War, destruction and Keynesian madness

Gerard Jackson

I had several emails from greenies arguing that curbing CO2 emissions is good economics “because it will lead to more investment and this would mean more growth and jobs.” This is one of the nuttiest arguments for cutting CO2 emissions that the greens used in their war on cheap energy and it reveals a staggering ignorance of economics. Nevertheless, the “usual suspects” have mindlessly promoted it, one of them being Anatole Kaletsky, an economics writer for the Reuters and The International Herald Tribune and one of the crudest Keynesians in the media today. And that is really saying something.

I referred to Kaletsky in particular because these emails reminded me of an outrageous article he wrote for Rupert Murdoch’s Australian¹ in which he seriously argued that severely restricting CO2 emissions would stimulate economic growth and employment because it would, and this comment is a real beauty, “have the effect on the world economy comparable to a large-scale war”. This is truly Orwellian: war and destruction bring prosperity, peace brings stagnation.

In case anyone thinks this nonsense is held only by ignorant journalists allow me to point to Paul Krugman who asserted that the upside of the 9/11 terrorist attack is that it will generate an “increase in business spending².” Of course, it also meant an increase in government spending which he thinks is absolutely terrific. Then we had Fred Bergsten from the Institute for International Economics in Washington. According to this brilliant thinker and former assistant secretary of the US Treasury the tsunami tragedy should be a good thing for its victims, at least those that survived, because:

 Like any disaster, you get negative effects through destroying existing properties and people’s health, but you do get a burst of new economic activity to replace them, and, on balance, that generally turns out to be quite positive³.

 It follows from their logic that wholesale destruction leads to greater and more advanced investments and thus raises the standard of living. This is Keynesianism gone mad. Wholesale war leads to the wholesale destruction of life and capital. This obviously lowers the standard of living. Does anyone think the standard of living was higher in Germany in 1948 than in 1938?

 Per capita consumption in Britain in 1948, for example, was lower than in 1938⁴ despite 6 years of continuous warfare — or should I say because of the effects of 6 years of war compounded by post-war socialist policies? As Henry Hazlitt pointed out with the example of the broken-window fallacy⁵, the likes of Kaletsky, Bergsten and Krugman only concern themselves with the immediate effect the action, they cannot see that for anything to be replaced something must be sacrificed. Economists — real ones, that is — call this opportunity cost.

 A competent economist will readily admit that when capital goods are destroyed by war the standard of living must fall. Now these goods can only be replaced from two sources: (a) Existing capital goods must be withdrawn from other lines of production, thus lowering output there, or (2) savings must increase which also means a further fall in consumption. Economic growth basically means capital accumulation⁶. Capital goods come from savings which in turn comes from forgone consumption. In other words, to save means to give up some present consumption in favour of greater future consumption. It should be patently obvious that bombing factories or flying airliners into skyscrapers cannot increase gross savings. In fact it lowers them because capital goods are also savings.

 Even after a devastating war a country can raise its standing of living, Germany and Japan are proof of that. But the point is that it was not the war that did it but their high savings rates and comparatively free-market post-war policies. If the likes of Kaletsky and Krugman are right it would pay a country to thoroughly wreck its factories, offices, transport systems and even housing stock every few years⁷. Looked at from this angle the absurdity of the idea that destruction creates prosperity becomes immediately obvious — or should.

 One doesn’t need a war, thank God, to expand the capital structure. One just needs plenty of savings and entrepreneurship. Greater savings provides the necessary capital while entrepreneurship dissolves and recombines capital combinations in a way that increases efficiency and lowers the costs of production — and all without the need for mass bombing. What Kaletsky and the other vulgar Keynesians don’t understand is that market processes are continuously dissolving inefficient capital combinations and even destroying obsolete capital goods. This is part and parcel of the market process that raises the standard of living.

Kaletsky’s silliness brings us to so man-made global warming. According to this economic wiz kid raising the cost of energy “will boost employment, investment and economic activity. . .”⁸ But how can it boost investment when investment can only come out of savings? Did Kaletsky mean that raising costs and lowering output raises savings? Or was he seriously suggesting that investment can exist without savings? After all, investment consists of the material means of production which can only come from forgone consumption, i.e., savings, which is the real cost of economic growth.

Kaletsky’s stuff is unbelievably bad. But on the basis of his outrageous nonsense he argued — as did others of his ilk — that the poor ignorant masses would be better off materially if they swallowed green propaganda, as he has done, and took a massive cut in their standard of living. What can I say, except drop dead, mate. The test of a good economist is to be able to follow the secondary consequences of an economic decision. He is one who is not captured by immediate effects and so ignores the long run. Kaletsky is not a good economist. So what does this also say about the mighty Krugman and the other Keynesians that utter this claptrap?

 * * * * *

¹Anatole Kaletsky, Digging beneath the gloom, The Australian, 29 November 2000.

²Paul krugman, Reckonings; After The Horror, New York Times, 14 September column 2001.

³Cited in Peter Martin’s article a Dismal failure to count the true cost, Herald Sun, 5 January 2005.

⁴John Jewkes, Ordeal by Planning, Macmillan & Co. LTD, 1948, pp. 20, 147-8).

⁵See Henry Hazlit’s Economics Made Easy. This splendid little book is a great introduction to free market economics.

6⁶By capital accumulation we do not means the simple multiplication of capital goods but, as the Austrian school of economics explains, an expansion of the capital structure.

⁷Simon Kuznets noted that before the advent of the Industrial Revolution there was virtually “no fixed durable capital” as we understand the term and that a great proportion of society’s savings were taken up in repairing and replacing capital that wore out about every 5 or 6 years. (Kuznets, Population, Capital, and Growth: Selected Essays, Heinemann Educational Books, 1973, p158.)

It ought to be obvious to any student of economic history that only the mass production of iron that the industrial revolution brought about could make possible a large-scale production of fixed capital goods without which there can be no real capital accumulation. Yet the unthinking likes of Kaletsky argue that destroying vast amounts of fixed capital promotes economic growth! Not only are they lousy economists they are historical illiterates

⁸In 2008 the Sydney-based Center for Independent Studies published Exploring a Carbon Tax for Australia, An absolutely shabby piece of work that actually argued that a carbon tax would bring fourth new technologies and promote economic growth. Greg Lindsey, executive director and founder of CIS, has yet to offer an apology or even an explanation for this atrocity.

The carbon tax and the deceit of one of its advocates

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