At long last a practical suggestion to deal with the economic consequences of the CV

From The Onion, of course.

This, however, not from The Onion, but seems related. It is a story you will see today, if you see it at all, and never again after: Former Senate Staffer Who Opposes Trump Accuses Biden of Sexual Assault.

Why anyone thinks this is newsworthy is completely beyond me.

John Stuart Mill on Laissez-faire

This is John Stuart Mill in his Principles of Political Economy, Book V, Chapter XI, Para 7 [Ashley edition p 950]:

Laissez-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil.

This is William D. Grampp in his Economic Liberalism: , Volume II: The Classical View, Chapter 3, titled “Liberalism in the Great Century” [New York: Random House 1965]. The chapter begins:

The nineteenth century usually is thought to have been the greatest age of economic liberalism, greater than any other, from its origins in Stoicism down to the present time. Economists think of the century as the long afternoon of the ideology. They believe it then meant laissez-faire and that laissez-faire was the policy of Great Britain, the major economy of the world. In fact, the century was not like that, and historians have tried to tell us so. They have reported the many ways in which the British government intervened in the market. The historians also have said the intervention was inconsistent with liberalism. In this, they are in my opinion, mistaken. (Grampp 1965: 73)

From the introduction to the chapter he continues with his first section on “The Importance of the Nineteenth Century”. He lists six reasons, this is the fourth:

“(4) The first effort to make a comprehensive statement on its principles was in 1848.” (Grampp 1965: 74)

1848 was the date of publication of the first edition of Mill’s Principles. He makes what he means absolutely clear on the following page:

“John Stuart Mill was the first to do this – to enunciate a theory of policy – and he did it in his Principles, which was published in 1848.” (Grampp 1965: 75)

He makes clear its significance in the very first para in which he discusses the notion of laissez-faire.

“1. The idea of economic liberalism, which had been gathering force for centuries, came to their full power in the nineteenth century…. Liberalism had many different meanings to these people. But one generalization can be made. To almost all who believed in it and to some who did not, liberalism did not mean laissez faire – that is, it did not mean a policy of non-intervention by the government and of allowing the major economic decisions to be made on unregulated markets. The rejection of laissez faire was one of the few ideas on which there was nearly complete agreement among the economists and between them and the political leaders.” (Grampp 1965: 74)

In that quote from Mill, the most important word is “unless”, “unless required by some great good”. His Book V is “On the Role of Government”, and in the 185 pages that follow he makes clear just how extensive he believed that role is.

First they clock you on the head, then they revive you and call it a “stimulus”

Economic theory is confused almost to nullity. Part of my Classical Economic Theory and the Modern Economy (available from June) is a detailed discussion how modern economics, particularly the macroeconomic side, has made it almost impossible to talk about economies in a way that makes sense because of the terms we now use. This latest proliferation of the term “stimulus” to refer to the efforts to minimise the harm inflicted on our economies by closing them down is an example that had not even occurred to me. It will now make its way into the final text. Here’s the definition of economic stimulus from the net:

 An economic stimulus is the use of monetary or fiscal policy changes to kick-start growth during a recession. Governments can accomplish this by using tactics such as lowering interest rates, increasing government spending, and quantitative easing, to name a few.

Whatever you might call what is being now done, it is not a “stimulus”. Even economists can no longer distinguish the present attempts to minimise the structural damage caused by government restrictions on the economy with an attempt to “kick start growth”. The plain fact is that they have no idea what they are doing although for a change they are doing the right thing.

But here is how it will have to end in about three months time when the Corona Virus is finally declared under control. They will have to raise interest rates a couple of percentage points to pull all of this money out of the system. It won’t take much of an increase but that will be crucial.

In the meantime they should cut wages among the non-essential members of the public sector by 20% at a minimum. I would do it on a permanent basis, but do it at least temporarily until the emergency is over.

Classical economic policy and the present recession

Whatever anyone might believe about the dangers of the Corona Virus, there is no doubt that the American economy, in fact every economy, will head into a recession. But as I have tried to explain, the downturn cannot be understood as due to a fall in demand as modern economic theory would have it but will be due to a massive structural shift in our economies. It is not that we will be buying less because we are saving more, but we will be buying not just less, because we will be producing less, but we will not be buying many goods and services we had been buying until concerns about the virus became so general. Lots of forms of production, such as air travel and restaurant meals, will experience a major contraction in demand because of the fears that certain activities are now forbidden or many people have self-isolated.

