My major presentation at FreedomFest was on Keynesian economics, using the same title as this post. There was lots more than this quote below from Hutchison written when Keynesian theory was unchallengeable at the risk of one’s entire career as an economist, but he did repent – mostly – later on. Here he is quoting John Stuart Mill to show how absurd classical beliefs were. But this is also what every economist in the nineteenth century believed, and then right up until 1936. No one, except a handful of others today, now believe what was absolutely mainstream. Not only that, they cannot understand the reasoning, and it definitely was not because they thought recessions never occurred or they ended almost as soon as they began.

Say’s law is the proposition that recessions are never caused by a deficiency of demand and that recessions can neither be brought to an end or employment levels improved by an increase in aggregate demand. The typical way in which this conclusion was expressed was to state that overproduction is impossible, that demand deficiency is never a valid explanation for recession and mass unemployment. Although completely siding with Keynes, these issues are thoroughly discussed by Hutchison (1953), where the proposition is examined through the writings of John Stuart Mill who was writing in 1848.

“The idea [wrote Mill] ‘that produce in general may, by increasing faster than the demand for it, reduce all producers to distress,… strange to say, was almost a received doctrine as lately as thirty years ago; and the merit of those who have exploded it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity’….

“Mill again agrees that in fact in commercial crises ‘there really is an excess of all commodities,’ which is a regular though transient phenomenon; but on the other hand, ‘it is a great error to suppose with Sismondi that a commercial crisis is the effect of a general excess of production’.” He goes on to denounce the latter notion (but not of course the former) as being (all in one paragraph) ‘ a chimerical supposition’, ‘ a confused idea’, ‘essentially self-contradictory’, ‘a fatal misconception’, ‘a fatal error’, and ‘a veil not suffering any one ray of light to penetrate’. Finally, he makes a pronouncement (later faithfully quoted by Fawcett) affecting the whole shape and task of political economy:

“The point is fundamental; any difference of opinion on it involves radically different conceptions of political economy, especially in is practical aspect. On the one view, we have only to consider how a sufficient production may be combined with the best possible distribution; but on the other hand there is a third thing to be considered – how a market can be created for produce, or how production can be limited to the capabilities of the market.”[Principles, Bk. III, Ch. XIV, para 4.]” (Hutchison 1953: 349-352)

This “chimerical proposition” is now mainstream and has been since 1936, with a major role for economic policy to determine “how a market can be created for produce”. I consider this as absurd as Mill had thought of it, but there is virtually not an economist alive today who agrees with Mill or myself.

Mill was right, and modern Keynesians are wrong, which really means that the whole of modern macro is wrong. It’s like believing that the earth is at the centre of the universe, but that is how it looks. Nevertheless utterly wrong, but you with certainty do not even know what a classical economist believed or how they thought the business cycle began and ended.

I realise that the Coalition, being from the right side of the political divide, are supposed to know something about how to run an economy, but I fear the evidence is very thin on the ground. And I know the RBA is supposed to be arm’s length from actual policy determined, but I have a feeling the PM and his economic ministers are absolutely onside with this: Rates could fall as low as 0.5% amid warnings of GFC-like slowdown.

Incompetent doesn’t even get near it. Incoherent and ignorant comes closer. Peter Costello was blessed with Glenn Stevens. Now we have this:

Official interest rates could be slashed to just 0.5 per cent to deal with an economy growing at its slowest since the depths of the Global Financial Crisis, markets and economists have warned as investors bet the economy needs more financial support.

Economists at JP Morgan on Wednesday became the first to predict the Reserve Bank of Australia will eventually take the cash rate to 0.5 per cent in a bid to protect the national jobs market and drive growth.

I am not going to try to explain the stupidity of this kind of policy in a blog post. So I will only make a couple of suggestions to our new government. First, talk to Peter Costello. I know, he’s from a different planet and what would he know about running an economy? However, he did set up conditions for a decade long era of extraordinary growth until we hit the GFC at the same time that Kevin Rudd was our PM. If you want to understand why we are now dealing with “an economy growing at its slowest since the depths of the Global Financial Crisis” you have to understand why public spending and low interest rates cannot and will not provide an economy with momentum of any kind.

The second suggestion is that someone provide the Treasurer with a copy of my book: Free Market Economics. It’s now in its third edition, but as a reminder of its message, the second edition of the book was launched by Peter Costello. This is what the book is about.

Key Features include:

* analysis derived from the theories of pre-Keynesian classical economists, as this is the only source available today that explains the classical pre-Keynesian theory of the business cycle
* a focus on the entrepreneur as the driving force in economic activity rather than on anonymous `forces’ as found in most economic theory today
* introduces a powerful though simplified model to explain the difference between modern theory of recession and classical theory of the business cycle
* great emphasis is placed on the consequences of decision making under uncertainty
* offers an introductory understanding, accessible to the non-specialist reader.

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.

Free Market Economics, Third Edition will help students and general readers understand classical economic theory, written by someone who believes that this now-discarded approach to economic thought was superior to what is found in most of our textbooks today.

If you actually believe that lower interest rates will promote economic growth, read the last two chapters to find out the harm that this kind of approach is guaranteed to cause. It is the only anti-Keynesian textbook on the market. After a decade of Keynesian failures, isn’t it time to consider something else?

WHERE TO BUY FREE MARKET ECONOMICS: I have had a request, for which I am very grateful, about where to find a copy of Free Market Economics, and the one certain place is from the publisher, Edward Elgar.

The book is also not very expensive so far as textbooks tend to go. It was never my intention to turn publishing into a money-making project – which I have truly succeeded at – and the price of the book has been kept as low as possible from the start. In this I was assisted by the publisher so that my text became the first publication of theirs that was published from the start in both a hardback and a cheaper paperback edition. No one ever in my memory ever bought the hardback edition, but what I also found interesting was that no one also ever asked the author to sign their copy of the book.