Extreme capitalism

Keynes delivered some other telling weaknesses in economic theory. He raised the moral question of income distribution that had become forgotten in neoclassical mathematical economic models. In 1936 Keynes rejected Ricardo's theory of comparative advantage on the grounds that his theories ignored aggregate demand. In the real world of massive unemployment, the economic philosophies (monetarism, classical, and neoclassical) of the time were unable to explain let alone offer solution to mass unemployment.

A most interesting point in the current debate is that 78 years after the Great Depression, protectionism is blamed for that crisis. Meanwhile John Maynard Keynes working professionally through that era pointed to the inability of 18th and 19th century theories to explain and correct the Great Depression. Moreover, economic literature records events causing the Great Depression in the USA as: mal-distribution of income; industrial weakness, farm weakness; and finally financial speculation. The attempt by contemporary economic gurus, media commentators and major political parties to re-write history is objectionable to anyone who has read a little historic economic literature.

The role of protection can be understood by reading The Australian Tariff: an Economic Enquiry, 1929.This historic document is better known as the Brigden Report. Historically, protection was a carry over from the ravages of World War I. World industrial production boomed in the post war period. By the mid 1920's a slump had begun. Widespread dumping of excess production took place. Australia became a prime target of world wide dumping. As a consequence prices collapsed for traded goods. As Australia had engaged in substantial overseas borrowing, exports could no longer meet interest and redemption on debt. The only solution available was to restrict imports. To this day, advanced nations retain anti dumping legislation to protect domestic industries from predatory international dumping. This historic side of the story is never mentioned by anti protectionist movements.

So far international economic policy response has been modern monetarist. Well into 2008, the Australian RBA and ECB were telling the world that inflation was the problem and interest rates must be used to dampen inflationary expectations. In contrary moves, the US and European countries have injected large sums of money to contain financial dislocation and stabilise credit flows. Every day brings another crisis or threat of crisis despite lower and lower world interest rates.

Some token fiscal stimulus has been offered in major economies. The recent G20 has encouraged greater use of fiscal policy. The Australian fiscal package is representative of international efforts on the fiscal front. It was an ill-conceived strategy constrained by modern orthodox economic shibboleths.

Current fiscal stimulus has been supply side economics (Say's Law). Tax cuts used to bolster low income expenditure is simply subsidising consumer income that is expected to be spent to create income for producers of wanted products. The first home buyer subsidy infers that savings drive investment which again complies with Say's Law of Markets. Appropriate fiscal policy needs to break out of the orthodox straight jacket of supply side theory to address aggregate demand deficiencies stabilise employment, and contain unemployment.

Fiscal policy instruments comprise a broad spectrum of government expenditure across:

• current expenditure on goods and services;
• capital expenditure on buildings and construction by both public enterprises and public authorities;
• capital expenditure on machinery, equipment, technology by public enterprises and public authorities;
• gross operating surpluses of public owned enterprises;
• cash benefits to persons ( transfer payments);
• personal income tax rates; and
• Commonwealth Indirect tax rates

So far the only fiscal instrument used has been cash transfers to persons. This has been politically marketed as tax cuts. In fiscal stimulus terms, one-off cash transfers to persons can deliver only a one-off impulse to the economy. The strength of the impulse will depend upon the final multiplier or flow on effects which will depend upon whether or not the money is spent on domestic or foreign goods, saved, or used to extinguish debt. Current expenditure on goods and service should be reviewed to ensure Australian made products are purchased where ever possible.

If things worsen infrastructure will become the fiscal instrument focus. If the infrastructure fund is used to vet and select efficient infrastructure expenditure, there is a real danger of repeating the error of the 1980's known as 45 degree Keynesianism. This phenomenon implied that large scale infrastructure in urban or major regional areas would have multiplier or flow on effects for the wider economy. That was a fallacious assumption and hence the contemptuous name of 45 degree Keynesianism.

Rather than a one-off cash transfer to persons, sound ongoing anti recession policy should look to reduce income tax rates and GST rates. The superannuation levy should be lowered. These measures would support ongoing consumption expenditure; and, generate a positive ongoing fiscal impulse to aggregate demand. Capital expenditure programs and rearrangement of existing programs need to be planned and implemented to ensure investment expenditure will deliver orders on order books of firms. This will support employment and employment growth.

The rise of the quasi-intellectual economist post 1980's structural reform is now a liability in formulating necessary policy responses to what is in store. Unless there is some marked change in economic philosophy, pending economic dislocation will be compounded by flawed orthodox economics. Even Alan Greenspan has had the grace to publicly admit that the economic philosophy he followed for 40 years has proven flawed (modern monetarism). It is time post 1980's media, political, and industry commentators also admitted this and recognise that fluent command of slogans is inadequate to what is now required.