Government ‘investment’ does not equal growth

Since she hasn’t posted it herself, I thought I would bring forward Judy’s column from The Australian today which goes under the heading, Public spending won’t fuel the growth engine. I mention this on the same day as I have received word that my paper on Mill’s Fourth Proposition on Capital has been accepted for publication.

First Mill. In 1848, John Stuart Mill in his Principles of Political Economy included his four propositions on capital which were not only never challenged in his lifetime, the fourth, that demand for commodities is not demand for labour, was described by Leslie Stephen in 1876 as the “best test of a sound economist”. It was the pons asinorum of classical economics, the divide that separated those who could understand economics from those who could not. But what is remarkable is that since that date in 1876, not only has there not been another economist to have embraced this statement in full, but it has been challenged by some of the greatest names in the history of economics – Marshall, Pigou, Hayek are just some amongst a quite extraordinary array of economists from every side of the economics divide who have tried to explain what Mill meant. To my astonishment, I am literally the first person since 1876 who has argued in print that what Mill wrote is literally true. It is the best test of a sound economist.

And what the proposition meant, as the words plainly state, is that buying non-value-adding goods and services – and here the issue is public spending in particular – will not lead to increased employment because it does not lead to economic growth. A Keynesian stimulus is therefore doomed to fail, evidence for which has been accumulating at an astronomical rate since 2009.

Judy in her column has brought forward evidence from a paper published in the UK whose subtitle is, “Government ‘investment’ does not equal growth” and written by an economist by name of Brian Sturgess. Here is Judy’s conclusion:

If the government is intent on spending even greater proportions of GDP on infrastructure — which was already ramped up under the Labor government — it must ensure that only projects for which the benefits far exceed the costs are approved. Spending money on infrastructure is no silver bullet to achieving economic growth and better living standards. Let’s just hope the audit commission has taken on board some of Sturgess’s conclusions.

Yes, let us hope our government has taken on these conclusions which once went under the collective name Say’s Law.

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31 Responses to Government ‘investment’ does not equal growth

  1. .

    What has been the rate of return of these projects? What was their cost of capital?

  2. Stateless, free and happy

    Saying that govt spending doesnt lead to growth is somewhat meaningless, as to date, very few variables have been found to be robust determinants of growth. And Judith’s CBA test is meaningless – governments routinely inflate the benefits and understate the costs.

  3. Stateless, free and happy

    BTW Steve, congratulations on the acceptance. Which journal? I ask as that is a key test for the value of ideas.

  4. Andrew

    I think Abbott666 is only planning to facilitate (by abolishing the Indian-Soviet hybrid approvals system we had under R-G-R) the private sector construction of infrastructure. While that doesn’t prove economic merit (if Macq Bank and its “consultants” are involved) it’s a lot better than leaving it to Rudd’s napkin. Tollroads, ports (and yes, they ARE by definition within 50km of the Reeeeeeeeeef), resource project rail etc. I don’t think A666 is planning on going nuts on school halls or anything like that.

  5. H B Bear

    How is that government co-investment in Holden going Kim Il-Carr?

    The fat, ****ing socialist should have been made to have his Parliamentary superannuation invested alongside the taxpayer’s money he flushed down his union mates toilet.

  6. RodClarke

    demand for commodities is not demand for labour

    Indeed Demand for commodities increases their price and therefoe reduces the amount of money everyone else has to Pay for labour.

    “Crowding out” occurs in many many different ways.

  7. Andrew

    Remind me never to vote for anyone named Carr. (Or Gillard.)

  8. sdfc

    Fiscal stimulus isn’t about infrastructure spending its raises private sector income, that’s quite important in a credit crisis.

  9. A H

    sdfc, a credit crisis usually comes about due to their being too much debt. The solutions are bankruptcies and paying down of debt.

    I agree with the post. Infrastructure is only good if it results in a return on investment.

    This is why governments should not, as a rule, invest in infrastructure. If there is a profit to be had them allow a private company to make the investment and build the infrastructure. If there is no profit to be had, the infrastructure should not be built.

