Ever wonder why real wages are falling?

A messy fight is looming over who will pay the huge extra costs of the Metro Tunnel, with the Andrew Government reportedly warned the total blowout of..

The Metro Tunnel is Victoria’s very own NBN, although there are quite a few others like it but not quite as draining although very bad as well. There was the desal plant, and the billion spent on the Miki Card, getting rid of level crossings in the city, others too, but this one is big big time. Infrastructure spending at its absolute stupidest. The above story is a snippet from the H-S this morning.

There are economic idiots everywhere, but the biggest ones are the ones who think government infrastructure projects like this are good for the economy. Even the Premier is beginning to see what a black hole this is. Construction everywhere you turn in the City, whole city blocks turned into construction sites, billions of dollars being spent, and not a dollar’s worth of actual value-adding output anywhere to be seen. We are looking here at immense costs, for which there will NEVER be a single cent of profit ever earned.

Keynesian economics was once only about getting an economy out of a recession. Now it’s about massive and permanent deficits coupled with massive and permanent forms of public waste. Now they have overrun their original costs to $3 billion, but there is more than just the tunnel that comes with all of this. Victoria is bankrupt in the same way that economic theory is bankrupt. I was just up in Sydney and they are about to finally start running their idiotic streetcars down George Street. That, too, will never turn a dollar of profit, which means it will never ever repay its costs in the benefits it provides. Pure waste but presented as a public benefit. My biggest query is always why isn’t this obvious?

Modern economic theory is a disaster for anyone whose government believes any and all of it. Public spending has its role, but is a drain on an economy’s productivity. Oddly because of the Keynesian nature of the National Accounts, all of this will show up as growth in GDP even though it is nothing of the kind. And there will be many people employed, except not employed on projects that will add to the economy’s net level of real production. They are not value adding. They may create a dollar’s worth of value, but for each dollar of value created it will cost much much more than a dollar. Why does this make sense to anyone?

Economic policy for idiots

Here’s a misleading headline: Interest rate cuts causing pain for no substantial gain. The reality is that interest rate cuts have done substantial harm to the economy, but at least people are beginning to see just how harmful these cuts have been.

The letter challenges the central bank’s strategy as it struggles to meet its inflation target and follows a groundswell of disquiet with the direction of monetary policy — including from former treasurer Peter Costelloformer RBA governor Ian Macfarlane and a trio of Liberal backbenchers.

The cuts have also sparked alarm for reigniting house prices in Sydney and Melbourne without boosting economic growth, or household or business confidence.

Mr Costello — Nine chairman — said record low interest rates and tax cuts had failed to stimulate consumer spending, which had hit advertising spending.

It’s this modern macroeconomic junk science that never ever gets anything right. I will again mention my Free Market Economics, Third Edition An Introduction for the General Reader where in its final two chapters sets out the flaws in Keynesian monetary policy as clear as you might like. Keynesian economics has evolved into the modern form of socialism, giving blanket approval to public spending, massive deficits and incompetent monetary policy. Think how incredible it is that the approaches taken to fix the Global Financial Crisis have never worked in a single instance in any country in the world. For an abbreviated version of all of this see The Dangerous Persistence of Keynesian Economics which begins with these two quotes:

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
—Steven Kates, Quadrant, March 2009
Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009

Great question. For the answer see my text. I might also mention that I have just sent off to the publisher my “Classical Economics for the Modern Economy” but that won’t be around till next year. But these central bankers and Treasury economists do only harm every time they touch the economy. And just for the record, infrastructure spending, beyond a minimum – and we are well beyond that minimum – will only make things worse.

The basis for value

For a Keynesian, value is determined by demand. For classical economists it is production costs in relation to scarcity that determines the exchange value of a good or service.

More to the point, however, do they mean value in use or value in exchange? Unless you know, both the question and the answer are meaningless.

And as for the answers given, the one thing that never determines exchange value are consumers by themselves. Ever seen a supply curve?

Classical economics explained by someone who thinks classical economic theory was the most accurate economic theory ever devised

I have finally submitted the manuscript for my Summary and Translation of Classical Economic Theory into a format that can be read by a modern economist. This is part of the note that went with the submission.

