Napoleon and the Commonwealth Bank – Paleo-Keynesian and Neo-Keynesian



Yes. Napoleon was a Keynesian. Perhaps more of a Paleo- (or early stage) Keynesian. But even two hundred years ago there were Daily Reckoning editors who made it their business to expose the fallacies of government intervention.

Frederic Bastiat, who wrote the quote above, was one of the best.

Your editor’s favourite revelation from Bastiat was the concept of what is seen and what is unseen.


In one of his ‘Essays on Political Economy’, Bastiat goes into a number of examples where the seen consequence is used to support government action, while the unseen consequences cause damage to the economy. For example, the stimulus from government spending is seen. The lost income from increased tax to pay for the stimulus is unseen.

But it’s not just government that Bastiat takes issue with. He also gets antsy when people remark that a broken window is good for the economy because the glazier gets some income. The glazier’s income from a broken window is seen. The lost income from the items that would have been bought if the glazier wasn’t needed is not seen. Importantly, the window is a replacement. But the other purchase could have been of a new good.

Of course, Bastiat lays the arguments and examples out better than that. In fact, even politicians should be able to read and understand Bastiat’s work. No longer could they advocate stimulus if they had read his essays. No longer would they support large military spending in favour of the economy if they had read his explanation of the fallacy. But, alas, it seems no politician will take time to read theories that undermine their own job.

What a shame.

So, as always, it falls upon us here to apply the common sense. And, taking Bastiat’s lead, we will apply his very method: Identify what is seen … and what is unseen. Hopefully we will prove to be good economists.

1. The carbon tax.

This one is pretty straight forward.

The reduction of carbon emissions is that which is seen.

One obvious unseen consequence is the economic activity that does not take place because funds have been redirected by the government. Just like in Bastiat’s broken window example.

But there is another subtler ‘unseen’.

The reduced effort of individuals to offset their carbon footprint is also an unseen. Why offset your jet flight’s pollution when the government is on the case? Why buy electricity from renewable energy when the government is taking up the issue?

Also, assuming the price of power increases, another unseen is that economic activity is further restrained.

2. The NBN

The investment and the infrastructure is that which is seen. The reduced efforts of the private sector to come up with a variety of technologies to provide high-speed internet is that which is unseen.

When the government provides infrastructure on a massive scale, it stops the private sector from competing. Why use a toll road when the government’s road seems free? (Of course, you have just paid for it in taxes.)

In the private sector the best solution is the last one standing. When the public sector decides to go one way, it can’t admit it was wrong and continues in the wrong direction. Usually it has to use its regulatory muscle to avoid being exposed as incompetent by competitors, which is only a matter of time. More on that below.

3. Quantitative Easing

The increased economic activity, the rising prices and the falling interest rates are that which is seen. QE’s unseen effects are very insidious.

As we have explained before, new money doesn’t spread throughout the economy from one moment to the next. Instead, the central bank buys bonds from banks, which then do what they want with the money. Usually the bankers and politicians have some pet project or industry in mind. And so that is where the money goes.

This unnatural allocation of capital is the unseen effect of money printing. It causes one industry to benefit over another. Perhaps that is an even better classification of the seen and unseen. The seen effect is who gets the new money first. The unseen effect is who gets the money last and has to deal with higher prices as well. Here, the crude concept of trickle-down economics comes in to explain why inflation is such a problem for the poor. The rich get the bankers loans first and employ the poor last.

Of course, this can be reversed, as the Commonwealth Bank set out to prove when its ATMs handed out money by mistake. Money can flow to the less wealthy first if you allow ATMs to let fly. Maybe this is the Keynesian monetary stimulus mechanism of the future? Or maybe the CBA got a little nostalgic of times past, when it was the central bank and could do such things.

Money Morning editor Kris Sayce suggested that those charged with ‘fraudulently’ taking the CBA ATM’s money should call on Keynes to defend themselves. ‘We just wanted to stimulate the economy to create jobs.’ Hey, if the government can do it…

4. First homeowners grant

That which is seen is the homeowners who use the money to buy the house.

