Category Archives: Economic theory and policy

Excessive savings[!] and Keynesian economics

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There was a comment on my previous post, Krugman’s Keynesian cluelessness reaches new heights, that got me to thinking. Here is the comment, for which I am very grateful:

I was looking up the “broken window fallacy” in comments at the link that Steve Kates provided about Skousen’s Gross Output… the words that were a howler to me was the concept of “excessive savings.”

Excessive savings!

Insane, right? Who could believe such idiocy that our central economic problem is too much saving? Completely ridiculous and beyond bizarre. Utter nonsense! How stupid would you have to be to believe such stuff!

And yet, I’m afraid, that this is indeed the very central point of Keynesian economics. There is demand deficiency because there is too much saving. There is no one who has studied economic theory that has not heard this, and absorbed it from their first days of study. You may think this is an obvious blunder, but it is a blunder shared by 95% of the economists in the world. Don’t believe it? Let me take you back to the General Theory itself, from whence it all began. In the following passage I have substituted the words “return on investment”, in place of Keynes’s own terminology, “marginal efficiency of capital”, since Keynesian terminology is part of the problem that people have in seeing through what a threadbare patchwork of stupidity the General Theory actually is.

I do hate to be technical. But with Rich raising the point, I can do no other than try to show that what he finds absurd beyond reason is in fact the single most central idea of Keynesian theory and policy, taught in every text to every student of economics. The following is from page 217-19. Keynes is pointing out that the central problem for economies is that there can be too much capital relative to its willingness to spend. If there is too much capital, an economy will produce more than it is willing to buy. If interest rates cannot be brought low enough, there won’t be enough investment to soak up all of these excess savings. Capital has to be kept scarce; it is not naturally so since the problem he is discussing is an excess of saving. So Keynes writes:

We have seen that capital has to be kept scarce enough in the long-period to have a return on investment which is at least equal to the rate of interest for a period equal to the life of the capital.

What then happens, if the community nevertheless keeps producing more capital, is that it will eventually find that spending is insufficient to absorb all of the savings. A poor community can maintain growth and full employment longer than a rich community, but eventually, as Keynes writes, the propensity to save will overwhelm the propensity to spend, and even the richest of communities will fall into recessions that have been caused by too much saving.

It follows that of two equal communities, having the same technique but different stocks of capital, the community with the smaller stocks of capital may be able for the time being to enjoy a higher standard of life than the community with the larger stock; though when the poorer community has caught up the rich ⎯ as, presumably, it eventually will ⎯ then both alike will suffer the fate of Midas. [GT: 219]

“The fate of Midas”: the more productive your economy becomes, the more it will be driven into recession and high unemployment. And if you should think that this is some far off prospect, given that we are dealing with the 1930s, that is not the case at all. Here is Keynes again, in the passage that actually precedes the passage above, saying that the high unemployment of the Great Depression has been literally because there has been such a large prior increase in capital accumulation, that the two richest economies in the world have fallen into depression.

The post-war experiences of Great Britain and the United States are, indeed, actual examples of how an accumulation of wealth . . . can interfere, in conditions mainly of laissez-faire, with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing. [GT: 219 – my bolding]

Keynesian economics is stupid. Its assumptions have never been validated by any actual experience of the world, but its logic is even worse. It is the dumbest economic theory every peddled to the world. But as noted in the comment that began this post, you put excessive saving in the company of ‘the list of weasel words, including: “inequality”, “fairness” and “social justice” to justify wealth redistribution and big government taking a cut’ and you can see its allure to governments and public servants, who in spite of having no idea how to get a positive return on the money spent, nevertheless get to spend more money than the largest corporations in the land.

Krugman’s Keynesian cluelessness reaches new heights

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This is economic cluelessness reaching some kind of peak:

The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.

