What would a modern economist know about economic theory?


I keep pointing out that the last person you should listen to about economic policy is anyone who has had a modern education in economic theory. Here is a bit of proof, from today’s Oz: Dismay at RBA as wages growth goes backwards. Here is the opening line of the article:

The person most disappointed with Wednesday’s sluggish wages growth figure is surely the Reserve Bank Governor. Real wages are now going backwards at 2.7 per cent.

How would it even have been possible for real wages to rise while the country has been in lockdown, our future sources of energy are under threat, government spending has risen at every turn, and while real interest rates are in negative territory?

Real wages can only grow if the flow of goods and services that wage earners can buy is rising. This can, of course, only happen if the private sector is expanding. 

It is the proliferation of all these Keynesians who believe that increases in public sector spending on useless junk will somehow “stimulate demand” and therefore lead to a higher level of productive enterprise.

That is, these people believe that if governments waste our available resources and capital on unproductive projects of their choosing that when their overpaid virtually entirely unproductive public servants spend the wages they receive that this will propel the economy forward.

It does sicken me to watch all this in action since I can see how not only almost everyone else but also I too will have to experience a fall in my real level of income because of all this.

That central banks around the world seem to believe that negative real rates of interest are a stimulus to growth is just how it is. If you would like to be cured of this absurdity, the only place I can think to send you is to Chapter 17 of the third edition of my Free Market Economics: An Introduction for the General Reader which is titled, “Saving and the Financial System”. There are other books as well, but virtually all of them were written at least a century ago.

It is maddening to watch our economy trashed by such ignorance, but there you have it.

FROM THE COMMENTS on the same post at New CatallaxyI try not to do this, and hardly do it at all, but this was the sole comment which to me really demands a response since I think  it is so instructive. From Hubris:

I read these tirades. Do you essentially advocate a return to industrial protection and supply? It seems like you just don’t like markets.

I know I am beating my head against a brick wall, but massive levels of public spending, enormous unfunded fiscal deficits and adjustment of market rates of interest by central banks are not in any sense leaving things to the market. Why is that not utterly obvious? 

On the brink of an inflationary disaster

Increases in the price level (nowadays referred to as “inflation”) are embedding themselves across much of the world. And I would like to emphasise that it’s not just a money-supply thing. It is essentially caused by the growth of purchasing power relative to the growth in the amount of goods and services available for purchase. The key element is productivity growth relative to the level of spending. 

I’m not interested in dwelling on any of this, other than to point out that getting inflation back down to zero hardly fixes the problem. Here are the latest data from the ABS:

  • The Consumer Price Index (CPI) rose 2.1% this quarter.
  • Over the twelve months to the March 2022 quarter, the CPI rose 5.1%.
  • The most significant price rises were New dwelling purchase by owner-occupiers (+5.7%) and Automotive fuel (+11.0%).

Suppose the growth rate went down to zero from 5.1%, which it won’t any time soon, if ever. Since the CPI figure is a percentage change in the index you have not recovered your lost purchasing power. 

Most extraordinarily to me, the ABS only just mentions the latest index number, which is 123.9. The publication, so far as I could see, doesn’t even mention the index level a year ago which I calculate to have been 117.9.

The point: unless the Index falls back to 117.9, a zero inflation rate still leaves you 5.1% behind.

It is people on fixed incomes who will be really punished, but everyone who has not had their incomes rise by that 5.1% will be financially worse off.

So we now have all the ingredients of a wage-price spiral. This is what Labor has promised: ‘Absolutely’: Albanese backs wage growth at rate of inflation.

“I believe the minimum wage should at least keep up with the cost of living,” Albanese told a press conference in the Melbourne seat of Chisholm on Tuesday morning.

Productivity has fallen backwards since the lockdowns and the covid restrictions. Governments everywhere – see Victoria specially – have thrown away billions of dollars on useless unproductive projects. (The US has gone absolutely insane.)

Put in place a system that adjusts wages to the movement in prices and the disaster that will follow will still be with us twenty years from now.

My reply to a request for the title of my latest book

I received an email with the following heading: “Can you please advise me of the title of Steve Kates’ latest book?” After almost a week I wrote the following in answer to the original query.

