Monday, May 24, 2010

Productive investment leads to greater wealth.

Peter Cresswell at Not PC has an excellent fisking of a subStandard demonstration of economic ignorance. Go read the whole thing. I hope Peter follows up with an analysis of New Zealand capital accumulation vs consumption over the last 100 years.
Now, the seed corn of economic growth is capital—capital put to work producing economic wealth, and still more capital. It’s an ongoing virtuous cycle dependent on one thing: that you keep growing your seed corn instead of consuming it.

Its a simple truth that New Zealand politicians have seemed unable to grasp. Peter goes into more detail with a quote from John Stuart Mill
“What a country wants to make it richer, is never consumption, but production.”
When spending on production exceeds spending on consumption, more capital goods are produced and a process of capital accumulation (and economic growth) is begun. When spending on consumption exceeds spending on production, however, the result is the opposite: capital is consumed instead of accumulated—and since the means by which economic activity is diminished, so too is the economic activity that the consumed capital would have made possible.

So (leaving aside the risks and uncertainties associated with entrepreneurs directing their capital towards all the various places it can be put to best use) the simple equation to look at as a predictor of economic growth is the proportion of productive spending to consumption spending.

The higher the proportion, the higher the rate of economic progress; the lower, the less.

That applies to the economy as a whole but with the ability of government to force their will on the country they have great power. As Peter says:
Governments you see have only three means by which they can obtain money to spend: taxes, borrowing, or the printing press. The higher their spend, the more one or more of these three hurdles are put in the way of successful capital accumulation. The more governments spend, the less private investment can happen.

From my long wanderings around the web for stats on capital accumulation & wealth there seem to be very limited data sets to do further empirical analysis. If anyone can direct me to some data sets I would be most interested.

The logic of capital accumulation means that Cullens fund actually served a worthwhile purpose by deferring expenditure in favour of longer term saving.

In a New Zealand context National policy on broadband, roading infrastructure, mining, even Canterbury water can be seen in a much more positive light. The recent budget is an excellent rebalancing between consumption and saving. As Peter points out the government temptation of having tax cuts without spending cuts is a false choice.

I am interested in carrying this them on and developing something more useful than one off posts on these subjects. To me the government is heading in a mainly positive direction but they need to focus on the following

1. Corporate Governance to protect private investors from the likes of Hawkins & Hotchin
2. German style depreciation of 100% in year one
3. Investment in production in New Zealand



Anonymous said...


Mort said...

In PC's post there is a post on what constitutes capital,“Capital [explains George Reisman] is the accumulated wealth that is owned by business enterprises or individuals and that is used for the purpose of earning profit or interest.
“Capital embraces all of the farms, factories, mines, machinery and all other equipment, means of transportation and communication, warehouses, shops, office buildings, rental housing, and inventories of materials, components, supplies, semi-manufactures, and finished goods that are owned by business firms....", so in essence the govt the investment into infrastructure is stepping down that path. If the infrastructure spending in itself was all that the new borrowings was going to pay for then I suppose it could be argued that it is a step in the right direction. But the question must be asked, why does it have to be the govt making the expenditure? Surely a better alternative would to remove the roadblocks from private individuals/ firms to make the path a little less hard to overcome the inertia, and build momentum. Inevitably the govt will stuff up the management of the new assets, because govt's change and new directions are found for SOEs, which would never have be allowed to progress if under non-govt management.