Seven years

This will also be my 4593rd post although there are also another 193 that I never published. Started it September 12th just for myself and to communicate with the family, who may be among the only people who are on the same wave length as me. Bless them, but also I am happy to say that the blog now has many others who come along who must also more or less agree with the direction these posts take, so bless you as well. It’s a tough ideological world out there.

People used to disagree, but I always thought it was just a point of view even while everyone was sane. I no longer think that. We on the conservative right, or even among the centre who would like to find some means of sharing the wealth in some non-destructive way, I am with them.

And there are virtually no racists anywhere on the conservative right. Every seriously racist organisation has always been some version of totalitarian murder incorporated [National Socialism, anyone?]. The biggest problem for many of us, me anyway, is that it is hard to believe these people really are as dense and ignorant as they appear to be. And therefore would willingly lead us all into a Venezuelan future if they were able. And so many of them are also friends and relations, who must harbour some deep and terrifying hatreds within them. No one like that comes here, and if they do, they don’t stay long. So my good wishes to all of you who are reading this. And also, Hi Joshi.

Entrepreneurship in one lesson

This is from a French soldier’s view of US soldiers in Afghanistan. Unexpectedly entirely positive. Here I only put up this passage to explain what entrepreneurship looks like.

And combat? If you have seen Rambo you have seen it all — always coming to the rescue when one of our teams gets in trouble, and always in the shortest delay. That is one of their tricks: they switch from T-shirt and sandals to combat ready in three minutes. Arriving in contact with the enemy, the way they fight is simple and disconcerting: they just charge! They disembark and assault in stride, they bomb first and ask questions later — which cuts any pussyfooting short.

It is the only managerial style that works. Of course, it won’t work in areas which are funded by the public sector, where profitability and adding value are never a consideration. But in the private sector, if a business is left alone to get on with its business, this is how it is done.

Keynesian economics is guaranteed to make an economy’s problems worse

This is Judy Sloan stating as clear as you like: Time to get the budget in surplus and pay off debt. What it is really about is how disastrous Keynesian economics is and always has been. I am a month away from finishing my book on how the idiocies of Keynesian economics replaced classical theory that had created the world of wealth we have now all become not just used to, but have come to believe it is all just automatic. It was for a while, but with Keynesian economics at the heart of policy making, we are potentially heading for a very large fall in living standards. The following are Judy’s comments about Keynesian theory and policy from her column today.

I’ve been reading Paul Tilley’s Changing Fortunes: A History of the Australian Treasury and a theme that emerges is the advent after World War II of unquestioned Keynesian thinking among senior officials.

Having seen the economic damage and human suffering the Depression caused — although Australia was less affected than many other economies and recovered more rapidly — consensus emerged that the federal government must seek to manage demand actively to maintain full employment.

There was little questioning whether this approach would work or what any adverse consequences might be. Rather, the politicians of the day meekly accepted Treasury’s advice that monetary and fiscal policy should be used to boost employment when needed and to quell inflationary pressures when required….

The Keynesian salad days came to an abrupt end during the Whitlam years when the stable relationships on which the theory was based — in particular, the inverse relationship between unemployment and inflation — fell apart. In its place, a prolonged period of stagflation ensued in which unemployment rose in the context of high inflation….

Today we observe Treasury as a much diminished institution with plenty of Keynesian devotees still occupying positions at various levels….

In the context of today’s debate about appropriate action to deal with a soft economy, many of the debates of yesteryear are there in the background. The simplistic Keynesian response is that the government must spend more immediately, even though experience says this is costly and largely ineffective….

And let us not forget that the government has been running a budget deficit for more than a decade — a long-running Keynesian experiment — yet we still find ourselves in a relative economic slump.

It’s time to get the budget back into surplus and start repaying the accumulated debt.

Keynesian economic policy has NEVER worked, not a single time, not anywhere, not ever. Let me take you to my own: The Dangerous Persistence of Keynesian Economics where all of this is spelled out in more detail. And I cannot refrain from adding this quote at the front of the article.

