Judy Sloan’s column from The Australian today goes under the heading, Public spending won’t fuel the growth engine. I mention this on the same day as I have received word that my paper on Mill’s Fourth Proposition on Capital has been accepted for publication.
First Mill. In 1848, John Stuart Mill in his Principles of Political Economy included his four propositions on capital which not only never challenged in his lifetime, the fourth, that demand for commodities is not demand for labour, was described by Leslie Stephen in 1876 as the “best test of a sound economist”. It was the pons asinorum of classical economics, the divide that separated those who could understand economics from those who could not. But what is remarkable is that since that date in 1876, not only has there not been another economist to have embraced this statement in full, but it has been challenged by some of the greatest names in the history of economics – Marshall, Pigou, Hayek are just some amongst a quite extraordinary array of economists from every side of the economics divide who have tried to explain what Mill meant. To my astonishment, I am literally the first person since 1876 who has argued in print that what Mill wrote is literally true. It is the best test of a sound economist.
And what the proposition meant, as the words plainly state, is that buying non-value-adding goods and services – and here the issue is public spending in particular – will not lead to increased employment because it does not lead to economic growth. A Keynesian stimulus is therefore doomed to fail, evidence for which has been accumulating at an astronomical rate since 2009.
Judy in her column has brought forward evidence from a paper published in the UK whose subtitle is, “Government ‘investment’ does not equal growth” and written by an economist by name of Brian Sturgess. Here is Judy’s conclusion:
If the government is intent on spending even greater proportions of GDP on infrastructure — which was already ramped up under the Labor government — it must ensure that only projects for which the benefits far exceed the costs are approved. Spending money on infrastructure is no silver bullet to achieving economic growth and better living standards. Let’s just hope the audit commission has taken on board some of Sturgess’s conclusions.
Yes, let us hope our government has taken on these conclusions which once went under the collective name Say’s Law.