This is, of course, the point of cutting back on the public sector during bad times, as Obama was forced to do. Krugman is describing the current upturn that has followed the sequester. Making virtue of necessity is the way of the world. But the incapacity of seeing what a dismal detour all of the stimulus spending actually was is the province of Keynesians. Of course, the fall in public sector spending shows up as a fall in GDP. But that’s a fault of the statistic, not of the policy.

Importantly, the reality described is of a rising private sector that is finally being allowed to recover by cutting back on public spending. For a true equation of economic growth, you should try Y=C+I-G, just for a change. It’s still pretty subdued by this is why “austerity” has become the universal policy, irrespective of what our economic textbooks say.

Fiddling the stats before our eyes

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obamacare gdp

The downward momentum of the American economy’s ability to sustain real income and employment growth, is something you can hardly find mentioned anywhere in the good-news media (good news as long as there is a Democrat President, that is). The fall in the unemployment rate driven by falling participation rates is a phenomenon that is almost never remarked on. The massive fall in real household incomes is incredible, but also hardly ever remarked on. Still, the outright deception in the latest National Accounts is something else again. The 5.0% quarterly growth rate for American GDP in the September quarter is a fiddle in more ways than one. The usual fiddle is the annualising of the quarterly data, which is an American practice that has never made sense. But this time they have gone one step farther still. This is from Tyler Durden at Zerohedge:

Back in June, when we were looking at the final Q1 GDP print, we discovered something very surprising: after the BEA had first reported that absent for Obamacare, Q1 GDP would have been negative in its first Q1 GDP report, subsequent GDP prints imploded as a result of what is now believed to be the polar vortex. But the real surprise was that the Obamacare boost was, in the final print, revised massively lower to actually reduce GDP!

Of course, even back then we knew what this means: payback is coming, and all the BEA is looking for is the right quarter in which to insert the “GDP boost”. This is what we said verbatim:

Don’t worry though: this is actually great news! Because the brilliant propaganda minds at the Dept of Commerce figured out something banks also realized with the stub “kitchen sink” quarter in November 2008. Namely, since Q1 is a total loss in GDP terms, let’s just remove Obamacare spending as a contributor to Q1 GDP and just shove it in Q2.

Stated otherwise, some $40 billion in PCE that was supposed to boost Q1 GDP will now be added to Q2-Q4.

And now, we all await as the US department of truth says, with a straight face, that in Q2 the US GDP “grew” by over 5% (no really: you’ll see).
Well, we were wrong: it wasn’t Q2. It was Q3, albeit precisely in the Q2-Q4 interval we expected.

Fast forward to today when as every pundit is happy to report, the final estimate of Q3 GDP indeed rose by 5% (no really, just as we predicted), with a surge in personal consumption being the main driver of US growth in the June-September quarter. As noted before, between the second revision of the Q3 GDP number and its final print, Personal Consumption increased from 2.2% to 3.2% Q/Q, and ended up contributing 2.21% of the final 4.96% GDP amount, up from 1.51%.

So what did Americans supposedly spend so much more on compared to the previous revision released one month ago? Was it cars? Furnishings? Housing and Utilities? Recreational Goods and RVs? Or maybe nondurable goods and financial services?

Actually no. The answer, just as we predicted precisely 6 months ago is… well, just see for yourselves [i.e. see the diagram above].

In short, two-thirds of the “boost” to final Q3 personal consumption came from, drumroll, the same Obamacare which initially was supposed to boost Q1 GDP until the “polar vortex” crashed the number so badly, the BEA decided to pull it completely and leave this “growth dry powder” for another quarter. That quarter was Q3.

The business cycle is a cycle, but we are experiencing the worst recovery from recession since the Great Depression. And as bad as the statistics are, the underlying reality is worse than these data show since they are all based on income flows rather than providing a picture of the underlying structure of the economy. The best data for that kind of reality is this:

U.S. real (inflation adjusted) median household income was $51,939 in 2013 versus $51,759 in 2012, statistically unchanged. In 2013, real median household income was 8.0 percent lower than in 2007, the year before the latest recession.

