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The Australian economy tanks while our 'free marketeers' flounder
Gerry Jackson
Alex Robson rightly slammed Prime Minister Rudd's so-called stimulus spending (Rudd the Profligate, Wall Street Journal, 22 April 2009). In doing so he inadvertently revealed how bad our self-professed free marketeers have been in alerting the Australian public to the severe dangers of interventionist policies. But what can one expect when most of these self-appointed defenders of the market cannot even explain what caused the financial crisis let alone what the real problem with Keynesianism is.
Because of this lack of understanding it will probably come as a shock to them to learn that the one thing Rudd has failed to singularly do is implement a Keynesian policy, irrespective of what Mr Robson evidently thinks. Now Robson correctly targeted Rudd's reckless borrowing policy and the rising tide of red ink that it will create. But Keynesianism is not about borrowing as the ordinary man correctly understands the term: it is about monetary expansion. To fully grasp this we need to turn to Keynes, according to whom:
The notion that the creation of credit by the banking system allows investment to take place to which 'no genuine saving' corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of the others. If the grant of a bank credit to an entrepreneur additional to the credits already existing allows him to make an addition to current investment which would not have occurred otherwise, incomes will necessarily be increased and at a rate which will normally exceed the rate of increased investment. Moreover, except in conditions of full employment, there will be an increase of real income as well as of money-income. (John Maynard Keynes, The General Theory of Employment Interest and Money, Macmillan-St. Martin’s Press, 1973, p. 82).
In plain English, money created by the banking system out of "thin air" and then used by firms for investment purposes is no different in principle than genuine savings (i.e. expenditure directed from current consumption to future consumption). When governments implement this policy the phenomenon of investment exceeding savings remerges. In other words we end up with inflation.
It ought to be clear, therefore, that if Rudd's policy is truly Keynesian then this would be reflected in the money supply figures. As the chart below shows the monetary aggregates have been comparatively flat for the last 16 months. Moreover, we can see from the second chart that the Reserve has been selling assets, strongly suggesting that it is constraining the money supply. At the same time it has also been cutting rates, leading me to wonder if anyone at the Reserve really knows what he is doing.
You cannot slap on the monetary brakes without pushing the economy into recession, a fact that I have pointed out numerous times. Last year I stressed that the economy was already in recession while our economic commentariat were still congratulating Australia for escaping the downturn. So why didn't any of them spot it. Because the manner in which the money supply distorts interest rates, the pattern of production and the structure of relative prices is a black box to them. Any Austrian would have pointed out — as I did — that recession would first emerge in manufacturing.
This is precisely what happened. I also predicted that members of our commentariat would then start spluttering nonsense about the appearance of a "dual economy": again I was right. (Australia's economic punditry and the emerging recession). In fact, manufacturing has been contracting for more than a year and yet not a single member of our self-anointed free market club saw anything significant in this. Unfortunately things are not getting better, The Australian Industry Group's Performance Manufacturing Index for March shows that manufacturing still contracting.
Mr Robson may find throwing bricks at Rudd extremely gratifying but it does absolutely nothing to educate the public about economic matters, something that our free market club has dismally failed to do — not that they ever made a genuine effort. The first thing they should have done is expose Keynes' fallacies. Yet I have never encountered an article by a single member of this outfit that made a serious attempt to do just that.
I can only conclude from Mr Robson's article that they are simply not up to the task. How can any informed person contradict me on this when Mr John Stone — former head of the Australian Treasury and arch "economic rationalist" — authoritively stated that "Keynes was right for the 1930s," that "savings exceeded investment"? This terrible nonsense is what passes for economic wisdom among our free marketeers. Have they ever read Keynes? I doubt it. Keynesianism is the equivalent of the Indian rope trick, with the exception that no sensible person ever thought of this clever deception as being truly magical. Keynes states
that the grant of the bank-credit will set up three tendencies — (1) for output to increase, (2) for the marginal product to rise in value in terms of the wage-unit (which in conditions of decreasing return must necessarily accompany an increase of output), and (3) for the wage-unit to rise in terms of money (since this is a frequent concomitant of better employment).(Ibid. P. 83).
Allow me to slice through this verbal fog, beginning with point 2. What this amounts to is that credit expansion will raise the value of the worker's marginal product relative to his wage rate. In short, it will cut real wages. Point three admits this by referring to a "rise in terms of money". Point 1is stating the obvious fact that if you employ more people by cutting wages rates relative to the marginal value (the value of the extra unit output from hiring from hiring an additional worker) then output will increase. Yep, at the end of the day it is all about using inflation to cut wage rates.
It's time our so-called rightwing got serious about tackling Keynesian nostrums and all the other economic fallacies that have brought about the present crisis. But this would involve an open debate, something they seem determined to avoid at all costs
Gerry Jackson Brookesnews' economics editor
BrookesNews.Com
Monday 27 April 2009
Source: Reserve Bank of Australia
Reserve Bank of Australia assets
PMI
Production
Employment
Average wages
Source: The seasonally adjusted Australian Industry Group-PricewaterhouseCoopers Australian PMI