At about 11:15 he actually brings Say’s Law into it, and this comes almost a minute after he bags Keynesian economics (around 10:25). The problem remains how difficult it is to keep track of the real side of the economy at the same time as you are trying to keep track of the money side. There are the real goods and services which are limited and finite and the amount of purchasing power that can be expanded forever.

The question that really does require a proper answer is why has there been no major increase in the growth in consumer prices even though there have apparently been massive increases in the amount of money.

It’s partly the way money has been kept from flowing into the economy generally, it is partly because we can produce standard goods and services more cheaply, it is partly because inflation has affected various products that do not enter into the CPI such as share prices, it is partly because the economy is do dead and it is partly because labour cost growth is so low.

[Spotted by Turtle of WA in the Catallaxy comments thread.]

They don’t say it in words, but the reality is that Say’s Law is right and Keynesian economics is junk science. A stimulus takes an economy backwards, makes things worse. This is not about this program or that. This is about the very principle of trying to revive an economy from the demand side based on unproductive forms of public spending. They also don’t use the phrase Say’s Law, and may not even be aware that Say’s Law was specifically designed to explain that a public spending stimulus not only will not work, but will make things worse. So read this from the front page of The Oz today: Stimulus a waste, damaged industries.

A damning Treasury-commissioned independent review of the former Labor government’s unprecedented spending response to the global financial crisis has found it was a “misconceived” waste of money, fundamentally weakened Australia’s economy, almost destroyed parts of the manufacturing sector and ­inflicted more long-term harm than good.

The review is also scathing of government failure on both sides of politics to address the budget crisis triggered by the $100 billion fiscal stimulus project, which has saddled the nation with the ­fastest-growing public debt in the world. “There is no evidence fiscal stimulus benefited the economy over the medium term,” says the paper, to be released today.

It says the stimulus was “misconceived”, with an emphasis on transfer payments and “unproductive expenditure such as school halls and pink batts”.

And I do wish to emphasise that this is not a critique of how things were done, but that these things were done at all. You want to understand the theory, you can either go back to John Stuart Mill or Henry Clay or any of the pre-Keynesian classics. Or you can read my em>Free Market Economics< in which it is all set down in cold print.

The History of Economic Thought online discussion forum has had this request posted:

I would be interested in your thoughts and reactions to this article: When Economics Was Radical. The article was published in The Chronicle of Higher Education [CHE].

My response is below.
___________

This is how I would summarise the point of the article, whose provenance is given away by its title, “When Economics was Radical”.

Economics had the opportunity to enter into radical economics during the late nineteenth century but missed the boat. Now the time has come again, when we can jump aboard by taking up Thomas Piketty’s call to arms over income distribution.

So here are my thoughts and reactions.

First, since I think economics has gone downhill pretty much since the time of John Stuart Mill, I’m not sure that we have missed many of the leftwards currents that have affected the political world that surrounds our studies. By the 1880s, laissez-faire had been long gone – pushed overboard by many including JSM. But what remained was a very robust subject that maintained the central role for free markets. The market mechanism had to be overseen and regulated by governments but the direction that the economy would take would and should be left to itself. Not sure anyone could say that about economic theory today.

Second, economics has remained outside the complete embrace of Marxist thought mainly because the labour theory of value remains an entirely empty theory of value, although no doubt there are still those who will come to its defence. It completely discredits Marxist thought since it is so indefensible. There are nevertheless many economists who have gone full Marx, but they have had to find other ways to reach these conclusions than through Das Kapital. I am well prepared to be corrected on this, but I cannot think how someone could use a modern first year economics text to explain what has happened to the Venezuelan economy. I imagine most of us can do it in an ad hoc sort of way, but not by using the latest editions of Samuelson of Mankiw as the guide.

Third, Piketty’s Capital for the Twenty-First Century tries to do today what Marx’s Kapital for the nineteenth century did not quite manage to do, which is to give central direction of an economy the imprimatur of economic theory. For Marx, it was to raise living standards or something by ridding us of the capitalist class. For Piketty, it is to achieve economic equality by taking from the rich and giving to the poor, and if I understand him right, it is not just to be done within individual societies, but to take from the rich capitalist nations and pass this wealth on to the less wealthy ones. As noted on Wikipedia, “Piketty offered ‘a possible remedy: a global tax on wealth’.” The authors of the article in CHE had this to say about Piketty, just in case you may think I am missing the point:

“[Piketty] had many harsh things to say about the field’s methodological narrow-mindedness and self-absorption and their cost: the absence of a convincing theory of rising inequality, downward social mobility, and resulting pathologies — and, in the absence of such a theory, a foot-stomping insistence that these phenomena either don’t exist or don’t matter.”

For myself, I don’t find this very hard to explain, but here is neither the time nor the place.

