependence and had progressed light years, to being considered the model for all of sciences. Furthermore, economic science was erected as the queen of the social sciences, due to its capacity to be proven with sophisticated mathematics and having solid research support in statistics.

Economists were delighted to have discovered instrumental mathematical sizes. They quickly and mechanically imposed the task of applying it, forgetting reality. Reality was what was observable and, from this, what was applicable.

After supplying data on the supply and demand curve, the price of equilibrium was determined. On this point, the long thread of mathematical dexterity can be unravelled, but one can never advance beyond what has been observed. Supply and demand depend on an endless number of factors that form the spool of the human spirit: desires, needs, customs, etc., technology. And mathematics cannot investigate an issue that is not its own, but rather takes data that economists find out to then extend them to the corresponding calculations.

Supply and demand curves are very easy to use. This great comfort consists of a continuous line that is drawn seriously and easily by researchers and professors, steadily and without moving the chalk from the board. No matter how small the goods are, their sizes are discrete and the drawing will entail the chalk shaking voluntarily in their hands ¹⁵³. Bernácer said that the same thing happens in physics, the quanta are small, but in the end are discrete magnitudes. These supply and demand curves, unreal, are currently explained with a great display of mathematical fanfare being used in econometric works.

They were born in a romantic era of economics and Bernácer believed they were novelties that had to be rejected. To start with, they only exist in researchers’ minds. The same thing doesn’t happen with curves, which relate the volume of gas to the pressure it is submitted to. They do exist and will always exist whenever the experiment is repeated. This is the great criticism launched by our physicist, who knew perfectly well how to use maths and physics efficiently and correctly in economics, since they are born in observable events that actually happened. To the contrary, many economists use mathematics with a cemetery full of illusions. They are only hypotheses and cannot be verified by proofs.

Another issue that is specifically macroeconomic is value metrics. In Newtonian physics or classical physics, there are a multitude of measurements and measurement units for measuring distances, areas, volumes, pressures, temperatures, densities, lights, etc. In economics, a measurement unit exists and it is called money. However, it is a measurement unit that is quite difficult to manage, since it shrinks and expands. And if this happens, the values of the things being measured are hotly disputed. The matter becomes even more complex if we are trying to measure the value of the currency itself. Its resolution is as complex as trying to measure the value of the linear metro with the road.

There is a single question. Goods are exchanged for goods through a unique buying and selling operation that links two wishes through an element that both parties want: money. The value of money will measure the value of the good being measured. If the value of money depreciates, this means that it will have depreciated with respect to the thing for which it is exchanged. Thus, more monetary units will be paid for the same good. If money increases in value, less will be paid for the same good, meaning that more goods will be needed to pay for the same quantity of money.

All of Bernácer’s caveats, none of them original, lead us to describe a psychological and scientific profile. His scientific precision was extended to the limit and his common sense and way of viewing reality totally lacked the impulses of romanticism and scientific ebullience. Reality is how he saw it, how we all see it, and nothing more. It is a physical fact that is explained in time and in space. If it doesn’t exist, he didn’t explain it. There will be no more demand or supply than the demand already made, since it coincided with a supply that was also exercised, since it is clear that there will be no demand without supply. All the rest, everything that is imagined, is not real, no matter how much mathematics seasons it.

He did not reject the usage of mathematics, but he asked for common sense in its use, nothing more. As a physicist, he knew about how physics advanced and what physics underwent through the utilisation of exact science. And as an economist, he knew about the fertility of its suitable utilisation. Only that physics exists forever, even in physical-mental experiments; but this is not so in economics.

The psychological and mathematical in liquidity preference¹⁵⁴

The same thing happens with psychology that, along with the improper application of mathematics, weaves a useless web of scientific complexities, making it impossible to simply observe reality.

Psychology and mathematics weaken economic theory, as well as being at odds with each other. The most typical case is liquidity preference. This idea of preference was mathematically imposed and expressed, said Bernácer, and thus M = L (r). The birth of this scientific formula tried to explain the real and psychological birth of preference, a basically mental activity. However, acting to fulfil this preference is an economic action.

They are uncomfortable with each other from the time they are made to depend on or function directly from a psychological factor, something a mathematician would be unlikely to accept. Here, the mathematician will have to supply data in order to operate with them. Among these data he will have to find the measurement of the liquidity preference, which is highly unlikely.

