Let me add a few words about William Baumol who has just passed away at the age of 95 which is very good going. He truly ought to have won the Nobel Prize in Economics. But what I would like to add to the record is what a truly great academic he was to the full extent of the meaning of the word and in the most positive way one can imagine. It was at the start of my work on Say’s Law back in the 1980s that I came across an article written in 1952 by two of the all time greats of economics, William Baumol and Gary Becker, on “The Classical Monetary Theory: The Outcome of the Discussion”. And whatever you might think from the title, it is about Say’s Law, end to end. And in that article, they craft what has become the modern sophisticated version of Say’s Law which is the division of the concept into Walras’ Law, Say’s Identity and Say’s Equality. I don’t think that’s right, but it was the time of high Keynesianism and it was not worth anyone’s career to criticise Keynes, and so they used someone by name of Lange as the stand-in in an article entirely devoted to showing that the arguments found in The General Theory n Say’s Law were baseless.

While Becker never came back to this issue, Baumol did. In 1977 he published an article on “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant”. Both articles were important parts of my thesis, and I therefore wrote an article critical of Baumol on his explanation of Say’s Law. My supervisor then said that I should send Baumol a copy before I sent it off for publication which I did. And then – and this is the most surprising thing from an academic point of view – I received an exceptionally nice reply from Baumol to say that he had enjoyed my article but didn’t think I had actually understood him correctly. The details are now completely gone of what and why, and there is no doubt that I do not agree with the Becker and Baumol conclusion, but I also agreed with Baumol that whatever I had been saying was not accurate. So I thanked him for his interest and didn’t even try to publish the article.

But eventually I ended up in a dispute with someone else over Say’s Law and this led to my being invited by the Eastern Economic Journal to lead a symposium. I therefore asked Baumol, along with Mark Blaug and the original person who I had been in disagreement with, to contribute to this symposium, for which I wrote the opening and closing articles. My opening was titled: On the True Meaning of Say’s Law. And while I have refined some of it, I would stand behind everything I wrote at the time.

Baumol in his contribution added to his own previous work. This is the abstract from his article which I can only find here (but it is actually Baumol’s 1977 article that is attached Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant). This is the abstract:

Part of a Symposium entitled, “Say’s Law Revisited,” this note is dedicated to showing that both Say’s and Ricardo’s concerns about unemployment were deeper than even the Kates article (in this symposium) suggests, that this concern even led Say to advocate a clear Keynesian remedy for unemployment: public works. Correspondingly, the paper shows that Ricardo’s disquiet about joblessness constitutes a good part of his reversal on the role of machinery (i.e., innovation) that so distressed his adherents.

I eventually did meet him personally and the impression that I had had in our correspondence that he was a very kind, good natured and sweet individual, as well as being as sharp and analytical as one might wish, was more than confirmed in the three quarters of an hour he gave me of his time. And by the time we met, there was no doubt in his mind how opposite to pretty well everything he thought about macroeconomic theory and Say’s Law I am. He was nevertheless everything one could have hoped him to be both as an academic and a human being. I therefore wished to add my own tribute based on my own brief encounters with one of the truly great economists of our time.

I’m afraid you can talk about debt and deficits to the end of time but unless you understand that the true enemy is macroeconomic theory with its emphasis on aggregate demand your chances of success are approximately zero. This is the equation of economic death: Y=C+I+G+(X-M). If this is not the focus, then things will just continue as they are until the crash comes and no one is willing to lend to us any more. Two bits from today.

First there was Jennifer Oriel with her Budget 2017: forget the fake patriotism and get working on debt. She sees the point, I suppose, but where is her full-blooded attack on the underlying theory? This is her hardest para but it is hardly a call to arms.

If the government drifts away from fiscal conservatism and ­engorges itself on the elusive promise of growth, it risks driving Australia off the fiscal cliff. It must downsize to reduce debt and ­repair the deficit. It could begin by cutting the morbidly obese ministry down to size. If the Coalition’s patriotism is more than mere rhetoric then it must make plain the case for an Australia-first budget by simplifying the taxation system, dropping the spin and putting the national interest first.

