War, destruction and Keynesian madness

Gerard Jackson

I had several emails from greenies arguing that curbing CO2 emissions is good economics “because it will lead to more investment and this would mean more growth and jobs.” This is one of the nuttiest arguments for cutting CO2 emissions that the greens used in their war on cheap energy and it reveals a staggering ignorance of economics. Nevertheless, the “usual suspects” have mindlessly promoted it, one of them being Anatole Kaletsky, an economics writer for the Reuters and The International Herald Tribune and one of the crudest Keynesians in the media today. And that is really saying something.

I referred to Kaletsky in particular because these emails reminded me of an outrageous article he wrote for Rupert Murdoch’s Australian1 in which he seriously argued that severely restricting CO2 emissions would stimulate economic growth and employment because it would, and this comment is a real beauty, “have the effect on the world economy comparable to a large-scale war”. This is truly Orwellian: war and destruction bring prosperity, peace brings stagnation.

In case anyone thinks this nonsense is held only by ignorant journalists allow me to point to Paul Krugman who asserted that the upside of the 9/11 terrorist attack is that it will generate an “increase in business spending2.” Of course, it also meant an increase in government spending which he thinks is absolutely terrific. Then we had Fred Bergsten from the Institute for International Economics in Washington. According to this brilliant thinker and former assistant secretary of the US Treasury the tsunami tragedy should be a good thing for its victims, at least those that survived, because:

 Like any disaster, you get negative effects through destroying existing properties and people’s health, but you do get a burst of new economic activity to replace them, and, on balance, that generally turns out to be quite positive3.

 It follows from their logic that wholesale destruction leads to greater and more advanced investments and thus raises the standard of living. This is Keynesianism gone mad. Wholesale war leads to the wholesale destruction of life and capital. This obviously lowers the standard of living. Does anyone think the standard of living was higher in Germany in 1948 than in 1938?

 Per capita consumption in Britain in 1948, for example, was lower than in 19384 despite 6 years of continuous warfare — or should I say because of the effects of 6 years of war compounded by post-war socialist policies? As Henry Hazlitt pointed out with the example of the broken-window fallacy5, the likes of Kaletsky, Bergsten and Krugman only concern themselves with the immediate effect the action, they cannot see that for anything to be replaced something must be sacrificed. Economists — real ones, that is — call this opportunity cost.

 A competent economist will readily admit that when capital goods are destroyed by war the standard of living must fall. Now these goods can only be replaced from two sources: (a) Existing capital goods must be withdrawn from other lines of production, thus lowering output there, or (2) savings must increase which also means a further fall in consumption. Economic growth basically means capital accumulation6. Capital goods come from savings which in turn comes from forgone consumption. In other words, to save means to give up some present consumption in favour of greater future consumption. It should be patently obvious that bombing factories or flying airliners into skyscrapers cannot increase gross savings. In fact it lowers them because capital goods are also savings.

 Even after a devastating war a country can raise its standing of living, Germany and Japan are proof of that. But the point is that it was not the war that did it but their high savings rates and comparatively free-market post-war policies. If the likes of Kaletsky and Krugman are right it would pay a country to thoroughly wreck its factories, offices, transport systems and even housing stock every few years7. Looked at from this angle the absurdity of the idea that destruction creates prosperity becomes immediately obvious — or should.

 One doesn’t need a war, thank God, to expand the capital structure. One just needs plenty of savings and entrepreneurship. Greater savings provides the necessary capital while entrepreneurship dissolves and recombines capital combinations in a way that increases efficiency and lowers the costs of production — and all without the need for mass bombing. What Kaletsky and the other vulgar Keynesians don’t understand is that market processes are continuously dissolving inefficient capital combinations and even destroying obsolete capital goods. This is part and parcel of the market process that raises the standard of living.

Kaletsky’s silliness brings us to so man-made global warming. According to this economic wiz kid raising the cost of energy “will boost employment, investment and economic activity. . .”8 But how can it boost investment when investment can only come out of savings? Did Kaletsky mean that raising costs and lowering output raises savings? Or was he seriously suggesting that investment can exist without savings? After all, investment consists of the material means of production which can only come from forgone consumption, i.e., savings, which is the real cost of economic growth.

Kaletsky’s stuff is unbelievably bad. But on the basis of his outrageous nonsense he argued — as did others of his ilk — that the poor ignorant masses would be better off materially if they swallowed green propaganda, as he has done, and took a massive cut in their standard of living. What can I say, except drop dead, mate. The test of a good economist is to be able to follow the secondary consequences of an economic decision. He is one who is not captured by immediate effects and so ignores the long run. Kaletsky is not a good economist. So what does this also say about the mighty Krugman and the other Keynesians that utter this claptrap?

 * * * * *

1Anatole Kaletsky, Digging beneath the gloom, The Australian, 29 November 2000.

2Paul krugman, Reckonings; After The Horror, New York Times, 14 September column 2001.

3Cited in Peter Martin’s article a Dismal failure to count the true cost, Herald Sun, 5 January 2005.

