Prudential idiocy

An accessible version of this infographic is available at https://www.apra.gov.au/consultation-on-draft-prudential-practice-guide-on-climate-change-financial-risks-infographic

The Australian Prudential Regulation Authority (APRA) has just released a note on “guidance on managing the financial risks of climate change” which includes the graphic shown above. Now, if they were releasing an approach to dealing with the psychologically disturbed people who take this stuff seriously, that would be one thing. But they seem to believe that the risk actually comes from global warming itself. What can be done with such fools? They will be the financial ruin of us.

What is particularly obvious is how inane modern economic theory is

I only look at Ross Gittins to find out just how far off the beam economists are, and once again he does not disappoint: Now we’re trying Plan C to end wage stagnation:

It’s a tacit acceptance of an obvious point many economists (and I) have been making for ages, but the government and its advisers haven’t been prepared to acknowledge: since consumer spending accounts for well over half of gross domestic product, and growth in wages is the chief source of growth in household incomes, without real growth in wages economic recovery simply isn’t sustainable.

The key to rising real wages is rising value added per employed person (ie higher productivity). That many economists (including Ross) think buying things will create value only shows to go you what a primitive subject economic theory remains. Come and see the billion dollar station they are building at the Shrine of Remembrance in Melbourne to see why real wages are going nowhere. If you build what no one is going to buy – a government speciality – you will not only fail to create growth you will diminish it.

Why isn’t that obvious? And it won’t matter a bit whether every single worker on every single project spends all of their income to the last dollar.

“A beautifully crafted and eminently fair review”

I’ve just written a book review for the eh.net website which I would not normally mention except that it attracted this comment from Tom Humphrey, one of the great historians of economics writing today:

A beautifully crafted and eminently fair review by Steve Kates. He takes a strong stand. But he does so in a spirit that few scholars could object to even if they disagree with him. In overall quality and readability his review rises far above the level of the average review. Wish all reviews could be so good. Nothing is as helpful and valuable as a good book review, if done right. Reviewing is an un- and under-appreciated art.

This is how my review begins:

There was a time that one might have said that economic theory was comprised of a series of concepts that help explain the way communities provision themselves and became more prosperous over time. Economic theory as it developed came in the wake of the pamphleteers of more ancient days who saw the world around them and thought there had to be a better way of getting things done. They therefore wrote polemical accounts aimed at addressing various problems as they saw them, to try to persuade others to take up the approaches they were attempting to advocate.

Meanwhile, almost from out of nowhere came the Industrial Revolution. It was not a consequence of Adam Smith having written his Wealth of Nations. The two just appeared on the scene at roughly the same time, and some — observing the world they were living in, while also reading Smith’s account of how economies worked — came to the conclusion that there was some actual theoretical knowledge that might assist in the improvement of the way in which economies grew and prospered. That is how we came to have the classical school first, and then the major critiques of the socialist writers, with Marx and Sismondi among the most significant.

The classical economists observed the world, saw the tremendous growth in output and living standards and, correctly in my view, came to the conclusion that it was the role of private entrepreneurs that had made the difference. Within the community, if it were designed in a way that allowed individuals to pursue their own best interests as they saw them, there would be a rearrangement of productive forces in response to where the greatest return on investments would occur. Output rose, innovations occurred, and as a direct result living-standards rose. It may appear to many of us looking back on those times that the social costs were immense, but many of those who were living at the time were content that England should exchange its “green and pleasant land” for a highly productive economic structure that allowed many individuals to move forward in what they could earn and in the range and quantity of the goods and services they could buy.

But the costs were high, and memories were short. Henry Mayhew’s London Labour and the London Poor, which he began in 1849 as an investigative journalist and which was finally published in 1861-62, brought the tremendous social costs into the limelight (Mayhew 1985). He was hardly the first to do so, but Mayhew’s work stands out as a depiction of the burdens that had befallen the newly formed proletariats of the industrial age. It was the appearance not just of poverty, which had till then been universal, that mattered, but the agglomeration of entire industrial suburbs that focused attention on the world as it had become. Dark satanic mills had become the way of the world.

