Now for some light entertainment. A number of leftists absolutely adore Ross Gittins (economics editor of the Sydney Morning Herald and an economic columnist for The Age). While these leftists rhapsodise over Mr Gittins’ unparalleled grasp of economics I find myself less than impressed with his opinions.
So how good is Gittins? On reflection, that should read: Just how bad is Gittins? Last July he revealed his deep understanding of economics in an article in which he basically agreed with certain so-called economists that there is no direct link with the minimum wage and the unemployment rate of marginal labour1. (Minimum wage rises don’t lift unemployment, analysts agree, Sydney Morning Herald, 12 July 2014). However, this post is not about Gittins’ failure to understand what is happening in the field of economics with respect to the minimum wage but his history of sloppy economic reasoning, of which the aforementioned article is one of his most recent examples. Continue reading Economic growth, the minimum wage and sloppy economic thinking
Nottrampis posted a comment criticising my attack on Keynesianism. The following is my response. It is not meant to be a rebuttal but more of an outline of my views. In the very near future I shall expand in far greater detail on each of my points.
Now where to begin:
1. Demand springs from production, not the other way round, a fact that is patently clear in a barter economy. Of course, if it were a simple case of demand bringing fourth production then poverty would never be a problem. Keep on increasing ‘demand’ and eventually you will make everyone as rich as Warren Buffett. Continue reading More Keynesian fallacies and the Great Depression
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
I’ve been out of sorts for some days. Hopefully I shall be posting again on Monday.
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