  10. sdfc


    Private sector debt is way too high in Australia hence the need to maintain private sector income during a credit crisis.

    Of course governments should invest in infrastructure.

  11. Z

    So “Says” said if I produce a “object” that I sell for $10 that cost me $5 to produce (50%GP) ITS GOOD
    But “Keynes” said if someone pays me $10 to produce a $10 item that I sell for $5 (-50%GP)it’s good (for who?)
    Is this right???

  12. His Omniscience

    Kates error this time is his implicit assumption that increases in employment come about only where there are increases in economic growth. In fact, government expenditure for which the costs exceed the benefits can lead to increased employment if there is a non-clearing labour market and the government spending entails a lower capital-labour ratio than the private sector spending crowded out,

  13. maurie

    Crony capitalism can always appear to create low unemployment. The fact that the economy racks up $Bs of debt at the same time is not an issue for a union owned political consortium such as our nation has recently suffered from. However the risk is that that there may be too many self entitled idiots holding out for a tax free pension in the current government, along with the “independents” holding their collective hands out for bridges to no where also!

  14. Brian

    Anything that relies on a Government subsidy to survive is also not worth having. The best example of this is renewable energy subsidies. Windmills and solar panels have driven up the cost of electricity to industry, which passes the cost on to the consumer, as well as to the domestic power consumers who have to cover the full cost of the increases themselves.

  15. Alfonso

    Sweet music is disinvesting Their ABC. Small beginnings.

    “Prime Minister Tony Abbott is poised to break a key election promise by cutting funding to the ABC…

    In a pledge his colleagues are now wishing he never made, Mr Abbott said on the night before the 2013 election: “No cuts to education, no cuts to health, no change to pensions, no change to the GST and no cuts to the ABC or SBS.”…

    “Fairfax Media believes one of the options involves introducing an efficiency dividend to the ABC budget – an annual funding reduction used to achieve deep and continuous cuts to government agencies…

    The ABC was allocated $1.03 billion in the 2013 federal budget. A 2.25 per cent efficiency dividend would see the broadcaster forced to strip around $22.5 million from its budget in the first year…

    The ABC is one of only three government agencies, along with SBS and Safe Work Australia, currently exempt from the efficiency dividend…” @ Bolta’s

  16. johno

    ABC, SBS and Safe Work Australia. Three of the most pointless government agencies in Australia. Our combined welfare would be greatly enhanced if funding to all three was stopped immediately.

  17. .

    His Omniscience
    #1262965, posted on April 13, 2014 at 1:01 am
    Kates error this time is his implicit assumption that increases in employment come about only where there are increases in economic growth. In fact, government expenditure for which the costs exceed the benefits can lead to increased employment if there is a non-clearing labour market and the government spending entails a lower capital-labour ratio than the private sector spending crowded out,

    Complete bullshit. Employing workers in the TCF industries on subsidies does not lower the unemployment rate or raise GDP. You utter fascistic moron.

  18. A H

    To lower unemployment simply lower the cost of employment. It’s not rocket science. That includes penalty rates, minimum wage, regulatory costs and all the rest.

    How to deal with excessive private sector debt? Let them pay down their debt, otherwise go bankrupt. Again, not rocket science. Businesses that rely on excessive debt or government subsidy are not creating sufficient value… let them go bust and let the businesses that do create value have cheaper access to the resources being wasted by the inferior businesses.

    Again, good infrastructure creates an economic benefit. Leave it to private companies to build the infrastructure and capture the economic benefit. But if there is not sufficient economic benefit to outweight the costs, don’t build the infrastructure. Leaving it to private companies means that only useful infrastructure will be built, or, if non-useful infrastructure is built, private interests will be on the hook, not the tax payer.

  19. Tel

    Crony capitalism can always appear to create low unemployment. The fact that the economy racks up $Bs of debt at the same time is not an issue for a union owned political consortium such as our nation has recently suffered from.