This was passed on to me and am grateful for the request which would have been extremely simple to reply to, as follows:
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Thank you for your request: this is the tile: Classical Economic Theory and the Modern Economy and this is the link to the publisher’s website: https://www.e-elgar.com/shop/gbp/classical-economic-theory-and-the-modern-economy-9781786433565.html

However, what then almost immediately came to mind was how best to get the points I am trying to make across, assuming that is actually why you were interested in the title. So what follows is the evolved reply that immediately came into my head which you will hopefully be able to read below which I will eventually be able to put up on the blog.
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My latest book is Classical Economic Theory and the Modern Economy and this was the summary at the publisher’s website [ https://www.e-elgar.com/shop/gbp/classical-economic-theory-and-the-modern-economy-9781786433565.html ]
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Economic theory reached its highest level of analytical power and depth in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains classical economics when it was at its height, followed by an analysis of what took place as a result of the ensuing Marginal and Keynesian Revolutions that have left economists less able to understand how economies operate.

The chapters explore the false mythology that has obscured the arguments of classical economists, clouding to the point of near invisibility the theories they had developed. Steven Kates offers a thorough understanding of the operation of an economy within a classical framework, providing a new perspective for viewing modern economic theory from the outside. This provocative book not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’s pathway in writing The General Theory. It provides a new look at the classical theory of value at its height that was not based, as so many now wrongly believe, on the labour theory of value.

A crucial read for economic policy makers seeking to understand the operation of a market economy, this book should also be of keen interest to economists generally as well as scholars in the history of economic thought.

`

This is, of course, the history of economics which has a fairly heavy dose of political philosophy mixed in with the economics. It is also historic and explains how economic theory ended up in the mess it is now in. It is not really for someone who has not previously studied economic theory (which, for all I know, you may well have done) and I imagine requires quite some background in the way that economic theory became what it has become. Therefore, on the assumption that your interest is in economic theory in relation to policy, then the book I would recommend, which is not my most recent, is the third edition of my classroom text: Free Market Economics: An Introduction for the General Reader. This is the publisher’s summary:

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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.

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There is then, in relation to economic theory, my Economics for Infants which is discussed at the publisher’s website [ https://www.connorcourtpublishing.com.au/Economics-for-Infants_p_65.html ]. It is not really for infants, of course, but is done in the form of a children’s book. This is the summary put up by the publisher:
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A perfect book to read to your children and grandchildren!

How do you explain the complexities of the economic order to a child? In this retro-inspired illustrated book, Associate Professor Steven Kates attempts this task in a storybook form. A basic primer on economics for the youngest of readers.

The text is to the point but what makes the book so valuable are the drawings by Liam Capello who has a phenomenal gift for representing text pictorially, who is now pursuing another career direction. But I have to say, especially with the drawings accompanying the text, that it explains some very complicated things in a very simple way. 
 
Finally, let me just mention this, which you can just download from the CIS in Sydney at this web address: https://www.cis.org.au/wp-content/uploads/2019/02/pp14.pdf  – This discusses the operation of the price mechinism which is dealt with in the first two books discussed above but this goes into it much more deeply. It explains precisely why no socialist system has ever worked or can ever be expected to work by showing how pricing and entrepreneurial decision-making is the key to understanding how things actually operate.
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Anyway, I hope this has been of some help to you. Your request has certainly been of some help to me.
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And if you have any further questions, feel free to drop me a note.
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With kindest best wishes.
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Keynesian economics and the Magic Pudding

The level of economic ignorance and stupidity has reached such astronomical levels that I can make the forecast that Australia is heading for many years of falling real incomes and a vast increase in the level of poverty.

You really have to stand in amazement at how little flak this morning’s front page in The Oz has received: Election 2022: Labor to turbocharge budget deficits in ‘quality spending’ focus. If Labor wins they will do nationally what Labor has done in Victoria. 

Labor is planning to unveil budget deficits up to $10bn greater than the Coalition over the next four years as Anthony Albanese sharpens his election pitch around the need for “quality” spending rather than fast-tracking debt reduction….

