The power of classical economic thought

Here is a story picked up just today which had a bit in it I found quite striking since it presents a real-world economic event straight out of classical economic theory. It’s from an article titled, New recession warning: The rich aren’t spending. There we find:

The savings of the rich has also exploded, more than doubling over the past two years, suggesting that the wealthy are hoarding cash. The middle earners, or those in the 40% to 89.9% of the income distribution, have largely picked up the spending slack from the rich….

The middle-class consumer, however, is being buoyed up by strong employment and a relatively stable housing market. A U.S. economy that for over a decade has been defined by the rich reaping the gains and fueling the spending, has now flipped. Now, it’s Main Street that is prospering, while the investor class is signaling a consumer recession.

Which made me think of this from Mill’s Principles:

The proposition for which I am contending is in reality equivalent to the following, which to some minds will appear a truism, though to others it is a paradox: that a person does good to labourers, not by what he consumes on himself, but solely by what he does not so consume.

Clear as a bell to anyone versed in classical thought but to anyone else, specially to a student of modern macro, a statement near impossible to comprehend.

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34 Responses to The power of classical economic thought

  1. Win

    A non scholar person did good for a labourer by starting a business putting time effort and money in to “hands on “manufacturing providing an income for himself and others and every one paid their tax to the country.Thats a huge chunk of our economy now in China. How did Paul Keating a failed rock band manager get a job with a Chinese bank?

  2. The Pugilist

    Production tomorrow can only be generated by deferral of consumption today. This is true, certainly in the long run. Income must be earned through the market before it can be spent.
    The provision of credit changes the picture slightly in the short run, but there must be the prospect of earned income in the near future for credit to continually be extended to individuals or businesses. Therefore, Mill’s statement is only slightly too strong. There is some benefit to labourers from consumption today, that is to the extent it creates an expectation of future income for an entrepreneur. It is an indirect benefit to the labourer in that they might have a job tomorrow. But Mill’s proposition that demand for goods (today) is not demand for labour (today) is correct.
    Me buying a loaf of bread today does not create the job of the baker today.
    The expectation, perhaps two years ago, that I (and many others) would buy a loaf of bread today is what gave the baker the incentive to rent a shop and install an oven, perhaps using their own savings from previous income or through credit extended off the back of previous earned income of others.
    The key element to all of this is understanding the role of time and realising that production must precede consumption.

  3. The Pugilist

    When you think about it, what the modern macroeconomist is saying is that we need consumption today to validate decisions made in the past so that behaviour continues, regardless of the merits. If consumers won’t willingly do it, the government must step in and ensure it. It is a recipe for a slowly but surely deteriorating economy.

  4. Bruce of Newcastle

    The problem is a lot of that money is now in government bonds, which are “safe”*. The fad in the last 50 years of governments borrowing vast amounts of money has offered this investment option to the big end of town. Before then when the billionaires wanted to invest for a return they had to buy corporate bonds or directly invest in a business.

    Consequently whereas then the capital was invested in a Says sort of way, these days the investment is going into unproductive government.

    Abolishing government debt would force such people back into nuts and bolts style assets which return on a investment, thereby driving the real economy in ways that government debt doesn’t do.

    (* Except in places like Argentina. From yesterday:
    Argentine Bonds Could Be Worth Only 30 Cents On The Dollar After A Default )

  5. mh

    Read this:

    Donald J. Trump
    @realDonaldTrump
    ·
    6h
    Our Federal Reserve cannot “mentally” keep up with the competition – other countries. At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually “getting paid” to borrow money – ZERO INTEREST PLUS! No Clue Fed!

  6. sfw

    Steve, I think I have an inkling of classical economics but not that much. Can you tell me what classical economics would prescribe to get us out of the current mess, and how long would it take?

  7. bollux

    To SFH.
    1. Make it a jailable offence for politicians to borrow money except in the most dire of national emergencies.
    2. Years and years now.

