Monthly Archives: March 2019

Sick and demented

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In contrast, sharp contrast: Trump Calls Out House Dems for ‘Inconceivable’ Failure to Condemn Anti-Semitism.

More on all this here and here.

PLUS THIS:

Via Instapundit with the full details from here.

AND NOW THIS: From Rahm Emanuel of all people: I’ve Faced the Charge of Dual Loyalty – It was Anti-Semitic then, and it’s anti-Semitic Now.

No one is questioning the right of members of Congress and others to criticize Israeli policies. But Omar is crossing a line that should not be crossed in political discourse. Her remarks are not anti-Israel; they are anti-Semitic.

A modern course in economics will not tell you what’s wrong with socialism

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“Socialism” is an elastic term, with a different meaning and connotation for everyone, which lets every believer in a socialist future off the hook since they can always say that’s not what I have in mind and it’s not what I mean. Moreover, I leave out the politics which is what everyone normally thinks about, since every socialist state – except the one that socialists imagine in their minds and discuss in public before they set one up – is about milk and honey for everyone, equality for all, and happiness to the fullest extent that human life can create. It is a fantasy world entirely removed from the reality of life.

Here I will define socialism as a system in which the economy is directed by the government through some kind of centrally-determined plan, rather than the economy being allowed to run on its own by itself through the decisions made by the individual owners of businesses. Nationalisation, massive levels of public sector spending, price controls and heavy-handed regulation of whatever is left in private hands are the mainstays of a socialist economy. If all it were was the normal operation of an entrepreneurial-driven market economy then there would be no need to set up anything new. Since socialists never specify beyond pie-in-the-sky what they intend to do – only the outcomes they promise to achieve – the best we can do is see what is found in the socialist literature of the past and present, as well as the practice of various socialist states, also both past and present.

I will add that macroeconomics as it is now taught, which sees only a positive role for large levels of public spending and thinks that an economy is perennially in danger of a failure of demand because of decisions to save rather than spend, are nine-tenths of the journey towards an acceptance not only of socialism, but of its necessity. The role of government in managing the economy and filling in the expenditure gaps with its only massive levels of expenditures is mainstream theory taught all over the world.

The basis for the presentation is my belief that a modern course in economics, based on standard economic texts in which the standard economic theories are presented, will leave a student without an adequate understanding of why a socialist economy cannot work, and in many cases with no such understanding at all.

This is based on my observation that very few – whether an economist or otherwise – can explain why socialism inevitably leads to poverty, although anyone willing to look can see this is true. There are innumerable political and philosophical reasons for fearing socialist ideas:

  • centralised political control
  • extraordinary power granted to government
  • loss of political freedom
  • diminished personal responsibility
  • diminished independence
  • encourages sloth

The presentation is based on my just-published, “I, Mechanical Pencil” which has been put out by the CIS and which you can find a copy of here.

My approach to the presentation is first to list the six absolutely essential elements of an economy, the absence of any one of which will cause the economy to cease working other than in the most rudimentary way. These six are:

(1) entrepreneurs who make decisions for themselves
(2) an independent financial system
(3) an operating price mechanism
(4) business profitability as the major determinant of what is produced and how it is produced
(5) sound government regulation, and
(6) a robust defence of property rights.

(1) Entrepreneurs

Every productive enterprise must be run by someone. There are many decisions to be made, all of which require a constant ability for someone to respond both to opportunities that present themselves and the problems which are both frequent and inevitable. In a market economy, productive enterprises are run by individual members of the community who do so because that is how they seek to earn their incomes. No entrepreneur is a government employee, nor are they chosen by governments to run these firms. Instead, entrepreneurs are the individuals who truly care about the welfare of the business, partly because every mistake takes money from their pockets, but also because the business is their creation in the same way that a work of art is the creation of an artist.

Entrepreneurs are not mere managers nor can they be replaced by managers. They are the individuals for whom the business is their own, and which they spend their lives trying to shape into as good a business as it can possibly be. It is not just a job. It is a vocation.

Yet no text on economics discusses the role of the entrepreneur. You can do ancillary courses in which the entrepreneur is discussed, and these are almost entirely courses that focus on innovation. The actual superintendence of a business is seen as of almost no relevance to the operation of a firm.

It is also the entrepreneur who determines what will be produced, and is entirely responsible for the commercial introduction of innovation onto the market.

