"What we must rather recognise is that we must return to some "true" valuation of real investment - the sort of real investment in the production of goods and services that we had in the period between 1945 and 1969."

I haven't studied the economics of that period in detail, however it's my understanding that much of the investment in infrastructure after the war was quite 'obvious'. Building highways, industry, etc. were all clearly needed and would provide a good ROI. However as these infrastructure projects developed it became less clear as to where best to invest resources.

This is where the market economy proved its value. It created a system where those who's investment policies best matched those best for society to be the most successful, and hence have the most control over future investment. However as the understanding of the investors evolved they began to learn that 'real' investment wasn't in their individual best interest, but rather their best option was to spend their money to acquire market power.

"We must see again the value of real private and PUBLIC investment..."

The major issue I have with those who advocate a minimalist government is that there is a significant amount of infrastructure within our society where private investors would have great trouble gaining enough return to justify the investment but where the government easily could.

"They call for a return to the attitudes of mind that we had at the end of World War II."

Unfortunately, I don't think we can rely on individuals for anything other than acting in what they see as their own best interest. Even if they means taking the foundations of our society and economy to sell off to the highest bidder as everything collapses around them.

From my admittedly limited understanding of economic history, it all seems not too dissimilar to what occurred prior to the Great Depression - wealth was so concentrated in the hands of a few, that the only way to "make" more money was debt and speculation. Today, wealth and income disparities in the U.S. are reaching similarly distorted levels, and it's leading to a similarly unsustainable type of economy.

The only realistic fix is surely some form of wealth redistribution. Gradually transfer wealth back into the hands of the masses, and economy has a chance to get back on a stable footing. But as long as governments are in the pockets of those who own the wealth, few politicans are likely to propose such a solution

I agree wholeheartedly with the theme of this article. My comments below are extracts from various letters to editors dating from as early as ten years ago. Earlier comments along similar lines are not on my computer.
Politicians are making little progress in coming to grips with the problems being caused by the acceptance of the $US as the main international trading currency and by the flood of privately created credit slopping around the world currency and securities markets.
In international trade, money’s only sensible use is as an intermediate facilitator for the exchange of real goods and services between market participants, not as a trading commodity in its own right.
We are failing to clearly distinguish between various types of capital and what I consider to be pseudo capital. The longest lasting real capital is agricultural land whether it is growing crops meat or timber and all it demands is careful and adequate maintenance. A second class of real capital are depletable resources such as coal, oil and other minerals. If any country wastes or exports these items to support current consumption it is robbing it’s future generations. This leads to the pseudo capital. America is consuming, for example, Arabian oil (a real asset), paying for it by creating bank balances in American banks for Arab princes and claiming that these balances can be on lent as if they are real capital. At 1990 oil prices Saudi reserves have about the same value as all USA farms at about $US8000 per hectare. When their oil is gone will the oil exporters own and occupy all USA farming land or will they own pseudo capital which can be wiped out at the stroke of a pen backed by a few nuclear powered warships? However a case can be made that mineral assets are the property of all human beings but the USA has already used more per head than any reasonable assessment of their entitlement

continued...
Adam Smith was adamant that capital should not be allowed to move across borders (meaning between different currencies). Politicians need to institute a different exchange system for genuine international trade. This could be based on a composite international exchange currency instead of the ridiculous reliance on the American dollar, complicated by the USA’s unwillingness to control its money supply, and the fictitious savings, in international trade terms, of its professional and business class.
Everyone who believes that economic management is chiefly concerned with improving the well being of the human race needs to remember, every day, section 6 of chapter ten of the General Theory of Lord Keynes.
In Australia our politicians are unwilling to make the decisions which are necessary to restrict activities which are in effect selling real assets such as coal and productive entities to buy imported current consumption goods which we could produce ourselves. In effect we are destroying the future of our grandchildren.
A country’s currency is the property of the country’s people and should be administered by their representatives for the peoples benefit. Allowing banks and other financial entities to privately create uncontrolled credit is another case of politicians abrogating their responsibilities.

“The steady, relentless creation of the monster that we now confront goes back decades. It has soured, poisoned and corrupted the whole system - the real economy, the real credit markets”

Maybe as far back as the “savings and loans” scandal which occurred during Reagan’s tenure.

Between these two “credit market” events we have had, the dotcom bubble and burst.

“Credit derivatives, SIVs, CDOs, hedge funds”

Sound so similar to the “junk-bonds” of the 1980-90s developed for MBO operations, typically the Michael Milken, issues, not those which Warren Buffet was overseeing.

“the countries with a grave speculative addiction and those who, through their superior perception - or perhaps because of their naivety”

Ah yes, the free market, where every opportunity is a potential risk versus the dead hand of oppressive government where every opportunity is a opportunity missed.

Somehow, the only outcome from the inertia created by oppressive government regulation, which denies the individual the right to “speculate”, produces only the stagnation and gloom of 1970s UK.

“Real fixed-capital investment is the great engine of growth of income, wealth and employment. It always has been and always will be.”

Ah yes, I see it, the those “dark satanic” cotton mills of Lancashire.
Huge public investments in railways and canal networks (but not much return of true “Social value”).

“We must avoid the volatility of recent years on which speculation breeds and the real economy is diminished or destroyed.”

Whilst innovative aberrations like Enron will always occur (about once a decade), the rules have changed since 1929.

The events which saw the type of collapse of 1929 are no longer legal. Whilst “illegality” will never inhibit the fraudesters, it at least minimises an otherwise wide potential collapse as experienced in the past.

“They call for a return to the attitudes of mind that we had at the end of World War II.”

Ah pump priming, Marshall Plan Style

The author has the attitudes and values of a very old man, who can no longer handle the “heat in the kitchen”.

A sad, pessimistic attitude and article

Dr Cumes accurately describes the problems of the “casino economies”, manifested in the continuing sub-prime crisis. (For my own analysis see http://mike-servethepeople.blogspot.com/2007/12/sub-prime-crisis-house-of-cards-waiting.html )

Whether it is possible to transform these economies back to “real investment” is a bigger question than whether or not such a move is desirable.

Real investment is investment in productive capacity, in productive processes that create added value which is realized through the sale of goods and services. Realized added value increases, however, the amount of capital, which in turn must reproduce or increase its own value in order to remain useful for its owners.

Up until the last quarter of a century or so, major economic fluctuations took the form of overproduction of material commodities.

Inevitably, finance capital sought faster and higher returns, and returns unencumbered by the requirement for part of the investment to be tied up in capital items such as plant and machinery.

So finance capital itself became a commodity once risk-takers established that its purchase and resale (often stripped of capital items and so-called labour costs) could result in massive quick profits. The financial market place now largely consists of tables simultaneously occupied by bodies of organized finance that can be buyers one moment, and bought the next.

Our current crises now take the form of the overproduction of finance capital, of capital as virtual capital not based on the real value of goods and services.

This arrangement is now so dominant that it has created a whole set of cultural, political, economic and military characteristics that we refer to as globalization.

Can we stop this? We can perhaps retard it, repudiating for example, the changes to Australian banking law introduced by Howard in December 2006 that exempted foreign investors from a 30% capital gains tax. This led to a massive increase in private equity buyouts.

But Cumes is correct. “Short-term expedients will not do.” Neither will playing King Canute at the shoreline of the profit economy.

Capitalism always finds ways of outwitting the regulators and is itself the problem.