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
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
I wrote this in response to Sarah’s comments about Austrian economics and Catallaxy. It was my original intention to post it as a comment but I then decided to rewrite it as a post. Sarah wrote that the Catallaxy people are “trying to give the impression that they are the only ones in Australia who have read the Austrians”.
Well, she is spot on. The Catallaxy crowd have been trying for years to pass themselves off as experts on Austrian economics. Yet any genuine Austrian who read them would know they are faking it. When it comes to Austrian capital theory, for instance, Sinclair Davidson doesn’t know what he is talking about. He just regurgitates Roger Garrison. He also knows nothing about Austrian trade cycle theory or Austrian monetary theory. In addition, he is also ignorant of economic history and the classical economists. For heaven’s sake, the man is still preaching the gross historical error that Australia left the gold standard in 1931! His casual approach to the crash of 1937-38 is just as bad. He even thinks ‘Ricardo’s theory’ of economic rent “has its origin in the labour theory of value”. No one who had read the classical economists could make such an egregious error. Continue reading Catallaxy gets it wrong again on the classical economists on the trade cycle
Socialists deliberately ignore the benefits of privatization because like all cultists they deny any evidence that refutes their dogma, including the fact that socialist states always collapse. Unfortunately, their economic illiteracy can have a malicious influence on public opinion. This is why it’s not enough to empirically demonstrate that genuine privatization generates benefits. One must also explain why free markets produce these results, and this is where Austrian economics has been exceptionally successful. Continue reading Austrian economics, socialists, profits and privatisation