Fourth, there is no doubt that the juices of envy are everywhere. It has been a long-time red rag for the left to worry about income distribution and how unfair it is. As it happens, Piketty was in Melbourne about a month or so back and I was the fourth in line to ask a question. Unfortunately for me, there was only time for three questions so I missed out. So I will put my question down here:

We are meeting in the Melbourne Town Hall, built when Australia was the richest country in the world, and Melbourne was the richest city in the world’s richest country [around 1890]. Back then, no one had a car, a computer, a radio or TV. Few had indoor plumbing, hot and cold running water and electric lights. No one flew to London, went to the movies or surfed the net. Antibiotics had not been invented. What possible difference could it make to anyone whether income distribution in some measure that is invisible to everyone without a dataset and a computer happens to be more skewed in one direction today than it was at some moment in the past?

Fifth, as my question suggests, income inequality is not an economic question, it is a political question. There have been no mainstream laissez-faire economists since the time of John Stuart Mill. The need to find some means to assist the poor and disadvantaged has always been part of economic theory. We have a much larger surplus today than we did back then, so we are able to assist others to a greater extent. But the issue is not inequality but welfare. Inequality has nothing to do with economic theory, other than to point out that you either have a market system where individuals earn what they can by selling to others, or you have some kind of centralised system where income is generally disassociated from one’s contribution to total output and income distribution is determined by political will – “from each according to his ability, to each according to his needs”. Well, who decides that and how would they do it? There are no economic answers here.

It’s at times like this that economists need to be able to explain what went wrong in Venezuela. And if you cannot do it without saying that it was the fault of the capitalists and the rich, you are not an economist and your answers have nothing to do with economic theory. I find this kind of call to arms from the CHE article perfectly ridiculous:

“It’s hard to escape the conclusion that in exiling radicalism from the AEA and from mainstream economics, its practitioners attained enormous intellectual prestige and elite approval by sacrificing the disinterested search for answers to the most controversial questions in economics.”

Aux barricades, comrades etc.

And as a sixth and last point, I have to say this did give me some pleasure:

“A re-evaluation of classical economics has been proceeding in recent years, highlighted by the publication of Piketty’s Capital in the Twenty-First Century.”

Well, no one is more interested in seeing a re-evaluation of classical economics than I am, but the last place I would send you to is Piketty. J.S. Mill, J.E. Cairns, Simon Newcombe, Henry Clay, that is where I would send you. In fact, I have just had an article published on Clay if you are interested in these kinds of things, with the ultra-neutral title, “The Hundredth Anniversary of Clay’s Economics: the Best Introduction to Economics Ever Written”. You can find the article here if a re-evaluation of classical economics really is your thing.

I have been asked by an economist friend, who is quite well versed in macro, whether it is worth reading The General Theory and if not, what should be read instead to get a sense of what Keynes wrote. This was my answer:

My view is that there is no reason that I can think of to read The General Theory cold without some specific purpose and question in mind.

Today, it’s a book for scholars alone, even more so than in 1936 when it was published. But then, all the presuppositions of classical theory were alive so that many of the issues and statements made were clear enough to everyone so that they knew what he was on about. A great deal of time of mine has been understanding the presuppositions of classical theory – the beliefs that were so entrenched that no one even bothered to state them – so that I can read what Keynes was saying against the background of a classical understanding of how things worked. Since that is basically what I do believe is true, I can read Keynes almost the same way as Frank Knight, say, and can see things as they might have.

But what has given me an entirely different perspective is that I came to Keynes not just with the presuppositions of the 1930s in my mind, but also with the presuppositions of the 1840s. It’s with the conceptual approach of John Stuart Mill that I read the GT, and from that perspective, the book is so backwards, so incoherent and so illogical, that it defies belief to me every time I open it. But the presuppositions of almost all economists today are founded on the Keynes-Hicks-Hanson-Samuelson axis which make Keynes seem sensible and Mill incomprehensible. For me, as for Mill, it is so unmistakably true that demand is constituted by value adding supply that I am amazed that no one else can see it or why it matters. And even though a Keynesian stimulus has failed on each and every occasion it has been applied, the belief in aggregate demand independent of aggregate supply remains so entrenched that it is literally impossible for an economist to understand why the latest attempts at a stimulus did not work, and must come to the conclusion that things would have been even worse had the stimulus not been applied. It is not that they are dishonest or lack the most intensive economics education we can provide today. It is that their professional deformation, that began with their first principles course, has never gone away.

What to read instead? All I can say is that I wrote my Free Market Economics at the start of the post-GFC stimulus because there was then no other economics text anywhere to explain why a stimulus would make things worse. The best I can therefore suggest is the second edition which is the economics of Mill brought up to date as best I could do it.