Economics in interesting times

In March this year I published an article in Quadrant on the “Dangerous Return of Keynesian Economics” and in April I published another on the Prime Minister’s attack on “neoliberalism”, the name given to economic theories based on relying on market forces rather than the decisions of governments and public servants to guide our economies ahead.

These are two closely related matters, since the more a Prime Minister gets it into his head that he is indispensable for the proper running of an economy, which is what Keynesian economics teaches, the more interventionist he will become. The global downturn was in fact made to order for the PM because, in spite of his insistence before the election that he was an economic conservative, everything he has done since has shown him to have been anything but.

He is an interventionist of the most intrepid kind. With the downturn he has taken the lead in pulling the economy out of the mud, and his means of doing so has been to increase spending on all of his favourite pet projects, in this case on school libraries, home insulation and a gold-plated broadband network. He also handed out $10 billion in cash as a pre-Christmas present.

He now claims credit for the minuscule growth rate in the March quarter National Accounts as having saved us from a technical recession.

These are the same kinds of conceits now found in the American President. There he is, in the midst of some of the most damaging economic policies ever inflicted on the U.S. economy, taking credit for a stimulus package that is certain to do immense harm before this recession is through.

He, too, is apparently going to save us from the neoliberal policies that he believes got us into this recession through compounding every error made before with an error or two of his own. It is truly beyond comprehension that there is not more anger at the kinds of decisions both Rudd and Obama have made.

If they had come along and asked every family if they could use their credit card to put on say $5000 to stimulate growth, there might have been greater understanding of what’s going on and there certainly would have been more reluctance. But since it has been done by the government, that great abstraction in the sky, few can apparently pick out that the debt is theirs, irrespective of how it was initially taken on.

At one stage or another, someone is going to come and ask for their money back, and you will pay either with higher taxes, higher interest rates or higher inflation, most likely all three. Certainly from the forms into which this present flow of government waste has been crafted, there will be hardly a dollar’s worth of added growth based on these expenditures. It will have to come from someone else’s efforts, and if you work in the private sector, then it will certainly be from you, but everybody is going to contribute something. 

Keynesianisms Failure

Why I mention this now is because there was an astonishing article in The Australian (19 June, 2009) about some quite scathing comments made about the Prime Minister and Keynesian economics – the two very subjects of my Quadrant articles – made by one of the most prominent economists of China. Since I have not been able to get my hands on the article itself, the newspaper account will have to do, but it certainly paints a very clear picture of some very blunt comments made about our Prime Minister.

The article begins with this:

“Kevin Rudd has been accused by a leading Chinese economist of being ‘either short of economic knowledge or misleading his readers’ in his famous essay attacking neoliberalism. 

“In a scathing assessment, Xu Xaonian, economics professor at China Europe International Business School in Shanghai, lambasts the essay, now translated and published in China, as ‘shallow and crude’.” 

Now who is this Dr Xu? According to The Australian he is one of China’s leading liberal economists, has a doctorate from the University of California and was formerly managing director of the country’s biggest investment bank.

According to Dr Xu, the Prime Minister “made a ‘big, big mistake’ in forming his ‘confident opinions’ based on ‘the observation that the crisis came as a result of neoliberalism and the absence of supervision’.”

What the Prime Minister had done, he wrote, was “to paint a clownish portrait of [neoliberalism] seeking to pioneer popular antipathy to this artificial enemy, casting a moral verdict without seeming to care about truth or logic”.

All this is in very close accord with my own views, but Dr Xu takes on a much bigger target, and one which really will be the economic issue of the future as our economies continue to misfire following the stimulus packages to which we have been subjected. What Dr Xu says, acccording to The Australian, is this:

“Instead, it’s time to announce Keynesianism’s failure, time to announce the emperor Lord Keynes has no clothes.” 

Although these are my own thoughts, I seldom ever see them expressed by others, never mind so directly and with such unmistakable clarity. Dr Xu goes on:

“[Rudd] wants to use expansionary financial policies to pull the economy out of recession.

“Instead, it will only add a fresh failure to the Keynesian list.”

This ought to make people think, but if the past is any kind of guide it will not. We seem to be in some way attuned to the idea that the things bought by governments in some sense come without cost. All the same, if he is right, then the dimensions of this failure have the potential to be massive, and quite beyond anything now being contemplated. These are policies putting the future of the Australian economy at immense risk with very small benefit even should they come off.

Say’s Law and the Keynesian Revolution

But who can understand what is being said, even as we see it all before our eyes. My book on all of this, Say’s Law and the Keynesian Revolution, published first in 1998 is now being released as a paperback. The book is about why the economics that existed prior to the advent of Keynesian economics in the1930s was in every way superior as a form of understanding and as a guide to policy.

In discussing these matters over the years, it has become very evident that it is near on impossible to make anyone brought up in the Keynesian tradition see why the classical theory of the business cycle makes more sense or why a Keynesian stimulus is almost certain to lead to additional problems while solving none. It is one of those things we are going to have to learn for ourselves through bitter experience. And given the way that the Japanese have refused to learn this lesson despite everything, it is not all that certain even then that the lessons will be absorbed.

But what is interesting is that at the top levels of economic analysis inside China there is the same antipathy to Keynesian economics and the same willingness to embrace neoliberal economics. This is not your father’s Communist China.

The often predicted suicide of the West may truly be upon us. If we actually believe that we will be economically better off with Kevin Rudd and Barack Obama choosing where our savings should go, then our economies will over the longer term weaken and slow. And if we stick with Keynesian economics to make sense of what’s going on, to adapt a quote from a famous economist of the past, we will end up in a process that engages all the hidden forces of economic law on the side of destruction, and will do so in a manner which not one man in a million would be able to diagnose.