What also was new in the world at the time was the business cycle, the periodic ebb and flow of economic activity which came at such a tremendous cost to the working classes. It was one thing to be mired in poverty. It was another thing entirely to find that the low wages upon which individuals depended would suddenly disappear, and for reasons utterly beyond the control of the workers themselves, indeed beyond the control of anyone. And while there was no denying the spectacular growth not just in the volume of output but in the assortment of goods and services that came into existence, there was also disquiet at the disruptions and harm that could be visited on individuals and their families because of the disruptions in their working lives.

And while this overview of the years of the Industrial Revolution is part of the background knowledge of every economist, the need for a means to account for how the industrial world operated was required as well as some means to control the forces that had been let loose upon the world. There was the positive side that came in terms of production. But there was the negative side that came in relation to the polluted cities that had sprung up and the uncertainties that had become embedded within the lives of so many individuals. And this is where the history of economic thought comes into the story.

Economists are the inheritors of the latest manifestations of the theory of the economy that more or less satisfies most of the profession. There are now theories of such astonishing abstraction that it is almost impossible any longer to look into what economists believe they know and truly understand how the economic world is structured or what can and should be changed to improve the operation of the productive aspects of our economies.

If you would like to read the rest, you can go here.

fyi

Who can say if any of this will really happen? What can be said is that there is no reason to be certain it couldn’t. We are pumping out money incomes across the world to people who are not producing anything. We have pushed our economies into recession as an act of policy. Value adding linkages are being broken at every turn. And the thing about recessions and crashes is that they are never seen before they happen other than by a handful of speculators who manage to clean up while everyone else goes broke. Just like in the Global Financial Crisis.

Just how useless is modern economic theory

“The 1-2-3 Toolbox of Mainstream Economics: Promising Everything,
     Delivering Nothing”
   Bichler, Shimshon; Nitzan, Jonathan
  We write this essay for both lay readers and scientists, though mainstream
  economists are welcome to enjoy it too. Our subject is the basic toolbox of
  mainstream economics. The most important tools in this box are demand,
  supply and equilibrium. All mainstream economists – as well as many
  heterodox ones – use these tools, pretty much all the time. They are
  essential. Without them, the entire discipline collapses. But in our view,
  these are not scientific tools. Economists manipulate them on paper with
  impeccable success (at least in their own opinion). But the manipulations
  are entirely imaginary. Contrary to what economists tell us, demand, supply
  and equilibrium do not carry over to the actual world
: they cannot be
  empirically identified; they cannot be observed, directly or indirectly; and
  they certainly cannot be objectively measured. And this is a problem because
  science without objective empirical tools is hardly science at all.
   JEL: E13 C01 O47
   Keywords: demand,econometrics,equilibrium,neoclassical
    economics,science,supply
   Date: 2021
 URL: http://d.repec.org/n?u=RePEc:zbw:capwps:202103&r=hpe

I made it a point in teaching micro to drill into my students that no price was ever determined according to where the supply and demand curves for a product were thought to be.

Keynesian malpractice started early

I don’t normally wish to speak ill of the dead, but with John Maynard Keynes I will make an exception. What has brought it to mind is this article today in The Australian: Investors could learn from economist John Maynard Keynes – and Winston Churchill. They do, however, admit at least this much.

A brilliant and well-connected academic, [Keynes] began as a speculator in the 1920s and initially did very well in a period that looks very much like our own, where new technology companies (auto and aircraft companies) spurred a speculative boom on wider markets.

In 1928 he had amassed a fortune of £44,000 but after the Wall Street crash of 1929 his fortune had shrunk to £8000. It is how he rebuilt his position and became a convert to what we now call value investing that is the kernel of the story. Over the next three decades Keynes evolved a system of watching and waiting for stocks he believed were undervalued by the market. He called them “stunners” and once he fixed on a bargain he went in big time.

Of course it didn’t hurt that by the 1940’s he was working inside Treasury and helping to design the budget which is part of the reason why he was able to die a wealthy man at the end of the War. But he took a bath not just in 1929, but in 1920 when he took down much of his family and many of his friends, as recorded here: John Maynard Keynes ‘a great economist but poor currency trader’.

