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Economists will never ever get it right until they return to Say’s Law

January 7, 2017

Two things sent to me by friends of which this is far and away the most significant. There may be about half a dozen economists in the world who understand the difference the absence of Say’s Law makes to economic theory. Mark Skousen is one of them, and he has just written an article on Which Is More Accurate, Say’s Law or Keynes’s Law? Here is the start:

We all know that teachers, especially at the college level when students are away from their parents, can have tremendous influence.

My best example is when I ask my economics students “Which is more accurate, Say’s law or Keynes’s law?” Say’s law (defined below) is named after the 19th century French economist J.-B. Say, while Keynes’s law is named after the 20th century British economist John Maynard Keynes.

Most of the students have never heard of either law, so on the blackboard or PowerPoint, I simplify the definition as follows:

Say’s Law: “Supply creates demand.”
Keynes’s Law: “Demand creates supply.”

Before we have any discussion, I ask the students to intuitively decide which one makes more sense, and why.

Invariably, the vast majority of students side with Keynes. Demand, they say, is essential. Without consumers willing to buy a product, suppliers will go out of business. They conclude, consumer spending drives the economy.

What can you do? These students are as clueless as most economists about what causes an economy to grow and employ. Read the whole thing. Then there’s this, Chief economist of Bank of England admits errors in Brexit forecasting. Forecasting errors are a dime a dozen and comes with the territory. The subtitle captures more of what’s wrong with economics:

Andrew Haldane says his profession must adapt to regain the trust of the public, claiming narrow models ignored ‘irrational behaviour’

This irrationality in economics – the latest pile of junk which comes under the heading “behavioural economics” – is as nonsensical as it gets. It seems to be news to economists that people make mistakes, which after the fact they describe as irrational behaviour. It’s the same guk I am getting in Michael Lewis’s Undoing Project. My great classical economists all understood the role of mistakes, and even crowd behaviour, in moving an economy off course. The point about the market economy was that you could not be wrong for very long since you would then lose your shirt, as many did. The modern view is that governments should do the spending to make up the difference, and they can be wrong for a very very very very long time. Even now with government debt rising, no one is seriously trying to cut it back. Classical economists universally would have understood the problem. A modern economist is miseducated to such a fantastic extent that they still think Keynesian theory is right and Say’s Law is wrong. And as long as that goes on they will never get anything right.

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