I think and hope I have now completed everything I need to do to submit my manuscript. I have adjusted the title, but am still looking for something that really says in compact form what I mean, which is that if you want to understand how an economy works, you will have to return to the economic theories of the classical economists. That is what the book is about, plus also being about how to understand a classical text since one must first work through how economic terminology has changed since classical times. If you read the word “saving” as a Keynesian does, you will not only not understand a classical text, you will also not be able to make sense of how an economy works.

The embedded notion that is almost explicit in the text is that only by understanding classical economic theory can one understand how an economy works, which also says, and the text discusses, that you cannot understand the operation of an economy using mainstream theory, any version of socialist economic theory, New Classical economics, Austrian economics or, for that matter, the economic theories of the early classical economists, such as Adam Smith and David Ricardo.

It is only with the publication of John Stuart Mill’s Principles in 1848, and then from within his last edition published during his lifetime in 1871, can one discover the actual operation of an economy. What that theory is no one any longer knows, other than a few specialists who number fewer than 100 across the world. And then, amongst those, there is oddly only a single one who believes that Mill’s text is the lost ideal of economic theory. I perfectly well understand how ridiculous it is to believe any such thing, but I do. The classicals laid it all out before the arrival of the Marginal Revolution which turned economics from the supply side to the demand side. But what has completely collapsed economic theory as a sound means to make sense of an economy was the advent of the Keynesian Revolution in the decade after the publication of The General Theory in 1936, where not only was everything overturned, but a new set of technical terms was introduced whose use makes a classical text all but incomprehensible to a modern economist. You will need my text to understand classical economic theory. You cannot do it on your own since you won’t know either the meaning of the terms or the presuppositions that underpinned the theory.

Our economies have managed, but only just, to maintain the role of the entrepreneur in directing our private sector firms, but the pretence found in modern macro that public spending – G – is as productive or as value-adding as private investment – I – is tearing our economies down, with no understanding of what is happening, least of all among our economists. That capitalists have been transformed into crony capitalists, who are now among the major welfare recipients taken from the massive tax revenues collected by governments, is a large part of the problem. What to do is hard to say, but first the problem needs to be recognised. That is what this book attempts to do.

Forcing people to pay other people’s bills

A comment from Medicare for All at Powerline.

When we reached a point that it became acceptable to force people to help pay the Dr. & hospital bills of others it resulted in a huge loss of freedom for Americans.

The talk about ensuring that we don’t become a socialist country would be funny if it were not tragic because it’s already here. And has been for a long time.

It has become accepted that Americans owe other Americans financial assistance in paying for their medical care. It is one thing to assist with the 2% – 5% of the population with chronic medical conditions and limited financial resources. It is entirely different to subsidize everyone’s medical expenses. And likely those most harmed are the middle range of financial resources. The poor receive more than what they pay and the rich can afford more than what they pay.

A huge opportunity was missed by the GOP in 2017 when they did not Repeal Obamacare completely.

A book on economics for people who want to understand how an economy actually works

Part of a note I wrote to a friend about the completion of my manuscript on classical economic theory.

I will also just mention that I have finally, only yesterday, finished my manuscript on classical theory. I will send it off to the publisher on Monday. For your interest, this is the Table of Contents.

Chapter 1: The Purpose of this Book and Why Only I could Write It

Appendix 1: John Stuart Mill. “Of the Influence of Production on Consumption”
Appendix 2: The Dangerous Persistence of Keynesian Economics

Chapter 2: The Background
Chapter 3: The Keynesian Revolution and Classical Theory
Chapter 4: Understanding Classical Presuppositions, Terminology and Concepts
Chapter 5: The Classical Theory of Value and the Marginal Revolution
Chapter 6: Keynesian Theory Overruns the Classics
Chapter 7: The Basis for Keynes’s Success: Why Keynes was Able to Succeed
Chapter 8: Classical Theory and the Role of Government
Chapter 9: Austrian Economics and Classical
Chapter 10: An Overview of Classical Economic Theory

An accurate title still eludes me. It needs to say in concise form something like: “Economic Theory Reached its Peak with the Economics of John Stuart Mill and has since been Subverted Firstly by the Marginal Revolution and then by the Keynesian Revolution Leaving Behind a Useless Husk of Empty Nonsensical Theory that Provide Virtually Nothing of Value in Framing Policy”. If you know what I mean. It also strikes me, now that I have looked over at the Table of Contents, that I don’t there mention Say’s Law, but you need have no fear that the book leaves it out.

