Prosper Australia

photo credit: Joel Bedford

Mason Gaffney

October 25, 2008
In a follow up to Professor Gaffney’s The Great Crash of 2008, he now delves into how credit can be freed from the current crisis. The Great Reckoning awaits…

1. Introduction

Working capital is the bloodstream of economic life. It is physical capital, the fast turning inventory of goods in process and finished goods that supplies materials to the worker, and feeds and clothes her or his family. Short term commercial loans and trade credit buy it, but the capital is “real” — a fact often forgotten in the paper and virtual worlds of high finance whence come the highest inner circles of government.

The bloodstream metaphor harks back to François Quesnay, an 18th century French physician turned economist. Quesnay drew on William Harvey’s (1578-1657) earlier discovery of how blood circulates. Adam Smith and other classical economists followed Quesnay, distinguishing “circulating capital” from “fixed capital,” the kind that is stuck in the ground or otherwise lasts for many years. Today we call the bloodstream metaphor “macroeconomics”, elaborated but not always improved from Quesnay’s insights.
Now the economic blood is drained down, and what’s left is slushy. We need to restore and thaw it, and get it circulating, right away as well as over time. To understand how, let’s see what drained it away in the first place.
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Now you’ve seen Steve Keen deliver a damaging analysis on the 7.30 report, listen to
Professor Mason Gaffney call a Great Depression (on yesterday’s Renegade Economists) and why current economic policy will only prolong the negative outlook.

Dr. Michael Hudson was Chief Economic Policy Adviser for the Kucinich for President campaign in 2007. He gave a compelling interview recently well worth your attention:
Michael Hudson are rising property prices a good thing?
Hudson pt2 – Houses as a tax shelter

photo credit: mtbdeano

Professor Mason Gaffney

Get yourself comfortable – this is Must Read!

This crash is The Big One; it has the signs of becoming a Category 5. How do we know? We’ve “been there and done that” so many times before, roughly every 18 years over the last 800 or more. Major wars and, rarely, plagues have broken the rhythm, along with the little ice age, reformation and counter-reformation, political revolutions and reactions, the rise of nation-states, the enclosure movement, the age of exploration, massive European imports of stolen American gold, the scientific and industrial revolutions, the Crusades, Mongol and Turkish invasions, and other upheavals.

Yet, the endogenous cycle keeps returning, as soon as we find peace, and economic life returns to its even tenors. What President Warren Harding famously called “normalcy” soon evolved into another boom and a shocking bust, as so often before. Calm and routine prosperity has never been man’s lot for long: it somehow leads to its own downfall, cycle after cycle.

Homer Hoyt published his classic 100 Years of Land Values in Chicago, 1833-1933, in December, 1933. He covered in fine detail the 5 major cycles that crested and crashed in 1837, 1857, 1873, 1893, and 1926-29. At the end he generalized “The Chicago Real Estate Cycle”, a regular rhythm of boom and bust with the same features in the same sequence. The boom sets us up for the bust. He could have omitted the limiting word “Chicago”, its cycles were synchronized with national waves recorded by other scholars like Arthur H. Cole, Philip Cornick, Lewis Maverick, Frederick Lewis Allen, Harry Scherman, Carter Goodrich, Ernest Fisher, Homer Vanderblue, Herbert Simpson, and others – surprisingly few others, in fact.
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Fred E. Foldvary

In economics, the waste of resources caused by a tax has two names. One is the “deadweight loss,” a loss to the economy with no offsetting gain. The other name is the “excess burden,” since the burden on the economy is in addition to or in excess of the tax payment.

For example, suppose a bookstore has 20 employees, and has to pay a taxes on the payroll as well as sales taxes on the books and taxes on its profits. These expenses are on top of the costs of the inputs that would be there aside from the taxes: the labor, the space, the books, and shelves. The store has to add the tax expense to the input expense, and pass the tax on to the customers. The higher price of books paid by the customers makes them buy fewer books, so the books that would have been produced and sold and enjoyed do not get made. This is a waste of resources, as the customers will shift to less valued uses for their incomes. The overall deadweight loss reduces production, investment, and economic growth.

The amount of deadweight loss depends on how responsive the customers are to the change to a higher price. If they cut back a lot on their book purchases, then there is a greater excess burden. The overall excess burden of taxation in the USA has been estimated at about $1.5 trillion dollars, more than 10 percent of total output. So roughly, our standard of living would be ten percent higher if the deadweight loss were eliminated.
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