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

The power of classical economic thought

Here is a story picked up just today which had a bit in it I found quite striking since it presents a real-world economic event straight out of classical economic theory. It’s from an article titled, New recession warning: The rich aren’t spending. There we find:

The savings of the rich has also exploded, more than doubling over the past two years, suggesting that the wealthy are hoarding cash. The middle earners, or those in the 40% to 89.9% of the income distribution, have largely picked up the spending slack from the rich….

The middle-class consumer, however, is being buoyed up by strong employment and a relatively stable housing market. A U.S. economy that for over a decade has been defined by the rich reaping the gains and fueling the spending, has now flipped. Now, it’s Main Street that is prospering, while the investor class is signaling a consumer recession.

Which made me think of this from Mill’s Principles:

The proposition for which I am contending is in reality equivalent to the following, which to some minds will appear a truism, though to others it is a paradox: that a person does good to labourers, not by what he consumes on himself, but solely by what he does not so consume.

Clear as a bell to anyone versed in classical thought but to anyone else, specially to a student of modern macro, a statement near impossible to comprehend.

Mill discusses the Quantity Theory of Money in 1848

From Mill’s Principles:

If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process . The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the quantity of money in circulation [M] is equal to the money value of all the goods sold [PT], divided by the number which expresses the rapidity of circulation [V]. (Mill [1848] 1871: 494 – letters in parentheses inserted into the text)

Note that the money value of all goods sold is PT, with the T standing for Transactions. This is the accurate rendering of the concept since the same item might be sold many times over. A sack of flour might find itself sold first to a distributor, and then to a retailer and then finally to a consumer. It is the number of transactions that matter. The transactions also incorporate all of the sales between input producers that occur well before, perhaps years before, some item is sold as a final good to a consumer.

Thereafter we come to the quantity equation which is actually a quantity identity since it is true by definition. It is true only because it could not be anything else.

M ≡ PT/V

Or in its more typical formulation:


The number of times a unit of money is exchanged is equal to the total money value of all sales that take place inside an economy. Since there is no means to calculate T or the average price of all of the items that are turned over in the market, PT is a number that can never be calculated.

Following that para from The Principles are a large number of additional considerations that help make sense of the point and also make it more comprehensible in relation to the operation of an economy.

Whatever else Mill is or is not trying to do, what he is not trying to do is provide some means to regulate an economy by trying to adjust any of the four elements within the identity.

Leaving it to the market plus the rule of law

A quite interesting article that adds to our understanding of why China is in such a hurry to shut down Hong Kong: Why People in Hong Kong Have Incomes 5x Higher Than People in China’s Richest Province. It’s not long, but will give you quite an understanding of what has made the difference. But I particularly wanted to point out the principles that lie behind its success.

  1. Business Efficiency – The Hong Kong government established simple procedures for individuals to start their own enterprises. Entrepreneurs fill out a single page form and pay $25. That’s it. Businesses can open that very day.
  2. Small Government, Big Market– Per-capita spending on government in Hong Kong is less than half of what the average New Yorker spends to support the various levels of government.
  3. Open Trading Systems– Hong Kong has the world’s 10th largest trading economy, with no trade barriers or tariffs imposed on other countries.
  4. Low Taxes – A typical New Yorker loses about half his income to taxes. In Hong Kong, the government claims just 15 percent.
  5. Sound Money– As the U.S. undermines the dollar with dollar printing and years of quantitative easing, raising government debt to never before seen levels, Hong Kong maintains low debt and sound money. It carries a debt to GDP ratio of 38.67 percent compared to 104.17 percent in the U.S.
  6. Few Government Regs – While the U.S. has reactionary regulation with many business crushing consequences, Hong Kong has an environment of permissionless innovation that embraces the benefit of “innovation allowed,” which switches the burden of proof to those who favor preemptive regulation and requires them to explain why ongoing trial and error experimentation with new technologies or business models should be disallowed.
  7. Rule of Law–  The British, during their long rule over Hong Kong enforced, the “Rule of Law.” People who stole or killed were jailed, which left the people to flourish in a free law-abiding marketplace.

