It’s understandable that Howard should feel satisfaction with the current course of the Australian economy, particularly in the area of unemployment. Unfortunately he neglected to mention Australia’s declining productivity. On this question the Government was sold a phony bill of goods when it bought the idea from the likes of the discredited H. R. Nicholls Society that freer labour markets would lead to rising productivity which would then promote greater growth. In addition, the large number of firms in the country would put a floor under real wages and thus rob the unions of the argument that labour market reforms would cut real wages.

These argument are a load of baloney. I predicted from the very beginning that labour market reforms would increase productivity by basically encouraging more efficient factor combinations. However, as these improvements worked their way through the economy is happening. I also emphasised that the decline would first be felt in the higher stages of production. This too is the case.

The Reserve Bank of Australia’s Statement of Monetary Policy: 13 November 2006 contains interesting data on productivity. (Table 8: Industry Contributions to Labour Productivity: Two years to 2005/06). It shows annual productivity growth for mining at –11.7 per cent and 0.0 per cent for manufacturing. Now this was not supposed to happen — but happen it did. The RBA’s statement declared that “... recent developments may be consistent with the pattern of adjustment that would be expected when capacity constraints are encountered”. This view does not explain why “constraints” emerged in the first place. In fact, on the surface this opinion appears to suggest that there is insufficient capital to employ workers more productively.

But to argue that “capacity constraints” have lowered productivity is to argue that monetary demand is racing ahead of production. And where does all this demand come from: the RBA and The People’s Bank of China. For years China’s central bank has been flooding the country with masses of credit. This policy has triggered an unsustainable boom that has led to a rapid increase in the demand for Australian resources. At the same time the RBA has been doing the same thing in Australia.

From October 2005 to September currency in Australia leapt by 11.3 per cent, bank deposits by 21 per cent M1 by 19 per cent. But this is nothing compared with the grim fact that since March 1996 to last September currency rose by 100 per cent, bank deposits by 143 per cent and M1 by than 132 per cent. Furthermore, from March 1996 to last October the RBA’s assets increased by 195 per cent. (What is truly bizarre about this gross monetary mismanagement is that no one among our economic commentariat has seen fit to remark on it. For them money truly does not matter).

I think we can now begin to see why the RBA expressed bewilderment at the apparent paradox of real GDP slowing as the demand for labour expands while productivity is declining: It knows nothing about economic history, especially where booms and busts are concerned. Making things worse is its total ignorance of capital theory and the true character of money, trapped as it is in a fallacious Keynesian paradigm that refuses to recognise the potency of money and the heterogeneous nature of capital. The Bank’s ignorance will inevitably lead to another recession.

The great crime here is that thanks to the crummy economic advice that John Howard’s Liberal Party has taken on board, it too finds itself unable to account for the current situation.

The Austrian definition of Australia’s money supply:
M1 (which equals cash and checking accounts) plus government deposits, including state RBA deposits. Government liabilities equal deposits of governments and government instrumentalities.

Note: Readers frequently ask how long can a boom last before the recession strikes? Not very long if a country’s on a gold standard. But as the world is on numerous fiat standard booms can by fuelled for quite a few years before a halt is called.

Gerard Jackson is Brookes’ economics editor