Here is what I have been writing about for years, finally confirmed: Low interest rates worldwide were killing productivity growth. Of course, this was from someone at the University of Chicago and not RMIT, so there’s a chance others might take it more seriously – although there is an even greater chance that they will pay no attention to any of it. Still, this is from the report picked up at Zero Hedge reprinted by Martin Hutchison from his website True Blue Will Never Stain.

The paper,“Low interest rates, market power and productivity growth” by Ernest Liu, Atif Mian and Amir Sufi, examines the behavior of firms in a competitive marketplace as interests decline, and demonstrates that, although lower interest rates at first increase competitiveness through increased investment, they also increase the comparative advantage of large firms, thus after a time discouraging the smaller firms from investing and making the market less competitive. If low interest rates persist and approach zero, eventually even the larger firms stop investing, because they are no longer subject to significant competition and thus do not need to invest.

The paper provides theoretical backing to and a possible mechanism for the observation set out in this column on several occasions in the last few years: that ultra-low interest rates in Japan, the Eurozone, Britain and the United States were closely correlated with unprecedented declines in the rate of productivity growth in those countries. In all the high-income industrial countries where interest rates were held artificially low after 2008, productivity growth by 2016 had effectively disappeared altogether, or close to it. The worst effects were seen in the eurozone and in Britain, where inflation continued, making real interest rates sharply negative. Even in Japan, where interest rates have been held artificially low for two decades, the productivity dearth worsened substantially after 2009.

All of this, including what follows below, can be found in much greater detail in the last two chapters of all editions of my Free Market Economics, and of course, in the third edition. If economic management and good economics is of interest to you, go to the link and read it all, but here are bits that you can also find in my text, embedded within the economic theory of the great classical economists. There you will also find a discussion of the natural rates of interest discusses in the article, along with my own diagrammatic explanation of what it is and how it matters.

Economies work best when interest rates are at or close to their natural level, that would be set in a free market. In a Gold Standard system with free banking, interest rates naturally stay close to that level. However, if as in modern economies governments have taken over the money creation and interest-rate-setting functions from the market and move rates a substantial distance from their natural level, then investment decisions become distorted and suboptimal. In such a situation, productivity growth will naturally decline; if the distortion of the interest rate curve is prolonged, productivity growth may even disappear as investments are made into entirely the wrong assets.

Not content with the damage they have already done, some extreme aficionados of low interest rates are devising schemes to drive them even lower, confiscating ordinary people’s cash holdings so that there was no longer any alternative to their diabolical financial schemes. Truly Ben Bernanke’s inspiration of 2002 to drop money from helicopters, uttered at a meeting of the National Economists Club at which I was present, has been among the most economically damaging ideas in all of history.

The article then goes on to discuss who has destroyed more value than the monetary theories advanced by Bernanke while he ran the Federal Reserve, we come to this.

Perhaps the most likely competitor to Bernanke’s contribution as a destroyer of economic value is Maynard Keynes’ “General Theory.” It unmoored us from the established truths such as the Gold Standard and balanced budgets and enabled greedy and unscrupulous politicians to waste ever more of our money in the name of “stimulus.” The California High Speed Rail scheme was just one $77 billion example of such folly; to misquote Oscar Wilde, a man would need a heart of stone not to laugh at its demise this week.

We do not yet know whether negative real interest rates or trillion-dollar budget deficits will be more ultimately destructive of our civilization, and Keynes, not Bernanke, is responsible for the latter. Unlike Marxism and like Bernankeism, Keynesianism has affected the entire planet; indeed, it seems irrefutable, the fallacy that will not die. However, Keynesianism’s effect on productivity is indirect; it merely grows government, a low-productivity activity, rather than destroying productivity directly.

I’m not going to get into an argument over who was worse, as long as we can agree that Keynesian theory has been a disaster (although I think he may have been more charitable to the growth potential of government activities in the modern world).

The point though, is that if you want an economic theory that will guide you in the right direction, no textbook – other than my own – written in the last eighty years will be of any help at all.

From Wikipedia: Criticism of socialism.

Distorted or absent price signals[edit]

The economic calculation problem is a criticism of central economic planning. It was first proposed in 1854 by the Prussian economist Hermann Heinrich Gossen.^[8] It was subsequently expounded in 1902 by the Dutch economist Nicolaas Pierson, in 1920 by Ludwig von Mises, and later by Friedrich Hayek.^[9][4][10] The problem referred to is that of how to distribute resources rationally in an economy. The free market relies on the price mechanism, wherein people individually have the ability to decide how resources should be distributed based on their willingness to give money for specific goods or services. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows—on the basis of individual consensual decisions—corrections that prevent shortages and surpluses. Mises and Hayek argued that this is the only possible solution and without the information provided by market prices socialism lacks a method to rationally allocate resources. Those who agree with this criticism argue it is a refutation of socialism and that it shows that a socialist planned economy could never work. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by economic historians as “the Socialist Calculation Debate”.^[11]

Ludwig von Mises argued in a famous 1930 [actually 1920] article “Economic Calculation in the Socialist Commonwealth” that the pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not “objects of exchange”, unlike final goods, therefore they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.^[11] This led him to declare “that rational economic activity is impossible in a socialist commonwealth“.^[4] Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.