4John Jewkes, Ordeal by Planning, Macmillan & Co. LTD, 1948, pp. 20, 147-8).

5See Henry Hazlit’s Economics Made Easy. This splendid little book is a great introduction to free market economics.

66By capital accumulation we do not means the simple multiplication of capital goods but, as the Austrian school of economics explains, an expansion of the capital structure.

7Simon Kuznets noted that before the advent of the Industrial Revolution there was virtually “no fixed durable capital” as we understand the term and that a great proportion of society’s savings were taken up in repairing and replacing capital that wore out about every 5 or 6 years. (Kuznets, Population, Capital, and Growth: Selected Essays, Heinemann Educational Books, 1973, p158.)

It ought to be obvious to any student of economic history that only the mass production of iron that the industrial revolution brought about could make possible a large-scale production of fixed capital goods without which there can be no real capital accumulation. Yet the unthinking likes of Kaletsky argue that destroying vast amounts of fixed capital promotes economic growth! Not only are they lousy economists they are historical illiterates

8In 2008 the Sydney-based Center for Independent Studies published Exploring a Carbon Tax for Australia, An absolutely shabby piece of work that actually argued that a carbon tax would bring fourth new technologies and promote economic growth. Greg Lindsey, executive director and founder of CIS, has yet to offer an apology or even an explanation for this atrocity.

The carbon tax and the deceit of one of its advocates

Bad economics and double-dealing


31 thoughts on “War, destruction and Keynesian madness”

  1. I was treating this as just another good read from Gerry until I got to footnote 7. That hit me tween the eyes. It made me realise how remarkable the industrial revolution really was.

  2. That footnote hit me as well, Sarah. I’m pretty sure there are some important ramifications coming from that insight

  3. There is something very wrong here. How does a clown like Kaletsky who believes mass bombing promotes economic get to be called a respectable economist.

  4. Fanatical Keynesian is an understatement. He hates “market fundamentalism” and believes that governments should pick winners and subidise them.

  5. I looked him up as well because I thought Gerry was maybe a bit over the top. He wasn’t. kaletsky is a fanatical Keynesian.

  6. I’ve met guys like Kaletsky and Gruber. They are not that smart. All they really ever did was memorise the textbooks and then regurgitate the stuff. It’s obvious that Kaletsky has read nothing since he left university. The twit even thinks that Hoover was motivated by Austrian economics!!!!!

  7. The Broken window fallacy is a fallacy in itself.

    one of the problems is that it increases GDP but not NET domestic product.

    Allowing externalities to be truly costed is basic economics as Pigou showed a long long time ago.

  8. Absolute nonsense, Nottrampis. To call it a fallacy is to call opportunity cost a fallacy. No competent economist would make such a statement, particularly Pigou, You have also missed the point that every genuine externality has an opportunity cost, what is sometimes called a trade-off. This is something every economist understands.

    Correction: I wrote in haste, something I rarely do. I should have said: Not every so-called ‘externality’ has an opportunity cost.

  9. Is Nottrampis trying to tell us that Gerry is wrong about bombing cities and that dipstick Kaletsy is right? I bet Nottrampis didn’t even do an introductory in basic economics.

  10. you totally incorrect Gerry. an externality is something that is detrimental to society and needs to be corrected by a tax or price.

    i actually wrote about how the broken window fallacy is a fallacy.Only people who do not know the difference between GROSS and NET domestic product swallow the rubbish.

  11. Wrong again, Nottrampis. You write that an “externality is something that is detrimental to society”. Not so. An externality can also be a benefit. Therefore, an externality, properly understood, is a cost or a benefit. You will find this in any economics textbook.

    Now let us take a simple example of opportunity cost. A town with a very high level of unemployment has the opportunity of voting on whether to allow a factory to be built in its vicinity. If built it will contribute considerably to reducing unemployment and increasing economic activity. However, the company admits that there will be a certain amount of unavoidable smoke but it would not be hazardous. Let us also assume the townspeople accept this as being true.

    The opportunity cost to the town of voting against the factory is forgone employment, tax revenue and increased business activity. The cost of voting for the factory is increased smoke. It is really is that simple. Another simple example is when I buy a book. The cost to me of the book is the alternative good or service that I forwent by buying the book.

    To therefore call opportunity cost fallacious is to argue that production does not involve forgone opportunities.

    I suggest you read Coase’s “The problems of social cost”. He has quite a bit to say about Pigou. There is also Wilfred Beckerman’s “Two Cheers for the Affluent Society”.

    You said that you wrote “about how the broken window fallacy is a fallacy.” Fine, send it to me and I’ll publish it and then we can debate it. Unlike Catallaxy I genuinely believe in open and honest debates.

    BTW, I do fully understand the difference between gross and net domestic product

  12. Nottrampis is at it again. I am no economists but even I know what an opportunity cost is. It really is a bit funny. Nottrampis calls every case of falling prices deflation because that’s what most economists say. He says consumption drives the economy because that’s what most economists say. He now says that opportunity cost is a fallacy even though all economists would disagree.