(2) An independent financial system

Similarly, finance is not discussed as part of the education of an economist. There is money, banking, interest rates and the role of saving that do get a run through, but the determination of which firms are determined to be potentially the most viable by those who make lending decisions is at most a paragraph worth of discussion.

More crucial, the very issue at stake in the decisions that go behind finance is the allocation of a nation’s available saving among all the alternative uses that savings might be channelled towards. And here there are two massive blunders which almost totally obscure what it taking place.

Saving is discussed almost entirely (perhaps entirely) as a flow of money. And in a standard macro analysis, it is made up of the difference between current income and current consumption: S = Y – C.

Then, beyond this, the level of saving is taken to be the sum of money that is generated during the course either of the quarter or the current year, but whatever period is chosen, the present, or near present is all that counts.

Thus, the very concept of saving is totally lost. What is actually being determined by finance decisions is completely misstated. Saving is not a sum of money, saving is that stock of productive assets (eg machines and buildings) and available labour that can be used to build additions to the nation’s capital stock. What those who provide finance actually do is determine to whom to give sums of money that allow particular businesses to purchase in the various forms of capital and labour with which they can complete their own investment projects.

More destructive still is the imbedded Keynesian belief that recessions are caused by excess saving. The entire and madly destructive theory that explains recessions as a sign of that savings levels are higher than businesses wish to invest has led to decisions across the world for governments to engage in largely wasteful and unproductive spending to soak up those savings, as if sums of money sitting in bank accounts or in some other way left unspent is evidence that our savings are being left unused.

The reality is that virtually every form of saving (capital equipment and labour) are owned by someone who does everything they can to ensure that the capital and labour they own (the labour is, of course, their own labour) are being put to work. There are periods of transition when capital and labour are idle – factories close and people lose their jobs for all kinds of reasons – but unemployed workers along with whomever owns the capital will do everything they can to find alternative forms of work. We systematically ruin our economies by following Keynesian models and prescriptions.

(3) An Operating Price Mechanism

This is the one that counts since it is both the most obscure but also the most important. This was the issue at the heart of the “socialist calculation debate” that went on from the 1920s and through until the 1950s and then ceased. No one, other than in a few classes here or there, is ever taught anything at all about any of this.

More to the point, in a world in which there are infinitely more uses for most of the resources that are available, and also many ways that any particular output could be produced, there is an absolute need to ensure that some means to choose the least resource-intensive means to produce each good or service. Unless you understand why a business cannot decide which way to produce using the fewest resources if there is no price system in existence, you will never be able to undermine socialism. Here is a made-up example for the production of a number of units of X.

X = 2A + 3B + 4C + 9D
X = 3A + 4B + 3C + 7D
X = 7A + 5B + 2C + 4D

All of these might be ways to make the same number of units of X but unless you know in a realistic way how much A, B, C and D cost, you cannot determine which way to produce at the lowest cost. These are not technical questions but entirely economic.

What is the relative value of a tonne of steel in comparison with a tonne of copper? Is it cheaper to build a wall out of plaster or out of wood? Only in a market system, where the producers of every single input have to price what they sell to earn a positive return on their outlays, can there even be an estimate made of which array of inputs would provide the lowest cost to the economy in providing the same utility to the buyer.

As in the above example, you will still get X irrespective of which combination of inputs is chosen, but some of those resources are rare and have other more valuable alternative uses. Without a price mechanism based on the proper relative valuation of the output, that can only be determined in a market setting by entrepreneurs, a central planner cannot even begin to decide how to go about producing anything.

And it has ever been thus in every attempt to introduce socialism. Every socialist economy immediately loses its bearings because it has no means to decide which alternative would use up a smaller proportion of the resource base of the economy, and if it cannot do that, it will choose means of production that will waste prodigious amounts of resources on each particular item so that fewer items in total can be produced.

There was a long debate over whether central planners could manufacture a reasonable facsimile of relative prices that happen naturally through entrepreneurial pricing on the market. It was at one time understood even among the defenders of socialism that an answer to this question was crucial if a socialist system was to function. And the fact is, that this issue was never properly resolved, as was evident by the collapse of the Soviet Union in the late 1980s.

The most astonishing example was the different standards of living in East and West Germany. The differences were immense since the East Germans could not even remotely maintain the same living standards, and this was even though they tried to determine costs by using the relative prices generated in West Germany and apply these to their own production techniques. But as close as they were both geographically and culturally, the relative price structure generated automatically in the West were near useless to the central planners in the East since they did not in any way reflect their own production costs.