The study found that Keynes “experienced periods of considerable losses in both the 1920s and 1930s. Indeed, he was close to being technically bankrupt in 1920 and could only stay trading thanks to his ability to borrow funds from his social circle.”

And even that understates just how catastrophic his losses were. And this was a man who worked in The City for almost all of his working life. The academic world for him was just something he did a few months a year. The General Theory is as bad for our wealth today as his speculations were for him and others while he lived. It really does irritate me to read about what a financial genius Keynes was when he was anything but.

Keynesian policy tested and once again completely failed

Keynesian stimulus actually led to a worse outcome than the predicted outcome if nothing at all was done. That is what any classical economist would have said would happen, but other than one or two here or there, no classical economists remain. So the entire profession just looked on, saw the manifest failure of the theories they all believed were true, and just blacked it out. Just as they have done on every occasion a Keynesian stimulus has been tried and inevitably failed.

Keynes view on deficits and spending

 

I have received a request from an old friend. He asked for passages that would be considered a compact summary of Keynes view on deficits and spending in Keynes’ own words. The following encompasses my efforts to put this request into effect.

#1

Here’s an article that I have run across, from The Guardian: Keynesian economics: is it time for the theory to rise from the dead? No direct quotes, however, but this is just the beginning of my hunt. It’s the standard nonsense you see everywhere today. Deficit spending assumes the existence of saleable goods and services that are not being bought because everyone prefers to save their money rather than spend it. 

Imagine this. In late 1936, shortly after the publication of his classic General Theory, John Maynard Keynes is cryogenically frozen so he can return 80 years later.

Things were looking grim when Keynes went into cold storage. The Spanish civil war had just begun, Stalin’s purges were in full swing, and Hitler had flouted the Treaty of Versailles by remilitarising the Rhineland. The recovery from the Great Depression was fragile. It was the year of the Jarrow march and Franklin Roosevelt’s second presidential election victory.

Waking up in 2016, Keynes wants to know what’s happened in the past eight decades. He’s told that the mass unemployment of the 1930s finally came to an end but only because military production was ramped up by the great powers as they came to blows for the second time in a quarter of a century.

The good news, Keynes hears, is that lessons were learned from the 1930s. Governments committed themselves to maintaining demand at a high enough level to secure full employment. They recycled the tax revenues that accrued from robust growth into higher spending on public infrastructure. They took steps to ensure that there was a narrowing of the gap between rich and poor.

The bad news was that the lessons were eventually forgotten. The period between FDR’s second win and Donald Trump’s arrival in the White House can be divided into two halves: the 40 years up until 1976 and the 40 years since.

Keynes discovers that governments deviate from his ideas. Instead of running budget surpluses in the good times and deficits in the bad times, they run deficits all the time. They fail to draw the proper distinction between day-to-day spending and investment. In Britain, December 1976 was the pivotal moment. Matters came to a head in early December when a divided and fractious cabinet agreed that austerity was a price that had to be paid for a loan from the International Monetary Fund, which was needed to prop up the crashing pound….

His General Theory says that the desire of the private sector to invest is affected by “animal spirits”. When animal spirits are low, governments should step in with public investment. They should do this even at the cost of a higher budget deficit, because the higher growth that will result will mean the investment more than pays for itself.

He is aghast to hear that apart from during a brief period of collective stimulus in 2009, this approach has not been followed. Governments quickly grew concerned about the size of their budget deficits and cut public investment. 

But weak growth meant deficit reduction took longer than expected. Ultra-low interest rates for the best part of a decade have led to asset-price bubbles. Measures of private indebtedness are rising again. All depressingly predictable, Keynes says. Time to return to 1936.

Before you go, he is asked, what advice do you have for policymakers in 2016. Keynes outlines three alternatives to the status quo. The tax-cutting and infrastructure spending plan proposed by Trump will lead to stronger growth in the short term, but Keynes says he is not especially impressed. He fears that there will be little extra investment in the public infrastructure that the US actually needs and that the stimulus will be poorly focused.

