It is becoming more apparent that modern macro with its Keynesian Y=C+I+G is utterly defective to the point of vacuity but the problem remains what ought to replace it? Here is my formula in brief:
1) never use variations in aggregate demand to explain anything
2) recognise that growth is driven by value adding production alone
3) the structure of production is the core concept in understanding how an economy works – even aggregate supply is a near on useless concept
4) government spending after perhaps the first 10% is never value adding
5) only businesses subject to the disciplines of profit and loss can be expected to create value
6) government subsidies to business do not create faster growth or more employment
7) recessions are inevitable
8) recessions can never be cured by higher levels of public spending.
Want more? See my Free Market Economics: an Introduction for the General Reader.
Steve, As I and many others have said on occasions when you’ve spruiked your book, I’ll buy it when you get you publish it as an e-book.
Godfrey
15 Feb 13 at 11:43 am
Entrepreneurialism is the only engine of growth. The US used to understand that better than any other nation. We’ve never really quite got it – too European/Socialist in our thinking.
Uber
15 Feb 13 at 12:25 pm
Godfrey. Thank you for the interest. It is an e-book but not on Kindle. If you would like to know where to get hold of it as an e-book, or in any other format, here is where it may be found.
Steve Kates
15 Feb 13 at 12:45 pm
Credit for the graphic goes to the amazing Kudelka, pearl of great price at the Oz. As he says:
Rats.
Bruce
15 Feb 13 at 12:51 pm
I’d add that I agree with your post Steve, except you miss the long term benefit of innovation. I can cook my potatoes in aluminium saucepans for very little cost now, but back in Napoleon’s day that would be an unafforable marvel. (Memo to self – I should go buy a bigger TV)
Bruce
15 Feb 13 at 12:57 pm
Thankyou Steve – I’ll read it at the pub tonight.
Winston SMITH
15 Feb 13 at 1:48 pm
Somewhat relevant – thanks to stupid git Homer Paxton
Ezra Klein thinks the US Government ought to spend MORE money than it currently does.
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/30/government-is-hurting-the-economy-by-spending-too-little/
That said, the government is hurting the recovery, and badly. But it’s not because it’s spending too much, or because of concerns over future policy. It’s because government, at all levels, is spending and investing too little. Despite the stimulus and various other policies we’ve passed to help the recovery, and despite the large deficits the government has been running, government spending and investment have, at all levels, been contractionary since 2010.
So if they spent more money then – they’d be hammering down the debt now?
This is just madness. Fucking barking madness.
.
15 Feb 13 at 3:18 pm
The people at Macro Business are claiming today that Abbott looking to cut public servants, cut the School Kids Bonus and not increasing the humanitarian intake of refugees increases the threat to a recession.
Andrew
15 Feb 13 at 3:32 pm
You can read the article yourself.
http://www.macrobusiness.com.au/2013/02/abbotts-recession-risk/
Andrew
15 Feb 13 at 3:32 pm
The school kids bonus is the most obvious, pointless and shallow political bribe I’ve seen in my life.
To mangle a Keating quote…”the woman with the cheap fistful of dollars, the principal saboteur”
.
15 Feb 13 at 3:39 pm
Well, in comparison to the usual, extremist ideological clap-trap that pollutes the Cat, this concession ranks as a step forward . Indeed, given the inclusion of “perhaps”, I can perhaps agree with it – as it allows for example for the possibility that, say, the first 90% of government spending is value adding.
The question I would pose to Steve, though, is what would be the equivalent figure for private spending?
Actually, I’m pretty sure that I already have a fair idea of what he’d say, and also why it is wrong, given his blind faith in market forces and his limited understanding and appreciation of the lessons of behavioural economics.
William Bragg
15 Feb 13 at 6:03 pm
Bragg
Tell us the rate of return on investment on stimulus projects.
Given the current job ads numbers in Australia – I’d be surprised if you can manipulate the data to have a + in front of it.
You’re out of your fucking brain pan, you mad bastard.
.
15 Feb 13 at 6:36 pm
What?!
You mean business is the engine room of the economy and not government?
Forsooth!
A serious question, Steve:
Government cannot cure a recession (short of declaring a war, I suppose), but can government spending ameliorate a recession/depression by creating artificial jobs, as it were and thus keeping part of the economy at least ticking over?
Anthony
15 Feb 13 at 6:45 pm
Steve
GDP(E) = GDP(P) = GDP(I)
You are arguing against a tautology. It’s amusing but silly.
sdfc
15 Feb 13 at 7:58 pm
Government spending can create jobs in those sectors of the economy that the government chooses to spend the money. There were jobs created in the building industry from Krudd’s school hall revolution.
But those jobs are created at the expense of jobs in other parts of the economy. If KRudd had left my money in my pocket instead of pissing it up against the wall, I would have spent it on the things that mattered to me, and that would have created jobs elsewhere in the economy.
Also, what does ‘keeping part of the economy ticking over’ actually achieve. If there is no genuine demand for those jobs, what is achieved by keeping them. Better that the money be spent on jobs that satisfies a genuine demand, not a made up demand.
Johno
15 Feb 13 at 10:07 pm
Johno
If the government cuts taxes or gives cash hand outs the money will be spent as households and business see fit.
sdfc
15 Feb 13 at 10:10 pm
“what does ‘keeping part of the economy ticking over’ actually achieve”?
Well, it keeps at least some people from the demoralisation of the dole queu.
Ideally, it could also result in crucial infrastructure improvement. What if, for example, the stimulus had been spent on dams, roads, bridges, railways, ports and flood mitigation projects?
Anthony
16 Feb 13 at 1:00 pm
No, it diverts cash flow from productive projects into unproductive ones.
It puts more people out of work.
Ideally!
It was and the rate of return on those projects was negative.
.
16 Feb 13 at 1:06 pm
“1) never use variations in aggregate demand to explain anything..”
This cannot be sustained. What we need to do is be more careful in defining what we mean by aggregate demand. We also want to find out what affects aggregated demand. Perhaps Professor Kates means demand for finished goods. If so then he’s mostly right. But we want to be more clear about this because its a very serious matter if aggregate demand collapses. Its a very serious matter is it soars as well.
Rumblefish
17 Feb 13 at 3:36 pm
I think he means as a method of calculating the actual growth of the economy.
entropy
17 Feb 13 at 3:42 pm
“….it could also result in crucial infrastructure improvement. What if, for example, the stimulus had been spent on dams, roads, bridges, railways, ports and flood mitigation projects?…”
Infrastructure comes up to muddy the waters when it comes to demand management. These projects may or may not be justified in their own terms if they can be financed from the surplus. Or through spending cuts elsewhere. Why muddy the waters here? If these projects are financed from anything but printed cash, then no evidence exists that this will increase aggregate demand.
Rumblefish
17 Feb 13 at 3:44 pm
“I think he means as a method of calculating the actual growth of the economy.”
As defined by what? By growth in nominal GDP? To define nominal GDP as aggregate demand is no good. I’m not accusing the Professor of this. But its just not sustainable to lazily graft one metric onto a conceptual idea that simply does not fit. Maybe we need more than one metric to help us get our head around a concept. But not just nominal GDP.
Rumblefish
17 Feb 13 at 3:46 pm