  8. Bruce of Newcastle:

    Consequently whereas then the capital was invested in a Says sort of way, these days the investment is going into unproductive government.
    Abolishing government debt would force such people back into nuts and bolts style assets which return on a investment, thereby driving the real economy in ways that government debt doesn’t do.

    I’ve been thinking our economy is suffering from a peculiar sort of investment schizophrenia for decades – you have just identified it for me, Bruce.
    Ta.

  9. sfw:

    Steve, I think I have an inkling of classical economics but not that much. Can you tell me what classical economics would prescribe to get us out of the current mess, and how long would it take?

    I’m very much like you, sfw – I realise something is horribly wrong with our economy but can’t work out what it is.
    I think Guru Bruce has hit on a very decent explanation above. The government has crowded out private investors from the savings pool and because government spending is unnecessarily wasteful, the economy is running against a terrible headwind.
    I would suggest Winston Economics, whilst not being of such economic pedigree as Classical Economics, would do the trick. Reduce red/green tape, pay off government debt, forbid deficit spending, and shoot all the lawyers. 🙂
    Yes – there are other areas to fix, but that would do for a start.
    Comments please?

  10. Fat Tony

    Winston – shoot all the lawyers

    i”m good with that – just lay off the good engineers m’kay….

  11. MPH

    Austerity becoming a status symbol? Leave the drooling consumerism to the huddled masses?

  12. sfw

    Winston, I think I agree with you but I was looking for more concrete steps I guess. I would start with the abolition of reserve banks and allow markets to set interest rates.

    Limited tenure for politicians, two terms maybe, only normal employer super.

    Election for Judges, Police Commissioners and other senior public officials.

    Reduce migration to a trickle and then only those who have done a service for Australia in overseas conflicts and those who have skills that cannot be sourced here (not chefs, hairdressers and uber drivers etc). All our migration system does at the moment is to disguise much of our economic problems by ‘growing’ the economy but not improving productivity.

    Abolish most of the advisory boards to the gov and cancel huge amounts of licensing and other restrictions on business.

    Stop subsidising any industry especially the rural sector.

    Review all non indictable offences (state and federal) and abolish any that have not been prosecuted in the past five years and minimise laws that have ‘statute’ as the victim.

    There must be heaps more but that’s a start.

  13. Fat Tony:
    Engineers do Gods Work.
    I always wanted to be one, but was told I had to do French and history.
    The only French I can remember is “Vous jigajig avec mois madamouiselle?” and the only history I know is that Vous jigajig avec mois madamouiselle? doesn’t work real well.

  14. The Pugilist

    Stop subsidising any industry especially the rural sector.

    sfw, what subsidies do the ‘rural’ sector get? They create wealth from the land and get next to no government assistance. For drought affected communities, their ‘unemployment benefits’ are less generous the than Newstart as they are time.limited to four years total over their lifetime. You don’t want to sound like a green mung bean addled loon

  15. Tel

    sfw, what subsidies do the ‘rural’ sector get?

    Ever heard of the “National Broadband Network”?

    Costs a lot more to run an underground fiber up the 1000m driveway on a horse stud back of Armidale than it costs to cable up a multi-story slab of city dogboxes. The government insists on a uniform non-market price for all services … something about universal service vote buying. What’s with that, huh?

    I would guess the same applies to roads as well, the city has a lot more people paying tax and gets good quality roads over a relatively short distance. The rural areas have hardly anyone paying tax and per-capita get much longer distances of roads built, admittedly at a lower quality.

  16. Tel

    1. Make it a jailable offence for politicians to borrow money except in the most dire of national emergencies.

    You don’t need to do that, just have a rule that anyone who sits in Parliament through five consecutive years of national debt becomes ineligible to ever run for election again. If it really is “the most dire of national emergencies” they will be very glad to retire … and the next lot can clean it up. If they seem reluctant to get out of there, that means they are enjoying themselves so it couldn’t be so dire.

  17. The Pugilist

    Ever heard of the “National Broadband Network”?