Most of it is about governments keeping out of the way, which was how we used to run our economies until modern macro rotted the minds of economic policy makers everywhere. Leaving it to the market plus the rule of law works wonders.

Idlers and good-for-nothings

I’m in the midst of a book on the coming of Keynesian economics into the world and the disappearance of classical theory. I have just now finished a section discussing the first Keynesian textbook ever written, Lorie Tarshis’s The Elements of Economics, which I thought I might share a bit of which with you.

Tarshis’s text made Samuelson and other economic writers more cautious in how they discussed Keynesian theory. A passage such as the following would never again enter a Keynesian text, as accurate a reflection of the theory though it may actually have been.

“To put it bluntly, employment and income, in money terms, can be expended to respond equally whether the government sponsors useful public works like highway construction, or completely useless ones like digging ditches and filling them up again. In either case, because the income of the newly employed would be higher than before, they would increase their spending, so that the output of consumers’ good would be expanded and the upward swing begun. Naturally we should prefer projects which directly add to our real wealth. Flood-control projects, highways, parks, school buildings, research projects, housing, and so on are better than leaf-raking and useless excavations. But the latter are better than nothing, for even though the projects are useless, carrying them out leads to an increased output of consumers’ goods. And even though the men responsible for the increased demand were idlers and good-for-nothings, their dollars, in our economy, are as powerful as any others in increasing consumption, income, and employment.” (Tarshis 1947: 518)

Possibly the most revealing passage in the entirety of Keynesian literature.

It was overrun the following year by the first edition of Samuelson’s Economics, in part because Samuelson’s was a much better book, but also because he was a bit more candid about what Keynesian theory meant in practice.

If they can bring on a recession to sink Donald Trump they will

Let me start with this sage piece of advice from Henry in the previous post:

No sensible purpose is served by the facile criticism of the administration that increasingly pervades the Australian media, and the equally facile ­questioning of the alliance that ­invariably accompanies it. For these issues are deadly serious; unless they are treated seriously, the consequences will be deadly too.

And then there’s this from Instapundit to bear in mind.

ADHERING TO LENIN’S “THE WORSE, THE BETTER” DICTUM: Recession Warnings Music to the Ears of Democrats. 

66Posted at 2:13 pm by Stephen Green

And today from the front page of The Australian: Global recession warnings as sharemarkets sink.

Which follows on this from The Economist: Markets in an Age of Anxiety, which begins:

Financial markets are often accused of complacency. However, the mood just now is not complacency but anxiety. And it is deepening by the day. In Germany interest rates are negative all the way from overnight deposits to 30-year bonds. In Switzerland negative yields extend right up to 50-year bonds. In America, meanwhile, interest rates on ten-year bonds are lower than on three-month bills—a harbinger of recession. Angst is evident elsewhere, too. The safe-haven dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to below $60 a barrel. Plenty of people fear that these strange signals portend a global recession. Yet a recession is so far a fear, not a reality. The true problem is that firms and markets are struggling to get to grips with uncertainty. And that is the result of the trade war between America and China.

Artificially low interest rates are as sure a way to cause an economy to stall as I can think of. That along with vast oceans of unproductive public spending.

JUST FOUND THIS TO ADD TO THE ABOVE: Drive-By Media Hell-Bent on Talking Us Into a Recession. It’s from Rush Limbaugh.

MEANWHILE: Starts about 15 minutes in.