What you would actually need to calculate to show what’s going on, no statistical agency in the world even tries to collect. Meantime, everyone adjusts to the world around them. But whatever the stats might say, it is very unlikely that we will see prosperity as we once knew it on any kind of national level for a long long time to come.

It’s not the money, it’s the metaphor

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So perfect. So exact. So just how I think things are.

RENOVATIONS to the Prime Minister’s possum-infested official Canberra residence have blown out to $6.4 million — more than double the initial estimate, three times the original construction cost and 50 per cent more than building an entirely new Lodge.

The completion date for the project has been delayed again, meaning the refurbishment will now take far longer than the ­original 14-month construction in 1926 and 1927, which cost £28,319 (roughly $2.1m, adjusted for ­inflation). Quantity surveyor BMT estimates a new 800sqm architecturally designed executive residence in Canberra should cost between $3.9m and $4.2m.

The upgrades to the 40-room Georgian-style home were commissioned by Labor and have been under way since September last year. Tender documents reveal the government on December 12 varied its agreement with head contractor Manteena to match the new $6.38m price tag, and the ­Department of Finance has further delayed completion to the middle of next year.

Criticising Keynes

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People worry about many aspects of the economy, and about their future security and income, but there is hardly enough worrying going on specifically about Keynesian economics, today’s mainstream version of what used to be the theory of the cycle. Keynesian theory has done an immense amount to undermine our potential for growth, and has made billions of people around the world insecure about the future, ironically based on the promise of higher incomes and greater security if one merely follows the prescriptions laid out by “Keynes”. The number of versions of “Keynes” there are is, of course, approximately equal to the number of Keynesians there are, but that’s another matter.

As it happens, I am at the final turn in producing what will be a two-volume, 1600-page collection on the critics of Keynes. The collection is complete, in that I am unlikely to add any additional articles. There is therefore only the introduction to write, which I have set aside the next three months to complete. Sometime thereafter, in 2015, the two volumes will be published. I cannot guess how many people will seek to read it, but the one criterion I laid down was that each article had to be accessible. The number of books on how wonderful Keynesian theory is remains amazing to me, and they keep pouring off the shelves. Even this year, there have been yet more of the same, when you would have thought Keynesian economics would be in deep retreat. It is a phenomenon.

My latest venture into dealing with Keynesian economics came from this query by Andysaurus: “This article which argues that governments have bottomless purses seems unlikely to me. Do you have anything with which I may refute it please? Thanks.”

The article was at The Conversation, and although my first instincts was merely to reply in-house, having written what I did I sent it off to The Conversation, which from the note I received, is apparently closed to new articles on economics until January 5 next year. So I sent it off to Quadrant Online instead, where it is now posted under the title, Seduced by Keynes’ Sweet ‘Nothings’. Why “sweet ‘nothings'” you may ask? Here is what I think of as the central para in the article I was replying to:

“Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.” (author’s emphasis)

It sounds too good to be true because it is. Here is part of the answer I wrote but I know that for a Keynesian this is the kind of thing that just pings off their armour, an attitude reinforced with virtually every macro text published today.

The belief that a government has any idea where value-adding activities can be found is one of the dopiest notions ever concocted. Governments can certainly spend the money they create, and some of what they do is value adding, but hardly everything. To believe that what governments produce automatically has greater value than the resources they use up is so nonsensical it is hard to believe any economist would ever peddle such a notion.

Take our own Rudd-Gillard stimulus. The two major projects were pink batts and school halls. Ask me if we are better off with more and better insulated houses and a better school infrastucture, I am happy to say that, all things being equal, we are. But if you ask me whether we have seen a return of more than $43 billion on our outlay – the approximate price tag of this spending – then the answer is that we have not had anything like that amount of benefit.

You may delude yourself from now until the end of time that these benefits were provided “for nothing”, but have you not seen our own reality: the dollar is falling, our standard of living is being dragged down, unemployment is on the rise. Ah, but where is that inflation? For most, real incomes are not rising, so however small the official inflation rate may be, it is plenty high enough to erode our ability to demand. Have you tried to buy a house lately, to cite but one example?