    Tel, is this a joke? Like a wise farmer (may or may not exist) once told the chaps at the betoota advocate, farmers have more chance of getting diabetes than they do of getting the NBN.
    In any case, a farmer would make far more productive use of high speed internet than inner city woke folk. I’d rather put my share of taxes toward that than subsidising light rail in Canberra, for example. There are a million other items of government largesse that you could cut before you get to.cutting phone and internet access for the bush

  18. sfw

    Winston, the only french that comes to mind is “Voulez-vous coucher avec moi?” whenever I meet a french woman I ask her what it means.

    Pugilist, you are either an ingenue, a farmer or ignorant. Farming, the only game where if things go wrong you go crying to the government for a bailout. I live in a rural area, whenever a cocky starts complaining about how hard he works and that he’s going broke and doesn’t know why he does it because there’s no money it, I ask him would he sell me his farm and how much does he want. The answer is always multiples of a million dollars. I point out that if my business was making money I would be lucky to sell it and if I did it would be at a massive loss. So if your farm isn’t making money it can’t be worth much, at this point they stop talking.

    Farm prices are at an all time high, it’s a business that if you know what you are doing, haven’t loaded yourself up with debt, you can do very well. Problem is a lot of farmers don’t do well and their farms and Australia would be better off if sold to those who can at a fair price. They don’t get sold or put into liquidation because the gov props them up through all manner of supports, both ensuring an inefficient agricultural sector and a loss to Australia.

  19. Frank Walker from National Tiles

    The Pugilist
    #3143612, posted on August 29, 2019 at 7:03 pm

    Ever heard of the “National Broadband Network”?

    Yes, it is a joke, of course.

    I blame IT for making this meme popular.

  20. Tel

    Tel, is this a joke? Like a wise farmer (may or may not exist) once told the chaps at the betoota advocate, farmers have more chance of getting diabetes than they do of getting the NBN.

    Not at all, most of the money was spent on rural areas long before it was spent on the city.

    Whether it works or not is hardly my problem, the rural people all loved the idea and the politicians loved spending the money. Don’t like it, don’t vote for it, and get your neighbors to make it clear they don’t want it. Of course, that’s never gonna happen because people in country towns feel mightily entitled to infrastructure built by other people’s money.

    This from federal debate back in 2008, here’s the National Party … https://www.openaustralia.org.au/senate/?id=2008-12-04.395.2

    Ron Boswell (Queensland, National Party)

    On 5 August 2005, state Nationals leaders from New South Wales, Queensland, Victoria, South Australia and Western Australia welcomed a unanimous resolution from a special joint conference of state National MPs on Telstra. This resolution mirrored the resolution that was passed by the Queensland Nationals conference the previous week and subsequently endorsed by federal Nationals MPs. It stated:

    This meeting of state Nationals MPs from across Australia resolved to oppose the further sale of Telstra unless all Australians in metropolitan, regional, rural and remote areas are protected from telecommunications market failure which may prevent the provision of parity of technology, services and price into the future between metropolitan and regional areas.

    Towards this goal, this meeting of National Party members of parliament called for the following implementation of this resolution:

    The establishment of a permanent and significant trust fund with the earnings used to provide future technology and infrastructure upgrades at parity price and service with metropolitan services in case of market failure (utilising a competitive tender process that considers providers with a permanent presence in regional Australia).

    Today the Senate is faced with a decision of whether to recant on this first pillar of the covenant we made with the bush. On the day we introduced legislation to live up to our commitment and had shaken hands with the people of the bush, the then minister for communications, Senator Helen Coonan, said that the telecommunications legislation amendment bill would ensure that regional Australia’s perpetual $2 billion Communications Fund could not be pillaged. She said the bill protected in legislation the $2 billion principal of the Communications Fund so that only the interest earned from the fund’s investment, up to $400 million every three years, would be spent. It would also provide certainty for the people in regional and remote Australia that the improvements in their telecommunications service would keep pace with the rest of the nation.

