For western civilisation to flourish, the West must return to what economists call the ‘virtuous cycle’.
Speaking in Poland last week, President Trump challenged western nations on whether they have the will to survive, the confidence to defend their values and ultimately the ability to preserve western civilisation.
To meet Trump’s challenge, western nations not only need to implement effective immigration and border control policies as well as reaffirm their commitment to the western canon, but they also need to revive their economies.
Across the western world, current levels of citizen disenchantment with the political establishment is not only being driven by high rates of immigration, collapsing social cohesion and domestic terrorism but also from substandard economic circumstances.
Anaemic rates of economic growth, high levels of government and household debt, widespread cost of living pressures, pronounced levels of unemployment and underemployment and wealth inequality are common economic phenomena across most western economies.
These trends must be addressed in order to provide western nations with the means to fund a strong common defence, world-leading education, scientific and technological innovation and high intellectual and cultural pursuits, allowing the west to maintain its current geopolitical leadership position.
To do so, western economic policy makers must reembrace the ‘virtuous cycle’ as a model for economic growth, which was at the heart of the rise of western economies over recent centuries.
The virtuous cycle stipulates that economic prosperity is derived from high rates of saving, which in turn funds high rates of capital investment, leading to higher rates of economic production through greater productivity, thus creating higher economic income.
The virtuous cycle is premised on a prudent monetary policy and a small role for government that facilitates interest and taxation rates which incentivises high rates of savings and investment.
This economic model was at the heart of the economic rise of western nations at the launch of the industrial revolution in the late 18th century through to the early 20th century in countries such as the United Kingdom, the United States and Germany. In recent decades, this model was the catalyst for the dramatic economic rise of Singapore.
Western nations, unfortunately, walked away from this economic model en masse after WW2 and embraced Keynesian economics, which its core tenets have largely dominated macroeconomic thought and public policy determination over the past 70 years.
Writing the General Theory of Employment, Interest and Money in 1936, John Maynard Keynes rejected the virtuous cycle as a model for economic growth and alarmingly suggested that poverty exists because economies save too much as a result of interest rates being too high.
Keynes therefore advocated that governments manipulate interest rates lower through money printing, engendering economic booms through greater investment and consumption.
Keynes also recommended that governments seek to engineer the elimination of recessions and thereby create ‘permanent quasi-booms’ through a continual lowering of interest rates (ultimately to zero) and evermore increases in government spending.
Consequentially, and not foreseen by Keynes, economies, under his framework, create enormous amounts of money and credit leading to artificially low interest rates; are obsessed with consumerism; are swamped with debt; experience significant mal-investment, asset price bubbles and economic inequality; suffer from low economic growth; and ultimately experience sizeable economic crashes and currency crises.
Unfortunately for Australia most, if not all, of our high school economic teachers and university economic faculties have taught Keynes’ economic theories to Australian students for several decades at the expense of other macroeconomic frameworks.
As a result, the Keynesian framework has both penetrated and dominated the economic thinking throughout all areas of Australia’s major governmental, financial and academic institutions.
Not surprisingly, after decades of operating under this framework, Australia now has the lowest official interest rates on record, low rates of household savings, record household debt, record foreign debt, a housing price bubble, record economic inequality, dramatically rising government debt and below trend economic growth.
For Australia to play its part in restoring and preserving western civilisation, Australian policy makers and institutions must discard the Keynesian economic framework and embrace, and internationally advocate for, the virtuous cycle. To do so will require a significant transformation and a disciplined commitment in our economic thinking, public policies as well as economic behaviour.
Fundamentally, Australian policy makers should seek to actively target and implement policies which foster a healthier national savings rate.
Singapore, for example, was able to achieve an average annual GDP growth rate of 7.8% per annum between 1960 – 2003 and transform itself from a 3rd world to a 1st world country within a single generation by dramatically increasing its annual savings ratio of gross national income from 12% to over 50%.
For the West and Australia to flourish this century, we must be willing to live simpler, work harder, sacrifice more and create more value by embracing entrepreneurship, industry and commercial risk.
John Adams is a former Coalition Advisor. This op-ed first appeared in the Daily telegraph.