These are so awful that it’s terrifying. A few of the best known individuals from history dressed up in modern drag. It’s that this is exactly how it would be that makes this so frightening.
Clothes maketh the man (and woman)
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Monthly Archives: May 2013
Doing its level worst
A government is supposed to do its level best, as best it knows how, to improve economic conditions and make the world a better place. It’s not supposed to do this. From The Age front page today:
Labor ‘booby trap’ set to enrage Coalition
Lock in unaffordable increases whose costs G&S will never have to find the money for and then leave the next guys to drown in the debt and deficits they have left behind. The worse the economy inherited will be, the sooner the ALP believes it can return to continue its wrecking program.
The worst government in our history. Since they know a surplus is what needs to be achieved, since they continually promised to deliver one until it became impossible, that they are doing the reverse only demonstrates an inability to rise about politics and think about the national interest.
“Adhering to the outdated ideas of thinkers such as Mises, Hayek and Friedman”
Having looked at Ben Eltham’s uninformed analysis of my article which was published in the Australian Financial Review in 2010, in which he had stated that I was “adhering to the outdated ideas of thinkers such as Mises, Hayek and Friedman”, I thought I might also put up the article I wrote then. I still think the RBA is far and away the best central bank in the world and I say this even though they have brought official interest rates to their lowest level since 1959 (or so I think I read). It is a reflection of their judgment on how dead in the water the Australian economy is. My AFR article was however published in November 2010, a more hopeful time for the economy when government plundering was at its height. And for you Keynesians out there, the analysis I use in this article is the same Wicksellian analysis Keynes used in his Treatise on Money.
It was pleasing to see the RBA raise interest rates, and the economy will be all the better for it as well.
The trouble with all that free stuff governments like to give out is that it isn’t really free after all. The true cost of government spending comes out of our collective wealth in a process almost invisible to the naked eye, with the frequent aim of governments to keep it as invisible as possible.
Australia is amongst the few economies where official interest rates have been rising. Nor is it a coincidence that the Australian economy has been amongst the better performing economies of the world. Raising rates has been an essential part of the reason why the economy has performed as well as it has. It is a cause as well as a consequence of our relative economic success.
The rate of interest is the price paid for resources made available for investment. When people save, they may think what they are saving is money but this is in many ways an illusion. They have produced goods and services, received an income for their efforts but chose not to buy everything their income would have allowed them to buy. Unspent income is saving, and to the individual saver these savings come in the form of money.
But that is to look at things from the perspective of the individual saver. From the economy’s perspective what savers do is leave for others the goods and services they had produced but did not themselves consume.
They have transferred to others, for a price, the right to use the output that has been made available by their decisions not to immediately buy as much as their incomes would have enabled them to.
They have postponed their own purchases until a later date but in doing so have provided an opportunity for others to make use of those unused resources to build productive assets through investment programs of their own.
Without saving there can be no investment. All investment is the product of saving and however much or little there is, you cannot invest more than what you have saved.
But it is not just private firms who seek access to these savings. Governments, too, absorb huge amounts, taking these in as tax revenues and then borrowing more to finance projects of their own.
Rising rates are a reflection of the supply and demand conditions for private savings. What’s left after the government has taken what resources it has decided to use up is what’s left for the private sector to divide amongst itself.
The advantage the government has in getting its hands on the savings of a nation is that when it borrows lenders know they will get their money back, governments get to print money when they cannot borrow all they want, and they can run deficits without immediate concerns about where the money to repay their debts will be coming from.
But here is the trick. Borrowing almost invariably comes in the form of money. A nation’s real savings, on the other hand, come in the form of actual resources which can be applied in building investment projects.
Of money there is an almost endless supply. There is as much as a government is prepared to create.
As to the availability of underlying real resources, the supply is finite and strictly limited. The core task for a central bank is to make sure the flow of dollars entering an economy is matched by an available flow of real resources the money can be used to buy.
Too much money relative to the resource base of an economy and we have inflation. It is this the RBA is determined to stop.
Interest rates are rising because the government is using resources even before they reach the private sector. The government may be able to provide school halls, install insulation and now the NBN. But if you think you are getting all this for free, you should think again.