    Did you get that bit? I highlighted it: “provision of parity of technology, services and price“, so what do you think that means? Maybe that should apply to other areas … you know it’s kind of unfair that the Sydney Opera House is only in Sydney … there should be parity with Dubbo so we need to build a matching Opera House in every outback town … else inequality doncha know. Come to think of it, surfing at Bondi should be available to the people in Tenant Creek so government should build a surf beach.

    Here’s even more hilarious:

    Labor had committed to draining the entire $2 billion from the Communications Fund, to rob the bush of its ongoing funding and to squander it on a commercially viable network estimated to reach around 75 per cent of the population. The passage of this bill through the parliament will protect rural and regional Australia from the gross economic irresponsibility of the Labor Party.

    Oh golly … the agrarian socialists are seeing money (righteously THEIR money) being squandered on something commercially viable. Gum! We can’t have that.

    Fortunately (phew) the ALP couldn’t manage “commercially viable” if their lives depended on it, but they did manage the “squander” part. Well the Nats demanded and they got what they asked for.

  21. Tel

    I tried to link to here https://www.openaustralia.org.au/senate/?id=2008-12-04.395.2

    It won’t let me quote too much, here’s the crux …

    This meeting of state Nationals MPs from across Australia resolved to oppose the further sale of Telstra unless all Australians in metropolitan, regional, rural and remote areas are protected from telecommunications market failure which may prevent the provision of parity of technology, services and price into the future between metropolitan and regional areas.

    Notice that? They want the same service for the same price as city people, regardless of cost of implementation … or as economists like to say “subsidies”. That’s the National Party a.k.a. the agrarian socialists of Australia.

    And the howler:

    Labor had committed to draining the entire $2 billion from the Communications Fund, to rob the bush of its ongoing funding and to squander it on a commercially viable network estimated to reach around 75 per cent of the population. The passage of this bill through the parliament will protect rural and regional Australia from the gross economic irresponsibility of the Labor Party.

    Yup, there’s the Nationals outraged that THEIR government money is getting squandered on something commercially viable. Didn’t they understand that the ALP would squander 20x as much money without being commercially viable? At any rate, it was the rural voters who demanded this monstrosity so they can cop their lumps getting blamed for the spending … it’s on their account as far as I’m concerned.

  22. Tel

    It’s also incredibly dirty for the Nationals to be talking about “telecommunications market failure” then demanding price and service parity.

    Is it a “market failure” that people in Bondi can walk to the beach and go surfing while people in Tennant Creek cannot?

    Why does it strangely become “market failure” when services that genuinely cost more to deliver because of the greater distances get charged at a higher price? WTF sort of economics do the National Party believe in?

    In any case, a farmer would make far more productive use of high speed internet than inner city woke folk.

    Yup … and when I drink beer, I enjoy it a lot more than you do, so you should buy me free beer.

  23. The Pugilist

    Tel, I doubt you enjoy beer more than I, but I digress. My point is that if you’re complaining about government intervention and subsidies, you would go after a whole heap of other shit before you went for the cross-subsidies for USOs.
    sfw, we hear a lot about bailouts for farmers, but they are inner city folklore. They don’t exist. Tell me how farmers get ‘propped up’? Be specific. List the programs.
    We’re in a massive drought at the moment, so where prices are high for certain commodities, it is because they’re in short supply and a lot of farmers aren’t making any money from those high prices. The thing is they can make money in most seasons and good farmers will ensure their own resilience by putting aside their own savings, building their own water and fodder storage facilities and making good, early decisions on whether to plant crops or restock their farms. There are bad farmers, just like there are bad shop owners or restaurateurs, but overwhelmingly they’re solid entrepreneurs. Agriculture is no better or worse than any other sector. So all I’m saying is that there are more obvious targets for cutting government interference.

  24. Tel

    We’re in a massive drought at the moment, so where prices are high for certain commodities, it is because they’re in short supply and a lot of farmers aren’t making any money from those high prices.