(4) Business Profitability

For reasons that I will not explain here, but every economist is taught, the ideal model of the operation of an economy is described as PERFECT Competition, and is contrasted with all other forms which are described as Imperfect Competition. For some reason, the ideal form of market structure is one in which, as it says below, “no one earns a profit”.

Perfect Competition – No One Earns a Profit

In perfect competition, the market is the sum of all of the individual firms. The market is modelled by the standard market diagram (demand and supply) and the firm is modelled by the cost model (standard average and marginal cost curves). The firm as a price taker simply ‘takes’ and charges the market price (P* in Figure 1 below). This price represents their average and marginal revenue curve. Onto this we superimpose the marginal and average cost curves and this gives us the equilibrium of the firm.

Source

The conception to reach this conclusion is so entirely static that it is absurd to think of this as in any way representative of the operation of a market economy. The very existence of profit shows, so far as economics is concerned, that the economy is not running at peak efficiency. There are also questions of an improper distribution of income since in a truly competitive economy, and in the long run, a larger return than the absolute minimum somehow implies that the market is not functioning at its optimal level. All other market structures, which in reality represents about 98% of the economy, are inefficient because firms are able to adjust their level of supply to earn a profit above the efficient minimum. But the existence of profit, as defined within an economics text, is a negative.

(5) Sound Government Regulation

There are schools of economic thought for which the very notion that government regulations have any role to play is anathema. There is no doubt that there can be over-regulation, and we experience just that everywhere today. The principle seems to be that if someone can think of some negative potential in some action, that it will either be examined to death or forbidden. But the opposite principle is just as bad, that business should just be allowed to get on with things without any scrutiny or direction from government.

The point here is not just that regulation is essential, but that regulation must be limited to just those forms of control that will actually pass some kind of cost-benefit test. Here the issue for modern economics is not that there should be regulation. That is much of what an economics course now is – a discussion of market failure and the need to remedy the errors of the market. So in this instance, the point here is to recognise that some regulation is essential.

This is from Mises’s Human Action. And while it is clear that Mises is reluctant to state that there is such a role for governments because of the principle of give-them-an-inch-and-they-will-take-a-mile, nevertheless, he does accept that government does indeed have such a role.

There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule. (Mises [1949] 1963: 748)

Regulatory overkill has been a disaster for the functioning of our economies. I truly never understand how the entrepreneurial types I know put up with it. You would think that those who set the rules are doing so with the intent of killing businesses off.

(6) Property Rights

Socialist governments are notoriously opposed to the private ownership of the means of production. “Expropriate the expropriators” is the ancient expression. Nationalisation of the commanding heights of the economy and whatever.

Whether this is driven by envy or by some unstated economic rationale, the aim to achieve something described as “equality” is the mantra. The result is that those who produce are taxed to provide incomes to those who produce less or produce nothing at all. And in the socialist commonwealth, the levelling is complete, with the masses living in poverty and those at the top living upon the meagre levels of wealth the economy might be capable of producing.

If property rights are included in a standard text, it has escaped me. There is nothing in how modern economics is taught, with it abstract and often mathematical discussion of the operation of the various forces to produce the strangest economic notion of all – equilibrium – that anywhere mentions that only if the producers of capital believe they will maintain the ownership of what they have crafted, will that capital come into existence in the first place.

What is the technical term used to describe an anti-semitic socialist?

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NAZI.

The rest is from Ace of Spades.

So The Alleged House Condemnation of Antisemitism Is Already Watered Down, and Now the Congressional Black Caucus and Progressive Caucus are Delaying It

As David Harsanyi wrote, the resolution which is supposedly a condemnation of antisemtism is so deliberately vague so as not to offend actual antisemites.

Democrats’ draft measure condemning anti-Semitism, which the House will vote on this Wednesday, is a useless and transparent attempt to distract from a serious problem. The melodramatic resolution mentions Alfred Dreyfuss, Leo Frank, Henry Ford, and “anti-Muslim bigotry”–because, hey, even when Jews are being smeared it’s about Islamophobia, but not once does it condemn Rep. Ilhan Omar or the strain of Jew-hatred she is helping normalize on the left. The resolution, teeming with useless platitudes, is one that even Omar could probably support.

But even that’s too much.

Even watered down to the point of saying nothing, it’s still too aggressive a statement for an idea — Jew-hating — that is all too popular in some communities.

