Really beyond stupid. Purely destructive, but I suppose you can’t expect them to know any better since they are all students of modern macro: RBA cuts official cash rate to 0.75pc at October meeting. They continue with all of their economic insanity expecting that the next time it will work out. Pathetic.

I am running a seminar tomorrow here at the University about which I have sent a note to the History of Economics discussion thread in response to a book review just published praising some tract commemorating the 80th anniversary of the publication of Keynes’s General Theory. Let me firstly just remind you that Keynes was the source of this stupidity that lower rates will stimulate growth. No classical economist ever believed anything so nonsensical This is what I sent.

I hope I will be forgiven for buying into this but it does astonish me that with an unbroken record of failure going back to the 1920s that Keynesian economics continues to hold such allegiance among economists. Is there no one who will rid us of this turbulent presence? And perhaps it is only because I am about to present a seminar to our own School here in Melbourne that I find myself once again so irritated by reading of yet another volume of praise heaped on Keynesian theory, now refined into post-Keynesian, but Keynesian all the same. Let me just add these to the discussion.

First, it’s not as if pubic spending didn’t have a constituency before Keynes, and yet, when it was tried, it turns out that the “Treasury View” was absolutely correct, and has been every time “fiscal stimulation” has been tried – see the GFC for the latest example. Winston Churchill was the British Chancellor of the Exchequer and this is from 1929, from well before the stock market crash in October.

“Churchill pointed to recent government expenditure on public works such as housing, roads, telephones, electricity supply, and agricultural development, and concluded that, although expenditure for these purposes had been justified:

‘For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.’” (Peden 1996: 69-70)

There is then this not-very-well-known quote from Keynes’s post-humus article in The Economic Journal from 1946, at least not well-known enough. That he was said to have stated that “I am not a Keynesian” is easy to believe when you see that he wrote the following.

“I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable to-day to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past’.”

This is the note I sent out to the School to see if I can get anyone to come along.

I am all too aware of how uninterested a modern economist is in the classical economics of 150 years ago. Nothing must seem more remote from the economic needs of the twenty-first century. So I will just say this.

1. Classical economic theory provides a much better understanding of how an economy works than anything found in a modern text.
2. Classical economic theory has infinitely more insight into how to create growth in a less developed economy than does modern economic theory.
3. Both the Marginal and especially the Keynesian Revolutions have made economic theory less insightful. There is almost nothing worth knowing, beyond the absolutely obvious, from marginal theory, while Keynesian theory is just plain wrong. Almost none of it will help anyone make sense of the operation of a modern economy.
4. Even if none of that were true – although all of it is true – if you wish to be a completely well-rounded economist, you should at least know something about the economic theories of the classical economists. This presentation will explain things to you that almost no one any longer has even the remotest idea of.
5. The attachment [not provided here] is made of up a series of quotes taken directly from Denis O’Brien’s Classical Economics Revisited (1975, updated 2002). All of what he writes is accurate. None of it is any longer taught to anyone.

The picture is of Australia’s Unemployment Rate since the present series began in 1978. There are lots of ups and downs but let me point out a couple of features.

John Howard is elected in 1996 where almost immediately Peter Costello delivers his first budget surplus which he continues to do year after year until 2007.

The GFC occurs around 2007-08 at which point the unemployment rate rises sharply. The idea we have not had a recession for 25 years or whatever nonsense is the modern idiom is obviously untrue. Things start to improve, as they automatically do following a recession, except that we soon see the effects of “go early, go hard” on the labour market. A peaks is reached around 2015 and has been coming down slowly ever since.

Leaving it to the market is so out of fashion, but that is the answer, and the only answer. Public spending, which never adds to jobs, does however diminish productivity growth. That real earnings are falling is just part of the story when governments attempt to direct the economy without a positive return on investment part of the way in which the economy is being steered.