    No problem, ScoMo’s got your back.

    https://www.budget.gov.au/2019-20/content/community.htm

    Supporting our farmers

    The Government is providing $6.3 billion in drought assistance and concessional loans for farmers and farming communities.

    As part of this, to prepare for future droughts, the Government is investing $3.9 billion in the Future Drought Fund.

    Flood-affected farmers in North Queensland will have access to up to $300 million in grants to rebuild farm infrastructure, replace livestock and replant crops.

    Yes, that’s right, somehow the Australian Constitution authorizes government crop planting, if you blur your eyes and squint with the paper held sideways … there! … did you see that? Crop planting, plain as day.

  25. Tel

    I admit there’s a lot of other spendthrift in that budget link … at least in the case of long distance rail it is constitutional … some of the other stuff is highly questionable. Long distance roads should be paid for by toll, which once was quite difficult to organize but today is very easy, and short distance roads should be paid for by local tax, whatever method you want to deploy but it’s local users who are mostly the beneficiaries.

  26. Roger W

    Just to support sfw’s request to Steve:
    “Steve, I think I have an inkling of classical economics but not that much. Can you tell me what classical economics would prescribe to get us out of the current mess, and how long would it take?”

    It is good to have other people’s ideas but Steve, you keep on making comments that, to you, are obvious, but to some of the rest of us at least, are a little like a Times cryptic crossword clue.

  27. Tel

    https://www.infrastructure.gov.au/infrastructure/water-infrastructure/nwi-development-fund/

    The $1.3 billion National Water Infrastructure Development Fund (the fund) is implementing the Australian Government’s commitment to build the water infrastructure of the 21st century. The fund is accelerating the detailed planning and construction of water infrastructure projects that will deliver new and affordable water, enhance water security and underpin regional economic growth, including irrigated agriculture and industry.

    There you go, water is mentioned in the Australian Constitution now. Bugger me, I thought I was paying for water already … and while paying also under water restrictions … but now I can pay for it all over again! Irrigated agriculture was so good, they have decided to irrigate both agriculture and industry. Twice as good!! I’m so glad I have to pay for that. Water the factory, it might grow.

    Weird that they don’t build any dams with the money … buy hey I’m a city guy I shouldn’t interrupt true experts while they are hard at work squandering.

  28. Howard Hill

    Tel
    #3143601, posted on August 29, 2019 at 6:48 pm

    So the hard working, productive people that provide a gorgeous T-Bone steak to your plate and pay their share of taxes should be shunned over a woke fuckwit that writes scripts for Australia’s got retards?

    Is it any wonder we’re fucked? Lets just kill all country people and give their assets to woke snowflakes that throw up milk on the pavement and call it art. I mean they are city dwellers that only pay a tiny bit to fill potholes, if they even do that?

    Not one of them feeds me, not one of them cures my ills, not one of them contributes to building my home, but somehow they are preferred over hardworking productive country folk? FMD!

  29. sfw

    Howard, nobody said they should be shunned, why would you say that? I just say that farmers should stop moaning about adverse circumstances, stop asking for government help and get on with the job, that’s all. Propping up and supporting unsuccessful farms is no more good for the country and the taxpayer than propping up any other unsuccessful business.

    When farm prices match the returns to capital (assuming the dire circumstances of many farmers is true), then I’ll believe the farmers. Until then I’ll remain sceptical.

  30. John A

    sfw:

    Steve, I think I have an inkling of classical economics but not that much. Can you tell me what classical economics would prescribe to get us out of the current mess, and how long would it take?

    I’m very much like you, sfw – I realise something is horribly wrong with our economy but can’t work out what it is.
    I think Guru Bruce has hit on a very decent explanation above. The government has crowded out private investors from the savings pool and because government spending is unnecessarily wasteful, the economy is running against a terrible headwind.
    I would suggest Winston Economics, whilst not being of such economic pedigree as Classical Economics, would do the trick. Reduce red/green tape, pay off government debt, forbid deficit spending, and shoot all the lawyers. 🙂
    Yes – there are other areas to fix, but that would do for a start.
    Comments please?

