Talk presented t the Victorian Skeptics "Soapbox" event, 18 August 2014
After Kelvin Thomsons talk to theSkeptics earlier this year it seemed to me that economics might be a bit of a mystery to skeptics, so I am glad of this opportunity.
Before I begin, being a student of Islam, I would like to point out why I think the establishment of an Islamic State is an important event. Why are young Musllims from all over the world heading over there to join in the mayhem? Because these events hark back to the halcyon days of the establishment of Islam when the Prophet Muhammad himself, waged war, beheaded infidels, and lived high on the spoils of captured booty. Apart from terrorism, will the Islamic State be a major military threat? No, because such a state is not economically viable.
Which brings me to the subject of economics. I want later to give my thoughts on Kelvin Thomson’s talk to the Skeptics earlier this year. Before I do that, I would like to clear up some common misconceptions about economic terms.
Firstly deficits. There are two types, current account deficit and the budget deficit. People mix them up. One is the balance of trade and the other is the government balance. On the latter, no emergency but long term issues mainly caused by middle class welfare entitlements.
Secondly, real terms. It means adjusted for inflation. All time series data in economics are index numbers. Raw data is in current dollars. We need to construct price indices and deflate to real terms, which are more relevant.
Thirdly productivity. It does not mean production it means output per worker. What drives it is technical progress, working smarter, not harder.
What is the origin of economic thought? It came from moral philosophy. You will have heard of Adam Smith an his invisible hand. You may be less familiar with Jeremy Bentham and his concept of Utility. This the essence of Utilitarianism. The concept of utility, and the maximisation of it, is rife throughout economics text books. The concept of general welfare, as in the greatest good for the greatest number is also rife throughout economic and political decision making.
Here we come to one of the great debates in economics, whether it can be separated into descriptive an prescriptive, positive and normative, purely scientific or value laden. The answer is that in economic these distinctions can never be quite clear cut.
Are there laws of economics as there are in science? There are very few, but here are a couple.
The Law of Supply and Demand. If prices are too high, demand will fall and supply will rise. If there are shortages, prices will rise, It there are gluts, prices will fall. There will be an equilibrium according to Adam Smith's invisible hand. It is true that market forces can act in this way, which serves humanity in a beneficial way. But markets can fail and government intervention is required.
The Law of the Diminishing Marginal Utility of Income. This must be the most unused law in economics. This means that as a persons income rises, utility rises, but at a decreasing rate. An extra dollar is worth more to someone on $10,000 than to someone on $100,000. The obvious implication is that general welfare will be increased by redistributing income. Those who laud the virtues of market forces prefer to bury this law. The current government wants to turn it upside down. We do still have the legacy of the law, which is progressive income tax.
What is the most significant determinant of the wealth of nations? It is the skills of the people and the installed stock of industrial plant and equipment, known in economics as the stock of capital. Technical progress means that the productivity of this capital increases over time. Smith knew this as did Karl Marx. Where Marx was wrong is that the benefits do not just accrue to the capitalists (although the pendulum does swing).
Living standards rise over time and technical progress is the reason why. An index of average real per capita incomes shows that these have grown by about 2 percent a year, compound, for 200 years, which is a factor of 50. This far outstrips population growth.
Technical progress is the reason that Malthus was wrong 200 years ago, was wrong ever since, is wrong now, and will always be wrong. Because technical progress will not cease.
Economic growth. Some people thin that endless economic growth is a disaster and must stop. That is wrong. Economic growth, as measured, can go on forever and it should and it must. You have to understand what the term economic growth measures and what it does not measure. It is an index. Real GDP is an index. It does not measure use of resources. In fact a more efficient use of resources will increase the index. Per capita GDP is both a measure of, and is driven by, technical progress.
What would happen if we discovered a way to harness fusion energy? Eg if cold fusion not a scam but real? Energy would be cheap, we would use less resources, and economic growth would increase.
The issue of population. I am in favour of population. Australia has 0.3 percent of the world’s population. Population is not the problem. Lack of investment is the problem. Elsewhere also, population is not the problem. Poverty is the problem. The solution to both is economic growth.
Tim Flannery has said that the carrying capacity of Australia may be only 5 million people. That is just a ridiculous statement. At what level of technology? Carrying capacity increases with technology: productivity increases.
Bob Birrell at Monash has been complaining for the last 40 years that immigration causes unemployment. During that time 5 million people have come to Australia and the rate of unemployment has gone down.
People benefit from living is cities, and frequently, the bigger the city the bigger the benefit. This is the economies of agglomeration that Ross Gittins was talking about in The Age the other day. There are of course also the benefits of economies of scale.
I went to Guangzhou 10 years ago and there was no metro. Now there a network of 135 underground stations. Meanwhile we still have no raliway line to Doncaster after 40 years of talking.
Now I want to come to what Kelvin Thomsonm said. I took notes.
Growth does not make us wealthier. Wrong. They are different issues. Growth and wealth are intimately related.
Growth concept is flawed and GDP as a measure is flawed. Wrong. Per capita GDP is a good measure of per capita income and this is still a good correlate of social well being.
Growth causes inequality. Wrong, Growth increases per capita wealth. Failure to apply adequate income redistribution policies causes inequality.
Population aging - don't worry it is good. Wrong. It is going to cause enormous government budget problems all over the already indebted developed world because government revenues will fall while expenditures increase due to demographics.
Immigration is increasing. Wrong. In percent terms (as it should be measured) it is around 1% as is has been for the last five decades
Population increases the cost of housing. OK it is a factor. Without immigration we may have had a housing bust like has happened universally elsewhere. Another house price factor is negative gearing which subsidies a high income rentier class at the expense of first home buyers. Through higher excahnge rates this has caused the demise of the manufacturing industry.
Population will not "take care of itself". Wrong, It has already done it in most developed countries, which will suffer because of population decline.
Population increases infrastructure costs. Well yes, but the entire population benefits and for a fixed cost the per capita costs are lower for a higher population.
Population causes price rises. Wrong. Economies of scale in production and distribution allow prices to fall in bigger markets. What rises over time is the cost of the more labour intensive goods and services relative to manufactured goods.
Population causes conflict and violence in Syria, Egypt Iraq is caused by population. Wrong. Islam is the cause. It is a growing crisis.
The best way to reduce fertility in developing countries is to educate
women. Births per woman decrease by one baby for every additional year
that a girl stays in school. The widespread provision of education requires
a degree of economic development.
The TV program Superized Earth gave a vision of the grand schemes that human ingenuity can achieve. www.abc.net.au/tv/programs/supersized-earth/
Note how they grow tomatoes in Spain, We do not need to fear population. In any case, further economic development is the only solution.
What we do need to worry about is the destructive power that pseudo science, myths, superstitions,and religions (especially Islam) have over the human mind. We need to help people to be rational and demythologize their ancient traditions.
What we do need to worry about is global warming, which is going to get us, unless we do something, no matter what the population size. If the solution is a fixed cost. a higher population will be an advantage in paying for it.
Economic growth is bad for the environment. Generally wrong. Environmental protection is expensive. The worst degradation usually occurs in poor countries. Economic development allows environmental protection measures to be better afforded and more effectively enforced.
..
Even if the population is static, technical progress will deliver higher productivity, with (likely) less resource use per capita, and higher incomes per capita. i.e. economic growth. That is good, not bad.
If you think global population is to high, what is your solution? My solution is to provide the economic means by which women cane be educated. When this is done, birthrates drop below replacement level.
To halt immigration in Australia would be a self-inflicted crippling
of the economy with lasting negative consequences. To deal with the issues
you are concerned about we need increased infrastructure investment and
increased environmental protection.