The RBA is continuing to raise rates because the government is taking up domestic savings more rapidly than we are able to generate those savings through productive activity.
In this economy at this time it is the government that is the single most important cause of rising rates. The RBA is only doing what it can to ensure the resources available for investment are properly priced.
The pressure on rates therefore remains upwards and will continue to remain upwards so long as the government continues its relentless take up of our productive resources.
But if you don’t like higher interest rates, there is no point in blaming the RBA or for that matter the private banks. It is the government that is absorbing our national savings and raising the cost of capital. So long as it continues to do so, the pressure on rates will remain.
As a side note, The Age this morning ran a front page splash on how the banks are gouging their customers based on the economically illiterate notion that the central bank sets the rates for everyone else.
Why you should study economics at RMIT
As it happens, I teach one of the finest introductory economics courses you will find anywhere in the world. Not standard by any means, it is based around my text, Free Market Economics: an Introduction for the General Reader. If you would truly like to understand how an economy works, you could not do better, in my view, than to read my book and if you can, to take my course. The reality is that you could not do better than to study economics at RMIT.
For all that there is a wildly absurd blog post by Ben Eltham, a self-confessed Keynesian and economic know-nothing, that comes first up if you google my name that goes under the heading, “Don’t Study Economics at RMIT”. Mr Eltham, it seems, wrote this in 2010. Must have been expecting a wondrous recovery although I must say he was a very optimistic soul to have still harboured such confident beliefs as late as the 6th November that year.
The kind of certainty found in Skidelsky (and Eltham) has drifted out to sea in the last few years. There are a few diehards of the Krugman variety but with economic matters getting worse just about everywhere, it will be a while before we again hear about the return of the master in relation to Keynes. I am told my students do read this post but interestingly they have never brought it up with me. What I describe to them in theoretical terms is exactly what they can see for themselves everywhere they look.
The notion that Keynesian policies have worked anywhere at all since the stimulus programs at the end of the GFC can not be sustained for a moment. They have been a disaster everywhere they were tried with the American economy amongst the most disastrous. The likelihood of any kind of serious recovery even now is remote. And it’s not because of some financial crisis years ago but because of the stimulus and the deficits and the debt that are a direct result of Keynesian theory. Mr Eltham, a self-confessed non-economist, totally without formal training in economics, is in absolutely no position to comment on any economic matter other than as a matter of wishing things were true that are not. You would think that by now he would have the decency to apologise but the possibility is as remote as his ever understanding the first thing about how an economy works.
Which is better?
Listening to the unctious and ignorant comments by Swan and Gillard talking about the economy is an actual health hazard for someone such as myself. But here is the question: Which would be better, today’s level of spending and our present deficit or public sector spending cut in half with a deficit twice as large? I don’t know your answer but I do know mine. It’s the growth you want, which will only come about if we manage to cut the dead weight cost of this useless politically driven public spending.
Everyone thinks of the Great Depression having been brought to an end by the start of World War II. Sure, sure. Most of the men in their 20s and many of the women were drafted into the armed forces so disappeared from the labour market. And while this may have ended the unemployment, it hardly created an economic boom since the war was characterised by shortages and rationing as well as massive deficts and a rise in the level of debt.
World War II ends with the soldiers mustered out of service and only some of the women who replaced them in the workforce returning to the home. This is 1945 and in the United States only four years before there had been 14% unemployment. And what does the American President do? He cuts spending and balances the budget. The result: the beginning of the fastest growth in world history which continues from 1945 through until the 1970s.
Make your economy productive and it will create the growth that eliminates your debt. Continue with public spending and extenstions of various forms of non-value-adding welfare expenditures one upon the other and our economies will continue to struggle. But the public spending addictions, shared by both the politican class and their constituencies will continue to edge us towards the cliff unless some kind of economic sanity can return.
Alesina and the Keynesians
My article, “Alesina and the Keynesians: Austerity and Say’s Law”, has been put up on the web by Springer. You can find it here.