    Steve Keen’s argument is that national GDP should be calculated by subtracting out the change in debt for that year. For example, in 2010 Australia’s GDP is listed as 923 Billion US Dollars (I’m just using the easy charts at trading economics). However the government debt went up by approx 40 Billion that year, so it should be subtracted off the GDP.

    Keen actually wants to subtract off the increase in private debt as well… the theory being that if all you do is get consumer spending by running up the credit card, well any idiot can do that, it isn’t productive activity and should not be listed as GDP. I’m tempted to agree.

  20. Token

    What has been the rate of return of these projects? What was their cost of capital?


    The left has learned from the set backs in the 70s & 80s. This time if you try to disent from the crusade to spend & regulate western economies into ruin they will demonise you as a racist, mysogynist, homophobic or with any of the other tools they can create to nullifer your right to discuss ideas in the community market place

  21. Jessie

    Dot, please point me to a suitable reading for a non-economist on a non-clearing market. I Am not sure wiki will fit that request?

    Steve Kates, congratulations on the acceptance of your paper. Is this the Leslie Stephen? The date in the heading quote threw me (1977), hence my question. And interest in the history.

    “…. I have not been able to ascertain whether he ever considered lobbying for election. Stephen would certainly not have been excluded from membership on the basis of his lack of standing as a political economist, since his brother and others had been elected without publishing substantial works in this field. Indeed, the lack of professional competence in the discipline of political economy demonstrated by some of the members, especially amongst the many bankers and politicians who sometimes dominated the proceedings, was then a perennial bankers and politicians who sometimes dominated the proceedings, was then a perennial subject of concern (see Tribe 1999). In any event, Stephen stated that it was at a meeting of the PEC in March 1863 (while still at Trinity Hall) that he first had the honour of being in the company of Mill, his undergraduate hero. The subject for discussion, “not at first sight a very attractive one, was the propriety of allowing cab fares to be regulated by free competition instead of fixed by tariff” (1873:383). The next record of Stephen attending was for a meeting at St James’s Hall in December 1866. On the authority of the minutes we know that the question Thornton put was: “What is the meaning of Supply, and what of Demand? Is it Correct to say that supply and demand determine price? If not, in what manner is it that supply and demand affect price?” (PEC 1921:xxii,86). As already mentioned, Stephen liked Thornton and wrote a positive review of Thornton’s first The Fortnightly Review article for the Saturday Review. It is nonetheless clear that he secretly thought him an amiable fool. His reaction to the speech was certainly less than complimentary. He wrote on the bill of fare with the point of a fork (with the resulting indents still visible today) the following note to his first fiancée: “My Dearest Minny,—I am suffering the torments of the damned from the God-forgotten Thornton, who is boring on about supply and demand, when I would give anything to be with you. He is not a bad fellow, but just now I hate him like poison. O-o-o-o-o-o-o-o-oh! Ever yours, Leslie Stephen” (Moore 2006). This note sums up Stephen’s slowly shifting interest over this period, and although he maintained an interest in political economy for the rest of his life, there is no record of him attending another meeting. The disputes, of course, carried on without him. Courtney’s correspondence in July 1879 conveyed that Newmarch was habitually contemptuous of views not his own (where upon blood was observed to rush to his head) and that Thornton was prone to querulous irritability (PEC 1921:314,327).
    ref: GCG Moore (undated) Leslie Stephen and the Clubbable Men of Radical London p16-17

  22. Tel

    Dot, please point me to a suitable reading for a non-economist on a non-clearing market. I Am not sure wiki will fit that request?

    I’ve come to the conclusion that it means what you want it to mean, just like “market failure” has arbitrary meaning depending on the circumstance.

    I also would be interested if anyone has a more definitive link than that. Indeed, it would be a thread in itself to define these terms.

  23. Jessie

    Thanks Tel, my grammar lapsed after leaving school.

    I should have written …………..please point me to a suitable reading suitable for a non-economist on a non-clearing market
    But then he may have pointed me to bullshit and I would be none the wiser.