    You have to admire Gerry’s patience. Not only does he put up with this he even offers to publish the guy’s stuff on the subject.

  13. Lenny’s right about Nottrampis not criticising “bomber kaletsky”. I dont get it. Mass bombing promotes economic growth and Nottrampis doesn’t find anything strange about that.

  14. I agree with Nick about nottrampis not having done any economics and I think his opinion that an externality is always a bad thing proves it. This definition of ‘Externality’ came from Investopedia. http://www.investopedia.com/terms/e/externality.asp

    “A consequence of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative.”

    There you are. Gerry really is using the standard definition of an externality.

  15. Gerry, do not be coy. Global warming is not a benefit! We are talking about attemptiong to price the TRUE costs of something.

    Mass bombings do promote growth.
    Buildings get bombed. What do you thinks occurs then.
    They build again
    This boosts GDP. IT ALWAYS does. That is because it is GROSS domestic product. It has less effect on NET domestic product because of depreciation.

    For no broken windows see this article.

    I would add I have not tried to be snide or make comments about anyone else. Do not go catallaxying on people.
    Address the issues. We are going to disagree.
    Whether you believe or not I have a lot of respect for Gerry despite disagreeing with him.

  16. Great comment, nottrampis. So if I burn down my and trash my car that will me and society richer?

  17. I get it Now. The way to get rid of poverty and unemployment in Australia is to pay the Americans to bomb all of our cities into rubble, including ports, railways, farms, mines, etc. Though this will leave us with absolutely nothing nothing except the rags on our backs it will still make us fabulously rich by increasing GDP.

  18. Look on the bright side. The more Nottrampis writes on Keynesianism the more he discredits it.

  19. Ref: Nottrampis

    1. There has been no global warming in 18 years, unfortunately. A warm planet beats a cold planet any day.

    2. Growth is capital accumulation, not destruction. Therefore a country does not get rich by destroying its capital every 5 years or so. In a sense, this was basically the point that Kuznets (the Keynesian) was making with respect to pre-industrial Europe.

    3. GDP does not measure growth. GDP rose rapidly under Roosevelt and yet America experienced significant capital consumption while Australia did not. That GDP includes spending caused by the destruction of wealth, whether by war or natural disasters, is a ‘flaw’ long recognised by its supporters and critics.

    4. As for “Debunking The Broken Window Fallacy” link, it is question-begging piece of ‘economic thinking’. Moreover, his view that the Great Depression debunked the ‘classical theory’ is itself bunk because he doesn’t even know what the theory is. If he did know he would have given us a critique of it instead of an arrogant sneer. In fact, the theory fits the Great Depression very well. As for the depression’s length, classical economists would have fingered real wages rates and political meddling.

    This bloke is not alone regarding the trade cycle and the classical school. Steve Kates is, in his own way, just as bad. Moreover, given Kates’ commitment to Say’s law it’s a wonder he hasn’t responded to this bloke.

    To be brutally frank, Nottrampis, I am tired of the likes of the Kates and Nielsen pretending to have read the classical economists when I know damn well that they haven’t.

  20. Gerry,
    You are wrong. The temperature has been rising. you are discounting the rise on the ocean’s temperature as well as those in the Arctic.

    2) Yes the difference between Gross and Net DP.

    3) Of course it measures growth. Every statistical agency measures growth this way.

    4) Let us disagree on this

  21. Nottrampis

    1. You are wrong. “Lack of ocean heat puzzles NASA hunt for warming ‘hiatus’”
    More and more evidence is showing that global warming is a greenie scam. I remember back in the ‘70s when greenies tried to panic people into believing that they faced catastrophic global cooling. That’s right, Nottrampis, 40 years ago we were going to freeze now the same clowns tell us we are going to fry. In each instance the solution was the same: more government control. Face it, the hoax is coming apart and the greenies know it.

    2. GDP does not measure growth. Every competent economist recognises the fact that you can get capital consumption (negative growth) even when GDP is rising. This is precisely what happened in America during the Great Depression, though it did not happen in Australia. Moreover, the Austrians always point out that it omits a great masse of economic activity. Before you make any further references to GDP I suggest you go into it somewhat.

    3. Sorry, but I have never agreed to disagree with anyone and I am not about to start now.

    4. Next week I am going to start another con: Keynesian spending and growth.

  22. How about something that’s very funny. Just came on a post by Steve Kates where he accused John Humphreys of “magical thinking” because he stupidly thinks by taxing energy “a cheaper alternative will simply materialise”. Kates said this is “bordering on the insane”. We always knew that John Humphreys is insane and now Kates is saying it too.

    Kates didnt name Humphreys but what he attacked and called nutty is exactly what Humphreys promoted. The sickening bit is that when humphreys was smearing Gerry for pointing out the same thing Kates said nothing and Davidson even praised Humphreys. Maybe catallaxy should change its name to Rats Corner.


  23. The broken window fallacy is not a fallacy. If someone broke their window; now instead of buying some other good they have to repair their window. If the window wasn’t broken they could still have their window plus another good like a new pair of shoes. So society on net is not better off.

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