As every pre-Keynesian economist once knew,  recessions do occur but NEVER because a deficiency of demand. When they occur, they are the result of a structural shift in the underlying economy. We are now in the midst of one of the most profound shifts in the international economy ever seen. Just the restaurant trade is facing a major fall in demand, along with airline travel, tourism and lots of other parts of the economy. The structure of the economy is under immense stress. The downturn which is inevitable is due to a structural shift, not a fall in demand. Everyone once understood that. Since 1936, since the publication of Keynes’s General Theory, this then-universal understanding of why recessions occur has disappeared utterly from economic discourse. I used to think the pre-Keynesian conception was obvious, but have discovered to my amazement that virtually no one any longer understands this. We are all Keynesians now, except for a handful of others who have retained this older, now abandoned, approach. But what has amazed me now even more is that the approach taken by Donald Trump clearly takes a classical approach to dealing with the economic fall-out that is now inevitable.

Nothing will prevent a downturn now, but what must be done is:

(1) ensure those who are now being temporarily displaced from their paid employment are receiving cash in hand so that they can buy what they need,

(2) businesses must have an immediate fall in production costs along with cash injections so that businesses which will return to profitability after this disruption are able to maintain their cash flow and pay their bills not just so that they can stay in business but that so too can their suppliers

It is the structure of demand that needs to be preserved, not the level. The level of demand will fall, but the crucial issue is that the structure of demand will also be badly affected so that the underlying structure of supply is maintained. It is to maintain the structure of the economy that matters. It is maintaining the structure that is crucial, not the totality. Demand is constituted by supply and supply will be falling all over the place.

See the airline industry as a clear example. People will one day wish to fly as they have always done, but the airlines must be preserved in the meantime. Virtually every industry is in exactly the same position. No revenue at the moment to meet their costs, but a certain expectation that demand will return in the near future. The aim must now be to preserve as much as possible.

The photo above was taken while watching Fox with the proposed government approach stated as follows:

RPT:PROPOSED GOVT STIMULUS PKG WILL INCLUDE $1200 FOR SINGLE AMERICANS AND $2400 FOR COUPLES

As we think of things today, it has to be presented as a “stimulus” as if the aim is to raise the level of demand. It is, nevertheless, an approach to dealing with a structural shift in the economy, and the aim is to preserve as much of the economy as can be preserved for when things return to normal. The policy proposal is discussed here: GOP coronavirus stimulus bill unveils $1,200 checks for public.

“Recovery checks of up to $1,200 will be put into the hands of most taxpayers, providing cash immediately to individuals and families,” the Senate Finance Committee said in a statement.

President Trump requested that the legislation include the direct payments to boost consumer purchasing. The White House requested two $1,000 waves of checks to all taxpayers, but some Republicans viewed the idea skeptically.

On the business side, there is also this:

The package also includes $300 billion in small business loans, which would be forgiven if the firms don’t lay off workers.

Another $58 billion in loans would go to airlines suffering a demand plunge worse than after 9/11, with another $150 billion of loans and loan guarantees to other businesses.

This is obviously also intended as a means to maintain the structure of the economy, not as a “stimulus” to lift demand. Among the good luck of the moment is that the President is a former businessman who understands the problems facing business and what needs to be done immediately to minimise the long-term harm to the economy. I can only hope the same approach is taken across the world.

Having just finished the first round of editing of my next book, Classical Economics and the Modern Economy, let me recommend it to one and all once it is finally published in June. It is even possible that classical economic theory may once again come back into fashion. The benefit to our economies and future standard of living would be massive.

Leave as few financial scars as possible

Quite like this. No stimulus stupidities, just plain subsidisation for businesses whose trade has been throttled by Corona Fears. From Coronavirus: Big banks join business bailout.

The big banks are negotiating a multi-billion-dollar business rescue package with the Morrison government that could see taxpayers underwrite loans to small and medium-sized firms facing collapse, in a bid to avoid mass job losses and a deep recession.