The second option would be to exploit exceptionally low interest rates by borrowing for long-term investment projects. Governments could do this without alarming the markets, Keynes says, if they followed his teachings and borrowed solely to invest.

Option number three would involve being more creative with quantitative easing, Keynes says. Instead of the newly created money being used for speculative plays, why shouldn’t governments use it to finance infrastructure? Building homes with QE makes sense; inflating house prices with QE does not.

There is, he adds, another escape route. We were building up to it in 1936 and it arrived three years later. Not recommended.

 

#2

What Keynes really said about deficit spending

What Keynes Really Said about Deficit Spending Author(s): Elba K. Brown-Collier and Bruce E. Collier Source: Journal of Post Keynesian Economics, Vol. 17, No. 3 (Spring, 1995), pp. 341-355 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/4538449 .

First para:

It is commonly believed that Keynes’ primary policy prescription for economic stabilization and full employment is federal govenment deficit spending. As will be developed below, Keynes’ policy for promoting full employment or reducing economic fluctuations was the socialization of investment. Any connection between his policy proposal and deficit spending was related to the choice of financing such social investment. The policies pursued in the United States over the last forty years have not been consistent with Keynes’ proposals for economic stabilization and have caused ever increasing deficits and financial instability.

Quotes from the article.

Keynes believed the following three phases would develop at the end of the war. (i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls; (ii) when the urgently necessary investment is no longer greater than the indicated level of saving in conditions of freedom, but is still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment; (iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises. [CW, vol. XXVII, p. 321]

But not a quote from Keynes although very on the money.

In summary, Keynes’ budget policies and stabilization policies call for the following: 1. As the normal circumstance of a capitalist system would result in insufficient private investment, 2 where total investment is less than the amount of saving that would be generated at full employment, social investnent would be necessary to maintain full employment. Further, since fluctuations in private investment are likely to occur, the investment plans of public and quasi-public entities should be designed so that they could be varied in a countercyclical pattern.

2. Countercyclical variation in incomes via taxes and, therefore, spending should not be relied on to maintain full employment and thestimulation of private investment by lowering interest rates is not likely to be sufficient to maintain the level of investment necessary for full employment.

3. Public investment should consist of those projects that provide a real return over time, either in cash retums such as public enterprises, or indirect returnsuch as school buildings. Such investment should be done from the point of view of the public good rather than private return. The shortage of private investment is likely to be so large that required public investment could range from 7.5 percento 20 percent of net national product.

4. The government should not deficit finance current expenditures. Public investment expenditures should be financed by borrowed funds that are repaid over the service life of the project. Tax revenueshould be budgeted so as to meet these payments.

5. There should be no deficit in the current or ordinary budget. In economic downtums the automatic variation in the collection of social security contributions might result in a deficit in that fund. However, in prosperous times, the fund should automatically run a suTplus. No other type of deficit should be incurred in the current budget. It is possible, however, to reduce contributions to the sinking fund for repayment of outstanding nonproductive debt in periods of economic downturn.

6. The borrowing from the public for financing public investment is best done by the central government. This would reduce credit costs to local governmental entities. 

#3

Most famously and this is a quote. From The Economic Consequences of the Peace (Keynes 1920)

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

We read this passage today with our definition of the term “inflation” understood in relation to Keynesian theory, which means more or less all economic theory following the publication of The General Theory in 1936. Before 1936, inflation was not something that passively occurred to the price level as we think of it today. Prior to 1936, inflation was an act of policy in which the money stock was artificially inflated at a rate of growth that exceeded the growth in the real level of output. A frequent consequence was a rise in the price level, but the inflation was the policy levers that were pulled prior to the rise in the price level, not the rise in the price level itself.

#4

From A Glossary of Political Economy Terms – the definition of “inflation” http://webhome.auburn.edu/~johnspm/gloss/inflation.phtml

In contemporary usage, a sustained rise over time in the general level of prices, normally measured by a weighted index of prices of a large and representative sample of goods and services (both consumers’ goods and producers’ goods) regularly traded in the economy under consideration.

