Gerard Jackson
5 September 2022

In a futile attempt to defend the billions of dollars that have been squandered on the Greens’ destructive anti-growth¹ energy policies a Reserve Bank of Australia official wrote a Keynesian inspired defence of this policy. He began with a fallacious definition of economic growth, calling it

an increase in the size of a country’s economy over a period of time. The size of an economy is typically measured by the total production of goods and services in the economy, which is called gross domestic product (GDP).

The correct definition of economic growth is a continuing increase in capital accumulation per head of the population, where capital is defined as the material means of production that directly or indirectly raises the marginal productivity of labour. As the earlier economists² put it, it is an increase in the amount of capital relative to labour that increases wage rates. GDP as a reliable guide to economic growth can be dangerously misleading, a fact that would leave our politicians, economic commentators and so-called journalists slack-jawed, not to mention RBA economists.  For example. from 1933 to 1940 US GDP averaged about 4.15 per cent a year and yet the capital stock still shrank. Arthur Lewis estimated that from 1929 to 1938 net capital formation plunged by minus 15.2 per cent³. Professor Robert Higgs calculated that from 1930 to 1940 net private investment was minus $3.1 billion⁴.

A good indicator of capital consumption would be the age of machinery. In 1925 the percentage of metal working equipment over 10 years old was 44 per cent: by 1940 it 70 per cent⁵. It had risen year by year during the Great Depression. This is a clear indication that the 1930s were a decade of capital consumption for the US⁶.  So don’t let the Green Party and their activists in the media and the Treasury⁷ try to you fool you into thinking that spending on solar and wind raises capital formation and hence real wages — it does not because it is not real investment. What really makes the Greens’ economic policy thoroughly immoral is that it is designed to eventually lower the standard of living of the great mass of Australians⁸.

In order to defend the Greens’ anti-energy policy our RBA economist used a hypothetical case where $10 million dollars is spent building a wind farm. (It could just as well have been a solar plant.) Eighty per cent of the 10 million is spent by the recipients and 20 per cent is saved. The result of this alleged “investment” is “$50 million in additional GDP”. It is important to understand how this magic is created in order to get a grasp some of the bad economic reasoning being used to defend so-called renewable energy.

 What we have here is the Keynesian investment multiplier which simply states that an injection of money into the economy multiplied by the reciprocal of the amount ‘saved’ will expand GDP by the size of the product. Hence, If the government spends a million dollars and as those dollars pass from one recipient to the next and 1/5 of each dollar received is ‘saved’ then the multiplier will be 5 and GDP will expand by $5 million.

 This is utterly fallacious. First, genuie investment is paid for out of savings⁹, and it is these savings that create genuine growth. But according to the Keynesian multiplier the less we save the bigger will be the multiplier and the faster GDP and real incomes will grow. In short, the less a country saves the richer it becomes.

Second, Keynes made a strange concession by admitting that if the recipients of the newly created monetary spent every penny of it then “prices will  rise without  limit”, which means the multiplier would be infinity¹⁰.  Well, if  the multiplier is infinity and prices are rising without limit then what we have here is hyperinflation. What saves us from this fate, according to Keynes’ disciples, is the concept of “leakages”. These so-called leakages ensure that the multiplier never becomes zero otherwise the multiplier would become 1. Therefore, when the multiplier’s magic fails to appear, which is always the case, the idea of leakages provides Keynesians with a handy rationale for explaining away the failure¹¹.  

Third, Keynes revealed his multiplier’s absurdity when he wrote that if the “Treasury were to fill old bottles with banknotes” and have men bury them it could then use private enterprise to dig them up again. This would eliminate unemployment and increase the country’s “capital wealth”¹². This is so obviously ludicrous that Keynesians usually make a point of ignoring it. However, this fantasy revealed the important fact that the multiplier consists entirely of a monetary expansion.

In plain English, it is simply a policy of printing more dollars. It has as much to do with real investment as does burying and digging up old bottles. And yet Keynesians persist in ignoring the obvious by absurdly defining the multiplier as fiscal policy. The multiplier is a dangerous delusion that can leads to accelerating inflation, which is why inflation is rising in so many countries, including Australia.  Moreover, using the fallacious Keynesian multiplier to justify the Greens’ destructive energy policies is also immoral.

Fourth, according to the Keynesian logic of our deep-thinking treasury official the $20 billion Australian politicians recklessly threw at wind power should have provided a significant boost to growth. Instead, the economy risks sinking into stagflation as  real wages continue to fall while in the meantime Europe is suffering from a green-created energy disaster. Australia will soon follow suit if politicians do not change course, which seems highly unlikely.

Capital accumulation comes from savings, not from the printing press or reckless borrowing and spending by politicians. To save means to demand future goods instead of present goods. Therefore, to save is to spend, as David Ricardo correctly stated.  In his greatly misunderstood fourth proposition John Stuart Mill rightly made the same point when he stated that the “demand for commodities [consumer goods] is not demand for labour¹³.”