    In the finance area,
    1. require banks to match assets and liabilities ie. have on call funds available to meet all on-call commitments being day to day trading accounts, at call deposits and maturing investments. [It used to be called ‘honest banking’]
    2. Lift interest rates and have the RBA stop jawboning rates downwards so that there are incentives to save and disincentives to squander investment funds. This will also have the side-effect of slowing (hopefully killing) asset inflation in the real estate and stock markets, plus support the Aussie Dollar
    3. Medium term: abolish the RBA lender of last resort function and have as its only tasks a) management of the payments system and b) banker to the governments of Australia.

    Then
    4. the above, especially killing the budget deficit. There was once a “Razor Gang” to cut expenditure; now we need the Machete Mob to really attack the bloat. Start with the ALPBC/SBS conglomerate, then move on to Education, and Health, eventually Welfare of all sorts: both subsidies and industry support and individual welfare.

    But don’t forget that the Australian equivalents of Sir Humphrey Appleby will be your enemies for life.

  31. The Pugilist

    In the finance area,
    1. require banks to match assets and liabilities ie. have on call funds available to meet all on-call commitments being day to day trading accounts, at call deposits and maturing investments. [It used to be called ‘honest banking’]

    I agree with this John A. In addition to that:
    1) The RBA should provide a one off injection of newly created money into all ADI’s exchange settlement accounts, thereby balancing an ADI’s assets and liabilities. This would extinguish all external wholesale liabilities (domestic and foreign). 2) At that point, it should be forbidden for a bank to lend fractionally. That is, all loans should be 100% backed by cash. Then 3) deposit insurance and other government guarantees for ADIs should be abolished. This would, at the stroke of a pen, ensure that the banking system is completely robust and would avoid a contraction of the money supply through the increased reserve requirements. The newly created money would not enter circulation and ADI shareholders would be 100% on the hook for the conduct of those ADIs.

  32. Tel

    Is it any wonder we’re fucked? Lets just kill all country people and give their assets to woke snowflakes that throw up milk on the pavement and call it art. I mean they are city dwellers that only pay a tiny bit to fill potholes, if they even do that?

    Not one of them feeds me, not one of them cures my ills, not one of them contributes to building my home, but somehow they are preferred over hardworking productive country folk? FMD!

    See what happens when you even mention those rural subsidies?

    Some guy goes off … like a frog in a sock.

    If the hardworking country folk are so productive … then they don’t need government programs up the whazoo. The Pugilist asked for some specific details to provide examples of subsidies and I posted some, now now the reaction to that is literally, “Lets just kill all country people …” just because I waved a hand in the general direction of the money spigot. WTF?!?

  33. carol kavanagh

    I know nothing about classical economics but out family has just returned from a visit to relatives in Germany. During our last visit there in the late 90’s the Australian dollar was also at a big low. Everything in Germany back then seemed hugely expensive, whether a drink in a bar, a simple sandwich, hiring a car and putting petrol in it, eating out, clothes, etc. etc.. This time, however, we were greatly surprised to discover all those same things were either much the same kind of prices we were used to paying in Australia or sometimes even less. Even Aldi was cheaper.
    We were wondering how this complete reversal could have happened, given that the Reserve Bank keeps telling us there is zero inflation in Australia. As I said, don’t know economics, but, if that were true, wouldn’t prices here still be much cheaper than in Germany, as they were during our last visit? I have determined that either the Reserve Bank has been lying to us, or my complete lack of knowledge regarding economics is so far off the charts that it has led me to misunderstand how these things work????? I would be greatly appreciative if someone would be so kind as to give me a little illumination on the issue.

  34. Frank Walker from National Tiles

    As I said, don’t know economics, but, if that were true, wouldn’t prices here still be much cheaper than in Germany, as they were during our last visit?

    Yes, but it’s relative and the price index accumulates over time.

    The problem with inflation watching is defining the index measure.

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