Category Archives: Economic theory and policy

How to describe my next book

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This was the outline of my next book that has been proposed to me by the publisher.

‘Classical Economic Theory and the Modern Economy’

Exposing the zenith of analytical power and depth of understanding that economic theory reached in the middle of the nineteenth century, this book discusses the importance of John Stuart Mill and his contemporaries. Steven Kates explains what took place in the ensuing Marginal and Keynesian Revolutions that hindered economists’ understanding of how economies truly operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, providing a route into the theory they developed. Kates offers a theoretical understanding of the operation of an economy within classical economic theory by classical economists, providing a new perspective for viewing modern economic theory from the outside. This provocative book also not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’ pathway in writing The General Theory.

A crucial read for economic policy-makers seeking to better understand the key policies needed to generate economic recovery, this book will also be of keen interest to economics and economic history scholars. It offers an alternative theory to modern macroeconomics for those studying economic theory and policy.

OK, but not what I think is needed. This is what’s needed.

‘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.

If that’s your interest, then you should certainly read this book.

Mainlining classical economic theory

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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:

  • Thomas Aquinas of the 13th century;
  • the Scottish Enlightenment thinkers, such as Adam Smith of the 18th century;
  • the Neoclassical school of the early 20th century
  • thinkers in the last few decades, including 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 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 nevertheless 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.

Inflation and its consequences

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As you read this, remember that “inflation” in pre-Keynesian times did not mean a rise in the price level but an increase in credit and money. Sometimes prices also rise but sometimes they do not which is why Mises describes a rise in prices as the consequence of inflation. With the advent of Keynesian economics, the very fact that a Keynesian policy was by definition inflationary had to be discarded, so inflation just turned into a rise in the price level, with the mechanism no longer mentioned. This is from, Ludwig Von Mises: The Theory Of Money And Credit. And while it’s about money and credit, the argument is really about Keynesian macro which I have attempted to highlight by bolding certain passages.

…the advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters. The undesirable but inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext…The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In spreading discontent and social unrest, inflation generates favourable conditions for the subversive propaganda of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two decades has offered has been really amazing. Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and ‘expansionist’ monetary and credit management as the surest way towards prosperity, steady progress, and economic improvement. But the same governments and their henchmen have indicted business for the inevitable consequences of inflation…they blamed private enterprise for charging outrageous prices and profiteering…And millions of voters have swallowed all this.

There is need to realize that the economic policies of self-styled progressives cannot do without inflation….Monetary policy is considered – wrongly, of course – as an instrument for keeping wage rates above the height they would have reached on an unhampered labour market…for many years there has been little opposition to credit expansion for the sake of ‘creating jobs’, i.e. for providing business with the money needed for the payment of the wage rates which the unions, strongly aided by the government, force business to grant….

Inflation and credit expansion are the means to obfuscate the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends…One of the foremost concerns of all parties hostile to economic freedom is to withhold this knowledge from the voters. The various brands of socialism and interventionism could not retain their popularity if people were to discover that the measures whose adoption is hailed as social progress curtail production and tend to bring about capital decumulation. To conceal these facts from the public is one of the services inflation renders to the so-called progressive policies. Inflation is the true opium of the people administered to them by anti-capitalist governments and parties.

Excerpt from Ludwig Von Mises. “The Theory Of Money And Credit” (1953)and posted on a previous thread by David Brewer.

Geoff Mann in a Marxist critique of Keynesian economics

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The video is found at the book launch of Geoff Mann’s In the Long Run We are All Dead.

Geoff Mann lives in Vancouver, where he teaches political economy and economic geography at Simon Fraser University, and he directs the Centre for Global Political Economy.

In the ruins of the 2007–2008 financial crisis, self-proclaimed progressives the world over clamoured to resurrect the economic theory of John Maynard Keynes. The crisis seemed to expose the disaster of small-state, free-market liberalization and deregulation. Keynesian political economy, in contrast, could put the state back at the heart of the economy and arm it with the knowledge needed to rescue us. But what it was supposed to rescue us from was not so clear. Was it the end of capitalism or the end of the world? For Keynesianism, the answer is both. Keynesians are not and never have been out to save capitalism, but rather to save civilization from itself. It is political economy, they promise, for the world in which we actually live: a world in which prices are sticky, information is asymmetrical, and uncertainty inescapable. In this world, things will definitely not take care of themselves in the long run. Poverty is ineradicable, markets fail, and revolutions lead to tyranny. Keynesianism is thus modern liberalism’s most persuasive internal critique, meeting two centuries of crisis with a proposal for capital without capitalism and revolution without revolutionaries.