That which is unseen is the increase in house prices (which offsets the grant), the loss in affordability to other homebuyers and the people who were taxed to pay for the grant.

Anyway, the list of seens and unseens could go on, but you have caught on by now.

Besides, economics seems to matter so little these days. Politics takes up all the headlines in the business section of the newspaper. And those silly politicians. If only they kept quiet, they could probably keep their jobs for longer.

Remember when the government’s rallying cry was to abolish the monopolies of free market capitalism? Well, the tables have been turned: ‘Telstra makes broadband warning: NBN laws “create new monopoly”‘. Here we have the big evil corporation fighting the government for competition, while it’s also negotiating for a contract from the government.

Everything is backwards. Or is it?

As you may know, the true definition of monopoly is, or should be, the legal restriction of engaging in a type of business. The best examples are licences, where only those with express permission from the government are allowed to take up a certain profession or business. In other words, a monopoly is a government creation. And so it is about as un-capitalist as you can get.

But back to the National Broadband Network. You just know that something that takes that much money ($36 billion) and that much time is going to go way over budget and finish well after technology renders it out of date. It’s doomed from the beginning.

But Telstra’s claims shed light on just how groanworthy the government’s policy stance is:

‘In its submission to the Senate, Telstra criticises the planned ‘cherry-picking’ rules to stop the NBN’s less regulated rivals building their own super-speed networks in metropolitan areas before the NBN is rolled out.’

Yes, the government wants to make sure you don’t get your broadband early and that private companies don’t provide infrastructure.

Even worse news is the re-emergence of the carbon price debate. Yes it’s the return of the Oxygen Tax (Carbon Dioxide has two Oxygen atoms after all). Of course, not so long ago, a different Prime Minister Gillard stated that ‘there will be no carbon tax under the government I lead’. The former Treasurer, also coincidentally called Wayne Swan, got quite offended at the suggestion a carbon tax was being considered: ‘What we rejected is this hysterical allegation that somehow we are moving towards a carbon tax.’ But now a new Julia Gillard and Wayne Swan are in government. And they are hysterical to say the least.

So now the carbon tax is back. We’re not sure whether the ideological drive of the Labor Party to ignore its electorate’s feedback is commendable or not. On the one hand, nations do sometimes need tough leaders willing to go against popular opinion. On the other hand, that is pretty contradictory to democracy. Of course, in the present case, the ideology and policy are mistaken. So, the only commendable part in the new Julia Gillard’s policy is that the tax is being called a tax, instead of a ‘scheme’ like last time (ETS and CPRS). And just to be clear, each of these was a tax, no matter what Julia claims.

Surely the Australian voter is sick of hearing about taxes. RSPT, MMRT, ETS, the Flood Levy and now the Carbon tax. How many of these taxes have made it into law?

If you ask Treasurer Wayne Swan, it doesn’t really matter. The Australian was interviewing him about the Carbon tax and claims the following was said: ‘Mr Swan said “every single dollar” raised under the tax would be returned to assist individuals, households and business who will be impacted.’

Think about that for a moment. And read it again. It must be out of context, or why bother going through the process of taxing in the first place? Oh wait, he is Labor too, right?

And what if the tax affects every Australian? And every BHP customer overseas? Whoa! Mr Swan will be racking up quite a debt.

Outside of Australia, the political class seems to be less obviously stupid. In a remarkable display of DOUBLETHINK (doublethink is the act of simultaneously accepting as correct two mutually contradictory beliefs), Chinese Premier Wen Jiabao reminded his Proles (the Chinese people) how democratic China is

‘The root of corruption lies in a government that has too much unrestrained power, Wen said in a two-hour online interview with citizens yesterday.’ Sounds like Thomas Jefferson, right? But then, like Obama, he makes promises of how the government will interfere:

‘[Wen] promised to curtail food costs and tackle surging property prices. Wen also cut economic growth targets and said the government would focus on ensuring the benefits of expansion were more evenly distributed. Wen’s comments came as hundreds of police deployed in Beijing and Shanghai at the site of demonstrations called to protest corruption and misrule. At least seven people were bundled into police vans near Shanghai‘s People’s Square, while in Beijing several foreign journalists were forcibly removed from the Wangfujing shopping district.