Keynesian economics has a lot to answer for. When I think of how sensationally prosperous we could all be, each and every one of us, had governments not seen it as their role to divert trillions into useless projects of their own choosing, it does make me despair. Not all government spending is useless, of course, but there are only so many roads and schools you can build, and almost every government project comes in over-budget and under-delivered. Anyway, the next three months will be devoted to thinking these issues through as my own small contribution to a better world.

Let me therefore end with a quote from Henry Hazlitt, my predecessor in putting together a collection of criticisms of Keynesian economics back in 1960. The following was written in 1984 when he was over ninety:

At this point I hear someone say: “Why are you still whipping a dead horse? The criticism of the last quarter-century has done its work. Keynesianism has already been discredited in the minds of economists.”

Of most professional economists, perhaps. But it is still the prescription of the great majority of politicians, and is at least still acquiesced in by the majority of voters. The undiminished prevalence of punitive graduated income taxes, the steady increase of other redistributive measures, the persistence of government monetary authorities in trying to hold down interest rates, and the endless and mounting budget deficits of the last half-century–these are Keynesianism rampant.

Keynesian economics is more rampant than ever, in spite of everything that has happened since.

OTHER LISTS: This is a list on critics of Keynes put together by Tom Woods that has been forwarded to me. If you see how thin this list is, you can see more clearly how hard such books and papers are to find.

Critiques of Keynes: Here’s a List

5th March 2012Tom Woods14 COMMENTS

A reader wrote to ask what he could read that challenged Keynes and his system. On a popular level, there’s Hunter Lewis’ book Where Keynes Went Wrong. Henry Hazlitt’s book The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies goes through and critiques the General Theory line by line. It’s a valuable book and a great achievement, but my own opinion is that it gets so caught up in line-by-line minutiae that the reader never really gets the big-picture critique. Mark Skousen edited a good collection of essays called Dissent on Keynes: A Critical Appraisal of Keynesian Economics, which you can read for free online.

Murray Rothbard wrote the lengthy memo “Spotlight on Keynesian Economics” when he was only 21. Also worth reading are Robert P. Murphy’s “The Critical Flaw in Keynes’s System” and George Reisman’s “Standing Keynesianism on Its Head.”

The only one on the list that I think of serious use was Mark Skousen’s Dissent on Keynes. I may have gone through a thousand articles and book on the way to my PhD but that was far and away my favourite. It exactly captured what I thought myself and I kept his book on hand and out of the library for a year after the thesis was done, with the intention of writing to him to tell him how much I admired what he had written. In the end, I just couldn’t bring myself to do it, so I gave the book back to the library. And on the very next morning, there were, like an apparition, two emails to me from Mark Skousen, who was then writing his history of economic text and had run across my Say’s Law and the Keynesian Revolution, the title I gave my thesis when it was published by Elgar. Mark had read it, and wrote to me to say what I had wanted to say to him. It remains the single most mystical experience of my life.

Cochrane may think he’s anti-Keynes but he doesn’t go far enough

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I am happy to find that others see me in the way I see myself, as a centre for anti-Keynesian thought. The article by John H. Cochrane in the Wall Street Journal with the title, An Autopsy for the Keynesians, made its way to me from a number of directions. I am, of course, content to see Keynesian economics being hammered. But the fact remains that so far as I am concerned, Cochrane makes only an averagey sort of anti-Keynesian. I shouldn’t quibble since slagging Keynes is all to the good, but he needs to go farther.

The essence of classical economics, and the core point made by Say’s Law, was that the economy NEVER receives momentum from the demand side. You cannot make an economy grow by buying more, only by producing more. And even that’s not enough. The “more” that is produced will make an economy grow if, and only if, the value of what is produced is greater than the value of what had been used up during production. Demand is created by value-adding supply. Here is the excerpt from Cochrane’s article that leaves me unsatisfied; I don’t think he quite understands it himself.

Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.

It never happened. Zero interest rates and low inflation turn out to be quite a stable state, even in Japan. Yes, Japan is growing more slowly than one might wish, but with 3.5% unemployment and no deflationary spiral, it’s hard to blame slow growth on lack of “demand.”

Keynesian policy has now mutated into a policy of low interest rates, again with the intent of trying to make the economy grow from the demand side. You need to go to the final two chapters of the second edition of my Free Market Economics, where the problems of low interest rates are discussed, to understand the problem. As he says at the end of the article:

Yes, there is plenty wrong and plenty to worry about. Growth is too slow, and not enough people are working.

He doesn’t see that low interest rates are the very essence of the problem, even after all the spending has slowed down. I will think he has finally got it when he starts worrying about quantitative easing, and recognises that rising interest rates are what is needed if recovery is every to take hold.

How economies fail

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This is such an unusual post, which I ran into at SmallDeadAnimals, but is more than just about engineering, but reminded me all the way through about the classical theory of the cycle. Its title is, How Complex Systems Fail, and is a lesson for engineers, but economists would do well to pay attention themselves. I will highlight some of the 18 listed points. But do look at it all. And if you are an economist, replace the words “catastrophe” and “accident” with the words “recession” and “downturn” and the point should spring from the page.

11) Actions at the sharp end resolve all ambiguity.
Organizations are ambiguous, often intentionally, about the relationship between production targets, efficient use of resources, economy and costs of operations, and acceptable risks of low and high consequence accidents. All ambiguity is resolved by actions of practitioners at the sharp end of the system. After an accident, practitioner actions may be regarded as ‘errors’ or ‘violations’ but these evaluations are heavily biased by hindsight and ignore the other driving forces, especially production pressure. . . .

3) Catastrophe requires multiple failures – single point failures are not enough.
The array of defenses works. System operations are generally successful. Overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Each of these small failures is necessary to cause catastrophe but only the combination is sufficient to permit failure. Put another way, there are many more failure opportunities than overt system accidents. Most initial failure trajectories are blocked by designed system safety components. Trajectories that reach the operational level are mostly blocked, usually by practitioners. . . .

6) Catastrophe is always just around the corner.
Complex systems possess potential for catastrophic failure. Human practitioners are nearly always in close physical and temporal proximity to these potential failures – disaster can occur at any time and in nearly any place. The potential for catastrophic outcome is a hallmark of complex systems. It is impossible to eliminate the potential for such catastrophic failure; the potential for such failure is always present by the system’s own nature. . . .

8) Hindsight biases post-accident assessments of human performance.
Knowledge of the outcome makes it seem that events leading to the outcome should have appeared more salient to practitioners at the time than was actually the case. This means that ex post facto accident analysis of human performance is inaccurate. The outcome knowledge poisons the ability of after-accident observers to recreate the view of practitioners before the accident of those same factors. It seems that practitioners “should have known” that the factors would “inevitably” lead to an accident. Hindsight bias remains the primary obstacle to accident investigation, especially when expert human performance is involved.

At least one of us has no idea how an economy works, and I don’t think it’s me

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I don’t normally do this, but I was asked about this article at The Conversation, Why the federal budget is not like a household budget, and out of pure exasperation I sent off this reply. My title is, “An Endless Supply of Keynesian Nonsense” of which there is no shortage. I shouldn’t write things at two in the morning since the exasperation does seem to overwhelm me, but here it is for what it’s worth.

The state of economic theory today truly is a scandal. The effect of Keynesian theory on the way economists think is so disturbing that the reality is there is no likelihood anytime soon that things will begin to come good. Let me take a case in point, which comes from the article by Warwick Smith which came with the title, “Why the federal budget is not like a household budget”, which I suppose is true, but it all depends on what conclusion you therefore draw.