I guess “GOAT” Farrakhan has some problems with the resolution.

Meanwhile, Alexandria Donkey-Chompers is defending Ilhan Omar’s antisemtism by making up Whataboutism situations that didn’t actually happen.

 

Which would be worse?

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Which would be worse?

[A] Doubling the size of the deficit with public spending cut in half, or [B] balancing the budget with the level of the deficit doubled in size from where it presently is.

Neither would be great, but for me A would be vastly preferable to B.

There is no way one could ever find out since no economic model could be trusted to give an accurate model. But on this score, my guess would be that most modern macro models would show B preferable to A.

Are there degrees of ‘socialism’?

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I had a brief query from a friend the other day:

This is probably a red-herring but I did wonder if there are degrees of ‘socialism’ in which some degree of government ownership and control of the means of production is acceptable but with private sector ownership and incentives the dominant force. I’m thinking of the so-called ‘mixed’ economy concept.

Here in NZ we are having a debate about how we should frame objectives for the economy, with a shift away from a predominant focus on growth (in GDP) towards a ‘well-being’ framework (currently being developed by the NZ Treasury. I don’t think most economists are persuaded by this but it’s politically appealing because it appears to offer more emphasis on distributional fairness and the environment.

Well, I do go on a bit, but the question is an interesting one and important. My reply, off the top of my head, but more consideration still needed.

Interesting issue since everyone who now declares themselves a socialist doesn’t define socialism in the same way. There are plenty of “socialists” who think socialism is a heavy duty form of the welfare state. It’s fantastically costly, and in rich economies like ours, we typically allow plenty of free riding which will eventually have to be paid for one way or another. We are ruining ourselves because we think we are richer than we are, to subsidise plenty of people who ought to be contributing to their own upkeep. But once you get into the various forms of attempting to create greater equality, you are in an endless spiral since you can never create enough of it since there are always going to be income differences, many of which have no cosmic justification but just are what they are.

We already do an incredible amount of redistribution from those with high incomes to those with lower incomes. But if you take from some who earn high incomes they will provide less output to the common pool. And funny enough, if you give to people with lower incomes, they too will provide less to the common pool. Very destructive of an economy based on personal incomes related to one’s own contribution to the total. In a bygone era, most individuals felt a responsibility to remain as productive as possible for as long as possible, so we invented a system of welfare to assist those who fell by the wayside. Now there are so many who sit by the wayside picking up whatever they can, and this is now made much much worse by the increasing numbers who never intend to contribute anything but intend to be subsidised merely for existing. You can call that socialism if you like. It is immensely destructive, but since we have so much productive capital to run through it may take a while before we really notice. By then, alas, it will be too late. An inbred lack of industriousness in the midst of a crumbling economic structure is what you have right now in California which has more people on welfare proportionately than any other American state. And as rich as they are, it will not survive another decade before some kind of collapse overtakes them. Already the productive are escaping to other states. Unfortunately they are taking their welfare mentality with them.

As for the more traditional forms of socialism, virtually no government now seeks to take over the commanding heights of the economy, other than idiots like in Venezuela. There it took around a decade for the full horror to manifest itself, but now that it has, everyone has backed off from that version, at least for the time being. The version we are in the midst of is what I think of as the “crony capitalist” version, which is based on governments squeezing the last dollar of tax revenue, plus whatever they can extort from their central bank money creation process, to direct spending in a politically advantageous direction. Australia is at the start of a fall in living standards that is in large part based on the notion that all public spending adds to demand and therefore is positive. Which is augmented here by a superstitious belief that bringing in many many migrants makes the economy rich because we have to build infrastructure and housing for them to live in. Quite insane, but if you really think economies are driven by C+I+G, you cannot see the problem until the economy finally does fall apart and even then won’t understand the problem although it will be right before their eyes. The RBA and Treasury keep expecting the economy to turn around, and are ever-amazed when it does not.

Free Market Economics vs Keynesian macro

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I realise how tedious all this maundering on about Keynesian economics is for some people, which I do go on about. But the thing is, you will not find this discussed anywhere else in the world. This is said more in amazement than anything else, but there is virtually no one else anywhere that I can see who is as focused on the damage caused by modern macro, with the reality being that virtually no one, even among economists who think they are non-Keynesian, can see the problem with macroeconomic theory unless they also understand Say’s Law and the classical theory of the cycle.

