Category Archives: Books and movies

Pedro Schwartz discusses Keynes and Say’s Law

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Pedro Schwartz is the President of the Mont Pelerin Society so you will not be surprised to find that he has just written an article criticising Keynes, with the lurid title, Keynes as Lucifer. But what we also have in common is our interest in John Stuart Mill. In 1973, he wrote one of the few books ever written on Mill’s economics, The New Economics of John Stuart Mill, which I am now re-reading. That I had read it perhaps two decades ago is why it feels so fresh. Everything had fallen from my mind about the book, but I have in the meantime re-discovered Mill for myself. But here we are discussing Schwartz on Keynes, and he begins by trying to explain what cannot be doubted, the grip that Keynes continues to hold over the economics profession.

A number of circumstances and coincidences explain this everlasting fascination with Keynes. First and foremost is the failure to foresee, account for, and remedy the Great Depression of the 1930s—and the same with the Great Recession of 2007-11. Secondly, his own seductive personality fits in supremely with the new morality of the progressive elites. Thirdly, people of progressive intent feel a crying need to find some excuse for continued government intervention in society, after Marxism, socialism, economic planning, imposed egalitarianism, public schooling, and state welfare have signally failed to fulfil their promises or are threatened with impending failure.

Keynes’s rejection of the classical model opened a door to the many who were unhappy with the orthodox belief that supply created its own demand; that unemployment was self-righting; that the gold standard was the best monetary system; that investment could be left in private hands; that the stock market, despite temporary episodes, reflected the fundamental values and trends of the productive system; and in general, that laissez-faire was the best possible social arrangement.

And yet, I fear, I will have to disagree with him when he comes to discuss Say’s Law. Here he writes:

Say’s Law, which holds that supply always find its demand, was the bugbear of Keynes. The classicists founded on it their belief that full employment was the natural state of a free economy and there could be no involuntary unemployment in a competitive labor market, barring the frictional unemployment of people changing jobs. On the contrary, for Keynes, the engine of growth was aggregate demand (the sum of consumption and new investment): and the normal situation of a free economy was one where that aggregate demand was insufficient to guarantee the full employment of resources. This shortcoming was due to the tendency of consumption always to lag behind income, leading to excessive saving; and investment depending capriciously on the animal spirits of entrepreneurs. It was necessary for the state to use those excessive savings to top up flagging investment. Laissez-faire was not the best policy.

This is not Say’s Law as explained by Mill. The very reason for this issue even entering into economic discourse at the time was because economists in the 1820s were debating whether demand deficiency was the cause of the recessions they were observing and came to the virtually unanimous view that demand deficiency did not cause recessions even while many other factors did. It is with a heavy heart I see that even someone who has studied Mill as intensively as Pedro Schwartz does not get Mill’s point. Keynes’s ability to beguile and mislead is extraordinary and apparently never-ending.

A disgrace to the economics profession – the single most damaging graph in human history

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Which has been the most damaging single diagram in the entire history of the sciences? There is not even a contest? The graph is, without any doubt, the Keynesian-cross diagram invented by Paul Samuelson which has been depriving economists of the ability to make sense of economic events since first published in the first edition of his Economics text in 1948.

keynesian cross

The idea for honouring this diagram has occurred to me with the publication by Mark Steyn of his just published book, “A Disgrace to the Profession” which he describes as “the story of the 21st century’s most famous graph and the damage it has done both to science and public policy”. Ah, but the present century is still young and although the harm the hockey stick has undoubtedly caused may well already be calculated in the billions, the harm Samuelson’s 45-degree diagram has done may be calculated in the trillions, and the damage it is doing is far far from over.

For those unfamiliar with the Keynesian-cross, it shows an upward sloping aggregate demand curve which reaches equilibrium where it crosses the 45-degree line at a level of national income well below the level of production that would employ everyone who wants a job. The answer, therefore, is an increase in public spending which pushes the line upwards and therefore pushes the equilibrium level of production along the horizontal axis to the right which then allows everyone to find a job.

The policy has, of course, never ever worked, but the trillions of dollars of public sector waste have drained our economies of astonishing levels of wealth that have kept our living standards well below their potential now for seventy years.

I have written my own book on the disgrace to the economics profession Free Market Economics which is now in its third edition. It takes apart Samuelson’s piece of beguiling illogic which has mesmerised the profession since it was first published. It is itself the very height of junk science, which has never on a single occasion given advice that has allowed an economy to raise its level of production and return an economy to full employment. It has, instead, led governments to pour their trillions into one wasteful project after another, of which green energy is only the latest, and while wildly expensive is for all that far from the most expensive example.

Economists who use any of these Keynesian diagrams starting with Samuelson’s are throwing sand in their own eyes. Profoundly shallow it is almost impossible to explain to someone who has been taken in by these graphs why they have been so badly misled. But there you are. No stimulus has ever worked but we still teach the diagrams that say public spending will bring our economies out of recession and give us strong and balanced growth. Do you believe that after what has gone on since 2009? Does anyone? A disgrace, but what is even more disgraceful is that the entire profession continues to accept a theory that has never worked. And there is the diagram that has corrupted the understanding of more individuals than any other diagram in human history.

