I considered getting into this on the first run but then thought better
of it. But with Rob’s latest posts, and then the posting by James whose
fundamental points I am in agreement with, I think I might chance my arm
at some kind of reply. 

I might also note that there really doesn’t seem to have been an HET
aspect to the original issues Rob raised, or at least none that I can
see off hand. But to reply properly in my view is to go back into the
realm of HET and into the world of pre-Keynesian economics. This is why
HET is so important to economic theory. We historians of economics
retain our tribal memory. 

In an I=S environment, saving so far as a national economy goes is not
money. Saving is output. Saving is the proportion of total production
that is not consumed but turned into investment. There is, of course,
also the flow of money payments but they ought to be seen as a
distraction to the real issues involved. 

The rate of increase in the flow of money payments in an era of debt,
deficits and vast oceans of non-value adding expenditures greatly
exceeds the rate of increase in the flow of real value adding output.
The problem we have is not the absence of expenditure. It is the absence
of products any additional expenditure can be used to purchase. 

Why is that? Many reasons but let me just point out two. Firstly, there
has been so much misdirected expenditure, initially with government
direction of production prior to the GFC and then even more so following
the stimulus. Secondly, given the nature of government policy, business
has gone into a shell. You would have to be very brave to take on
additional capital investment in this environment. But while it is hard
to make such calculations, going back to the first point, it does seem
to me that there are few free resources available that could be readily
deployed into activities that would make a profitable return. All this
is from the classical theory of the cycle. 

But really, the last thing we need is another demand stimulus, this one
forced by governments onto a clearly reluctant banking sector. It seems
to be a modern version of Douglas Social Credit or Gesell’s stamped
money with the aim being to get money spent. The policy focus should
instead be on trying to create an environment in which businesses will
undertake value adding activities. Spending in itself is not the answer,
which the two years of the stimulus ought by now to have quite
comprehensively shown. 

I know this is an old idea, and one that may no longer be sayable in
mixed company, but is there really no one any longer prepared to leave
the recovery process to the market? 




Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Level 12 / 239 Bourke Street
Melbourne Vic 3000

Phone: (03) 9925 5878
Mobile: 042 7297 529