All this has come to mind with the publication of The Elgar Companion to John Maynard Keynes for which I received notice just yesterday. This may be compared and contrasted with my own What’s Wrong with Keynesian Economic Theory? which was published in 2016.

With this in mind, let me again mention the article I did for the March Quadrant on The Dangerous Persistence of Keynesian Economics. It is in my view the best short statement I have ever managed to put together to contrast the classical approach to economic theory with the modern. If you are at all interested in these kinds of issues, you should read it. And let me emphasise that to understand classical economics properly you must understand Say’s Law in its true meaning, which you will not find by reading Keynes or any mainstream economist since the 1930s. One of those who does understand Say’s Law is Arthur Laffer – the Laffer of the Laffer curve – whose comment on my book is found below.

His comment is found in the advertising notice sent out just yesterday by Edward Elgar on my Free Market Economics. They describe the book as “Austrian”, which is accurate enough since Austrian economics is the last variant of classical theory that remains alive today. My approach, however, comes through a different line of descent, from the greatest economist who has ever lived, John Stuart Mill. That is why there is no other book in the world like mine. Don’t take my word for it; this is from just yesterday in the comments:

mrwashout
#2951538, posted on March 6, 2019 at 7:11 am (Edit)

Steve I bought a copy of your book a few years back and thoroughly enjoyed it. It gave me clear lines of argument to use against the mob when they tell me how awesome the NBN is, or how 27 years without a recession is a great thing etc. great book, keep on fighting the good fight

This was the notice put up by Elgar.

It’s not too late to order your exam copies.

If you’re teaching Austrian or Public Choice Economics next semester and you’re planning the course reading list, take a look at the textbook offering below from Edward Elgar.

Email us to order your examination copies, or access the online version on Vitalsource.
Free Market Economics, Third Edition

An Introduction for the General Reader

Steven Kates, RMIT University, Australia

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

– Arthur B. Laffer, Laffer Associates, US
In this thoroughly updated third edition of Free Market Economics, Steven Kates assesses economic principles based on classical economic theory. Rejecting mainstream Keynesian and neoclassical approaches even though they are thoroughly covered in the text, Kates instead looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation is a continuous process and the future is being created before it can be understood.

The aim of this book is to redirect the attention of economists and policy makers towards the economic theories that prevailed in earlier times. Their problems were little different from ours but their way of understanding the operation of an economy and dealing with those problems was completely different.

Free Market Economics, Third Edition will help students and general readers understand classical economic theory, written by someone who believes that this now-discarded approach to economic thought was superior to what is found in most of our textbooks today.
​ Key features:

  • analysis derived from the theories of pre-Keynesian classical economists, as this is the only source available today that explains the classical pre-Keynesian theory of the business cycle
  • a focus on the entrepreneur as the driving force in economic activity rather than on anonymous ‘forces’ as found in most economic theory today
  • introduces a powerful though simplified model to explain the difference between modern theory of recession and classical theory of the business cycle
  • great emphasis is placed on the consequences of decision making under uncertainty
  • offers an introductory understanding, accessible to the non-specialist reader.
 ​

And if you would prefer a digital copy of the book you can locate one here.

Mises discusses government regulation

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Mises’ Human Action is an austere no frills explanation of not just how a market economy works, but also why only a market economy can work. There are the members of a community who have material desires they would like satisfied and personal services they would like to engage. Most of what individuals want is dependent on what has already been produced and sold in the past, although of those desires are for goods and services that have only just been made available.

There are also individuals who earn their own living by running businesses that produce these goods and services in the hope that others will buy them, and in so doing pay enough in total amongst all purchasers to cover the costs of production.

There are also entrepreneurs who run businesses that produce inputs that are used within other businesses. Ultimately, however, all production is focused on satisfying the demands of final consumers. It is in this sense that consumers call the shots. What people are willing to pay for determines what will be produced since only those enterprises that produce goods and services that earn a profit can stay in business.

But what people will be willing to pay for is an unknown that can only be discovered if an entrepreneur makes the decision to produce some good or service and put it on the market. Only then can it be discovered whether whatever has been produced can be sold at a profit. Once it has been determined that a profitable enterprise can be established to produce these particular goods and services, many other firms may then follow along and try to produce the same product or even better versions.

