Classical economic theory presents perennial truths that economists once knew but have completely forgotten

The perfect statement of classical economic theory, from David Uren in The Australian today: Get used to the new normal – booming rates of growth are gone.

Over the year to December, growth was only 2.3 per cent and, short of massive revisions by the Australian Bureau of Statistics, Treasury’s forecast of 2.7 per cent growth this financial year looks unattainable

It is time Treasury let go of its vision of an extended burst of rapid growth around the corner.

After a decade in the slow lane, this may be as good as it gets.

It is not such a bad place to be — employment growth has been strong.

It was a staple within classical economic theory that economic growth is unrelated to employment. And there we see it before our eyes, low rates of economic growth and high levels of employment growth. All that is discussed in my Quadrant article this month: The Dangerous Persistence of Keynesian Economics. There at the very end of the article we find the then-Treasurer of the UK, Winston Churchill no less, discussing the futility of public spending to add to employment in the wake of their attempt in the 1920s to stimulate employment through high levels of public works:

“For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.”

Ninety years later we demonstrate once again what once upon a time every economist knew which now no one knows. Read the Quadrant article if for no other reason than to get another perspective.

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8 Responses to Classical economic theory presents perennial truths that economists once knew but have completely forgotten

  1. stackja

    So again, if Keynes is the solution? Why is there still a problem?

  2. Iampeter

    Classical economic theory presents perennial truths that economists once knew but have completely forgotten

    LOL, do tell, oh classic economist, that supports regulating trade and immigration. Do tell.

  3. Bruce of Newcastle

    After a decade in the slow lane, this may be as good as it gets.

    I love that saying. Here’s an almost perfect replication from just before the 2012 US election:

    With six months to go until Election Day, time just ran out for Team Obama to run any sort of plausible “Morning in America” reelection campaign. And it’s not just that the U.S. economy grew at a subpar 2.2% annual rate in the first quarter, according to the Commerce Department.

    It’s that this may be about as good as it gets for the economy this year. Most analysts have been looking for the second quarter to be no better—if not worse—than the first. So we could end up having a first half of the election year with GDP growth near 2% or below.

    And what happened when Trump was elected four years later? He cut taxes and green tape and the US economy went gangbusters, to use a Howardism.

    Maybe our politicians could do the same as Trump?

  4. Squirrel

    “There at the very end of the article we find the then-Treasurer of the UK, Winston Churchill, discussing the futility of public spending to add to employment in the wake of their attempt in the 1920s to stimulate employment through high levels of public works”

    Australia did much the same thing in the 1920s, with lots of money borrowed from overseas – the heavy debt burden made the Depression in Australia that much worse. The parallel to the massive splurge on “congestion busting” infrastructure which is going on now (and without which we would already be in an official recession) is striking.

  5. RobK

    And here we are reconfiguring our electricity grid to one which is complex and light-weight, expensive yet unreliable, and will be facilitated by demand management. It will keep a lot of people busy doing bugger-all.

  6. Merry Poster

    It’s time to have the recession we finally have to have. End all immigration and watch house prices drop and wages rise and the market readjust to where it should be.

  7. Chris M

    We can just import more goat herders and stimulate both the welfare and building industries

    Sign them up for grossly overpriced little houses on micro blocks of land built as cheap as possible and totally unsuited to Australia’s climate. Then churn the welfare back with crazy prices for utilities, fags, rates, booze you name it.

  8. Anonymous

    it’s all very well to know how a well functioning economy should work.. viz low unemployment low inflation. But highly endebted governments who wield the power and the enforcing apparatus don’t want that. They might like their definition of low unemployment ( even if they have to lie about it.. yes ABS looking at you) but the one thing they can not abide is low inflation.

    Ergo. They will do whatever is necessary to keep the political trough open, right or left, red or blue, and for sure it will involve a stand and deliver on your hard earned.

    You might know what they should do. It’s what they will do that should inform your economic decision making. Sorry, but part of real life economics is pragmatism.

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