    As you have an interest in IT.
    I note the Royal couple with babe in arms are to visit Ayers Rock and visit the national academy there. In the middle of seeming nowhere. But good airstrip.
    Following some quick web work I see now the academy is a culinary one, but with no obvious link to the indigenous program it conducts. I state obvious as I tried hard to find the link before resorting to a search query. And I was struck by Bolt’s trough comment (offensive). However, there are (is) to my knowledge no local Aborigines employed or training there. Or if they are they are repeating Charles Darwin uni training courses and other govt funded training and tourism exercise ad nausea ad infinitum.

    Anyways, in the interest of markets and non-markets, labour or not forces, human capital and reality for the majority of LOCAL Aborigines out that way, and given Twiggy’s brain storm on a network of learning centres (like that isn’t new), what the frig is a national training academy doing stuck next to Ayer and Olga?
    Question: Telstra Optic fibre? Can’t recall seeing copper out that way. Satellite to Singapore training academy. Apparently the education would be ace.

    ref: Australians for Constitutional Monarchy
    •April 22 – Uluru (Ayers Rock) (Second night away from George): Visit the National Indigenous Training Academy, view Aboriginal art display then walk round part of the rock.)

  24. rickw

    Of course governments should invest in infrastructure.

    No, who needs highways to nowhere, or data highways to nowhere (NBN)?

    If you look back through Australia’s history, a lot of the early infrastracture was built by public subscription and / or tolls.

    Government wasn’t that cashed up thanks to the limited avenues they had to raise revenue (no personal income tax), the people however generally were, thanks to no personal income tax.

    Government building infrastructure is a relatively recent racket that is fraught with cronyism and a lack of real return or benefit for investment.

    Would you buy shares in any company who had their investment decisions mad by a bunch of ex-lawyers and school teachers? They have absolutely no clue, in fact most junior accountants and engineers in Australian companies would have far more idea about project selection and execution than the clowns in Government.

  25. Combine_Dave

    Speaking of which.

    Recently completed a short car journey from Brizzie to Tiaro. Infrastructure projects all the way along the 3hr journey, sadly none apparently to expand the highway itself.

    After years (decades ?) of no change it’s good to see some improvement. To keep it on topic I assume these projects are all government funded.

    Mind you, I didn’t enjoy travelling at 80, 70, 60kms/hr on a supposed national highway.

  26. Jessie

    Is that you travelling agriculturally uncoupled Combine_Dave?

  27. His Omniscience

    In post 1263131, the -‘s first error is to assume that employment = 1-unemployment. As anyone halfway familiar with labour market dynamics would know, changes in the participation rate can also be expected after the withdrawal of government funding for particular sectors, or in response to government funding for projects. Thus, the -‘s assertion that subsidising TCF does not lower unemployment, even if true, would not disprove (or provide counter-evidence to) my point as it fails to address the effects of TCF subsidies on employment – as distinct from unemployment.
    The -‘s second error is to presume that one counter-case would invalidate my point, yet I said that government spending that reduces GDP ‘can’ increase employment: I did not say it does in all cases. A counter case can disprove an absolute claim, but anyone halfway familiar with logic would realise it cannot disprove a point of the type I made.
    The -, alas, appears to be familiar with neither labour market dynamics nor logic.

  28. Combine_Dave

    Is that you travelling agriculturally uncoupled Combine_Dave?

    Great picture of a great river but no.

  29. Tel

    Jessie, I wasn’t bitching about grammer, your question is a reasonable one.

    The concept of a non-clearing market is fraught with fuzzy definitions, and you find very few people discuss market clearing in a careful and consistent manner. That’s why I said it means what you want it to mean.

  30. .


    The neoclassical synthesis, re economics as it is practiced, has a vague branch called disequilibrium economics.

    Probably your best bet since Mises writes in a plain language way:

    This has links to the html version of Human Action.

  31. .


    The tendency towards equilibrium is more important and significant than equilibrium itself.

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