Category Archives: Austrian school of economics

Australia’s recovery from the Great Depression compared with Roosevelt’s sorry unemployment record

I’ve had several emails regarding unemployment rates during the Roosevelt administration. These readers were confused by some Keynesian sites asserting that the unemployment figures were inflated. One reader wrote that “the unemployment figures must have been greatly exaggerated because they excluded people on relief. If these people had been included then unemployment in 1938 would have been 12.5 percent and not be 19 percent.” I immediately recognised the figures as coming from Michael R. Darby’s 1975 paper1.

There is a sound reason why it is Keynesian votaries that tend to use Darby’s figures while the vast majority of economists and historians stick with the conventional figures. Putting the unemployed on relief and giving them a pay check is called working for the dole. It is an attempt to hide unemployment, not eliminate it. The old statisticians and economists understood that and were scrupulously honest in their estimates. It was called relief because it was understood that this ‘employment’ was a government-funded substitute for real employment. Better to be paid for doing something rather than be paid for doing nothing. Therefore, if these had been real jobs they would not, by definition, have been called relief. Taken to its logical conclusion all a government would have to do to eliminate unemployment is assign the jobless to various activities, no matter how pointless, and classify their dole payments as wages. Continue reading Australia’s recovery from the Great Depression compared with Roosevelt’s sorry unemployment record

Unemployment and reduced output is the cost of having inflation, not the cost of fighting it

Gerard Jackson

What is the real connection between inflation and unemployment? Then again, maybe that should be inflation and employment. That this has been raised several time on this site which got me thinking about a 1993 study called The Costs of Unemployment in Australia1 by Raja Junankar and Cezary Kapuscinski. The authors, both of whom are Keynesians, argued that a “fight inflation first” policy generally incurs more costs than benefits, a view that is held by most of the economics profession.

As I recall, this study elicited a favourable response from our media. The striking thing — in my view — is that though 22 years has passed it seems that not a single free market commentator made an effort to establish a link between inflation, booms and the consequent unemployment. What we do get is the likes of P. D Jonson, Peter Smith, Des Moore, Sinclair Davidson and Steve Kates2, etc., falsely asserting that the so-called boom-bust cycle is a natural part of the free market order and that we will just have to grin and bear it. (This attitude is music to the ears of the left and Keynesians because to them it justifies their own so-called solutions to the problem of recurring recessions). Continue reading Unemployment and reduced output is the cost of having inflation, not the cost of fighting it

Steve Kates gets it badly wrong on Roosevelt, the Great Depression and government spending

Gerard Jackson

It looks like Steve Kates will never get it right on the Great Depression. Harold L. Cole and Lee E. Ohanian wrote a paper blaming Roosevelt’s economic policies for keeping America in depression. Any genuinely informed and honest person would have to agree with them, at least in principle. Now Kates quoted from an article on the work of these two economists that ended with the following quote from Cole:

The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes… Ironically, our work shows that the recovery would have been very rapid had the government not intervened.

 Steve Kates took immediate umbrage with this view, asserting that “what it doesn’t do is put the blame on public spending which is where the blame truly belongs.” Now there is a fundamental error in Ohanian and Cole’s work but it has nothing to do with public spending, an issue about which Steve Kates is utterly wrong. We get the same nonsense from Sinclair Davidson and Julie Novak who argue that Australia’s recovery from the Great Depression was due to cuts in public spending plus interest rate reductions and devaluation. Continue reading Steve Kates gets it badly wrong on Roosevelt, the Great Depression and government spending

The minimum wage and defending the free market

Gerard Jackson

I am frequently asked why free-market thinking in Australia doesn’t seem to be making any headway against the statist thinking. Needless to say, these people also expressed considerable disappointment in Tony Abbott’s economic record, which brings me to the right-wing’s sorry record. No serious scientist ever disconnects from first principles, and the same should go for economists. Unfortunately, first principles are something that our self-appointed advocates of the free market seem incapable of applying, particularly when it comes to the pricing of labour. And this is why, after more than 30 years of intellectual grandstanding, they have failed dismally to persuade the great majority of Australians that the effective minimum wage destroys jobs. Continue reading The minimum wage and defending the free market

Tony Abbott’s lousy economics and the menace of Keynesianism

Gerard Jackson

I have been asked a number of times what the hell is wrong with Tony Abbott. The answer is simple: The same thing that is wrong with the Liberal Party. The Liberals are still largely governed by statist thinking and Keynesian economics. It is a party without a grasp of sound economic theory, any knowledge of the history of economic thought and thoroughly ignorant of economic history. James Guest, former Liberal MP, is a perfect and depressing example of this dangerous mixture of sanctimonious witlessness.