The Australian understands the government is considering a loan guarantee to keep businesses afloat as part of Scott Morrison’s second-round economic rescue package, which could take the total government spend to more than $40bn….

The banks have been pushing for a version of the New Zealand model, which would involve cash payments to businesses to prevent them laying off staff. The banks favour the New Zealand scheme because of concerns that businesses may be reluctant to take on additional debt during an economic downturn.

The Bank’s approach seems to make a great deal of sense. Keep businesses afloat in a way that leaves no scars. Think of it as a form of war loan. Meantime, no increases in public spending.

Australia showing the way

The one area that I consistently believe PDT has it wrong. It is almost as certain that Powell is keeping rates up because he is trying to harm the American economy and PDT’s re-election prospects, but the US is better served with financial capital going to where it will earn a higher return. Higher rates deter lower productivity borrowers, although at the rates we find today, it hardly makes a difference.

John Stuart Mill at Econ Lib

This is the EconLib (The Economics of Liberty} online biography of John Stuart Mill. The greatest defender of freedom and liberty in history, this is what they come up with. They really have no idea about the economics of Mill or about the economics of freedom for that matter, but it is sadly par for the course in our day and age.

The eldest son of economist James Mill, John Stuart Mill was educated according to the rigorous expectations of his Benthamite father. He was taught Greek at age three and Latin at age eight. By the time he reached young adulthood John Stuart Mill was a formidable intellectual, albeit an emotionally depressed one. After recovering from a nervous breakdown, he departed from his Benthamite teachings to shape his own view of political economy. In Principlesof Political Economy, which became the leading economics textbook for forty years after it was written, Mill elaborated on the ideas of David Ricardo and Adam Smith. He helped develop the ideas of economies of scale, opportunity cost, and comparative advantage in trade.

Mill was a strong believer in freedom, especially of speech and of thought. He defended freedom on two grounds. First, he argued, society’s utility would be maximized if each person was free to make his or her own choices. Second, Mill believed that freedom was required for each person’s development as a whole person. In his famous essay On Liberty, Mill enunciated the principle that “the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.” He wrote that we should be “without impediment from our fellow-creatures, so long as what we do does not harm them, even though they should think our conduct foolish, perverse, or wrong.”

Surprisingly, though, Mill was not a consistent advocate of laissez-faire. His biographer, Alan Ryan, conjectures that Mill did not think of contract and property rights as being part of freedom. Mill favored inheritance taxation, trade protectionism, and regulation of employees’ hours of work. Interestingly, although Mill favored mandatory education, he did not advocate mandatory schooling. Instead, he advocated a voucher system for schools and a state system of exams to ensure that people had reached a minimum level of learning.
Although Mill advocated universal suffrage, he suggested that the better-educated voters be given more votes. He emphatically defended this proposal from the charge that it was intended to let the middle class dominate. He argued that it would protect against class legislation and that anyone who was educated, including poor people, would have more votes.

Mill spent most of his working life with the East India Company. He joined it at age sixteen and worked there for thirty-eight years. He had little effect on policy, but his experience did affect his views on self-government.

 
Let us in particular look at this: “Surprisingly, though, Mill was not a consistent advocate of laissez-faire.” Not only was he not a consistent advocate, he was no advocate of laissez-faire at all. No economist has ever been an advocate of laissez-faire, not Adam Smith, not David Ricardo, not anyone else. If you mean in all cases, leave it to the market, no one has ever advocated such a hands-off approach. Going further, Mill was an advocate of using government agency and regulation in a wide variety of instances. Yet his economics was the most hands-off approach to economic policy of any economist since the middle of the nineteenth century. This was from my own discussion of Mill that appeared on the EconLib website back in 2015: John Stuart Mill explaining what is wrong with Keynesian theory. My book on the economics of Mill will be published this year: Classical Economics and the Modern Economy.

This is overview of the book found on the Elgar website:

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.

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.