If our current crises have renewed Keynesianism for so many, it is less because the present is worth saving, than because the future seems out of control. In that situation, Keynesianism is a perfect fit: a faith for the faithless.

Far-left, all about Hegel and Marx, but not an ounce of economic understanding from what he has to say. But the book is coming and will see what we find then. His conclusion is that “poverty is produced by the system itself”. This is the kind of drongo idiocy only a self-satisfied utterly pampered member of the academic bourgeoise would believe.

Facebook and pornography cannot just be left to the market

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Here’s one way to discredit the market system:

The great The clueless Arnold Kling asks the question:

I am sick of reading about people who want to regulate Facebook. You didn’t come up with the idea. You didn’t build the business. Now that it’s here, who the heck do you think you are telling them how to run it?

There is not a business in the world anywhere in the present or at any time in that past that is not and was not regulated by government (see the toothpick industry for a salient example). It is sometimes done well and sometimes with devastating consequences. At the present moment in most market economies, the level of regulation is heavy-handed and could use greater restraint. But to imply that because a business has been set up by some private entrepreneur that there is nothing further to be said by the community via its government shows such a lack of sense that I can barely believe this was a genuine quote.

Let’s therefore have a look at another area of the business community that has just come to our attention: A Group Of Republicans Want The Government To Start Fighting Hardcore Pornography. They’re Right. Here’s Why.

As National Review reports, a small group of Republican lawmakers have sent a letter calling for Attorney General Bill Barr to enforce obscenity laws as a way to fight hardcore pornography. Representative Jim Banks of Indiana explains that pornography causes measurable harm in a number of significant ways.

Who can deny it? And speaking of Facebook and pornography, as it happens this was the front-page story in The Australian just yesterday: Facebook fuelling avalanche of child sex abuse.

Facebook was responsible for nearly two-thirds of the 18.4 million worldwide reports of child sexual abuse material last year, as a new international threat assessment warns of a looming ­“tsunami” of online child abuse and exploitation in 2020.

The report found publicly ­accessible social media and communications platforms were the most common place for meeting and grooming children online. It warned that the nearly 12 million incidents of child sexual abuse material reported by Facebook Messenger were likely to be the tip of the iceberg.

Regulation is a balancing act, but this is a cesspool that most people will agree that something needs to be done, even if Arnold is not one of them. There was then this, also in The Oz: Google hit for billions but EU chief regrets not going harder.

A European competition chief who imposed fines of more than €8bn against Google says she should have been “bolder”, as the Morrison government moves to respond to the Australian regulator’s report into the tech titans.

Treasurer Josh Frydenberg and Communications Minister Paul Fletcher are on Thursday to ­announce the government’s ­response to the Australian Competition & Consumer Commission’s digital platforms inquiry released six months ago.

“There are privacy issues, consumer protection issues, competition issues, a lot of media policy issues, and so we are obviously working through our response on that,” Mr Fletcher said.

His comments came after ­European Competition Commissioner Margrethe Vestager said with hindsight she would have taken a different line with Google despite imposing massive fines after a decade-long investigation.

“If I knew then what I know now I would have been bolder,” Ms Vestager said.

For me it’s their disgusting political bias that riles me the most, but there are other things as well that are also clearly important.

And then there’s this, from our ABC even, which you can tell by the snide leftist presenter who is even more unctuous than normal, and that is truly saying something. But the story is truly interesting, bias or no bias.

“By now we should realise that we can’t really trust Facebook.”

How to get high marks at University

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Amongst my friends from economics classes these decades ago, the one who always got the highest marks – and not just because he understood this stuff better than the rest of us – was the one who took the fewest notes. He would write down only what the lecturer said more than once, got the wording exactly right, and would then be sure to write these words back on the exams. A superior strategy which I am reminded of by reading this: How to Cope With Your Prof’s Left-wing Bias. It wasn’t at the same level as today, although possibly no one really noticed since we were all Keynesians then (and therefore all socialists). But here’s the advice:

To get the best possible grade, students may need to pander to their professors’ left-wing ideology.