He also says that, “the whole deficit/surplus thing has been greatly exaggerated”, which again I am willing to accept, depending on how he follows up from this. He goes on to add that “the focus on deficits and surpluses distracts us from what’s really important in the macro economy.” OK. So just what is it that is the really important thing? And this is his great insight:

“Inflation is the limiting factor for government expenditure, not taxes or borrowing”.

That is, governments can keep spending right up until we reach the point where prices begin to rise too much. There is therefore plenty of room for government stimulus that is not limited to the amount of spending that is covered by one’s revenues. Here are his words:

“A government that can create money doesn’t need your money from taxation or from borrowing in order to spend. There is no limit to how much money a sovereign government can spend, but if government spending plus private spending exceeds the productive capacity of the economy then you get inflation.”

Until the government reaches the point where the economy is at its capacity level, it can, it seems, keep spending without taxing or borrowing, and it is all to the good. The economy will keep growing and inflation will remain under control. Here is his conclusion, in his own words so you can see for yourself I am not making it up:

“Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.” (My bolding)

How is it possible to believe anything like this and call yourself an economist?

So here is the answer to why this is nonsense, which I hope will also help you understand why the American economy is falling to bits, and if we are not very very careful, ours will do exactly the same.

An economy only grows by producing goods and services whose value is greater than the value of the inputs plus labour-time used up during production. There was a time every economist understood this. If you have some timber, a hammer, a few nails and some time, you can do many things with them, but only some of the things you might do will end up with the value of what was produced greater than the value of the timber, nails and time used up.

The belief that a government has any idea where value adding activities can be found is one of the dopeyist ideas ever concocted. Governments can certainly spend the money they create, and some of what they do is value adding, but hardly everything. To believe that what governments produce automatically has greater value than the resources they use up is so nonsensical it is hard to believe any economist would ever peddle such a notion.

Take our own stimulus. The two major projects were pink batts and school halls. If you ask me if we are better off with a larger number of insulated houses and a better school infrastucture, I am happy to say that, all things being equal, we are. But if you ask me whether we have had a return of more than $43 billion on our outlay – the approximate price tag of this spending – then the answer is that we have not had anything like that amount of benefit.

You may delude yourself from now till the end of time that these benefits were provided “for nothing”, but have you not seen our own reality. The dollar is falling, our standard of living is being dragged down and unemployment is on the rise.

Ah, but where is that inflation? For most, real incomes are not rising, so however small the official inflation rate may be, it is plenty high enough to erode our ability to demand. Have you tried to buy a house lately to take one example?

But the real damage comes through the other mechanism in which inflation affects an economy, which is the deterioration in our capital stock. Our economy is just not being maintained, never mind allowed to grow, because the government is diverting our resources into its own projects, instead of allowing businesses to replace their capital as it erodes during production. The real side of the economy is slowly but ever so surely falling to bits.

If you don’t understand it, well you are in good company since people with economics degrees apparently don’t seem to understand it either. But even if you don’t understand the process, you can certainly feel the effects.

On the first Keynesian texts but when will there be the last?

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In the discussion thread on introductory texts on economics from the 1890s to the 1950s, in which I discussed Clay’s Economics, the issue has swung round to what is a story frequently told on the left, how political pressure from the right killed off the supposedly great first Keynesian text, Loris Tarshis’s The Elements of Economics. To which I contributed the following:

This note is in regard to Lorie Tarshis’s first “Keynesian” text in the US, his Elements of Economics, which supposedly was killed off by an attack from William F. Buckley, thereby clearing the way for Samuelson to take the field with his own more cautiously written Keynesian tract. This story about Buckley and Tashis is an old established myth. In fact, Buckley went after Samuelson just as much as Tarshis. This is the start of Buckley’s assessment, which in some eyes might even look quite prescient:

“Marx himself, in the course of his lifetime, envisaged two broad lines of action that could be adopted to destroy the bourgeoisie: one was violent revolution; the other, a slow increase of state power, through extended social services, taxation, and regulation, to a point where a smooth transition could be effected from an individualist to a collectivist society. The Communists have come to scorn the latter method, but it is nevertheless evident that the prescience of their most systematic and inspiring philosopher has not been thereby vitiated.

