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Savings, jobs and Professor Quiggin’s bad economics*
Gerard Jackson
Professor Quiggin's collectivist views surely show what is wrong with a great deal of what passes for economics in our universities. In his view (The Australian Financial Review 12 May 1997) the pressure on governments has retarded the growth in the amount of resources that the state allocates to health and education, “even though there is substantial unmet demand for these and other publicly provided services” which, in his opinion, is capable of creating considerable employment. This was followed by the assertion that the drive against government spending was ideologically motivated, clearly, and dishonestly, implying that it had nothing to do with economic theory.
In another article (The Australian Financial Review 20 March 1995) he even argued that if we added foregone earnings of students and reclassified health and educational spending as investment the measured decline in Australia’s savings would be wiped out. Sneering at his market opponents as “fundamentalists”, our unrepentant collectivist dismissed their objections on the grounds they are merely ideological.
Let us do what Quiggin didn’t do and that is strictly adhere to economic logic. Now he rightly pointed out that there is some confusion here. Unfortunately, he too is confused, especially on the nature of savings and investment. It is only the sloppiest of thinking that has an economist call the consumption of hospital services or education investment activities. They are no more acts of investment than eating out at McDonald’s. Investment takes only one form and that, as the Austrian School has pointed out, is the material means of production. (Professor Lachman, Capital and its Structure and Böhm Bawerk, Capital and Interest)
The Austrian School stresses that production takes place in stages. The more roundabout the stages of production the higher will be the productivity of labour and hence living standards. Only savings, forgone consumption, makes investment possible. There is no other way. Because capital takes the form of a structure consisting of stages of production (we owe production structure analysis to Böhm Bawerk) it takes little imagination to realise that the more stages are added to the structure the further away they move from the final stage which is consumption. This insight allows us to immediately demolish Quiggin’s fallacies and clear away the debris.
Now Quiggin claimed that the unmet demand for government subsidies would create a considerable number of jobs. There are two very old fallacies here, fallacies that the classical economists had exploded well over a 150 years ago, and the logical destruction of both can be found in John Stuart Mill’s works. The first fallacy is the assertion that taxes expand the demand for labour. Mill put it beautifully when he wrote:
The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained. Taxes are not now esteemed to be 'like the dews of heaven, which return in prolific showers'. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune.
As Mill pointed out the demand for consumer goods is not the demand for labour, explaining that if we mean by demand for labour that which raises the value of labour services then demanding consumption goods directly does not perform this function (Principles of Political Economy). Demanding consumption goods directly, whether they be in the form of education, medicine, TVs or hamburgers, does nothing to raise real wages.
All of which brings us back to capital as a structure and Austrian analysis. This demonstrates how directing spending to consumption does not raise productivity and thus the real demand for labour. Directing spending to consumption means that more productive methods (stages) will eventually have to be abandoned in favour of more labour intensive and less productive processes thus exerting a downward pressure on real wages. (Hayek, Prices and Production and Profits, Interest and Investment).
It follows that when Quiggin's critics argue that spending on hospitals is not investment they are perfectly correct in the sense that hospitals and schools, like cafes, theatres and cinemas, are at the final stage of the production structure, the point of consumption. Hence spending at this level does not raise the marginal productivity of labour. It is because they lack Austrian capital theory that the critics are unable to effectively deal with Quiggin’s fallacies and statist solutions for unemployment.
As for Quiggin — he is wrong, wrong and wrong. And no amount of snide comments by him about market “fundamentalists” can alter that fact. But there is no way Quiggin will abandon his collectivist ideology, even in the face of inexorable logic. But what staggers me is that here we have a professor of economics who seems totally ignorant of production structure analysis, who shows no grasp or understanding of the nature of savings, capital or economic growth and who does not even realise that his proposals would retard if not reverse any real growth that we may be enjoying.
*This article was first published in The New Australian, 30 June 1997. It has been republished in the light of the sad fact that Quiggin’s fallacies are once again making themselves felt.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 29 May 2006
In other words, taking money from some to spend on others redistributes demand, it does not add to it any more than it adds to the demand for labour. Mill would be shocked to find that the doctrine he despatched with such clarity and eloquence has now become the established doctrine at some universities. The second of Quiggin’s fallacies is his belief that the demand for goods is the demand for labour. (In fairness to Quiggin this appalling fallacy is rife in all our universities, which explains why it tends to dominate economic commentary).