Technology, markets, investment, and Professor Quiggin’s flagrant errors

Gerard Jackson

What proponents of central planning proposals (industrial polices as they like to call them) overlook is that no matter how productive a technology appears to be it will always need capital and entrepreneurship to convert it into a commercial success. Without these factors new technologies with commercial promise will always gravitate to foreign shores.  When a country appears to be lagging behind other countries the interventionists solution is always the same: more intervention. That government intervention, meaning political meddling. may have created the situation these same politicians and their academic advisors now lament never seems to occur to them.

They also appear unable to grasp the fundamental fact that it is savings (spending on future goods as opposed to present goods) that  fuel an economy and it is entrepreneurship that drives it. However, according to the eminent Professor John Quiggin:

The main lesson from Asia is that the process of economic development is quite straightforward. Given a reasonable education system, the rule of law to a basic extent and access to the technology and capital goods of the developed countries, catch-up growth is more or less automatic. Well-designed industry policies and good financial management may add a few percentage points to GDP and bad policies may cost a few percentage points, but the growth process is quite robust1.”  (Emphasis added.)

There is nothing automatic about growth because there is nothing automatic about savings and entrepreneurship. Note that should the actions of politicians cripple either one of these or both together they will cripple growth, the accumulation of the material means of production, that which raises the productivity of labour and hence real wages2. In his book (Zombie Economics) Quiggin reveals his ignorance of the true nature of savings3 and investment, going so far to emphatically state:

If lots of people want to save, and few want to invest, total demand in the economy will fall below the level required for full employment4.

This is Keynesian claptrap. There is no record in economic history of this ever happening. In fact, Australia’s experience in the Great Depression5 exposes this thinking as a dangerous Keynesian fallacy. Now Quiggin just cannot help himself when it comes to his socialist creed. He even thinks it is a good idea to defend the Soviet Union’s appalling economic record. According to this great economic historian it

is in any case obvious that between 1917 and 1989 Russia was transformed from a semi-feudal peasant economy into a middle-income developed country with living standards comparable to those of capitalist countries like Greece and Portugal6.

Not only is it not obvious it is an outrageous lie. Russia was steadily and successfully industrialising, albeit from a low base, from at least the late tsarist period. From 1910  to 1913, coal production rose by 45 per cent, pig iron production by 55 per cent, copper by 52 per cent7. Russia’s total output was growing faster than Europe’s8. Come the eve of WWI her industrial production was fifth in the world9. It was not WWI that destroyed this rapid progress but Quiggin’s Bolshevik mates. Figuring he was giving it to capitalism good and hard he then made the absurd claim that by 1989 the Soviet standard of living was “comparable to those of capitalist countries like Greece and Portugal”. (He thought he was being clever in picking two of the poorest countries in Europe to try and make his point.) Now Moscow was considered by many Russians the most desirable place to live. So what was it like under the Soviets?

In 1990 Moscow’s Health Minister revealed that half the hospitals had no sewerage, 80 per cent had no hot water, and 17 per cent no piped water at all10.

Can we now expect Professor Quiggin to argue that the health situation was just as bad or even worse in Athens and Lisbon? Somehow I doubt it. Moreover, the Greeks and Portuguese did not have to put with televisions bursting into flames. Per capita GDP is used as an indicator of a population’s standard of living. If Quiggin were right we would expect per capita GDP of Greece and Portugal to be comparable with that of the Soviet Union. Nothing like it. Using current US dollars per capita GDP for Greece in 1989 was $7,847, for Portugal it was $6,056 and for the Grand Old Soviet Union it was $3,42911.

But he wasn’t done making a fool of himself. He argues that because the Soviets were the first into space it proves that innovation central planning are compatible. Baloney. There was no innovation. They simply attached huge boosters to a massive missile.  They then stuck a sphere on the top containing a radio transmitter. Once in space it beeped — and just kept beeping until the battery ran down. Nothing new there at all. Four months later the US launched a much smaller rocket containing Explorer I. This satellite contained scientific equipment that detected the Van Allen belt and by doing so contributed to our scientific knowledge, unlike Sputnik. Oddly enough, Quiggin neglected to mention that the Americans were the first on the Moon — and without the aid of a single central planner or even having to murder millions of people. By the 1970s the Soviets were so far behind America they had to steal IBM computers. I am left wondering whether John Quiggin is living in a parallel universe.

Then of course he had to bring the internet into it. According to him private enterprise had nothing to do with it. It was all the result of brilliant scientists and technologists toiling away in our universities. Then why didn’t the Soviets invent it? They too had brilliant mathematicians and physicists at work in their universities. It would never occur to him to ask this very obvious question. Or even why they didn’t invent the transistor or the desktop computer? The truth be told, Quiggin’s tale of the internet is a gross distortion of the facts.

In a pathetic attempt to strengthen his argument in favour of central planning he asserted that “[t]he case against central planning seems obvious…” But it ain’t. Mises explained that central planning will always fail because it abolishes factor markets, which makes genuine economic calculation impossible12. The collapse of the Soviet Empire proves he was right. Robert Heilbroner, a prominent American socialist, was forced to admit:  “It turns out, of course, that Mises was right13.” I am at a loss to understand how Professor Quiggin apparently managed to remain ignorant of Mises’ work, unless he has been living under a rock.

