Leithner&Company Pty Ltd - The Leithner Letter

Just finished reading the current Leithner Letter and have to post this diatribe delivered by Fritz Machlup (1902-1983) about Austria, his home country. Hopefully we have all learned from this debacle.

Machlup spoke directly to todayÂ?s Anglo-Saxons when he observed that the Â?[importation] of capital does not increase the productive capacity of the country but only compensates for the internal capital consumption. This was obviously the case in Austria. Money, borrowed from abroad, was lent (mostly through banks) to corporations [in order to] Â? finance investments which were in reality replacements of outworn or obsolete equipment.Â?

Further, Â?in the absence of new saving, mere shifts in demand involve economic decline; in other words, an economy which is stationary in respect to the supply of savings is declining in respect to its capital base. Or, to put it another way, quick change in the objects of consumption without the emergence of new savings is itself a form of consuming capital.Â? Machlup identified an extreme consequence of this phenomenon. Â?Austria,Â? he concluded, Â?was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures; she increased wages; she increased social benefits; she increased bank credits; and she increased consumption.Â? This is clearly not capitalism. Call it what you will Â? mercantilism, fascism or social justice Â? it means interventionism, privilege, corruption, violence, economic superstition and financial voodoo. Its fruits are bitter and inedible: Â?after all these achievements [Austria] was on the verge of ruin.Â?