Economic Aspects of the Pension Problem – Part 2

Appears Sixty Years Later

Part Two: Productivity Theory of Interest Revisited

Antal E. Fekete

In Part One I discussed the clear and present danger to pension rights: deflation as manifested by the interest rates structure that has been falling for thirty years, while most observers think that the real danger is inflation. In this second part I carry out a deeper analysis of the pension problem, looking at the marginal productivity of labor and capital and its relevance to the theory of interest.

Courtesy of Professor Fekete @ Professor

Higher marginal productivity: boon or bane?

There is a lot of loose talk about productivity. Paul Krugman is expecting miracles to start happening after an increase in a mythical productivity, provided that government spending is increased to the level matching or exceeding that during World War II.

However, as Mises pointed out, productivity is a vacuous concept unless its meaning is fixed, such as that of marginal productivity of labor. Then, and only then, can one state the pension problem. According to Mises, the only means to increase permanently the wages and benefits payable to workers is to increase the per capita quota of capital invested in the methods of production, thereby raising the marginal productivity of labor. (See References, Planning for Freedom, p 6.) This is certainly true so far as it goes. It is also true that, if we project this observation to the world at large, then we can conclude that in order to have a progressive world economy and receding poverty, global capital accumulation must accelerate relative to increase in population. The greater the quantity and the better the quality of tools, the greater will be the output of the marginal worker, that is, the greater will be the marginal productivity of labor.

In reading Mises one may get the impression that an increase in marginal productivity is always beneficial to society ― as indeed it would have been under the conditions he envisaged. However, in the case of a monetary system that admits both large swings and prolonged slides in interest rates, this is no longer true. If the matter were simply increasing marginal productivity, monetary policy would be a valid means of “turning the stone into bread”. All it would take is central bank action to keep raising the rate of interest indefinitely. This would force the marginal producer whose capital produces at the marginal rate of productivity to fold tent. His marginal equipment and plants would be idled. His workers producing, as they are, at the marginal rate of productivity of labor would be laid off. Marginal productivity would increase. Indeed, the marginal productivity of both capital and labor automatically rises as a consequence of a rise in the rate of interest. However, in this case the rise in productivity, far from being a boon, is a bane to society, as it makes output and employment shrink. The trick is precisely to make marginal productivity rise along with rising output and employment.

Gold standard: a safeguard against deflation

Continue reading

Economic Aspects of the Pension Problem – Part 1

As It Appears Sixty Years Later

Part One: Euthanasia of the Pension Funds

Antal E. Fekete

Sixty years ago. in 1950, Ludwig von Mises published an article with the above title. He pointed to inflation as the greatest threat to pension rights. Today an additional threat is looming large on the horizon: the threat of deflation, and a new examination of the pension problem is timely.

Courtesy of Antal E. Fekete @

Deliberate Dollar Debasement

In 1950 Mises looked at the pension problem from the point of view of the shrinking purchasing power of the dollar, a consequence of what he called the deliberate policy of currency debasement by the U.S. government. In 1950 a pension of $100 per month was a substantial allowance, he noted. Shelter could be rented for a month for less than $30 in most parts of the country. (In 2010, $100 hardly buys one night’s stay at a decent hotel.) In 1950 the Welfare Commissioner of the City of New York reported that 52 cents would buy all the food a person needed to meet his daily caloric and protein requirements. (In 2010, $100 barely buys a cup of coffee and a muffin for every day of the month.)

Of course, currency debasement does far more damage than simply eroding the purchasing power of pensions. As Mises observed, it also leads to the insufficiency of capital accumulation. Companies report phantom profits that mask losses, since depreciation quotas understate the wear and tear of productive equipment. Savings are hardly adequate to pay for capital maintenance, let alone new capital or technological improvements in production — the only source from which pensions to an increasing labor force can be paid. When young workers who now join the labor force are ready to retire, the necessary funds to pay their pensions will simply not be available.

Capital destruction due to declining interest rates

I have written extensively about the proposition, one that mainstream economists doggedly refuse to discuss, that a falling interest-rate structure has a deleterious effect on accumulated capital. Capital is destroyed across the board simultaneously and stealthily. By the time the damage is discovered, it is too late to do anything about it and firms go bankrupt in droves. The falling trend of interest rates is the unrecognized cause of the depression that is presently devastating the world economy — just as it also was 80 years ago. Nowhere is the erosion of capital caused by falling interest rates is more obvious than in the case of the capital of the pension funds. They must earn adequate return on their investments, but a falling rate of interest frustrates this effort. At the lower rate the original schedule of capital accumulation cannot be met. Continue reading

Everything we thought we knew about the economy is wrong

Well the UK is taking steps to become a true banana republic, bought and paid for by corporates and using accounting fraud to mask the issues of the economy. Don’t worry, Big Dave and hokey cokey Gidion have a plan to include ‘illegal’ activity, R&D spending and a wholehost of other nonsense. Not only does this lead to a monumental misallocation of resources and lulls people into a false sense of security but it gives the corrupt media a siren song to sing about.

Just remember, they’ll tell you it’s raining while they’re stood overhead pissing on you. Courtesy of Allister Heath @ City AM:

FACTS are sacred, unlike mere subjective opinions – or so most sensible people believe. In reality, as every good French philosopher would tell you, what we trust to be objective data-based truths all too often turn out to be social constructs. We are about to see a beautiful demonstration of this with the British economy, where the official statisticians will shortly entirely and drastically rewrite decades of history.

Everything we thought we knew – all the “facts” – are about to change. This is massive news for anybody who cares about the UK economy, politics and public policy; the last time a similar rewriting took place was when the UK’s economic statistics were harmonised with those of the rest of the EU many years ago.

One change will see research and development spending classified as capital expenditure; at a stroke, this will raise the level of the UK’s economic output by a cool £25bn. That’s just the beginning: overall, the statistical deckchair shuffling will boost the size of the UK economy by between 2.5 and five per cent, a shockingly large amount (and a vast range that makes it hard for outside forecasters to be able to predict exactly what the Office for National Statistics (ONS) will come up with).

Nothing real will have changed – but we will all officially be substantially richer. Hurrah – who said economic growth was hard to come by? The changes will start to come into effect this year but there is an “ongoing programme of work until 2017”; the ONS will publish various pieces of research this month and in May. Continue reading