Professors are much more likely to be progressives than they are to be moderate or conservative. Law professors are no exception. Progressive professors view progressive views as a sign of intelligence, and conservatism as a sign of stupidity. For example, Prof. Robert Brandon, head of Duke University’s philosophy department, argued that conservatives are rare in academia because they are stupid.

He is talking about law, but it applies in all the humanities and social sciences, and absolutely in economics. Just ask yourself, how bizarre is it that virtually all academic economists (along with their idiot graduates) are socialists of one kind or another. Same everywhere, but among economists it is the greatest disgrace since they are supposed to know how an economy works, and if you are a socialist who never discusses the role of an entrepreneur you clearly do not.

Productivity is dead

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Just got to the AFR at the end of the day, and what do we find: Falling productivity numbers cloud economic recovery. The headline front-page story too.

The weakest productivity numbers in at least 25 years have unsettled the outlook for an economic recovery, a pick-up in wage growth and a string of budget surpluses predicted by the Morrison government and the Reserve Bank of Australia.

Former Productivity Commission chairman Gary Banks said that while he was cautious about the poor productivity reading, it “caps off what has been consistently weak productivity performance” in Australia and the serious need for structural reform to lift economic output.

“Trying to stimulate demand through monetary and fiscal measures won’t cut it, I’m afraid, and these pose risks of their own,” Mr Banks said. “The causes of [economic weakness] require regulatory and other reforms to enhance the supply side of the economy.”

Public sector spending is notoriously non-value-adding. You can have all the fake GDP growth you like, building train lines in Melbourne and streetcars in Sydney, and who know what everywhere else, but if they do not repay their production costs in higher levels of output, they are taking your economy backwards. And like with the trains and the trams, since neither is even carrying a single passenger as yet, there is absolutely nothing on the ground taking place that creates any value whatsoever. All for very classical reasons, but you’d have to read Mill and not Mankiw to see the point.

Liked this bit too, also for very classical reasons:

While the figures are likely to reflect strong jobs growth at a time of weakened economic activity, including a drop in farm production because of the drought, many economists blame structural problems, such as a distinct lack of business investment, especially outside the resources sector.

My favourite line from Mill, the most radicalising phrase I ever read, was “demand for commodities is not demand for labour”. To translate: there is no connection between the level of demand and employment. With real wages there is a major connection, but with employment none at all.

Economics is stale and worthless

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This is the abstract for a paper on “The Focus of Academic Economics: Before and After the Crisis”.* As is quite obvious from watching Treasuries and central banks around the world, no one learned a thing. In fact, no one even tried to investigate. Economics as now taught is stale and worthless.

Has the global financial crisis of 2007ff had a visible impact on the economics profession? To answer this question we employ a bibliometric approach and compare the content and orientation of economic literature before and after the crisis with reference to two different samples: A large-scale sample consisting of more than 440,000 articles published between 1956 and 2016 and a smaller sample of 400 top-cited papers before and after the crisis. Our results suggest that unlike the Great Depression of the 1930s the current financial crisis did not lead to any major theoretical or methodological changes in contemporary economics, although the topic of financial instability received increased attention after the crisis.

Moreover, given the dating of the papers examined, no one has learned a thing from the absence of a recovery anywhere in the world in the decade following the GFC. Of course, what they learned after the Great Depression was Keynesian economics, which was a universally-understood fallacy among the entire mainstream of economic theory before 1936, accepted only by Marxists and economic cranks, but I repeat myself.

I might mention that I have just been sent the book description being used by my publisher for my next book which is on classical economics and how to understand it.

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.

On this, let me again quote Senator Cameron from when I appeared before the Economic References Committee in 2009.

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?

Best question ever. My book will provide the answer.

* Ernest Aigner (Vienna University of Economics and Business); Matthias Aistleitner (Johannes Kepler University); Florentin Glotzl (Vienna University of Economics and Business); Jakob Kapeller (Johannes Kepler University). “The Focus of Academic Economics: Before and After the Crisis.”

The ABC is ecstatic: “free market capitalism is facing a challenge”

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From the economically-illiterate ABC: Modern monetary theory is gaining traction. But can it knock out free market capitalism? Socialist grifters that they are, they have zero understanding how wealth is created and therefore think it’s just there to be parcelled out by governments, the same way the ABC is funded. Let’s listen in to their profoundly ignorant discussion:

MMT points an accusing finger at Neoliberalism, blaming it for rising economic inequality and corresponding reductions in the quality and scope of essential services — both public and privatised.

