I gave my presentation on “Classical Economic Theory and Supply Side Economics” on Friday and from my perspective it could not have gone better. And what made it work for me is that I heard things that have helped me clarify in my own mind what needs to be stated with the greater emphasis. There were a few things that came out, but let me deal with the most important which you will not be surprised to find is about how to explain the problem of Say’s Law and why it is important.
So let me state it again: Say’s Law means, quoting Keynes, that it is “impossible for effective demand to be deficient”. In spite of the existence of recessions and frequent periods of high unemployment, if you understand Say’s Law then you understand that the problem is never a deficiency of demand. It may look that way to you and to many producers. Businesses may feel grateful that government spending helps sell what might otherwise have sat on the shelves. It is why Keynesian economics has a plausibility that has allowed it to survive its constant failures for seventy years and counting.
Nevertheless, if you cannot state and explain why recessions are never caused by demand deficiency (a general glut as it was once known), you cannot in my view even begin to refute Keynesian theory. You can argue that the economy works in some other way and can go up hill and down dale with counter-explanations. But unless you can and do make the statement that “demand deficiency does not cause recessions”, then you can never overturn Keynesian economics because you have not engaged with the other side which says that recessions are caused by demand deficiency. As long as it is universally accepted that recessions are caused by a deficiency of demand – as long as we continue to teach that Y=C+I+G and that more G will lead to more Y – it will remain impossible to explain why a demand stimulus will only make matters worse. The only argument then is to point out each time a stimulus has been tried that it has failed. But unless you make it your aim to explain why that is, there is no winding Keynesian economics back.
The problem goes deeper. Public spending in almost all circumstances is seen as creating growth and jobs. The NBN is such a catastrophe yet is hardly ever given its due credit as a vast open drain on Australia’s wealth and our standard of living. From Henry Ergas today:
By the time it was booted out of office, NBN Co’s revenues were 91 per cent short of the 2011 corporate plan’s objective, while operating expenses, calculated net of payments to Telstra and Optus, were running at twice the levels the plan envisaged.
In terms of actually building the network, the number of premises to which fibre was effectively available was 89 per cent below the plan’s target. And as a wave of disputes with contractors ground deployment to a halt in four states, the NBN looked well on its way to being dead before arrival.
This is just seen as more G leading to more Y leading to more jobs. You cannot use any part of modern macro to explain just how harmful this is to the national economy. If it adds to demand, it is all to the good. So I say to you that unless you can explain why the NBN is a catastrophe in spite of all of the “demand” it creates – something neither Malcolm nor Bill are able to do – you are unable to understand how an economy actually works.