Friedrich Hayek argued in 1977 that “prices are an instrument of communication and guidance which embody more information than we directly have” and therefore “the whole idea that you can bring about the same order based on the division of labor by simple direction falls to the ground”. He further argued that “if you need prices, including the prices of labor, to direct people to go where they are needed, you cannot have another distribution except the one from the market principle”.^[12]

Ludwig von Mises argued that a socialist system based upon a planned economy would not be able to allocate resources effectively due to the lack of price signals. Because the means of production would be controlled by a single entity, approximating prices for capital goods in a planned economy would be impossible. His argument was that socialism must fail economically because of the economic calculation problem—the impossibility of a socialist government being able to make the economic calculations required to organize a complex economy. Mises projected that without a market economy there would be no functional price system, which he held essential for achieving rational and efficient allocation of capital goods to their most productive uses. According to Mises, socialism would fail as demand cannot be known without prices.

The socialist planner, therefore, is left trying to steer the collectivist economy blindfolded. He cannot know what products to produce, the relative quantities to produce, and the most economically appropriate way to produce them with the resources and labor at his central command. This leads to “planned chaos” or to the “planned anarchy” to which Pravda referred…. Even if we ignore the fact that the rulers of socialist countries have cared very little for the welfare of their own subjects; even if we discount the lack of personal incentives in socialist economies; and even if we disregard the total lack of concern for the consumer under socialism; the basic problem remains the same: the most well-intentioned socialist planner just does not know what to do.

The heart of Mises’ argument against socialism is that central planning by the government destroys the essential tool – competitively formed market prices – by which people in a society make rational economic decisions.^[13]

These arguments were elaborated by subsequent Austrian economists such as Friedrich Hayek^[14] and students such as Hans Sennholz.

The anarcho-capitalist economist Hans-Hermann Hoppe argues that in the absence of prices for the means of production, there is no cost-accounting which would direct labor and resources to the most valuable uses.^[15] Hungarian economist Janos Kornai has written that “the attempt to realize market socialism […] produces an incoherent system, in which there are elements that repel each other: the dominance of public ownership and the operation of the market are not compatible”.^[16]

Proponents of laissez-faire capitalism argue that although private monopolies do not have any actual competition, there are many potential competitors watching them and if they were delivering inadequate service, or charging an excessive amount for a good or service, investors would start a competing enterprise.^[17][18]

In her book How We Survived Communism and Even Laughed,^[19] Slavenka Drakulić claims that a major contributor to the fall of socialist planned economies in the former Soviet bloc was the failure to produce the basic consumer goods that its people desired. She argues that because of the makeup of the leadership of these regimes, the concerns of women got particularly short shrift. She illustrates this in particular by the system’s failure to produce washing machines. If a state-owned industry is able to keep operating with losses, it may continue operating indefinitely producing things that are not in high consumer demand. If consumer demand is too low to sustain the industry with voluntary payments by consumers, then it is tax-subsidized. This prevents resources (capital and labor) from being applied to satisfying more urgent consumer demands. According to economist Milton Friedman: “The loss part is just as important as the profit part. What distinguishes the private system from a government socialist system is the loss part. If an entrepreneur’s project doesn’t work, he closes it down. If it had been a government project, it would have been expanded, because there is not the discipline of the profit and loss element”.^[20]

Proponents of chaos theory argue that it is impossible to make accurate long-term predictions for highly complex systems such as an economy.^[21]

Pierre-Joseph Proudhon raises similar calculational issues in his General Idea of the Revolution in the 19th Century, but also proposes certain voluntary arrangements, which would also require economic calculation.^[22]

Leon Trotsky, a fierce proponent of decentralized economic planning, argued that centralized economic planning would be “insoluble without the daily experience of millions, without their critical review of their own collective experience, without their expression of their needs and demands and could not be carried out within the confines of the official sanctums” and “[e]ven if the Politburo consisted of seven universal geniuses, of seven Marxes, or seven Lenins, it will still be unable, all on its own, with all its creative imagination, to assert command over the economy of 170 million people”.^[23]

Mises argued that real-world implementation of free market and socialist principles provided empirical evidence for which economic system leads to greatest success:

The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: that the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism.^[24]

According to Tibor R. Machan: “Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals”.^[25]