Hayek and the market economy

My approach to the free market economy is probably closer to the political economy of Friedrich Hayek than to anyone else who had written during the twentieth century (other than the incomparable Henry Clay). Let me therefore draw your attention to this article, just published at the Claremont Review of Books, HAYEK’S TRAGIC CAPITALISM. The opening paras:

Best known for his anti-socialist polemic The Road to Serfdom (1944), the economist and political philosopher Friedrich A. Hayek is often thought by foe and friend alike to have offered a plain and striking argument for capitalism: the least deviation from laissez-faire is the first falling domino that will inevitably lead to totalitarianism. The foes and friends draw different lessons from the fact that decades of regulation and welfare policy have never actually had this result. For the foes, it shows that Hayek was obviously wrong and his analysis unserious. For the friends, it shows that the dreaded socialist dictatorship must now be imminent rather than far-off—no doubt finally to arrive with whoever the next Democratic president turns out to be.

But in fact, Hayek never gave so silly an argument. Nor will one find in his work the chirpy optimism with which many libertarians and Reaganite conservatives ritualistically defend the market economy. Hayek’s case for free enterprise doesn’t fit any of the usual simplistic stereotypes. He not only explicitly and persistently rejected laissez-faire, but could write as eloquently about the moral downside of capitalism and the emotional attractions of socialism as any left-winger. In an era in which—young socialist chic notwithstanding—global capitalism appears to have swept all before it, it is the triumphalist defenders of the free market rather than its critics who have the most to learn from Hayek’s cautious, nuanced apologia.

Classical economists were not laissez-faire. Economies must be meliorated by political judgement. Knowing how to do it right is the issue, not acting as if doing nothing at all is optimal. It is acting as if the free market is all one needs that plays into the hands of socialists and will ensure the end of free market economies. Read my text for a modern discussion not only about how a market economy works, but also the role of government policy in keeping an economy on course. It also explains what governments should never do as well, but that is only one part of the story, and not necessarily the most important part of the story.

Wicksell and William White

This is a comment from Sunni Bakchat dealing with monetary policy.

If the morons in the Reserve Bank had a broad education they’d know about Wicksell rather than just Keynes. Clearly Keynesian economics does not have the answer or it is being interpreted incorrectly. This idiocy from the Reserve Bank will continue until their hand is forced. For there is not an original thinker or courageous person to be found in the institution, or just about any other western reserve bank at present. For those seeking a little inspiration, William White, former chief economist at The Bank of International Settlements is all over the subject.


I’m working on a piece for the G30 which basically deals with the future of central banking and the future of monetary policy. I sense from talking to many of the members, many of whom are previous central bankers, that they are very concerned about the direction this has taken, in particular the continued over reliance on stimulative monetary policy to get us out of the predicament we are in. It has turned into a kind of Pandora’s box. Swiss Re has recently published a paper called “Financial Repression: Quantifying the Cost” which looks at the cost of these unusually low interest rates for the insurance industry. Clearly, they are really, really worried about it and I don’t blame them.

I’ve written a lot about this stuff, not least of which a paper that was published by the Dallas Fed in 2012 . It was called “Ultra Easy Monetary Policy And The Law Of Unintended Consequences.” It contained page after page of all the things that might go wrong. Moreover, knowing that even my imagination might be inadequate, I treated that paper as a kind of work in progress. So every time I opened up The Financial Times or something else and I saw something unpleasant that wasn’t in my paper, I clipped it out and added it to the pile. Unfortunately, the pile is getting bigger and bigger. There is a possibility at least that this whole exercise could end very badly.

Larry Summers argues that the Wicksellian natural rate is now below zero, and the financial rate can’t go below zero, so therefore we have a real problem. Well, my reaction is to suggest we try through policy to get the natural rate back up again The way that you do that is to raise expected profit rates for viable companies that are being held down by all the zombie companies bring supported by banks or governments in one form or another. It will be painful, absolutely no question. There will be a lot of vested interests, which will be hurt. But the way out of this thing is to get rid of the excess capacity and give people an opportunity to make an honest dollar.

There is hope, as dim and faded as it might be.