“What we need to be able to do is to flick the switch in the budget, not to austerity, but to quality, so we can fund the things that we care the most about,” Dr Chalmers said.

hese idiocies. Our present Government actually does know better but are barely able to explain any of it in a way that will have the general run-of-the-mill Treasury and academic economist on side. Certainly you will find almost not a single warning out there from hardly any of them.

Meanwhile we will be dismantling our power grid and ability to deliver low-cost electricity to industry. I don’t wish to single out The Age but reading its editorial today really did depress me: Fair wage growth must be at the heart of economic recovery.

more value adding output than the value of the resources used up in production. If anyone thinks the ALP is remotely capable of that sort of outcome, just vote these people in and then sit back and enjoy the rising level of poverty that will then be inevitable. Not for everyone, of course, just most of us.

Interest rates and the deficit

What can you do if Australia has the most incompetent central bank in the world? That they have raised interest rates in the midst of an election is the second time it has thrown in its lot with Labor, as it did in 2007. 

Of course, the problem really is that it has waited this long to do what has been an essential for quite some time. Let me remind you of this: Victorian state budget: Daniel Andrews government spending splurge as debt heads to $167.5bn. Labor steals from every constituency it gets to govern. The article is mostly about how Labor blames the Federal Coalition government, but I blame it on the phenomenal level of economic ignorance, which begins with the economics profession and continues from there across the entire community who are so grateful to see the level of demand being maintained. The level of supply, not so much, but who really cares anyway?

Keynesian stupidity is now so embedded that it would be very rare economist in May who has any sense of the devastation of governments indulging in one unproductive and loss-making project after another. 

There was a time when a community would understand that with a more or less fixed resource base, the more the government spends the less available for the rest of us. They would also have understood, perhaps only dimly, that governments cannot manage productive forms of enterprise. This at the very end of the article really sums up what is going on:

Mr Pallas attributed most of this sum to the West Gate Tunnel project, which the government recently revealed would cost an extra $4.1bn and open three years late, in 2025.

Among the responsibilities of the 500 new cops will be helping to raise millions more in speed camera and on-the-spot fine revenue, which is expected to jump 16.4 per cent next financial year alone, from $615m in 2021-22 to $716m in 2022-23, and $829m over the forward estimates.

The government is desperate for money to cover the massive debts it has wracked up. Until they are permitted to sell the State to the Chinese via China’s Road and Belt “initiative” they are going to have to cover their debt from the only source available, from the people who live within the State. However, once we have a Labor government federally, the competition for your money will intensify exponentially. And this, I remind you, is the pre-election budget. Just wait till you see the one next year when they have four years till the next election. 

As for the increase in rates of interest, a mere pin prick in the midst of all the rest but it will be the only issue that anyone will pay attention to.

An example of classical economics in the real world


There is an article in The Oz on who used to be my favourite American president but is now only my second-favourite – Warren G. Harding. As the article points out, although he was president for only 29 months, he is regularly listed among the worst presidents in American history by that motley crew of academic historians (and economists) who have no idea about which direction is up. They would almost all have voted for Joe Biden so you can see how sound their judgment must be.

The title of the book under review is The Jazz Age President: Defending Warren G. Harding. Alas, I only have the review to find out what the author wrote, but this is the bit that I wish to focus on:

Harding’s first priority was the economy – gross national product was down 17 per cent, stock values were cut nearly in half, unemployment was over 12 per cent, and farmers were devastated by plunging prices.

This was the economy Harding inherited on becoming President. You hardly need to guess what a modern political leader would do, and be expected to do, if these were the circumstances they had to deal with. Anyway, he did precisely what no one would do today – the article continues:

Harding reduced government spending, slashed individual taxes (the marginal rate had reached a high of 77 per cent), increased tariff rates, and reduced the intrusiveness of the federal government.

The result was what is today recalled as The Roaring Twenties.

What is even more astonishing is that you can no longer find an economics text that will explain why such policies deliver the outcomes they always do, other than, of course, my own Free Market Economics. And then there is this if you would like more detail on the entire history and framework of an economic theory that provides wealth and prosperity: Classical Economic Theory and the Modern Economy.

Donald Trump did the same to the American economy but you will hardly ever find a good word about any of it virtually across the entire media and certainly not from within the academic world of economics.