Psychological differences are important

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A paper on Psychological Differences between citizens of the West in comparison with other cultures. Here is a sample:

In the eyes of most Westerners it looks immature and childish when people try to use threatening behavior, to mark their dislikes. A Danish saying goes “…Only small dogs bark. Big dogs do not have to.” That saying is deeply rooted in our cultural psychology as a guideline for civilized social behavior. To us, aggressive behavior is a clear sign of weakness. It is a sign of not being in control of oneself and lacking ability to handle a situation. We see peoples’ ability to remain calm as self confidence, allowing them to create a constructive dialogue. Their knowledge of facts, use of common sense and ability in producing valid arguments is seen as a sign of strength.

The contrast follows, and this only relates to dealing with anger. Other issues are discussed as well.

This is a movie you gotta see

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Being in some ways a follower of Leo Strauss, I get it when he says that there are, in politically difficult times, two interpretations of a text. There is the superficial meaning, and there is the actual message that the author has in mind but cannot say what he thinks just like that. Or maybe I’m just reading too much into it. In either case, an amazing film that had me in for the whole two hours plus.

The movie is Straight Outta Compton. At Rotten Tomatoes 90% from the critics and 95% from the audience. A respectable but lower 8.3 at IMDb.

Waffle Street and Say’s Law

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In re Waffle Street, Jimmy Adams has himself put up a comment in the comments thread.

While Steve may be unwilling to take an ounce of credit for it, allow me to publicly recognize his “little red book” as being the most influential of all the economic literature that I referenced in writing “Waffle Street.” Say’s Law is the transcendent and ironically, least appreciated, principle of economics. And no one explicates it better than Prof. Kates. Thanks again, Steve.

says Why is it my “little red book”? That’s why. The most astonishing part is that around once every decade or so some economist ends up stumbling onto Say’s Law and realises what it actually means and then tries to tell everyone else. The list is not that long, but includes Benjamin Anderson, Henry Hazlitt, William Hutt, Thomas Sowell, Art Laffer and Murray Rothbard. Once you see it, everything about how an economy works suddenly changes shape, and most importantly, Keynesian forms of economic management seems utterly insane. No one who understands Say’s Law is ever surprised that some Keynesian stimulus didn’t work, or that the rise in public spending ever does anything other than pull an economy down. And each of us has tried to explain as best we can why Say’s Law is so important but no one gets it. They don’t even get it to the stage where they could really answer that I see what you mean but I disagree. They do not even understand this enough to be able to explain what it is they disagree with. If you think that “supply creates its own demand” covers it, you have to ask yourself why no classical economist ever said it. The phrase comes from a book published in 1933 by a critic of Say’s Law which was then purloined by Keynes in the General Theory published in 1936. Say’s Law is not even all that hard to understand: all economic activity is driven from the supply side; none of it is driven from the demand side. What is true for an individual product is not true for the whole economy. If there had actually ever been a single Keynesian success story, there might be some case for the continuation of Y=C+I+G in our texts. But a Keynesian stimulus has failed, and failed spectacularly, on every single occasion it has been tried. Yet Keynesian macro persists in our texts. If you would like to understand the entire sordid story, my little red book will explain it, and is also the only place you can find out how the Keynesian Revolution came about.

Waffle Street the movie is coming

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Waffle Street the book is a true life adventure in which the author learns about the meaning of Say’s Law by going from an investment house to working the night shift at a Waffle House. Waffle Street the movie is now about to be released which, as it says, is based on a true story along the lines, no doubt, of what is found in the book. I have been following both book and movie from the start, and while I cannot take even an ounce of credit for any of it, I have to admit there is a very great pleasure in being able to tell you that my Say’s Law and the Keynesian Revolution is sitting on Jimmy’s desk in the final scene, right beneath a copy of Jean-Baptiste Say’s Treatise on Political Economy. To understand why you will probably have to read the book, which along with a great story will explain to you the meaning and significance of Say’s Law. But for a movie in the true Hollywood style, you should see the film as well when it comes out. How extraordinary it must also be for Jimmy Adams to find that being fired from his job in finance led to his ending up writing a book that was turned into a movie with Jimmy himself played by James Lafferty!

UPDATE: I’ve just had a look at the interview with Jimmy linked at the start. A good question from the interviewer, which led to this reply drenched in the logic of Say’s Law:

Too often, white-collar financial service workers forget that any given good or service can only be obtained by 1) producing it yourself or 2) by creating something of value which can be exchanged for it. Instead, we’re prone to think the major impediments to our individual and collective prosperity can be readily removed by tweaking interest rates, the tax code, or deficit spending.

