The first half was my post on Value added and public spending. Growth only occurs where the value of what is produced is greater than the value of the resources that have been used up during production. There was a time when everyone understood that, even economists. Alas no longer. But there is a second element that matters, and that is the price mechanism. Unless you have a functioning price mechanism, where market prices reflect relative scarcity, you cannot tell what anything actually costs.

Which brings me to this: I, Mechanical Pencil: Why a socialist economy can never work. There you will see why the price mechanism matters and how crucial it is that the prices in the market are actually set by people who are trying to earn a living from what they sell. This is what I say about the price mechanism:

This is so important that almost nothing is as crucial as this for ensuring our prosperity continues. Without a functioning price mechanism, in which businesses set their own prices for themselves without government involvement, an economy absolutely will not work. Unless businesses are permitted to set their own prices based on their own production costs and customer demand, you are guaranteed to live in poverty.

The buffoons who “manage” the Victorian economy are creating disaster. It is why the most important element in the Victorian budget dealt with mental health: ‘Very targeted’: Acting Premier defends mental health levy.

Business owners have warned the levy set out in Thursday’s budget is a tax on employment and will hit those in the retail, hospitality and tourism sectors hard.

“These are very targeted, appropriate, well-thought-out revenue initiatives that impact less than 5 per cent of employers,” Mr Merlino said.

“Many of those are multinational companies. It is very targeted, and in terms of the benefit to businesses, right across the state of Victoria is massive….

The acting Premier rejected the notion that Victorian businesses – which were badly hit by the state’s second wave of the coronavirus pandemic caused by government failures in hotel quarantine and contact tracing – were being penalised for the state’s mistakes.

He also said a $4 billion budget blowout over the past two years on Victoria’s Big Build project had no impact on funding mental health services as the two were in different funding streams – the former in capital spending, and the latter on service delivery.

Looneys everywhere.

The video is on Value Added – which I did many years ago as part of my economics course. Much too long to watch, but it’s there if you are interested. Alas, value added is virtually no longer even mentioned inside an economics course, and even when it is it is never dwelt upon.

This mishmash is how value added is defined at Google. This is about as close to what you might get in an economics course today, and then only if they are discussing the National Accounts. It’s never mentioned as part of macro generally.

1. the amount by which the value of an article is increased at each stage of its production, exclusive of initial costs. “the proportions of both total output and value added fell”

2. the addition of features to a basic line or model for which the buyer is prepared to pay extra. “value-added digital technology”

Value added was once properly understood as the difference between the cost of the resources used up in some production process and the revenue stream generated by selling the products that have been produced. It was about creating economic growth and higher living standards. Government spending is almost never value adding, and I include the word “almost” since occasionally, very occasionally, governments actually create more value then they use up. There is no such government anywhere in the world today.

I am reminded of all of this by the release of the Victorian budget and the shamelessly shallow response in the media. Treasurer goes all in on the Robin Hood approach to funding.

If you ever needed proof of how confident the Andrews government is of winning the next election, look no further than Thursday’s budget.

Handing down his seventh budget, Treasurer Tim Pallas resembled Robin Hood as he hit developers, big business and affluent home buyers with higher taxes to fund billions of dollars in spending on mental health, hospitals and schools.

Boosting taxes is rarely popular at the ballot box. But next year, the state government’s tax revenue will increase 13.2 per cent, with an average annual increase of 6.9 per cent over four years.

Justifying the tax grab, Mr Pallas said he was simply asking Victorians who had done well out of the pandemic – successful businesses and those lucky enough to hold on to their jobs – to help those who had suffered the most. It’s a strong argument.

This was once known as eating one’s seed corn. This is entirely using up your capital base with no replacement in sight. This has gone even beyond Keynesian moonshine, where they used to pretend that the problem they were solving was caused by too much saving. I guarantee you Australians are not saving too much, nor is anyone else. Now it is just spending for spending sake.

And let me thank Rodney for finding this video and alerting me to its existence on Youtube.