An outline of my economic beliefs in an email to an American colleague

A letter I sent to an American economist who had sent me two books to read. This is my reply.

I read the books you sent with great interest, one which I thought was part of the problem as I see it and the other of sublime excellence, better even than the authors know. But to help you understand where I am at, I will put in the cover note for this next book of mine that I have written but not yet submitted to the publisher [ie the book’s been submitted but not my version of the cover text]. I have highlighted the part of what I do that puts me outside the norm even among we on the free market side of things.

‘Classical Economic Theory and the Modern Economy’

The book starts with two premises: First, that economic theory reached its deepest level of understanding in the writings of John Stuart Mill and the classical economists of his time, and then, secondly, the author of this book has understood Mill and has accurately explained what the classical school of the late nineteenth century wrote. From these premises, this then follows.

If you are to have any hope of understanding how an economy works, and how modern economic theory became the dead end it has become, you will need to read this book.

The classical economists, and John Stuart Mill in particular, lived through the Industrial Revolution, saw its astonishing economic transformation before their eyes, and explained, so others could understand for themselves, how their prosperity had been created through the emergence of the market economy.

Mill, the greatest utilitarian philosopher of his age, refused to use utility as part of his theory of value. Mill explicitly and emphatically denied any role for aggregate demand in the creation of employment. In reaching these conclusions, there was no disagreement among the entire mainstream economics community of his time.

First through the Marginal Revolution of the 1870s, and then through the Keynesian Revolution of the 1930s, the entire edifice of classical theory has been obliterated. From a classical perspective, modern economic theory is Mercantilist trash. If you are interested in how economic theory became the wasteland it has become, and wish to understand the classical theory no one any longer has the slightest clue about, this is the book you must read.

I think of the Marginal Revolution in much the same way I think of the Keynesian Revolution. It shifted focus to the demand side of the economy, lost touch with actual measurable quantities, and replaced an utterly meaningless concept – utility – for what had mattered to the classicals, production costs relative to demand. They have rendered much of economics into a series of abstraction with little concrete to examine. So to the books.

The one I didn’t especially like was Economics and Free Markets which I won’t go much into. Starts with marginal analysis and then goes through supply and demand omitting the single most important element, which everyone else omits as well: no seller ever knows the position or shape of the demand curve for any product they are selling. Demand curves are not concrete entities but are nevertheless treated as if they represent known matters. In reality, everyone in an economy travels blind and has to guess their way into profitability. Some parts of the book were all right, but really, to my mind part of the problem.

On the other hand, I thought Applied Mainline Economics was excellent and even better than the authors themselves understood, which I hope they will forgive me for saying. And what they have done is put together a classical text without knowing it which they describe as “mainline economic thinking”. I wrote a blog post to myself on it which I hope will be sufficiently clear to see what I’m saying.

This is an astonishingly excellent text which understands a great deal but misses the most important part. This is the text: Applied Mainline Economics: Bridging the Gap between Theory and Public Policy by Matthew D. Mitchell and Peter Boettke. And there we find (pp. 2-3):

And though mainline concepts are constantly evolving, they draw their inspiration from, and are intimately connected with the enduring lessons of early economic thinkers. A line connects the contemporary variants of these ideas to insightes of Thomas Aquinas of the 13th century; the Scottish Enlightenment thinkers, such as Adam Smith of the 18th century; and the Neoclassical school of the early 20th century. Thinkers in the last few decades have extended this line of inquiry, including Nobel laureates F.A Hayek, James Buchanan, Ronald Coase, Douglass North, Vernon Smith, and Elinor Ostrom.

Let’s see who’s included which adds in those mentioned in ftn 5 of Chapter 2:

  • Thomas Aquinas of the 13th century;
  • fifteenth and sixteenth century scholastics;
  • the Scottish Enlightenment thinkers, such as Adam Smith of the 18th century;
  • 19th century French liberals Jean Baptiste Say and Frédéric Bastiat;
  • the Neoclassical school of the early 20th century
  • thinkers in the last few decades, including Carl Menger, Ludwig von Mises, F.A Hayek, James Buchanan, Ronald Coase, Douglass North, Vernon Smith, and Elinor Ostrom

Now let’s see who is missing? Who is missing in particular is the English Classical School of the mid-19th century and especially John Stuart Mill.

