It is of course arrant nonsense to argue that a country can make itself rich by using part of its labour force to bury pound notes in bottles which are then dug up again. (I think Keynes was having a sly dig at the gold standard which he detested for putting a brake on inflationary policies). No one in his right mind could seriously argue that the ancient pharaohs' policy of building pyramids, a practice that seems to have drawn Keynes' admiration, enriched Egypt.

The real trick, as I have said so many times before, is to create more and more higher paying jobs. And this can only be done through capital accumulation. It is this process — usually called economic growth — that raises living standards, something that neo-classical economists would not dispute. But it is also at this point that the Austrians sharply depart from their neo-classical cousins. While the Austrians stress the fact that capital forms a heterogeneous structure consisting of complex stages of production, the neo-classical economists have adopted the view that capital is homogeneous and — in the opinion of many — a self sustaining fund.

This difference of opinion is crucial in discerning the dangers of Obama's green proposals. According to Austrian capital theory a continuing lengthening of the production structure raises productivity and hence real wages. But this can only happen if the community produces more than it consumes, the difference being savings that are used to produce capital goods. It should be clear by now that the process of capital accumulation raises the ratio of capital to labour, something that no neo-classical economist would take issue with.

This point needs stressing because what Obama and his advisors are proposing is the dissipation of capital. This means that the ratio of labour to capital would rise, a process guaranteed to lower the demand for labour thereby cutting real wages. We can see this in the greens' argument that their proposal would employ more people than would the building of coal or oil-fuelled power stations. But these power stations involve huge economies of scale that reduce unit costs. It is these falling costs that create more and more jobs right down the production structure to the point of consumption. What Obama's proposal amounts to is using taxpayers' money to deliberately create malinvestments that will lower living standards.

In a nutshell, according to Obama's logic green projects create more jobs because they are labour intensive. So are wheel barrows and shovels. Does this mean that all earth moving machinery should be banned by law? That scores of factories should be set up to manufacture nothing but shovels and wheelbarrows? Think of the enormous number of jobs this would create. And think of the gigantic wage cuts that such a policy would impose on the masses.

I am deadly serious about this comparison. There is no fundamental economic difference in principle between sabotaging the building of centralised power stations and the banning of bulldozers. The only thing that makes them differ is that the latter proposal is self-evidently stupid while Obama's proposal requires the kind of knowledge that most people do not possess — and that includes himself and his oh-so clever advisors

For those who think I am exaggerating, let us take a swift look at some basic facts. The upper limit for a windmill is about 59.3 per cent. This is called the Betz limit. What it tells us is that it is impossible for any windmill or wind turbine to turn more than 59.3 the per cent of the wind’s energy into mechanical or electrical energy. In English so plain that even Obama and his advisors can grasp it — wind power is dilute and that's where its diseconomies of scale come from.

The same goes for solar panels. There is a fundamental physical law at work here. It states that the maximum amount of energy that the earth receives from the sun under optimum conditions is just under 1 kWh per square metre (11 square feet). So even if these panels were 100 per cent technically efficient they would still be grossly inefficient economically. (One should take note that greenies and their mouthpieces are always careful about never mentioning economic efficiency).

Diseconomies of scale mean rising costs, not falling costs. Another insurmountable technical problem is the scientific fact that the maximum power one can extract from a windmill is also proportional to the third power of the wind’s velocity. This means that even small changes in wind velocity will generate huge disproportionate changes in output, even with the best designed windmills.

A 1978 British study should give you some ideal of how inefficient these projects are. It calculated that it would take 20 million windmills with 100 foot diameter blades to meet the country's electricity needs. For America, it would have been something like 250,000 windmills with 300 foot blades. How many windmills would it take today? (That the study is nearly 30 years old is irrelevant. Physical laws do not change with the passing of time or politicians).

Denmark is one country from whose energy mistakes have been ignored. It allowed itself to be conned by green fanatics in to diverting masses of scarce capital into building wind farms, much to the disgust of real scientists and engineers. The country is now in the ridiculous situation where its theoretical generating capacity is three times that of peak demand.

Yet, according to a 1999 estimate, wind accounts for only about 1.7 per cent of electricity production — at a cost of about $AUS600 million in annual subsidies. On the other hand, gas-fired power stations have concentrated power and economies of scale, which means falling costs. By this means, the price of electricity is lowered. And that means lower input prices for industry which in turns expands the demand for more jobs.

Let us now take a quick look at what reasonably informed and intelligent people are up against. Anatole Kaletsky is the associate editor of the London Times and is considered to be a top-notch economist. He his also a rabid Bush-hater. To him Bush is "doltish" while Obama is of high intelligence. (New president could help US economy recover quickly 4 November 2008). In the same article he argued that if Obama levies "higher energy taxes . . . [he] would raise trillions of dollars in revenues", which in turn would fund greenie projects. In short, this genius thinks you can squeeze trillions out capital intensive industries and still raise living standards.

Just in case you are thinking that I misrepresented him, this is the same pompous ass who argues that putting severe restrictions on Co2 emissions would stimulate growth and raise the demand for labour because they would "have the effect on the world economy comparable to a large-scale war". (Digging beneath the gloom, The Australian, 29 November 2000). That's right, this joker thinks waging war which means the destruction of men and capital is good for a country. I guess that's why living Germany and Japan in 1946 had the world's highest living standards.

Gerard Jackson is Brookesnews' economics editor

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