The Greatest Fraud in History


Came across this: Wall Street analyst: COVID vaccines ‘greatest fraud in history’. This is the point:

Dowd and a Wall Street insurance analyst with whom he has teamed, concludes the CDC data show the Millennial generation suffered a “Vietnam War event,” with more than 61,000 excess deaths from March 2021 to February 2022.

That is more than just fraud, but mass murder if it’s true. But so far this only in my view makes it to second place. Above it is Global Warming about which I received a note today which said this:

Pursuing a Net Zero by 2050 target will jeopardise our energy independence and national security and raise the cost of living for mainstream Australians without making any discernible impact on global temperatures.

I see phrases like this all the time: “without making any discernible impact on global temperatures” as if this is a real problem that needs to be solved but we are perhaps either not doing enough or doing the wrong thing. For myself, the entire issue is a fraud. There is no problem that needs solving. There will be enormous costs across the world but nothing will be achieved since it is a non-existent problem, much in the same way as I think about Covid. This is not the return of the Great Plague, in the same way that Global Warming hysteria is not directed at an actual problem that is in need of solution.

The Number One fraud, to me, is and has been for a long time, modern macroeconomic theory with its fundamental equation learned by every socialist in their first year in economics: Output is the sum of Consumer Demand [C], Private Investment [I] and Public Spending [G]: Y=C+I+G.

So if there is unemployment then all the government needs to do is increase its level of spending [G] and the problem is solved.

The inflation in the US followed by the eventual collapse in its economy will demonstrate just how insane – and also fraudulent – this policy is. Trillions have been wasted over the years in pursuing this agenda with no success at any time ever in history anywhere.

But while the cretins who are funding their own lives along with their mates will do very well out of it, the rest of us will need to scramble just to stay ahead of the pack. See Venezuela (and Cuba, and the former Soviet Union) for examples of just how disastrous such policies can be.

The causes of inflation go well beyond growth in the supply of money

There was a time that even economists understood that the story of inflation went well beyond increases in the stock of money. But Keynesian theory, with its Y=C+I+G, is now so embedded across the mindset of everyone as a means to make economies grow, and not just amongst economists but there as well, that the bizarre rates of growth in public spending in the US is seen as normal and generally appropriate. In reality, it is not just the cause of inflation but will create vast pockets of poverty as well.

Saw the chart at Powerline with the heading about class dismissed. There was at least this one comment so that someone else does see the deeper nature of the problem.

If an economist tells you modern monetary theory works, that person is NOT an economist. Run.

We are on the edge of a precipice in so many ways that it is hard to see how we will survive the next five years.

LET ME ALSO ADD THIS:

Came across a couple of additional posts that seem to add to the issue. First from Instapundit.

“I know there’s a lot going on in the world today, but can we just take a moment to reflect on how crazy it is that the United States House of Representatives just passed a $1.5 TRILLION spending bill that no one has read?”

And then from the comments there was this.

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Warren Harding and classical economic theory

It’s not that I care one way or the other about which American president was the worst, although Joe Biden really does test the waters, not that the American media and its academic accomplices will ever mention it, but this is about Warren Harding who was and is my favourite since he took the US from recession into the best period of growth and prosperity in its history. This is from an article titled, How Liberals Unfairly Maligned Warren G. Harding. And why it matters even now is because the left who still controls everyone’s access to information still thinks the FDR approach works when it does not, but the Harding approach does and showed its genius in real life.

His program of laissez faire conservatism revived the American economy from the “forgotten depression,” leading to the most prosperous decade in US history, an era with average annual growth rates of 7 percent. He slashed taxes, regulations, and government spending, and created the Budget Bureau, which gave the federal government a comprehensive budget for the first time. The country ran a budget surplus every year and one-third of the national debt was paid off. Statistics also reveal that every class of citizen benefited throughout the “Roaring Twenties.”

Where will you find out about any of these policies in any textbook written this side of 1920. Well there is this: Classical Economic Theory and the Modern Economy.

Socialists have no imagination whatsoever

Picked this up here where they take it for granted that communism is obviously a very bad idea, but I wonder how many people really think that. The market economy was an approach that took millenia to emerge, and already it has more enemies than friends. The notion that we can run an economy centrally and pass along high living standards to everyone is completely false, but how many people understand that?