This is why Joe Biden’s Keynesian policy of  massive spending gave America stagflation, drove down real wages and generated accelerating inflation. Therefore, the idea that spending on so-called renewables will raise the standard of living, and hence real wages, is pure nonsense. Any attempt to run an economy on sunbeams and the capricious state of the weather will only end in tears.

Footnotes

¹The Greens’ anti-growth beliefs are laid out in principle 4  of their Economic Justice policy statement. It reveals a staggering ignorance of economics and economic history. It also reveals that it would require a socialist state: in short, central planning.

²Adam Smith. Wealth of Nations, Liberty Classics, 1981, Vol. II,  p. 677,

James Mill, Commerce Defended (1808), Reprints of Economic Classics, Augustus M. Kelley, New York, 1965. pp. 73, 74, 93.

David Ricardo, Principles of Political Economy and Taxation, Penguin Books, 1971, pp.  168. 179.

Rev, T. R. Malthus, Political Economy Considered, John Murray, 1820, p. 351.

This discussion about excess investment and economic stagnation is strange considering the brilliant description of the nature and process of forced saving he gave in the Edinburgh Review, February 1811, pp. 363-372.

Robert Torrens, Wages and Combinations, Longman, Rees, Orme, Brown, Green, & Longman, 1834, pp. 16, 17,  21, 36, 44.

John Stuart Mill, Principles of Political Economy, liberty Fund, 2006, Vol. II, pp. 719, 749, 751.

William Stanley Jevons, The Coal Question, Macmillan and Co., Limited, 1906, pp. 142, 448. Jevons stressed the role of cheap energy in promoting economic growth. The importance of cheap energy has been overlooked by most of our politicians, most of whom are not that bright.

³W. Arthur Lewis, Economic Survey 1919-1939, Unwin University Books, 1970, p. 205.

⁴Robert Higgs, Depression, War, and Cold War, The Independent Institute, 2006, p. 7.

Lester Chandler, a Keynesian economist, observed that the “failure of the New Deal to bring about an adequate revival of private investment is the key to its failure to achieve a complete and self-sustaining recovery of output and employment”. And yet from 1934 to 1940 the average estimated rate of unemployment never fell below 14 per cent. Michael Darby claims the unemployment rate has been inflated because it includes those on relief. This criticism is illegitimate. Relief work is work for the dole. It is an attempt to hide unemployment, not eliminate it. This is something the statisticians understood but Darby apparently did not, or chose not to. Moreover, the very existence of the relief was evidence of Roosevelt’s failure to restore full employment.

Lester V. Chandler,  American Monetary Policy 1928-1941, Harper & Row, 1971, pp. 247.

Michael R. Darby, Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941, Journal of Political Economy, 1976, Vol. 84, No. 1.

⁵Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946, LibertyPress, 1979, p. 491.

⁶H. G. Moulton, Income and Economic Progress, The Brookings Institution,

1935, pp. 23-24. He also deals with the effects of Deferred maintenance.

⁷It is Australia’s misfortune to have Dr Steven Kennedy as Treasury Secretary. The man is a climate change fanatic with an absolutely crummy record of predictions. This joker was one of the key players behind the 2008 Garnaut Report that proposed a crippling carbon tax on the economy. He and the rest of the crew even thought the Greenland ice sheet  would melt. Lo and behold, 14 years later it is still there and intact. They also suggested that about half the planet’s species would be extinct. This bloke couldn’t pick the winner of a one-horse race.

Unfortunately, Kennedy’s cultish green beliefs are shared by most of those in the Treasury and the rest of the public service and that’s why they will continue to impose their destructive green policies on the country. It is interesting to note that Alexandria Ocasio-Cortez’s chief of staff Saikat Chakrabarti, who is a socialist, admitted that the true reason for the Green New Deal is to overhaul the entire economy. It has nothing to do with climate change.

⁸The Greens’ hope for a future without economic growth are absurd. Nassau Senior pointed out 186 years ago that if an advanced country tried to remain stationary its standard of living would continue to fall behind all other nations. What he missed is that the ruling party would have to impose severe totalitarian controls to maintain a stationary state.

Nassau W. Senior, An outline of the Science of  Political Economy, Reprints of Economics Classics, August: M. Kelley, 1965, p. 69.

⁹In his exchanges with Malthus regarding economic depressions Ricardo stressed:

Mr. Malthus never appears to remember that to save is to spend, as surely, as what he exclusively calls spending.

By this he meant that to save is to direct spending to future goods (capital goods) as against present goods (consumer goods).

The Works and Correspondence of David Ricardo Vol. II, liberty fund Indianapolis 2004, p. 449.

¹⁰ John Maynard Keynes, The General Theory of Employment, Interest and Money, Macmillan, St Martin’s Press for the Royal Economic Society, 1973, p 118.

¹¹An addition to a cash balance would be a leakage along with buying imported goods. The point remains that there is no multiplier. It is a fallacy.

¹² John Maynard Keynes, The General Theory of Employment, Interest and Money, Macmillan, St Martin’s Press for the Royal Economic Society, 1973, p. 129.

¹³John Stuart Mill, Principles of Political Economy, libertypress, 2006,  p. 78.