And then there is a list of characteristics that have been suggested over the years that breed strong economies which include everything discussed by Mill and the his contemporary classical economists:

  • specialisation and the division of labour
  • institutional structures
  • natural endowments
  • geographical advantages
  • capital accumulation and growth
  • cultural inheritance
  • personal traits such as attitudes to thrift and hard work
  • technological sensibilities
  • individual liberty
  • social attitudes to commercial activity

And yet it is Mill and the Classical School whose perspective is the perspective most congruous with these characteristics which is left out. And you know why that is? Because no one has any idea what they said. There is a gap between Ricardo, who died in 1821 and the coming of the Marginal Revolution in 1870 that is almost entirely unknown to economists today.

My specialty is that gap. That is what my books are about and especially my textbook which is Mill’s Principles for the twenty-first century. I will leave you with the bits that I included in my Christmas letters to friends who are economists; no one else would be even slightly interested while my economist friends are slightly interested, mainly to see just how absurd my economic views have become, although I am happy to say some of my friends even agree with me. Hopefully you will also see my point.

I have finally submitted the full text of my next book in the proper format which is very nice but took a month of fiddling to get it exactly right and ready for publication, and that was after the two years it took to write. This is what it’s about via the blurb they put together:

“Economic theory reached its highest level of analytical power and depth of understanding in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains what took place in the ensuing Marginal Revolution and Keynesian Revolution that left economists less able to understand how economies operate. It explores the false mythology that has obscured the arguments of classical economists, providing a pathway into the theory they developed.”

There is also the second book I have been finishing off which I finally completed today. It is a near-definitive collection of all of the anti-Keynesian articles and excerpts from every anti-Keynesian book of any importance ever written.

Not entirely best-seller material, but fascinating to me. Since the basis for everything I believe about an economy is based on John Stuart Mill’s Principles of Political Economy which was the most used text in English from 1848 till around 1890 and remained as a major text used everywhere until around 1920 I am following along after someone who ought to have a few street creds you might think. But then classical theory went out of fashion and then there was the Keynesian Revolution and then economics became mathematical and then diagrams infested economic texts page after page and then economic students became illiterate and beyond that, reading nineteenth century prose became impossible to almost everyone, specially economists and even then Mill is beyond just trying to read Trollope and Dickens and even then Mill, who wrote his 1000-page text in around 18 months so his is not exactly a polished account filled as it is with 100-150 word sentences and worse, often going off on tangents to explain what he is getting at using examples that can go on for five pages where if you don’t already know what he is getting at cannot be followed. But I love what he says and how he says it. It is pure common sense to me – highest IQ of the nineteenth century; fifth highest of all times if you take these things seriously – and since nothing about how an economy works has changed all that much at a theoretical level since around 1776, I remain possibly the only economist, even among historians of economics, who understands not just what Mill was getting at, but also agree with virtually everything he says. So while my projections and forecasts have never been wrong, no one pays any attention to me because my reasoning is so foreign to everything an economist thinks, or is supposed to think. Since in my books it is not just Keynesian macro but also marginalist micro that I throw onto the dust bin of history, there is not much of “that modernist stuff gone sour and silly” left around by the time I am through with it – the quote, btw, is from Keynes in 1946 looking at what had become of The General Theory by the time it got into the hands of Joan Robinson.

If you are still with me, I will leave you this which was published this year as a tenth anniversary reminiscence following an article I wrote in 2009:

It starts with a quote from an Australian Senator who was querying me during some Committee meeting in 2009 about my opposition to the stimulus which really does capture where I am:

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

Funny to me but no one pays any attention. To be right too soon makes everyone think you are wrong in principle. All they remember is that they disagreed with you about something, but what it was they never remember.

My aim is that eventually, around fifty years from now, when economics returns to where it once was, that someone will discover my book and say, look, this guy Steve Kates, he got it nearly right fifty years ago. “Nearly” because everything is always a little off centre and no two economists ever think about anything in exactly the same way. On the other hand, by then every economy in the world may be like Venezuela is today and no one will even be able to understand a word, just as no one can understand Mill today.

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