And what then did John Maynard Keynes propose? He carried around the intention of explaining interest a priori and invented liquidity preference a posteriori to justify this explanation. But liquidity preference depended on interest.

To Bernácer, this methodologically imperfect communion of liquidity preference and interest is an error in analytical procedure. So after criticising it and at the end of his life, he tried to explain it with his typical common sense. Thus, he said:

‘Liquidity preference, like desired cash balance, is one of the most overcomplicated methods of expressing the old concept of supply and demand…’ (A Free Market Economy, page 291).

It is clear that there will be desires for more or less money or cash balances, but obviously no one will throw money away if he has extra and people aren’t usually going to steal or counterfeit money if they need more. Instead, people buy and sell goods to stock up or get rid of money.

Buying and selling activities, as old as humanity itself, don’t consider psychological activities (although not rejecting them) but true data. Here is where their complexity begins and ends. And it is clear that not only goods are bought and sold, but also the busy and illegitimate papers of financial assets that provide the allure of interest and profits. People buy and sell for this allure. If goods are not bought and sold, then financial assets are bought and sold. In the first case, prices are born and, in the second, the market price of securities and interest. So much psychology and mathematics was not necessary to explain what has always been known.

The method and counter-method of identities¹⁵⁵

In any positive science, after breaking free from its philosophical womb, which is where almost all of them are born, you need to try to define the concepts and relationships that are laws, in the apparent anarchy of observation. Sometimes this anarchy is not expressed, but seems overwhelmingly and apparently regular. This is the case of astronomy, which analyses the movement of the planets. The periodicity of days, seasons and years express this regularity. But tautologies are never created and are actually fled from, because they are an illness of scientific vision. The equalisation between mass and energy in physics is not a tautology. These figures are an equivalency and are manifestations of the same thing. Economic science, perhaps trying to excessively imitate physical sciences and become their brother, has created tautologies in order to be analysed with mechanistic rigor. This is the case of quantitative theory.

Supporters of Fisher’s Equation state that it expresses an undeniable ratio. Bernácer said that they are right and maybe even too right. Said equation has overwhelming evidence and overwhelming emptiness.

If the total amount of all transactions A is divided by the price index P and we call this quotient T, then (A/P) = T, and it follows that A = PT. If we divide A by M, where M is the amount of working capital, then A/M equals V, which represents the circulation speed of money. The value of transactions divided by the monetary mass necessarily indicates the circulation speed of money, which in turn can be expressed by saying that, so much monetary mass circulating so many times will give you the value of transactions: A = MV, then MV = PT. I am not trying to improve or criticise this equation, but the analysis method. For better understanding, I will provide a quote by Bernácer:

‘But while the condition for an equation to be true is that it can be reduced by logical transformations to an identity, the condition so that it will be fecund is that the unknown is provided according to variables that are independent of the unknown. This condition is not present in Fisher’s Equation. In the market problem, the unknown is the variation in price levels and, in all cases, the variations of market terms…’ (The Functional Doctrine…)

The truly dangerous action is if consequences are derived from a truth that one assumes is clear by itself but actually is not clear. Then one proves it through logic, which can then let people fall into serious dangers. If A = A, then MV = PT, which tells us that what was bought is equal to the value of what was sold. And thus we have not moved forward.

I spoke before of Bernácer’s cognitive task when talking about mathematics and psychology. Now in the case of tautologies, I will speak of scientific health, which prescribes that we must feed ourselves from many things that, arriving from outside and combined with the organic participation of science itself, move towards the creation of more science or more body. It will never be a question of feeding on itself. The cannibalism of a cannibal that eats himself, if he doesn’t die, which would be natural, would not permit him to reproduce.

The aforementioned dangers lead us to believe that things are tautologies that are not. For example, mathematicians say that production income and production are quantitatively equal, but their natures are different, just as spending on consumption and production in consumption are different on the one hand and, on the other, savings and capitalisation are different.

Equality is a relationship between two figures that are equal in a hypothetical field and in specific circumstances. This doesn’t happen with an identity that is the same thing looked at in a mirror. Thus, equality demands the link of a mathematical equation, which is pure logic or, in other words, entails proof. Identities do not require a proof. Equality carries itself to different roads on the diverse road of reality. Identities are railway stations that establish a starting point and an arrival point, but don’t let you go anywhere.