My restaurant co-workers, in contrast, were under no such delusions. With the exception of the manager, I was the only person working third shift who hadn’t spent considerable time in a state or federal correctional facility. Most of them were extremely grateful for the opportunity to perform honest work at a market wage, and took a very proactive, customer-service-oriented approach to their financial lives after parole. Generally speaking, they were great examples to me. In the book, I use a number of my interactions with them as commonsense illustrations of economic principles. I really intended the narrative to be wholly humorous self-deprecation, but I had so many financial epiphanies on the job that I couldn’t help but share them with my readers.

Hillary’s rules for radicals

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hillary rules for radicals

Speaking of which, why does no one even bother to mention that Hillary’s senior thesis was on Saul Alinsky’s Rules for Radicals. Once upon a time unavailable. Now, it is hardly worth a mention; it is, if anything, a feature and not anything she needs to hide. She has the same genealogy as Obama. If you are interested, you can read it here. You won’t find anything you don’t already know, which is in itself a large part of the problem.

Tom Woods on Say’s Law

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This is a podcast of me talking to Tom Woods about Say’s Law. I think of it as the single most important economic issue of our time, because if we don’t finally work it out that Keynes got it completely wrong, we are going to create for ourselves a permanently lower standard of living and a widening underclass of the unemployed and under-employed. You cannot make an economy grow from the demand side. It is so rare to find someone who understands the point, making this an almost unique and quite exceptional place from which you can discover what the issues are and why they matter. Most of it is found in great detail in my Say’s Law and the Keynesian Revolution but there are some things I have discovered since, many of which are found in the Liberty Fund discussion on the Economics of John Stuart Mill for which I wrote the lead article. But the podcast gives a summary of everything that matters, which can only happen when the person asking the questions understands the issues himself.

My endless thanks to Tom Woods for doing this podcast and for recognising the importance of Say’s Law.

Robert Conquest (1917-2015)

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It is essential to mark the passing of one of the great historians and enemies of totalitarians of all varieties. Robert Conquest passed away on August 3 at aged 98. I think it is even possible that I read every one of his books [UPDATE: I just went to look at what he’d written – I got nowhere near it]. This is from The Telegraph in London picked up at Powerline:

Conquest personified the truth that there was no anti-communist so dedicated as an ex-communist. His career illustrated also what the Italian writer Ignazio Silone, another former communist, meant when he said to the communist leader Palmiro Togliatti that “the final battle” of the 20th century would have to be fought between the two sides they represented.

An ardent Bolshevik as a young man, Conquest became a bitter foe of Soviet “Socialism”. He had first visited Russia in 1937 as a youthful devotee of the great experiment. It was a half century before he returned in 1989, having spent his life between chronicling the horrors the country had endured, and emerging, in the view of the Oxford historian Mark Almond, as “one of the few Western heroes of the collapse of Soviet Communism”. “He was Solzhenitsyn before Solzhenitsyn,” said Timothy Garton Ash.

The most dedicated anti-socialists are former socialists, which I have seen often. Of what he wrote, I have found his Three Laws of Politics amongst the greatest insights you are likely to find anywhere:

1. Everyone is conservative about what he knows best.
2. Any organization not explicitly right-wing sooner or later becomes left-wing.
3. The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies.

But if you want his best quote of them all, it is his suggested title for the reprint of his The Great Terror after the Berlin Wall had fallen and his estimates of death by gulag had turned out to be too small: “How About”, he said, “I Told You So, You Fucking Fools?”. When dealing with the left, there are many instances when you feel like saying it, but no one has ever had the right to those words more than he did.

Henry Spearman, the Sherlock Holmes of economics

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I was reminded of Milton and Rose which made me think of the Marshall Jevons crime fiction series:

Marshall Jevons is a fictitious crime writer invented and used by William L. Breit and Kenneth G. Elzinga, professors of economics at Trinity University, San Antonio and the University of Virginia, respectively.

It was Breit’s notion to write a mystery novel in which an amateur detective uses economic theory to solve crimes. Elzinga was enthusiastic about his colleague’s idea and not only encouraged him to proceed but also decided to take an active role in writing the book. Over the next twenty years, on top of their academic schedules, Breit and Elzinga co-authored three mystery books featuring Harvard economist-sleuth Henry Spearman. The first Henry Spearman Mystery, Murder at the Margin, came out in 1978, and was followed by The Fatal Equilibrium (1985), A Deadly Indifference (1995) and The Mystery of the Invisible Hand (2014).

Ken Elzinga was at Freedomfest, attesting to his fine economic credentials, and gave a presentation on how he came to write the series with his partner who has unfortunately passed away. But the one thing that I learned that has helped bring the books alive – I am reading the third one right now – is that the main character, Henry Spearman, is designed after Milton Friedman, Professor of Economics at Harvard though he may fictionally be. And the one problem they had in writing the series was that Rose Friedman did not see herself mirrored by Pidge Spearman, and for reasons I cannot see doesn’t like the way Henry’s wife is depicted. The books are fun to read, but are better if you are an economist, although it is not an essential. A large part of their sales, it turns out, are as assigned texts as part of an economics course.