An economic fairy tale
BrookesNews.Com
Reading media absurdities about how government spending can drive economic growth makes one realise the extent to which this fallacy has become embedded in what all too frequently passes for economic debate in this country.
The economic views of Professor Barry Conyngham provide a pretty grim example of how this spend-and-tax fallacy has become the perceived wisdom. In an interview with The Australian (27 March 96) the professor declared that regional universities could become the "engine rooms" of economic growth. He based this proposition on a report that said $50 million of spending by the SCU (Southern Cross University) on wages directly 'created' 1,900 jobs, which in turn generated a further 1,380 jobs and an additional $34 million in wages.
Professor Conyngham’s examination of these figures evidently led him to conclude that government spending was the economic equivalent of a perpetual motion machine. All that governments have to do to generate growth, according to the professor, is pour more and more money into universities and colleges which in turn would generate more and more economic growth.
The logic of this fairy tale is that if we turned the whole country into one giant university not only would everyone get a degree Australia would literally become an economic wonder, an economic powerhouse that could lead Asia and the rest of world into an economic nirvana.
But wait, is there not some vital element missing from the good professor's tale of good fortune? Well blow me down, I just found it. It is called the taxpayer. It turns out on closer examination that the professor's fairy tale does not generate growth at all, it merely distributes income (the product of growth) from the poor to the children of the far from poor.
The government takes, let us say, $200 million dollars from genuine taxpayers and gives it to a university which then spends it in a number of ways. Therefore it is clear that the government has funded the university, worthy or not, by forcing taxpayers to forgo expenditure. In short, the government has merely taken money from the pockets of one group to put it in the pockets of another group.
What Professor Conyngham does not understand is that real growth comes from investment spending, not consumption. Expenditure by Professor Conyngham's university does not add one jot to the country's capital structure.
Perhaps it is too much to expect every vice-chancellor to have a solid grounding in elementary economics. But I do not think it is expecting too much for them to be able to spot obvious economic absurdities. I suppose we must not be too hard on the professor. After all, the economic report was penned by two economics lecturers.
In case the reader thinks that this line of economic 'reasoning' is confined to only one or even several economic faculties I should direct him to the views of Professor Quiggin who believes that raising taxes to increase government spending will increase the demand for labour, provided that the spending is on labour intensive activities (Keynesian economics lessons, The Australian Financial Review 16/7/98).
Quiggin's self-evident absurdity was demolished by Jean-Baptiste Say* in 1803, Robert Hamilton in 1813 and John Stuart Mill in 1829. But economic logic and a reasonable knowledge of the history of economic thought have no place where ideologues rule the roost.
No wonder there is a lousy level of economic debate in our media.
Melbourne: Australia
Friday 31 Jan. 2003
*Say's Law was rarely stated by pre-Keynesian economists because it was taken for granted much as mathematicians take simple multiplication for granted. Although the British classical approach to Say's Law was narrowly based it still held up. This is because the law itself is basically a truism that requires no particular expertise and no elaborate explanation. For this reason economic texts did not consider separate chapters on the nature of Say's Law to be necessary.
See Henry Hazlitt's The Failure of the New Economics, Arlington House, New Rochelle, NY, 1973, Ch. III. There is also W. H. Hutt's Rehabilitation of Say's Law, Ohio University Press, 1974. I honestly think there is nothing of significance that could be added to Hutt's work regarding Say's Law.