And then there was marcus with his terrifying statistics and historical record. This is a major public service: What did we get for our $400 billion loan? It really is the most blood-curdling analysis I have come across except that other than a few of us out here on the periphery, no one’s blood has been curdled. You really should read it, but my guess is that with aggregate demand at the core of economic theory, the general belief is that this debt and spending has saved us from a fate far worse than our current levels of debt.

Completely wrong, but we still have a lot of capital to run down before we truly hit the skids. So along the way we will put Labor back in who will blame it on Malcolm, or at least Tony. If you do not understand that the problem is the economics of Keynes and the theory of aggregate demand deficiency, you are not even at first base in understanding what needs to be done and why.

It is an anti-Keynesian article so I won’t complain a lot, but still it does get me down that no one any longer has much of a clue why public spending depresses economic growth. And it’s not as if Keynes wasn’t crystal clear about his own intent. His aim was to remove Say’s Law from within the midst of economic analysis. That he has most comprehensively done. Since only if you understand Say’s Law will you understand what’s wrong with Keynesian economics, and indeed all of macro and the policies that come with it, you will never get policy right until you see the point the classical economists made.

The article is Budget 2017: This is not the time to turn to Keynes and let me say how much I agree with this:

That brings us to the most contentious budgetary option of cutting government expenditure. By crude Keynesian closed economy logic, enthusiastically embraced by Kevin Rudd, Wayne Swan and federal Treasury during the GFC, reduced spending can be recessionary. But this is debatable in theory for an economy like Australia that is open to international trade and capital flows. It is also at odds with real world evidence.

Economic history is replete with examples of “expansionary fiscal contraction”. For instance, there were no economic downturns following the significant spending cuts undertaken by treasurers Paul Keating and Peter Costello in the 1980s and 90s; quite the contrary. More recently, Ireland has emerged as one of the ­strongest performing economies in Europe after severe public spending cuts.

Keynesian economics is also at odds with sound theory, or at least the theory that existed from the time of Adam Smith until the publication of Keynes’s General Theory in 1936. It has nothing to do with closed economy or open, nor whether we are a trading nation or not. It is that unproductive non-value-adding public spending drags an economy down (think NBN, pink batts and school halls). That is Say’s Law. That is what you need to understand.

I picked this up at Andrew Bolt which reminds me why I tend not to read the papers any more. The article is quite accurate and important – Living standards in decline as real wage growth stagnates. The problem is that we are never told why it is, and I suspect it’s because most economists cannot work it out since they are all Keynesians.

Nothing about the deadness of our economies worldwide has surprised me since I wrote on The Dangerous Return to Keynesian Economics back at the start of 2009. You can either find the explanation for how badly our economies have gone since the stimulus in John Stuart Mill’s Principles first published in 1848, or my own Free Market Economics, for which the third edition is coming out in June. Where else you can find a modern classical critique of Keynesian theory I could not tell you since I don’t think any other such book exists.

MAGICAL THINKING UPDATE: This article came up in conversation this morning, by Peter Martin in The Age: The Dark Side of Harry Potter could transfer to our world. It begins:

John Maynard Keynes is one of the most important people who ever lived. His conviction that governments should spend up when things turn down saved lives and probably saved capitalism.

Aside from the fact that The General Theory was published in 1936 and the Great Depression ended in 1933 and therefore could not have saved capitalism, Keynesian economics has blighted lives endlessly across the world since it was published since for those economies that did not begin as market economies, the belief that public spending will create growth has led to a fantastic reduction in living standards wherever such demand-side policies have been applied. Same again although in a somewhat milder form where market-based systems had already been established. If you think Keynesian theory has any answers to our economic problems you are more into magical thinking than even Harry Potter himself.

This is from an article on “The New Deal” written by H.L. Mencken in May, 1935 and published in A Mencken Chrestomathy [Vintage Books New York 1982: pages 424-25]. It discusses how the first application of Keynesian economics by the Roosevelt Administration came about even before The General Theory had been written. The article begins with excerpts from two articles in The New Republic and The Nation describing how FDR’s closest advisor, Harry Hopkins, in collaboration with three others, came up with the idea of massive increases in public spending to bring the Depression to an end. Although tentative in approaching Roosevelt about such a massive spending program without even having done the slightest bit of analysis, he expected Roosevelt to be reluctant about spending such immense amounts of money, all the more so since Roosevelt had committed himself to balancing the budget. That was not, however, how it went.