And this is a note to another friend telling him the same news.

I have finished off my manuscript on Classical Economics for Idiots which cannot be the final title, unfortunately. It is far and away the best thing I have written as I judge things. It will also be the last thing I ever write that will be as polished as this one is, since I found this such a grinding process. Here, at least every time I thought of some addition that needed to go into it, I still had the will and strength to do the work. On the printed out draft I handwrote the following which I think is true:

“There is no doubt that if you read the book you will be convinced there is something to what is said. The challenge for me is to get you to read the book.”

What gives the book its value is that I have classical economic theory as the frame against which modern theory can be judged. Other than Austrian or Marxist theory, there is no other frame of reference available. I have now thus added a third frame of reference into the mix and in my view, the most accurate frame of reference from which to see what’s wrong with modern theory since classical theory was the theory that existed when capitalism was new and fresh and where an understanding of how a market economy operates reached its peak. I can only say how happy I am to have finally finished the manuscript. Now I have to work out, as I wrote above, a way to get others to read it. Getting them to believe it will be a bridge or two too far.

Even a bunch of spaced out zombies can outperform the government

You knew that already, but here’s some more evidence: The Ontario government lost $42M selling cannabis in the last year.

Ontario Cannabis Retail Corp. lost $42 million in the latest fiscal year, according to newly released public documents.

The provincial Crown corporation tasked with online sales and wholesale distribution of recreational pot reported revenues of $64 million for the year ended March 31, 2019.

However, Ontario’s consolidated financial statements show the OCRC, which operates as the Ontario Cannabis Store, racked up expenses totalling $106 million during the period.

The comments section on this post is filled with the same: What We Call National Health Care or Single-Payer Is a Crime Against Humanity. Think of this:

Sure. Let me relate a small story, indicative of what happens when government gets into health care:

Half of my engineering career was in Biomedical Engineering. In about 1989, I was the designated engineer for a Neonatal Intensive Care Unit (NICU) at a top-ten teaching hospital.

My highest failure item was the fan motor for the infant incubators. I might go through a dozen in a week. Here’s the thing –

I could buy a replacement for that fan motor for $5 at Radio Shack. Except government and regulatory agencies mandated that I buy this product from an “authorized vendor.”

The cost of the motor from them? $225. That is forty-five times what it would’ve cost if I could have gone to Rac-Shack. Forty-five times the cost, for the exact same item.

So if you ever wonder just how you’re getting screwed by the healthcare system, well, there’s an example.

And now they want to manage the system that turns on the lights and heats our homes. Freezing in the dark is what comes next.

A market-based success story

Australia does have as near as I can tell the best healthcare system in the world. The other three I know best are the Canadian, the British and the American and they are not as good as ours. To understand the reason it has turned out so well goes back to the early days of the Fraser government (some detail here). Whitlam had put in Medibank/Medicare which was a socialised public-servant run system like the English. Fraser having promised to end Medibank of course found he could not (see the fate of Obamacare for a recent example of how hard it is to remove a freebie), so made one small change. He allowed private insurance to continue with a private sector system sitting side by side with the public. So rather than it becoming socialised medicine – if Labor had had its way, our system would have ended up like the English with no private hospitals – we have and retain possibly the most private-sector-driven government-funded health-care system in the world. You want to go to the doctor, just go to any doctor who will take you in. Want to roll up at a public hospital, they will treat you for free. Private insurance will sometimes buy you a shorter queue and perhaps a better doctor, but will also help subsidise the public system if you are treated in a public hospital.