I never worry that anyone will be able to contradict me about Mill since the most certain statement I can make is that no one, but no one, has read Mill in the past fifty year to find out how an economy works, and virtually no one has read him sympathetically – other than myself and a handful of others – in over a century. But you do have to wonder about those who tell you about freedom and liberty who don’t read the author of On Liberty for some insights into how an economy works and his views on the role of government in making an economy work.

 

How to deal with the coming downturn in ways that will actually do some good

Here is the latest in idiotic advice on how to deal with the economic consequences of the Corona V: Scott Morrison ‘must ramp up stimulus to $60bn’. I keep thinking that there must eventually be an end to Keynesian stupidity and ignorance but it seems endless.

Here is what is happening. There is a major structural dislocation going on, some of which will be temporary and some of which will be permanent. The problem is NOT A LACK OF DEMAND. If you think it is, you are as economically clueless as it is possible to be. The problem is that some firms and industries are being clobbered by an unanticipated fall off in sales because, for example, if you are in the business of providing ocean cruises, there are going to be a lot fewer sales, and nothing in relation to increased demand will sell you a single additional ticket.

Some people are going to lose their jobs, either temporarily or permanently. There will be enormous uncertainty all across the economy. The only value a government might provide is to assist in the ADJUSTMENT PROCESS. Most assistance must be on THE SUPPLY SIDE, although there might be some value in assisting those who are being displaced from their jobs with a bit of income replacement.

Keynesians are a one-trick pony. The advice might have been useful in the 1930s when not only did unemployment rise to unprecedented levels but at the same time the price level was falling. It wouldn’t have worked then either, since what they did do was cut public spending and balance the budgets everywhere but in the US. And everywhere but in the US there was an almost instantaneous upturn. The Great Depression reached its trough in 1933, and then the General Theory was published in 1936.

If you are an economic advisor and you cannot tell the difference between a structural problem and demand deficiency then you are an incompetent. Please try to address the actual problem, and not some phantom issue that has not only never allowed an economy to emerge from recession but if applied now in these circumstance will only make things worse.

Mill’s Principles reviewed by Bonar in 1911

In 1911, James Bonar wrote a review on the publication of the Ashley edition of Mill’s Principles of Political Economy which was published in The Journal of Political Economy, titled: The Economics of John Stuart Mill. It perfectly summarises the consensus view of Mill’s economics at the start of the twentieth century, which shows just how far from the centre Mill’s economics had already by then moved.

If John Stuart Mill’s eminence is not supreme, it is great enough to make almost every utterance of his worth considering. His was rarely a hasty judgment; and what he says of his fellow-enthusiasts of the year 1825 might be applied to himself on most occasions: he never left a subject he had taken up until he had (to the best of his ability) untied every knot in it.

Another century later, there is virtually no economist who reads Mill today for instruction. And it’s not just their loss, we all lose because of the inanity of modern theory. It is the residuals from the economics of Mill and his contemporaries that allow our economies to limp along and innovation to continue. It was also interesting to discover how Mill came to write The Principles:

The success of the Logic drew him back into political economy by making the publishers willing (perhaps anxious) to print what they had refused before, namely, the Essays on Some Unsettled Questions in Political Economy, Mill’s part of the work projected in 1831 [he had originally intended to co-author a series of papers on economics which is why it was “Mill’s part”].

As he was setting out to write his Political Economy, he wrote the following to Auguste Comte in 1844:

I know what you think of the present political economy. I have a better opinion of it than you; but, if I wrote something about these things, I should never forget the purely provisional character of all its concrete conclusions and I should devote myself more especially to separating the general laws of production, necessarily common to all industrial societies, from the principles of distribution and exchange, which assume a particular state of society. Such a treatise could have a great provisional utility, especially in England.”‘ It might appear to you essentially anti-scientific; and it would be so as a matter of fact, if I were not taking great pains to establish the purely provisional character of every doctrine (about industrial phenomena) which made abstraction from the general movement of humanity. I think that if this plan is at all adequately executed it would give a scientific education (education positive) to many who are now studying social questions more or less seriously; and in taking as my general model the great and brilliant work of Adam Smith I should find good opportunities for spreading directly one or two principles of the new [positive] philosophy, as Adam Smith found them for spreading most often those of negative metaphysics in his social applications, yet without awakening dark misgivings by waving any flag.