Austerity and Keynesian economics
Oddly, could the real beginning of the Keynesian counter-revolution begin here in Australia? It’s one thing to stop spending because you have run out of other people’s money. It’s quite another to understand the problem of valueless public spending which will lead to a very focused attack on public waste.
Adam Creighton has a wonderful article in today’s Australian, Nothing austere about Europe’s fiscal policies which truly goes to the heart of the problem. He begins:
IN 1946 George Orwell famously pointed out how politics degraded and abused the English language for the sake of political ends. The same is true in economics. The word austerity, used to describe European and even US fiscal policy, has been a clever ruse by opponents of measures that may cause any reduction in the size of government.
No objective, sane person could describe, in a relative or absolute sense, fiscal policy in Europe or the US as austere, a word stemming from the Greek meaning harsh or severe.
‘The word austerity entered into the conversation once it became clear what a disaster the debt-financed stimulus was going to be,’ says Steven Kates, an economics lecturer at RMIT University, referring to the failure of repeated and colossal budget deficits to resurrect economic growth across advanced countries, almost five years after the end of the global financial crisis.
‘Those who support public spending and deficits prefer to characterise those who oppose them as wearing a hair shirt, rather than wanting to reduce public waste and have governments live within their means,’ he adds.
Government budget deficits in Europe are still up to twice as large as they were before the GFC – when no one described them as austere – and are contributing to already vast public debt burdens. Far from the ‘savage cuts’ of Wayne Swan’s imagination, European governments have reduced only the rate of growth of public spending. Even in Greece, a country with little population or economic growth in recent years, spending is still greater than it was five years ago.
Yet ‘mindless austerity’ has become a favourite phrase of the Treasurer since he dumped his promise to restore the budget to surplus this financial year. With a tsunami of costly spending promises on the horizon across disability, health, the environment and parental leave, it appears unlikely the budget will return to surplus soon – and without a change in attitude, ever.
OK, obviously I was one of the people he spoke to when he put this article together. But I speak to lots of people who never seem to get it. This is different. He sees the point and explains it exactly right which I don’t think you can do unless you understand it. And while it has felt somewhat strange to discover what I have discovered ploughing this furrow since the 1980s, I would still make the statement that there is no other way to find our way out of the economic problems we are in without a return to pre-Keynesian economic theory. First let me get back to the article and then let me continue:
Adam Smith’s dictum that what is prudent for households is never folly for governments infuriates economists who remain deeply wedded to the theory of John Maynard Keynes, who said public borrowing and spending, however wasteful, could revive moribund economies.
The giants of economic history before then – Jean Baptiste Say, John Stuart Mill and Alfred Marshall, for instance – all railed against the idea, which for Mill was an absurdity: ‘The usual effects of the attempts of government to encourage consumption is merely to prevent saving; that is, to promote unproductive consumption at the expense of the reproductive (investment).’
You won’t find the problem explained in any modern text based on the idea that aggregate demand drives an economy forward, which as it happens constitutes virtually all modern texts at the macro level. You certainly cannot make sense of the economic problems we have in the absence of a focus on value adding activity (i.e. the supply side of the economy) as the actual driver of economic growth. These concepts were, however, the foundational principles of the economics of Smith, Mill and Marshall, and indeed for all economists of the classical school prior to Keynes. But with the publication of The General Theory, which argued that public spending on anything at all will prime the pump and get an economy moving again, the notion that spending to create growth and jobs had to be value adding evaporated from the curriculum.
For me, schooled in the classics as I am, it was as obvious as a cloudless day that the stimulus could never achieve its ends. For virtually the rest of the profession it was not. Why the difference? I base my understanding on the classical theory of the cycle; they base their understanding on Keynes. That’s it. Nothing else. Anyone can do it. So why don’t they? Because the grip of Keynesian demand management has since the 1930s had the profession locked into the most destructive form of economic analysis, a form of analysis every classical economist understood as fallacious to its very roots. So all I can do is direct you to the pre-Keynesians. Here is a primer on the classics.