MMT’s proponents argue that the current “surplus obsession” is at best misconceived and at worst ideological — a deception to justify reductions in government spending in order to fund taxation cuts for the wealthy.

They argue that governments shouldn’t be afraid of pushing the economy into deficit if that deficit helps fund further economic growth.

Ah yes, the deficit. Who’s afraid of deficits today? Trillion-dollar deficits as far as the eye can see, and hardly a voice of caution to be heard. E.g.

Democrats have a strong policy basis for their position. Early this year, the two most prominent Democratic economists — former Treasury Secretary Larry Summers and Jason Furman, chairman of the Council of Economic Advisers, both under Barack Obama — wrote an influential article citing structural declines in interest rates. This means that “policymakers should reconsider the traditional fiscal approach that has often wrong-headedly limited worthwhile investments in such areas as education, health care and infrastructure,” they said.

“Politicians and policymakers should focus on urgent social programs, not deficits,” they advised.

Keynesian airheads every one of them. Then this: Corporate debt nears a record $10 trillion, and borrowing binge poses new risks. Did they say “risks”? What sort of risks would these be?

The root cause of the debt boom is the decision by the Federal Reserve and other key central banks to cut interest rates to zero in the wake of the financial crisis and to hold them at historic lows for years.

The low rates were needed to encourage companies to invest and hire as the nation recovered from the worst economic collapse in 70 years.

Cutting interest rates is the standard answer to a troubled economy. But rates have never been this low for this long, and the side effects from too much easy money are becoming clear as central bankers struggle to return interest rates to traditional levels.

Since it’s the Washington Post it is looking for the gloomy side in the story, but for a change I agree with them and not the President.

An artificial environment of near-free money is masking serious underlying ailments and may be storing up problems for a future reckoning. This era of perpetually cheap money has kept alive some debt-ridden “zombie” companies that would have failed if rates were at traditional levels; widened the wealth gap between rich and poor; and distorted financial decisions.

The dangers are immense but between MMT and the traditional Keynesian ignoramuses, there is virtually no one around to turn things around.

But if you want to know what needs to be done, don’t bother with the ABC.

Ever wonder why real wages are falling?

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METRO TUNNEL COSTS COULD BLOWOUT TO $3B
A messy fight is looming over who will pay the huge extra costs of the Metro Tunnel, with the Andrew Government reportedly warned the total blowout of..

The Metro Tunnel is Victoria’s very own NBN, although there are quite a few others like it but not quite as draining although very bad as well. There was the desal plant, and the billion spent on the Miki Card, getting rid of level crossings in the city, others too, but this one is big big time. Infrastructure spending at its absolute stupidest. The above story is a snippet from the H-S this morning.

There are economic idiots everywhere, but the biggest ones are the ones who think government infrastructure projects like this are good for the economy. Even the Premier is beginning to see what a black hole this is. Construction everywhere you turn in the City, whole city blocks turned into construction sites, billions of dollars being spent, and not a dollar’s worth of actual value-adding output anywhere to be seen. We are looking here at immense costs, for which there will NEVER be a single cent of profit ever earned.

Keynesian economics was once only about getting an economy out of a recession. Now it’s about massive and permanent deficits coupled with massive and permanent forms of public waste. Now they have overrun their original costs to $3 billion, but there is more than just the tunnel that comes with all of this. Victoria is bankrupt in the same way that economic theory is bankrupt. I was just up in Sydney and they are about to finally start running their idiotic streetcars down George Street. That, too, will never turn a dollar of profit, which means it will never ever repay its costs in the benefits it provides. Pure waste but presented as a public benefit. My biggest query is always why isn’t this obvious?

Modern economic theory is a disaster for anyone whose government believes any and all of it. Public spending has its role, but is a drain on an economy’s productivity. Oddly because of the Keynesian nature of the National Accounts, all of this will show up as growth in GDP even though it is nothing of the kind. And there will be many people employed, except not employed on projects that will add to the economy’s net level of real production. They are not value adding. They may create a dollar’s worth of value, but for each dollar of value created it will cost much much more than a dollar. Why does this make sense to anyone?