Five years ago James Guest did the public a service by openly displaying his staggering ignorance of these subjects in an article he wrote for Quadrant in which he attacked Steve Kates for rightly taking issue with the Labor Government’s reckless spending policy to counter the recession. (One can read Kates’ tepid response here). Continue reading Tony Abbott’s lousy economics and the menace of Keynesianism

Tony Abbott finds his inner central planner causing Mises and Hayek to rollover in their graves

Gerard Jackson

It seems that the Tony Abbott administration has discovered its inner central planner by approving a “competitiveness agenda” (code for industry policy) that will use taxpayers’ money to fund those economic activities where Australia has the greatest advantage, leading one to wonder why they would need public funding if they are that strong. Picking winners always leads to even greater political meddling in the economy and, if implemented, Abbott’s proposal will be no different. His policy also envisages ‘cooperation’ between businesses, training colleges, universities and schools. Funny thing, though, is that Mussolini had a similar vision: he called it corporatism. Continue reading Tony Abbott finds his inner central planner causing Mises and Hayek to rollover in their graves

Recessions, investment and total spending: an Austrian perspective

Gerard Jackson

I think it’s pretty clear that Keynesians and their votaries in the media have learnt nothing from the last recession. Their absolute faith in the fallacy that consumption drives economies is sufficient proof of that. Time and time again I keep reading that consumer spending is 70 per cent or so of GDP which means, according to them, that if consumer spending falls the economy will slide into recession. Austrian economics has continually pointed out how dangerously wrong this view is.

What really matters is total spending, of which business spending is by far the largest and most important component. The problem is that the commentariat unthinkingly swallowed the fallacy that including spending between stages of production would be a case of double-counting with the result that national income figures seriously underestimate actual spending. Continue reading Recessions, investment and total spending: an Austrian perspective

Austrian economics, economic growth and the Laffer curve

Gerard Jackson

It was 1962 when Jack Kennedy stated that “it is a paradoxical that tax rates are too high and tax revenues too low”. In other words, high taxes were retarding investment and output, thus keeping the American standard of living lower than it would otherwise be. It was this belief that motivated the 1963 tax cuts. The result was a surge in investment. From 1959 to 1963 only 27.8 per cent of what is termed ‘investment’ went to business and 38.5 per cent to real estate. In 1967, thanks to the cuts, the proportion going to business had jumped to 58.6 per cent while the amount going to real estate had dropped to 11.2 per cent and the demand for labour jumped. In addition, revenue from the income tax rose from $48.7 billion in 1964 to $68.7 billion in 1968. (The Kennedy’s tax cuts were enormous and, as a proportion of national income, about twice as large as the Bush cuts).

But from whom did Kennedy obtain his wisdom on the value of tax cuts? Keynesians, that’s who. Prominent among these was Walter Heller who believed that tax cuts could increase tax receipts. As he himself said: Continue reading Austrian economics, economic growth and the Laffer curve

Consumer spending, investment and the trade cycle

Gerard Jackson

This is a general response to a comment posted by Nottrampis. Once I began to write I realised my reply would be better as a post rather than a comment.

No matter what Keynesians argue, investment is not driven by consumer spending. This fallacy is based on a total misunderstanding of the nature of derived demand. (I shall deal with this fact in later posts). Investment is driven by the prospect of profit. In a free market the rate of interest determines the length of investment projects. Consumer spending has nothing to do with it. Continue reading Consumer spending, investment and the trade cycle

Why economic policies promoting consumer spending are bad for an economy

Gerard Jackson

Some readers, still swayed by the current orthodoxy, are a little puzzled by the argument that government policies that bring about increased consumption come at the expense of economic growth (capital accumulation). The classical economists fully understood that economic growth was forgone consumption, meaning that investment, spending on capital goods, can only take place by directing resources away from consumption. It follows that the reverse must be true. Promoting consumption at the expense of savings results in resources being redirected from investment.

Unfortunately, policy-makers, not to mention a huge number of economists, genuinely believe that increasing the demand for consumer goods, by whatever means, will raise profits and thereby raise the demand for more capital goods which in turn would lead to an increased demand for labour. This Alice-in-Wonderland thinking (meaning the Keynesian multiplier) leads to the absurd conclusion that massively raising the spending power of the unemployed would generate enormous growth. Continue reading Why economic policies promoting consumer spending are bad for an economy