Even though interventionists recognise the existence of risk they appear incapable of understanding  its nature. How else could they confuse risk with the reluctance to invest long term. In a stable political environment where the rule of law prevails risk has no direct connection with any investment’s gestation period. Let us make this very simple indeed. Assume there are  two countries where taxes are low, the rule of law prevails, their monetary systems are based on a pure gold standard14 and they differ  only in their rates of interest. It should immediately be apparent that the country with the lowest interest rate would undertake investment projects with the longest gestation period15, despite the fact that investments in both countries are free of risk.

Long term investments are those that require an amount of labour and capital goods that can only be supplied by increased savings. A low market rate  of interest signals to entrepreneurs that an increase in savings has released the necessary resources for these projects. A crude example should suffice to clarify the matter somewhat. There are two projects A and B and their respective gestation periods are one and two years; respective rates of return are 10 per cent and 5 per cent. If the quantity of savings are such that the rate of interest is 10 per cent then project B will not be considered. But if increased savings drive the interest rate down to 5 per cent then more time consuming projects will also be undertaken. The fall in interest rates clearly means that savers are prepared to wait longer for a return on their investments. (Regardless of what the Cambridge school claims so-called reswitching16 is a myth.)

Quiggin uses the return on equities to justify his socialist impulse to nationalise companies. Equities are essentially shares. Historically the return on equites exceeds the “real bond rate”. I should bloody well think so. The return on equities minus a risk premium is a profit. It has nothing to do with the government bond rate. It is truly astonishing that any economist could in all seriousness call it market failure. Only in a state of general equilibrium would the return on equities equal the return on the bond rate.

Sometime in the future I shall return to this equity question with particular attention to the nineteenth century.


1John Quiggin, A lesson for microeconomists, Australian Financial Review, 2 January 1998

2Taxes, spending and inflation are those thing can misdirect entrepreneurial activities. Friedrich Hayek, Prices and Production, Augustus M. Kelly. 1967, p. 134. Also his Profits, Interest and Investment, Augustus M. Kelly. 1975, pp. 228-235.

3David Ricardo rightly pointed out that to save is to spend. Savings are the demand for future good. The money you put in your draw or wallet is a cash balance. An increase in cash balances (sometimes called hoarding) is an increase in the demand to hold money.

4John Quiggin, Zombie Economics, Princeton University Press, p. 85.

5Professor Quiggin’s Keynesian Creed Destroyed by Australia in the Great Depression.

  6John Quiggin, Myths of the market.

7Friedrich Hayek, Economic Planning in Soviet Russia, George Routledge & Sons, LTD, 1935, p. 203.

8Paul R. Gregory, The Political Economy of Stalinism: Evidence from the Soviet Secret Archives, Cambridge University Press, 2004, p. 25.

9Richard Pipes, Russia Under the Old Regime, Penguin Books, 1974, 192-3.

10Robert Conquest, Reflections on a Ravaged Century, 2000, p. 106.


The official Soviet exchange rate was a ludicrous $US1 = 0.62 RBL when the black market rate was 4 to 5 roubles to the dollar. It was this rate, not the Soviet rate, that reflected economic reality and that is why it was used to adjust Soviet per capita GDP.

12Ludwig von Mises, Economic Calculation In The Socialist Commonwealth, pp. 87-131 in Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism, Augustus M. Kelly, 1975, edited by Friedrich Hayek. Mises’ paper was published in 1920, sending  a shockwave through Europe’s socialist intelligentsia.

13Robert Heilbroner, Reflections After Communism, The New Yorker, September 10, 1990.

14This does not mean transactions are carried out in gold, only that note and demand deposits are fully backed by gold. It should be noted that credit instruments such as bills of exchange are not money but money economising instruments.

15Eugen von Böhm-Bawerk’s volume work, Critique of Interest Theories, Positive Theory of Capital, Further Essays on Capital and Interest. The English translation is by LibertyPress 1959. With respect to gestation periods and the determination of the rate of interest volumes II and III require careful reading.

16Böhm-Bawerk used the term “roundabout methods of production”, meaning more time consuming methods of production. It would have been less confusing if he had used the term more physically productive at that rate of interest. His unfortunate terminology led Irving Fisher to provide a simple example of reswitching, thereby concluding it was impossible to determine which was the more “roundabout” method. In 1960 Sraffa provided a mathematical illustration of reswitching. Left-wing economists use this to argue that the same production technique can be profitable at two very different rates of interest. Hence, refuting Böhm-Bawerk’s monotonic approach. However, I intend to write an article in the near future explaining why both Fisher and Saffra, along with the Cambridge school, are wrong.

Irving Fisher, The Rate of Interest,  Macmillan Company, 1907, p. 352.

Piero Sraffa,  Production of Commodities by Means of Commodities, Cambridge University Press, 1960, chapter XII.

4 thoughts on “Technology, markets, investment, and Professor Quiggin’s flagrant errors”

  1. That is what is called a blistering take down. Quiggin is just a pile of rubble. Please do those follow-up articles.

  2. A damn good article, Mr. Jackson. I am heartily sick of Quiggin’s socialist poppycock. It was time he was taken down a peg or two and you are clearly the man to do it.

  3. You sure as hell took a flamethrower to that old lefty Quiggin. What did he do to piss you off?

  4. Your weekly output is stunning in its content. The Australian right is not producing anything. The IPA is in a permanent state of hibernation. I have not bothered with the CIS for years. Quadrant is so-so, The Australian and the Spectator are dominated by blowhards. It is the same six people every time. Gerry is the only one with the backbone to take on Quiggin. The right does not have any fighting spirit.

    I was hooked by the slap-down you gave Quiggin over the development of the internet. I hope you return to the topic in more detail. I think it would be very informative.

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