[Hopkins] expected to be told to develop the idea and come back with a fuller outline. He still expected that when he left the White House that evening. But it so happened that he had caught the New Deal Messiah in one of his periods of infatuation with the spending art, and Hopkins literally woke up the next morning to discover that Roosevelt without further ado had proclaimed the CWA* in effect.

It is now more than two years later. Mencken is here looking back on the fantastic amounts of spending and the effect such spending has had.

The money began to pour out on November 16, 1933, to the tune of a deafening hullabaloo. By December 1 more than 1,000,000 were on the CWA pay roll; by January, 1934, the number reached 4,100,000. Press agents in eight-hour shifts worked day and night to tell a panting country what it was all about. The Depression, it was explained, was being given a series of adroit and fatal blows, above, below and athwart the belt. In six months there would be no more unemployment, the wheels of industry would be spinning, and the More Abundant Life would be on us. Brains had at last conquered the fear of fear.

What actually happened belongs to history. By the opening of Spring Hopkins had got rid of his billion, and the whole thing had blown up with a bang. More people were out of work than ever before. The wheels of industry resolutely refused to spin. The More Abundant Life continued to linger over the sky line. There ensued a pause for taking breath, and then another stupendous assault was launched upon the taxpayer. This time the amount demanded was $4,880,000,000. It is now in hand, and plans are under way to lay it out where it will do the most good in next year’s campaign.

Go back to the clippings and read them again. Consider well what they say. Four preposterous nonentities, all of them professional uplifters, returning from a junket at the taxpayer’s expense, sit in a smoking car munching peanuts and talking shop. Their sole business in life is spending other people’s money. In the past they have always had to put in four-fifths of their time cadging it, but now the New Deal has admitted them to the vaults of the public treasury, and just beyond the public treasury, shackled in a gigantic lemon-squeezer worked by steam, groans the taxpayer. They feel their oats, and are busting with ideals. For them, at least, the More Abundant Life has surely come.

Suddenly one of them, biting down hard on a peanut, has an inspiration. He leapt to his feet exultant, palpitating like a crusader shinning up the walls of Antioch. How, now, comrade, have you bitten into a worm? Nay, gents, I have thought of a good one, a swell one, the damndest you will ever heard tell of. Why not put everyone to work? Why not shovel it out in a really Large Way. Why higgle and temporize? We won’t be here forever, and when we are gone we’ll be gone a long while.

But the Leader? Wasn’t he babbling again, only the other day, of balancing the budget? Isn’t it a fact that he shows some sign of wobbling of late – that the flop of the NRA has given him to think? Well, we can only try. We have fetched him before, and maybe we can fetch him again. So the train reaches Washington, the porter gets his tip from the taxpayer’s pocket, and the next day the four brethren meet to figure out the details. But they never get further than a few scratches, for The Leader is in one of his intuitive moods, and his Christian Science smile is in high gear. Say no more, Harry, it is done! The next morning the money begins to gush and billow out of the Treasury. Six months later a billion is gone, and plans are under way to collar five times as much more.

Such is government by the Brain Trust. Such is the fate of the taxpayer under a Planned Economy. Such is the Utopia of Damned Fools.

We never seem to learn a thing. Not from the experience of the 1930s, the 1970’s, Japan in the 1990’s and everywhere across the world since the GFC. Keynesian economics is junk science; no public sector stimulus has ever brought an economy in recession into recovery. It would only be about one economist in a hundred who even knew an economy is not driven forward by aggregate demand, never mind could explain why the stimulus, either now or then, didn’t work. Indeed, there are probably still many who would argue the stimulus had been a great success.
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* The CWA was the Civil Works Administration, the stimulus program put in place by FDR in 1933 that worked as well as Obama’s stimulus program after it was put in place three-quarters of a century later.