“It is a revolution of the second type, one that advocates a slow but relentless transfer of power from the individual to the state, that has roots in the Department of Economics at Yale, and unquestionably in similar departments in many colleges throughout the country. The documentation that follows should paint a vivid picture.” — William F. Buckley, Jr. God and Man at Yale: The Superstitions of Academic Freedom, Henry Regery, 1951, p. 46-47.

And I might also mention Buckley’s attitude to Keynes, also from the same source, which would have applied to Samuelson quite as much as Tarshis:

“The individualist insists that drastic depressions are the result of credit inflation; (not excessive savings, as the Keynesians would have it) which at all times in history has been caused by direct government action or by government influence. As for aggravated unemployment, the individualist insists that it is exclusively the result of government intervention through inflation, wage rigidities, burdensome taxes, and restrictions on trade and production such as price controls and tariffs. The inflation that comes inevitably with government pump-priming soon catches up with the laborer, wipes away any real increase in his wages, discourages private investment, and sets off a new deflationary spiral which can in turn only be counteracted by more coercive and paternalistic government policies. And so it is that the “long run” is very soon a-coming, and the harmful effects of government intervention are far more durable than those that are sustained by encouraging the unhampered free market to work out its own destiny.”

The true reason, in my view, that Samuelson’s text won out over Tarshis’s is because it is a far better book, much much more accessible. The macroeconomic side, with its C+I+G diagrams and others of a similar kind, is a fantastic improvement in the underlying power of explanation. I have first editions of both Samuelson and Tarshis, and there is no comparison. Even Samuelson’s 1948 version is an order of magnitude better, both to teach and to learn from. There are virtually no diagrams in the macro half of Tarshis’s text (and the diagrams in the micro half are often bizarrely complex), while Samuelson has a number of diagrams (a small number, especially in comparison the text we are now all familiar with), which bring out the underlying message in a way that the hundreds of pages of diagramless text in Tarshis does not.

I might add, but only just for fun, that in my Defending the History of Economic Thought, I discuss the ways in which diagrams have dumbed down economic thought, so that we now move lines in a two-dimensional space, instead of trying to think through the actual economic adjustments that are supposedly going on. But that is just by the way.

And if you have reached this far, Nato asked a very interesting question, for which I am grateful, and for which there is a very interesting answer. The question: “Talking about your contributions, Say’s law and the classics, is the Elgar debate with Rochon still running?”

The answer: We had agree to a third letter each and when I sent off my third letter off, I suggested that perhaps we could even go for a fourth. The reply that came back was that Rochon had decided that he no longer even wished to do the third, so we would stop there without publishing this third letter.

It is clear that he is no longer game to go on, but that was, in my view, all the more reason to hold him to what he had agreed. Keynesian economics is the absolute standard in macroeconomics at the moment. If anyone should have been overwhelmed in this debate – going only by the numbers – it should have been me. My third letter was a clarification of some of the issues already raised, I replied to what had been written previously, as well as going on with a further discussion of the problems with Keynesian theory. That is just what such a debate should be. Each of us gets to respond to the issues the other has raised. By probing for the weak points in each other’s arguments, we bring the various tensions on our own positions to light and, hopefully, learn something at the same time.

I can only say that if Keynesian theory is as indefensible as it appears from the the first two letters defending Keynes, and which I think my third letter would have helped to emphasise to others, then I think there is some kind of moral duty to publish my third letter. This is not some small matter, but involves the entire theoretical and strategic approach to managing our economies. If the Keynesian defence is as feeble as it has been shown it to be – and I would hardly deny that there may be others who could do a better job – then I think my third letter should enter into the public debate, and if there are others who think they can do better, they can come forward to try to explain the Keynesian position more clearly. But to me this is a debate that we need to have.

I will only add at this point that the matter is not yet closed.