Sounds like a government with unrestrained power to me.

If you’re up to date on American politics, try substituting ‘Obama’ where it says ‘Wen’ in the quote above. It works quite well for the first half.

Speaking of Obama, the President kicked off the gathering of his new economic panel of advisors by lecturing them about the importance of employment. No news on whether he did any of his famous listening afterwards. Perhaps that’s reserved for non Americans.

Technical Glitch Keynesianism

The stock markets have discovered a new way of reducing volatility. It’s called the ‘turn it off method’ and the London Stock Exchange, Borsa Italiana and ASX have all trialed it in the last two weeks. Italy was first, with a ‘technical glitch‘. Fears over Italy’s exposure to Libya caused the stock exchange to remain closed for a day after it had fallen 3.6% the day before. Then the LSE experienced a ‘technical glitch’ shortly after UK GDP was revised downwards. As your editor is writing this, the ASX has ceased trading. Why? A ‘technical glitch‘.

But while the stock markets stopped you from taking money out, the Commonwealth Bank decided to give people extra.

Tired? Stressed? You’ll feel better with gold!

Amongst the din of financial news, you will find that gold made a series of all-time highs.

Dan on Monday:

‘If you’re still not sure that gold is really money, ask yourself why Egypt has banned gold exports, according to the Middle East News Agency. It’s a capital control that prevents money from leaving the country in times of civil unrest. Get used to it. You’ll be seeing a lot more of it as the petro-dollar standard unravels.’

Even the Italian banks have caught gold fever. Traditionally enemies of mark to market accounting, Italian banks are lobbying to have their gold reserves recognised as capital. Capital that has grown dramatically in value and should thus be marked to market.

Of course, now that gold pessimists have been dealt a blow, the ‘gold bubble’ talk has returned. Gold will be in a bubble when the Australian cricket team’s captain is selling gold coins on TV. When a former Reserve Bank Governor is telling you how safe the gold ETF is. And when the Gold Coast’s NRL team is sponsored by Newcrest Mining, after having been renamed the Gold Coast Doubloons. For AFL fans, the Suns will be renamed the Bullions. ‘Physical Delivery’ will be their motto.

The really big short

Last week’s comments about the dollar value assigned to a human life by American regulatory institutions have proven pretty divisive. Some criticised the math and data of the reader’s comment. But the best take on the matter was as follows:


8 million per life!? 6 billion people in the world.. Each of them worth $8million, what is 8,000,000 x 6,000,000,000? Er.. $48,000,000,000,000,000?

That sounds expensive..

What about just Americans? 300,000,000 x 8,000,000…. That’s….$2,400,000,000,000,000!

Hmm, this human race seems over valued to me.. Where can I buy a short..

As though triggered by the comment, the UK government began looking for ways to devalue British lives:

‘Speed limits on the motorway could be increased to 80mph in a bid to increase productivity, Philip Hammond, the transport secretary, has suggested. Mr Hammond said that safety might no longer be the sole consideration in judging how fast cars can go and that gains to the economy from shorter journey times should also be taken into account.’

Apart from being amusing, is there anything to this idea of speed limits and productivity? The Germans are supposed to be the economic powerhouse of Europe and they do have the partially speed-limitless Autobahn.

Perhaps the Keynesians could adopt a stimulus package that increases speed limits. Or, we could implement an automatic stabiliser, by which the maximum speed limit in Australia is determined by last quarter’s GDP growth. One thing is for sure – we know Labor has a history of sacrificing lives in its stimulus attempts. So why not try it?

Nick Hubble
For Daily Reckoning Australia

Nick Hubble

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2 Comments on "Napoleon and the Commonwealth Bank – Paleo-Keynesian and Neo-Keynesian"

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My 2 cents worth

Why is the idea of higher speed limits to increase productivity supposed to be “amusing”? It make perfect sense. Higher speed limits will save lives and money.


It’s amusing because originally national speed limits were introduced to make people slow down during the oil scares in the 1970s, to conserve fuel and thus save money.