(In 19th century usage, the term referred more specifically to any sustained expansion in the stock of money available within the economy under consideration — the eventual consequence of which would normally be a generalized increase in prices.)

#5

This is taken from Chapter 7 of Classical Economic Theory and the Modern Economy by Steven Kates (Elgar 2020). Chapter 7 is titled: “Keynesian Theory Overruns the Classics”. This is the link to the Elgar website on the book: 

https://www.e-elgar.com/shop/gbp/classical-economic-theory-and-the-modern-economy-9781786433565.html

An Unexpected Critic: Keynes on the “Classical Medicine” (1946)

Lastly, this from Keynes himself. He has notoriously been quoted as saying, “I am not a Keynesian”. That this may be in fact true, as his last, posthumous, article from The Economic Journal, may make clear. Keynes, by 1946, may have been the last of the classical economists. By the time this was published, Keynes had passed away which may be why it is not found in the thirty volume Collected Writings of John Maynard Keynes. He is discussing the forces at work that help bring economies towards an international equilibrium that will occur by leaving things to the market.

“I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable to-day to over-look because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past….

“We have here sincere and thoroughgoing proposals, advanced on behalf of the United States, expressly directed towards creating a system which allows the classical medicine to do its work. It shows how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems, with age-old poisons, that we should have given so doubtful a welcome to this magnificent, objective approach which a few years ago we should have regarded as offering incredible promise of a better scheme of things.

“I must not be misunderstood. I do not suppose that the classical medicine will work by itself or that we can depend on it. We need quicker and less painful aids of which exchange variation and overall import control are the most important. But in the long run these expedients will work better and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never get really fit again. The great virtue of the Bretton Woods and Washington proposals, taken in conjunction, is that they marry the use of the necessary expedients to the wholesome long-run doctrine. It is for this reason that, speaking in the House of Lords, I claimed that ‘Here is an attempt to use what we have learnt from modern experience and modern analysis, not to defeat, but to implement the wisdom of Adam Smith.’” (Keynes 1946: 185-186)

 One cannot walk away from a text such as this without wondering what Keynes’s own judgement may have been on what “Keynesians” had done with his arguments.

“It shows how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems, with age-old poisons

Nor what did he mean when he wrote:

“I must not be misunderstood. I do not suppose that the classical medicine will work by itself or that we can depend on it. We need quicker and less painful aids of which exchange variation and overall import control are the most important. But in the long run these expedients will work better and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never get really fit again.”

This is no idle speculation given how badly the modern prescriptions of that Keynesian medicine have left our economies. Economies never get really fit again, using Keynes’s words, until the “Keynesian” prescriptions are reversed. Keynes seems to have recognised just how badly those who had supposedly carried his message forward had mangled the policy mix. Unfortunately, in the immediate post-War period, he was no longer there to explain just what those errors were.

Barely alive

Taken from Joe Biden’s Handlers Let Him Out, and Things Are Not Fine. There it says:

Earlier today, the Democrats in the Senate passed their COVID “relief” bill along a party-line vote. Not even Lisa Murkowski or Mitt Romney saw fit to break ranks this time because that’s how bad this piece of legislation is. In fact, only 9% of the bill goes to direct assistance for those who have suffered at the hands of government lockdowns. The rest goes to a smattering of special interests and payoffs, from the National Endowment of the Arts to bailing out blue states that were in dire financial straits long before the pandemic hit….

Biden truly looks barely alive at this point. His skin is taut, his eyes are squinty, and he once again shows an inability to articulate even the most basic points. None of his verbal fumbles are due to any supposed stutter. Keep in mind, there’s a teleprompter feeding him lines in a massive font right in front of him. How in the world is this guy ever going to do a State of the Union address if he can’t operate for ten minutes in an environment built to prop him up?

We are always in uncharted waters, but this time we are really really in uncharted waters. Where we end up four years from now is utterly unknowable, other than the name of the woman who will become president in name only, to replace the man who is now president in name only.

BTW there is at least one economist – up, down and sideways – that does not think you need to spend the money to grow the economy. In fact, if your interest is in growing the economy, not one cent of it should be spent. Just leave it alone, and the economy will grow back by itself.