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
Nottrampis made comments about my post on wages and the fallacy behind union bargaining. My thesis, as he called it, is an economic law. To wit: if you price the services of any good above its market clearing price you will get a surplus. And that also goes for labour. The Great Depression testifies to that fact.
Arindrajit Dube is one of the 5 so-called economists that Nottrampis referred to. Now if Dube’s ‘analysis’ were right then there would be no youth unemployment in America. Yet when he published his study in 2010 youth unemployment had averaged about 18 per cent for the year. It is now 2014 and he is still peddling his snake-oil even though youth unemployment is still being reported at crisis levels. Continue reading The minimum wage, economics and dishonest studies
My post on the minimum wage got me involved in a couple of exchanges regarding the determination of wages rates in the market place, hence this post. Now free market economists are perfectly correct in pointing out that unions justify their existence on the basis of the alleged “imbalance of bargaining power” that lies with employers. According to union apologists, particularly in the media and the Australian Industrial Relations Commission, employees must combine if they are to get a fair wage.
Unfortunately, these economists rarely attempt to explain why the “imbalance of power” concept is another dangerous fallacy. This is a particularly egregious failing on their part considering that union apologists have sometimes even drawn on the writing of Adam Smith in support of their actions. In fact, one could even argue that it was Adam Smith who fathered the “imbalance of power” idea. According to Smith: Continue reading Passing thoughts on wages and the fallacy behind union bargaining
It is a fundamental economic law that pricing the services of any product above its market clearing price will create a surplus for that product. It should therefore be a self-evident truth that this economic law applies to labour with equal force. Regardless of what a many people think, labour is not special nor is it bought and sold. What employers actually do is pay rent to labour for the use of its services. How much rent must be paid for those services depends on the supply of labour and the value of its marginal product. The lower the supply (given an unchanged demand) the higher will be the wage, and vice versa.
The demand curve for labour consists of a descending array of marginal productivities. The point at which the wage rate is determined is where we find marginal workers, those it only just pays to hire. It is at this point that minimum wage laws* do their damage. These workers are the first to go when the effective minimum is raised. It follows that what really matters is not the minimum wage per se but the effective minimum rate, the rate that exceeds the market clearing price of labour. Hence it is this rate that causes unemployment. Continue reading The minimum wage, Keynesian fallacies and leftwing malice
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
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
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
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
Stephen Koukoulas was expressing a fallacious view shared by the vast majority of economists when he wrote that
if wage levels remains too low for too long. It holds back or even oppresses growth in consumer spending. The household sector needs steady real income growth if it is to maintain a solid growth rate in consumption spending. While borrowing and a run-down in savings can temporarily underpin higher spending, more fundamentally sound and sustainable increases in spending rely heavily on household income growth.
This is the sort of plausible nonsense that leaves one in despair as to whether sound economics will ever gain ground in Australia, or anywhere else for that matter. Continue reading How government spending levels hurt real wages and the standard of living
Alan Moran has been leading the Institute of Public Affairs charge against renewable energy policies. Now far be it from me to criticise Australia’s leading authority on the economics of renewable energy but, as was the case with Lord Cardigan and the Light Brigade, Dr Moran has mistakenly charged down the wrong valley.
His approach boils down to simply chanting that renewables are too costly, which is just another way of saying that they are less efficient than centralised power generation. It eludes him that the greens’ response is to argue that renewable energy will become more efficient if given enough time to develop. (I have been unable to find a response from any member of the rightwing to this assertion).
Every single member of our rightwing failed to grasp the simple and fundament fact that renewables just do not work. By this I mean that they cannot do the job that greens dishonestly claim for them. Expecting renewables to provide the vast amounts of energy required to drive an advanced economy is like expecting a Ford pickup to do the work of a 300 ton truck. It is a physical impossibility. The bald fact remains that so-called renewable energy faces insurmountable natural and economic obstacles. Yet this unalterable truth has never rated a mention from Alan Moran or anyone else at the Institute of Public Affairs. Continue reading Where the Institute of Public Affairs went wrong on renewable energy