What has also made a major difference is that the amounts paid into private insurance bring additional funding into the health-care system overall. No central government would be able to tax to the extent needed to keep the level of funding as high as it is, where we have both the public and the private system working in tandem. And there should be no doubt that if the result of buying private insurance meant that for privately-insured patients to get treated in a hospital they would have to pay additional amounts to what they already have paid in the Medicare Levy and their private insurance, that private insurance would virtually disappear.

So to Richard di Natale and his nonsense tweet having been treated in a public hospital:

Yet another Medicare success story.”

He typically shows his incomprehension of what has made the Australian health care system work so well, and that is the free market inclusion. That as a member of the “elite”, he would in any case have had the best there is, even in the disastrous Cuban medical system which the left pretends is the model system but may provide its ordinary citizens some of the worst health care of any country in the Americas.

BTW that chap lying in bed in the photo above is myself having been in hospital for the last few days and having been under astonishingly excellent treatment since the end of September for what might have been a major problem but which now looks under control. My gratitude to the staff at the Alfred here in Melbourne, and let me also put in a special good word to Gigi (a South Indian name in case Leslie Caron and Maurice Chevalier come to mind). Really as thorough and comprehensive a treatment as I could have hoped for.

Hayek v. Mises

Sinclair’s post and the John Papola video on Mises v Marx was a really interesting but I doubt will have the same penetration as did his early video on Keynes v Hayek. This continues to provide some kind of ground for understanding the economic policies of our time, and the disasters of a demand-side approach to managing an economy. Central banks are now the major carriers of the disease.

As it happens I am in the last stages of completing my manuscript on Classical Economics and what is needed for a modern economist to follow the classics, which studying modern theory makes virtually impossible. This is the draft opening to the chapter on Austrian economic theory for your interest. Comments welcome.

Although Carl Menger initiated the Marginal Revolution with the intent to find a unified theory of value, the names now most closely associated with the Austrian School are Friedrich Hayek and Ludwig von Mises. And while both are seen from a distance as almost one and the same, up close they were quite different from each other. There are many ways to highlight their differences, but here their approaches will be compared through their attitudes to John Stuart Mill, since both specifically identified themselves with the classical liberal tradition.

Where it matters is in the social aims an economist might hold. The essence of Mill’s approach to economic theory was to attempt to answer the question, what ought to be done to create the greatest amount of good for the greatest number of people? Uppermost in his mind was the question of what can be done to raise the living standards and economic wellbeing of the individual members of the community. Yet while he called himself a “socialist”, it was the kind of socialism that by today’s standards would have had him grouped among the most market-oriented political theorists of the present day. In particular, he would find modern macroeconomic theory, and the policy matrix that accompanies its Keynesian basis, completely false. While he saw a definite role for government involvement in the economy, the basic framework was that everything that can be left to the market should be, while also understanding that not everything can be left to the market. He saw a clear but limited role for government regulation.

Hayek’s approach is similar to Mill’s (and I would say my own). Hayek discusses the economics prior to the publication of Menger’s Principles of Economics in 1871, noting that this was only “a mere twenty-three years since the great restatement of classical economics by John Stuart Mill (Hayek 1992: 96-97). He continues:

“It is important for proper appreciation of Menger, that we do not underestimate what had been achieved before. It is misleading to think of the preceding period, 1820-1870, as simply dominated by Ricardian orthodoxy. At least in the first generation after Ricardo there had been plenty of new ideas. Both within the body of classical economics as finally expounded by John Stuart Mill and even more outside it there had been accumulated an array of tools of analysis from which later generations were able to build an elaborate and coherent structure of theory after the concept of marginal utility provided the basis of the unification. If ever there was a time in which a quasi-Ricardian orthodoxy was dominant, it was after John Stuart Mill had so persuasively restated it. Yet even his Principles contain very important developments which go far beyond Ricardo. (ibid.: 97)

The point was that Mill had provided much of the raw material that the marginalists had been able to consolidate into a more unified whole. Hayek stops to state that

“It is indeed quite difficult to understand how a scholar of the penetration and transparent intellectual honesty of John Stuart Mill could have singled out what was so soon felt to be the weakest part of his system for the confident assertion that ‘there is nothing in the laws of value which remain for the present or any future writer to clear up; the theory of the subject is complete.” (ibid.: 98)

That Mill, the greatest utilitarian scholar of his generation, had no interest in making utility the core of his own theory of value may have been a conundrum to Hayek, although it might also have suggested that utility had been considered by Mill but then rejected. Yet the core point here is that there is no question that Hayek had a profound and extremely high regard for the economics of Mill, self-proclaimed “socialist” though he may have been. This is opposite to the attitude taken by Mises.