After that read either the first edition of Haberler’s 1937 Prosperity and Depression or if that doesn’t appeal to you, you can try my own Free Market Economics. But unless we can get out of this Keynesian death grip, our economies may never fully recover. We’ll just get used to slow rates of growth and limited improvements in our standard of living, in just the same sort of way the Japanese have done since their own Keynesian stimulus of the 1990s wrecked the world’s fastest most vibrant economy of the time.
Dangerous economic ideas
Niall Ferguson, historian, buys in on the anti-Keynesian debate with the totally superfluous comment that Keynes developed his theory of the short run because of his absence of children and etc. And what about all those fathers of six who thought that Keynesian theory was the answer to our economic problems? I just wish people would concentrate on the theory and leave the rest alone. Ferguson has apologised but so what. One more distraction away from what really needs a bit of discussion: the harm that Keynesian theory is doing and the reason why his theories are so economically unsound. The rest is trash.
Here is an article on Ferguson’s claim, “Sex, Economics, and Austerity“. The one useful bit that I did pick up was this:
As Mark Blyth has shown in his new book Austerity: The History of a Dangerous Idea, the power of arguments for austerity come from the fact that they invoke the traditional moral system of the West, a way of thinking that is rarely questioned because it seems like common sense. Implicit in austerity are all sorts of moral adages: no pain, no gain; suffering builds character; thrift is virtue.
Austerity: The History of a Dangerous Idea! I fear life is too short but I suspect that if I run across it on a shelf I will pick it up just because. We are ruining our economies before our eyes by this madcap spending but it’s austerity that’s the dangerous idea. Well so far as dangerous economic theories are concerned, I came first with my Dangerous Return of Keynesian Economics in Quadrant in March 2009. Four years later and I wouldn’t add a word or change a comma.
What’s missing here?
The Australian Conference of Economists has listed a number of areas of interest for special examination at this year’s meeting in Perth. Notice anything missing?
Researchers are invited to submit original papers that examine factors that influence ‘Beyond the Frontiers: New Directions in Economics’. We welcome the submission of papers that further develop this theme. We believe the theme offers considerable flexibility and could be used to report research findings or discuss issues related to areas such as:
- GFC / Euro / Banking Crisis
- Resources Boom (Energy Crisis)
- Federal / State Financial Relations
- Chinese Economy and Impact on WA / Australia
- Experimental and Behavioural Economics
- Climate Change / Environment
- Monetary Policy / World Bank
Of interest to me, but to few others apparently, is the dismal policy failure of Keynesian economic theory. And as long as the belief remains that the world’s economies are suffering from the after effects of the financial crisis rather than the Keynesian stimulus that followed, the longer it will be before we start dealing with the actual nature of the problems we have.
The anti-capitalist mentality
I spoke at Latrobe University today on the anti-globalisation movement about which I had hardly ever given a thought. But to start off I began with this letter to the editor from yesterday’s Australian:
QUITE simply the rich get richer and the poor get poorer – and fewer people on the fringes seem to care about suffering, just so long as the next piece of fleeting fashion or new technology is available at an affordable price (“Rags, riches and rubble”, 6/5).
History does repeat itself. Think back to the industrial revolution. But this time around the phenomenon can be described in one word: globalisation. Unlike the industrial revolution , it is easier for most people to forget the true origin of the goods that enable them to live comfortable lives. For many of us, Bangladesh may as well be on a different planet. Out of sight, out of mind. So much for the level playing field that we are force-fed by our political leaders as being the answer to all our future problems.
The usual lefty stuff. Something happens in some business somewhere and a label is attached to the process which can be used to demonstrate that capitalism is an intrinsic problem that must be suppressed. So to match the story of the horror of the building collapse in Bangladesh I discussed the Triangle Shirtwaste Factory fire in New York in 1911. Industrial accidents are a tragic reality but to use it as a reason to end the slow slow progress of material development in the third world is a specialty of the comfortable who will never be afflicted by the sudden disappearance of the market system. Its deterioration will affect them over time, just not right away.
But of all the sanctimonious nonsense, the Colombian girl who told us of the good that was being done in her home country by the Marxist guerillas and how Colombians peasants were the happiest people in the world struck me as sensationally inane but merely proved my point since all I did was discuss the anti-capitalist mentality that remains so prevalent.
Law of Markets 