Peter Zhang
BrookesNews.Com
Monday 15 December 2003

A few days ago I was discussing the direction of the Chinese economy with several colleagues when one of them praised the work of Anatole Kaletsky. This stunned me as I am even completely baffled as to why The Times employs Kaletsky as an economics commentator. His grasp of economic theory and economic history, even Asia's recent financial history, is genuinely shocking in my eyes.

On more than one occasion I have used his vulgar Keynesian nostrums to demonstrate to my colleagues why Westerners are really no smarter, and in some cases a great deal dumber, than us Chinese. I remember when in 1998 he made the absurd claim that the world faces "inadequate demand" and "that Keynesian policies around the world will stabilise global demand." What the world was suffering from, and still is, is Keynesianism — not demand deficiency.

The Austrian school predicted Keynesian policies would give us stagflation and world-wide inflation. And yet Kaletsky demanded more of the same. What brought this stupidity on was, of course, the Asian financial crisis, which in turn was caused by Keynesian policies. Let me do what Kaletsky is evidently incapable of doing and that is apply some economic reasoning to the situation.

If there was such a thing as demand deficiency then the economic impact of shrinking demand would first be felt in the consumption stage of the capital structure from where it would work its way through the higher stages of production. That is, consumer demand would drop off first, followed by a decline in the capital goods industries. But precisely the reverse happened, just as the Austrian theory of the so-called trade cycle predicted.

In fact, Asia is a classic example of Austrian trade-cycle theory in operation. These countries kept their interest rates artificially low. This had the effect of telling capitalists that there were more savings available then actually existed, despite Asia's massive savings rate, thus encouraging them to embark upon investments for which insufficient capital goods were available to make them profitable.

In other words, cheap money policies created massive malinvestments. The Austrians stress that the longer the boom is maintained the deeper will be the unavoidable financial crisis as the economic contradictions work themselves out, emerging as misnamed 'excess capacity', rising bankruptcies and unemployment.

Keynesians, and Kaletsky is no exception, have never grasped the role and nature of interest, thinking that it can be manipulated at will, even turning, as Keynes in one of his more fanciful moods put it, "stone into bread." Interest is basically the price of time, a ratio of the value of present goods to the value of future goods.

By this means it is determined how much of our resources will be devoted to future goods, i.e., longer and more productive stages of production, by determining the supply of and demand for capital goods. We can now see what happens when the rate is artificially lowered: demand rises but not supply. (I am ignoring the phenomenon of forced savings.) This is what happened in Asia.

Now all these malinvestments needed to be liquidated. Japan's problem is that rather than liquidate its malinvestments, allowing prices and costs to adjust to consumers' savings investment ratio and implementing sound money policies, it adopted the economic idiocy of Hoover and Roosevelt and tried to prevent the necessary adjustments. This is why, despite its low interest rates, its economy languished.

Taking Kaletsky's vulgar Keynesian advice is like giving a recovering drug addict an over dose. To be honest, Kaletsky's economic stupidity was nearly as offensive as his grovelling to Bill Clinton. I can only conclude that Kaletsky's tenure at the Times is due to Murdoch's total indifference to intellectual standards. It certainly is not due to Kaletsky's intelligence.