I find this especially enlightening since quite a number of Mill’s views that have been superseded according to Bonar are views that I believe are of premier importance.

There are many details of economic doctrine in respect of which Mill has probably few followers now. Occasionally his positions, instead of being solemnly refuted, are quietly dropped as purely Ricardian. Many of the pages devoted to wages and profits are so treated. His particular form of Malthusianism has gone out of doors into the hands of an energetic sect of reformers. Without adopting the sweepingly adverse verdict of Jevons, we may admit that there is at once too much and too little in Mill’s Political Economy for most of us now. We should not confine wealth to exchange value, or believe that nothing remained to be added to the theory of value. We should not say that without competition there is no economics. We should not say so broadly that industry is limited by capital. We should not make so much of the distinction between productive and unproductive labor or try to prove that a demand for goods can never in any sound sense be a demand for labor. We cannot be induced to rank land, labor, and capital as co-ordinate factors in production, or to adopt Senior’s view that abstinence is rewarded in interest. We should probe further into the cause of interest. We might ratify the general principle of Malthus without making all progress turn on the practical recognition of it. We should be more chary than Mill in the use of the word ” laws.” We should not, all of us, admit that the “laws” of production were purely physical and the “laws” of distribution “of human institution solely.” Mill was probably aware that the abandonment by him in I869 of the wages fund carried consequences reaching into the heart of his arguments on profits and wages reducing them largely to useless dialectic.

But once we have removed Malthusian pessimism on population from the list, the rest of Mill’s judgements stand, even if few [no] modern economists any longer understand or subscribe to Mill’s position.

Much more to read at the link if these things interest you. But there is this one error that should be a reminder that no one can write anyone else’s life without error. This was the dates of Mill’s life stated by Bonar: “(May 20, 18o8, to May 8, 1873)”. Mill was, in fact, born in 1806.

“No permanent additional employment can be created by State expenditure”

A review of the following book was put up on the Societies for the History of Economics online discussion thread:

Robert W. Dimand and Harald Hagemann, editors, The Elgar Companion to John Maynard Keynes. Cheltenham, UK: Edward Elgar, 2019. xxi + 648 pp. $250 (hardcover). ISBN: 978-1-84720-008-2.

Reviewed for EH.Net by Bradley W. Bateman, Randolph College.

To get the flavour of the review, this was its first line:

Rarely does one read a reference work for pleasure. After all, would you take the Encyclopedia Britannica or the New Palgrave to the beach for your holiday? Not likely. And yet, there are reference books that one not only depends on, but enjoys. These might be surveys of the literature such as G.C. Peden’s little gem, Keynes, the Treasury, and British Economic Policy (1988); or they might be traditional multi-volume works like the Dictionary of National Biography. A good reference work can take many forms; but when you find a well-written and authoritative work that can help you in your research, you turn to it regularly and, yes, can even come to enjoy it.

I therefore wrote a note to put my own perspective forward.

I hear all the time that Keynesian economics has been transcended, that it is a thing of the past, but the evidence, both from the way our textbooks are written and in the way policy is conducted across the world, is that the very core of macro theory and policy remains Y=C+I+G. I am in no doubt that this collection is indeed a valuable collection in that it consolidates a great deal of writing on Keynesian economics and its history into a single volume. Yet the issue for me remains, that economists continue to trundle down this Keynesian path without the slightest evidence that it accurately explains how economies work, or that there has ever been a single instance where a Keynesian fiscal expansion has actually succeeded in bringing an economy out of recession and restoring full employment. You might have hoped that the failure of every stimulus in the world to succeed following the GFC might have created some kind of learning experience, but so far there is little evidence that economists are even beginning to rethink these macro models. Since the bibliography includes G.C. Peden, I will add in my favourite quotation from his writings, and leave it at that. And what this quote shows is that 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, as it has been every time a “fiscal stimulus” has been tried. Winston Churchill was the British Chancellor of the Exchequer and this is from his Budget Speech in May 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)

I just wonder whether this volume has an entry on Critics of Keynesian Economics. I doubt that it does, but in any case it would undoubtedly and unfortunately have to be a very short entry.

So far no rejoinder to my response, but will let you know if there ever is.