The economics of Mises is astonishingly detailed and profound. But what makes his approach so austere is its narrow focus on economic issues almost entirely outside the social and political arena. Hayek, like Mill, was continuously thinking through how economic conditions could be improved using as many arms as policy as possible, while always understanding the limits that are placed on the various possibilities available by the laws of gravity of economic theory which forbid various approaches to be adopted. Mises, on the other hand, thought that only an absolutely rigid adoption of market-based economic theory was acceptable. And unlike Mill, who even in 1848 could see how economic policies would be constrained by popular pressures to alleviate economic pressures and to use governments to temper economic outcomes, Mises accepts no compromise with the hard-edge views of how a market economy must operate. Here he discusses his views of John Stuart Mill in his Liberalism in the Classical Tradition (Mises 1985).

“John Stuart Mill is an epigone of classical liberalism and, especially in his later years, under the influence of his wife, full of feeble compromises. He slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people. Nevertheless – or perhaps precisely because of this – one must become acquainted with Mill’s principal writings:

Principles of Political Economy ˆ(1848)
On Liberty (1859)
Utilitarianism (1862)

“Without a thorough study of Mill it is impossible to understand the events of the last two generations. For Mill is the great advocate of socialism. All the arguments that could be advanced in favor of socialism are elaborated by him with loving care. In comparison with Mill all other socialist writers – even Marx, Engles and Lassalle – are scarcely of any importance.” (Mises 1985: 195)

An indication of how adamantine Mises’s political judgements are may be recognised in the following comment from the preface he wrote for Liberalism in 1962.

“In England the term ‘liberal’ is mostly used to signify a program that only in details differs from the totalitarianism of the socialists.” (ibid.: xvi)

At any rate, no actual socialists have ever cited Mill as the source of their views on how an economy ought to be managed. Yet Mises’s concerns over the drift of economic theory and government policy remain a vivid warning of how dangerous economic theory has become, both economically and politically.

The long-forgotten supply side needs to be recalled

When I was the Chief Economist of the Australian Chamber of Commerce and Industry, this is what you never saw: Business Calls for Stimulus Spark. In normal English, this says, “Business Calls for More Money from Taxpayers”. There may be no better way to subvert an economy than through public spending. Modern macro is an economic death cult. It’s now more than a decade since the stimulus programs that followed the GFC were introduced, and still our economies remain stalled and stagnant. So let me take you to the words of Australia’s greatest Treasurer:

Mr Costello said fiscal and monetary policy had run out of puff and supply-side reforms such as deregulation were now the key to improving efficiency and ­restoring growth, as retailers pushed for a fresh look at lowering the company tax rate.

Despite the IMF again slashing its growth forecast for Australia from 2.1 per cent to 1.7 per cent — well below the government’s 2.25 per cent forecast — Mr Costello said he did not agree with the school of thought that it was “all doom and gloom out there”.

“We need to turn to another arm of policy which has been long forgotten and that’s the supply side,” he told a Citi investor conference in Sydney.

“After 10 years of deficits and 28 years of continuous growth, we could really get a boost by dealing with some of the imbalances that have built up in the economy.”

While the Morrison government has been under pressure to ditch its commitment to a budget surplus and pump-prime the economy by going into deficit, Mr Costello said he did not believe this held much appeal.

Remember the Costello approach? Cuts to public spending, continuous years of surplus and zero public debt. Worked like a charm. Just let me take you back to my days in ACCI. One of the questions I would ask the entrepreneurs who used to wander through our office is whether they had expansion plans sitting in their drawers that they would put into place if they had the extra revenue. And the universal answer was yes. The American economy has possibly never been as robust as it is today, and all of the efforts have been made on the supply side. That’s where the action is. Public spending as an economic stimulus is a dead end.