This is how the market works through the trial and error efforts of entrepreneurs to find products that can be sold at a profit. If a community is content never to change any of the products it chooses to buy, and there are never any interruptions or changes in the supply conditions for the inputs used in production, the economy can enter a steady state which can repeat endlessly the same routine. But since in the real world there are new innovations taking place all the time, and changes in the supply conditions for inputs, a steady state outcome is an impossibility.

Therefore to ensure an economy continually improves the products produced, and can adjust to new conditions in the supply of inputs, a market mechanism is essential. No other mechanism will work if a community is intent on improving its standard of living or wishes to accommodate changes in the conditions of supply.

The question then is whether there is any role for government oversight and regulation in such an economy. And while it is clear that Mises is reluctant to state that there is such a role for governments because of the principle of give-them-an-inch-and-they-will-take-a-mile, nevertheless, he does accept that government does indeed have such a role. This is from Human Action:

There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule. (Mises [1949] 1963: 748)

There ought to be no doubt from this passage that there are circumstances for which government regulation is warranted. It is a cost-benefit calculation in which regulations are laid down, which have a cost in lost production, but in which there is a positive return in the prevention of an even more costly outcome whose probability of occurrence has been reduced.

His reluctance to state in a more fulsome way that such regulations have a role in economic management is based on his no doubt correct judgement that from the example of this unquestionable use of government regulations to diminish the possibility of a much more costly outcome has been a thin edge of the wedge to justify an enormous and monstrous regulatory regime across all the economies of the world. If anything has occurred, the meticulous examinations that now occur are to determine if there is absolutely no possible harm that might occur if some regulation is not introduced and enforced. The weight of evidence has now been placed on those who wish to reduce such regulations where outcomes with a small probability of occurrence are not made the basis for such rules.

The principle should therefore not be seen as a blanket ban on government regulation per se, but as the need for those who wish to impose such regulations to demonstrate that the potential risk is large and that the market would not be expected to provide its own cure if left on its own to work things out.

If, for example, individuals who wish to built houses in the middle of flood planes that are expected to flood only once in fifty years should be permitted to do so, but also told that if they do, they must cover the cost of insurance themselves and not expect a government to make good any losses they might endure because of flood damage.

And while there is need for licensing for doctors and electricians, since no consumer can be expected to research into the competencies of individuals who declare themselves a doctor or electrician, there is no need for regulation in endless other occupations, with hairdressers as the most notorious example of regulatory overkill.

But there is a further issue in relation to regulation. Within political debate, to argue that no regulations are ever justified will instantaneously lose the public debate. No one will accept that the market can be left to itself without oversight and regulation. Finding the balance is important, but not to recognise an important social function of regulation by governments, specially by governments under popular control, is to throw the baby of good economic management out with the bathwater of heavy-handed control.

Mises, Ludwig von. [1949] 1963. Human Action: A Treatise on Economics. Fourth Revised Edition. San Francisco: Fox and Wilkes.

The persistent failure of economic theory

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I see the RBA today froze at the thought of raising rates in the midst of an economy as stone cold dead as this one. They are, of course, clueless about why this is, just as Treasury is equally clueless. So let me take you to my article just published at Quadrant on The Dangerous Persistence of Keynesian Economics. Here’s how it starts.

OUTSIDE the United States, no economy has fully recovered from the downturn that followed the Global Financial Crisis in 2008-09. The crisis came and went in half a year, but just about every economy continues to have problems generating growth, increasing employment and raising real incomes. As I was writing my article on “The Dangerous Return to Keynesian Economics” in 2009, I commenced working on an economic textbook, now in its third edition, to explain why modern macroeconomic theory is utterly useless, why no one using these economic models as a guide to policy would ever succeed. And here we are, ten years later, and everything discussed in that earlier article, explained in far more detail in my text, has come to pass.

________________

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
—Steven Kates, Quadrant, March 2009

.

Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009

________________

Why did I get it so right? Because nearly everyone else thinks economies are made to grow through increases in demand, while in reality, as was once universally understood, economies can only be made to grow through improvements in supply-side conditions. Demand has absolutely nothing to do with making an economy grow. Demand of course is crucial to how many units of any particular good or service will sell, but has nothing whatsoever to do with how fast an economy in total will grow, or how many workers will be employed.

Does being right count for anything? Not a bit. Still, you can go back to my original article from ten years ago, The Dangerous Return to Keynesian Economics, and see how well what I said then stacks up with how things now are.

Let me add that if you are not already a subscriber, you should be. Subscribe here.