Category Archives: Economic theory and policy

Note to “The Economist” – your solution is the very problem itself

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economics whats wrong

I’ve just been reminded of an article from The Economist published 16 July 2009 titled, What went wrong with economics. Note that it is not a question but a statement. The Economist naturally has no clue being an ultra-Keynesian rag but this, at least, can be dredged from its commentary:

And if economics as a broad discipline deserves a robust defence, so does the free-market paradigm. Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism. Their logic seems to be that if economists got things wrong, then politicians will do better. That is a false—and dangerous—conclusion.

What’s missing apparently is a more sophisticated financial model to graft onto the Keynesian core of what The Economist thinks of as good economics:

Central banks are busy bolting crude analyses of financial markets onto their workhorse models. Financial economists are studying the way that incentives can skew market efficiency. And today’s dilemmas are prompting new research: which form of fiscal stimulus is most effective? How do you best loosen monetary policy when interest rates are at zero? And so on.

As early as July 2009 they could see that the fiscal stimulus had been a disaster. They just do not see that trying to drive an economy along using either monetary or fiscal policies is the problem. Public spending and near-zero interest rates leave an economy dead in the water but they cannot see that their solution is the very problem itself.

Why focus on Say’s Law?

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This was not written to me but I was copied in on the reply that was sent to Michael:

Michael

You asked about the article in the latest Quadrant by Steve Kates on “The Dangerous Return of Keynesian Economics – Five Years On”. On the use of “Keynesian” stimulatory policies, I think he is right to draw attention to their failures and the idea that budgetary action to stimulate demand works. This is apparent from recent and past experience, such as the failed Roosevelt policies in the 1930s cf to the Premiers plan of budgetary cuts, which helped get Australia out of the recession much more quickly than the US (I think I have written to you about this before). However, don’t forget that Keynes himself said at the time not to risk budget deficits and that he also changed his advice to Roosevelt ie Keynes did not in practice necessarily stick to his textbook (published I think in 1936, half way through the recession). It is amazing that Australia’s experience in the 1930’s is still said to reflect Keynesian “stimulatory” action: Rudd ran that line when he became PM and used it to justify his stimulatory policies during the GFC.

I prefer not to get involved in the Say’s law argument like Kates does [my bolding]. It is simpler, I think, to focus on what is the likely response of the private sector to budgetary stimulus action. As suggested, recent experience supports the view that it is not likely to result in any sustained increase in spending (ie there may be a temporary surge but not a lasting one). Treasury had to publish a correction to the budget papers about the claimed success. [But why didn’t it work?]

What about “stimulation” through monetary policy? The recent experience in the US and some other countries again suggests this doesn’t work. It may be claimed that it has worked in the sense that Bernanke may have prevented the US from going into recession. But what would have happened to interest rates if there had been no abnormal increase in the supply of money and the market had been allowed to determine interest rates without central bank intervention? My guess is that they would still have fallen to similar low levels because the private sector would not have been invited to finance additional spending by borrowing, just as it wasn’t under the Bernanke policy.

I have also written to you about what caused the GFC. I won’t venture further on that here other than to say that central banks allowed the supply of credit to increase at far too rapid a rate.

In his article Kates also includes a graph on the US unemployment rate calculated by including in it labour force drop outs since 2009 and showing that (on this basis) the rate has not fallen at all from the 11% reached in 2010. Kates uses this as one indication that the stimulatory policy in the US hasn’t worked. With press releases and letters I have been trying (unsuccessfully) to get across a similar message here and that the unemployment rate is not on its own an effective measure of the state of the labour market and the regulations thereof ie including drop outs our unemployment rate in Australia is much higher than the published one.

So my reply.

I much appreciate Des’ comments but if I might, would like to add my own perspective. And what is most important here is why I do dwell on Say’s Law which I do not just because it is the most accurate way of thinking about macroeconomic issues which I will come to in a moment. But why Say’s Law.

First, Say’s Law was Keynes’s own issue. The General Theory is written as a book-length refutation of Say’s Law which Keynes is at pains to show. The key passage in the General Theory so far as explaining Keynes’s intentions are found on page 32:

The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas. [My bolding again]

The one innovation of The General Theory that remains embedded in all macroeconomics today is aggregate demand. The existence of aggregate demand as an independent force in economics was absolutely denied by pre-Keynesian economists. The denial was summarised in the propositions “demand is constituted by supply” and “overproduction is impossible” which were the specific meanings associated with Say’s Law, along with there is no such thing as a general glut. Demand deficiency, so far as classical economic theory is concerned, is never a realistic explanation for recession and therefore demand stimulation is never a solution for recessions when they come.

If you use aggregate demand in any context to explain anything about the state of the economy, in my view you have sold the pass. You can never recover since you have accepted Keynes’s basic premise to argue against Keynesian theory. And once you have done this, you really have no firm foundation that will allow you to turn back the Keynesian tide. In fact, if you think of aggregate demand as actually independent from aggregate supply, and therefore a force for raising the level of economic activity and employment, there is no reason not to apply a stimulus of some kind during recessions. It is only if you understand that such a stimulus cannot possibly work that you would oppose a stimulus as a set of actions that will certainty harm our economic prospects whatever brief relief it might do over the initial one or two quarters.

But there are other reasons for bringing Say’s Law into it. Because when I do, I am invoking the conclusions reached by all of the great economists of the past: David Ricardo, John Stuart Mill, William Stanley Jevons, Alfred Marshall, Henry Clay and Allyn Young. This takes me across a period from 1820 through to 1928 and thus encompasses economists from the first days of economic theory through until almost the very day of publication of The General Theory. No economist of any stature denied the validity of Say’s Law until it was swept away by Keynes. Please see my Say’s Law and the Keynesian Revolution if you would like to go through the entire sordid story how Say’s Law disappeared from economic discourse.

But the theory is what’s important, and for this you would need to go to my Free Market Economics. Very hard to summarise but the two elements that make this kind of economic theory different are firstly the essential role of the entrepreneur and secondly the embedding of value adding into the very core of economic thinking.

The order in which everything occurs within an economy is that entrepreneurs come to conclusions about what they might produce and sell at a profit, then go through the many stages of setting up their businesses which requires a tremendous amount of outlay before they earn a single cent of positive return, and then, when the goods or services are brought to market, buyers may or may not choose to buy enough to repay all of the previous costs. Demand, to be strictly technical about it, is the relationship between price and quantity demanded for an existing product that is already on the market. All production, however, is future orientated and while past sales may provide some clues about what might sell in the future, it is hardly the most important consideration in the minds of entrepreneurs in trying to decide what they will do next. Governments wasting a tonne of money on pink batts and school halls is great in the short term for pink batt and school hall producers but distorts your economy away from productive activities, raises input costs across the economy and provides no clear direction about the nature of demand say eighteen months ahead. And because such activities were non-value-adding, the effect on employment at the going wage was certain to be negative as time went by.

As for Say’s Law here’s a brief outline.

1) If you pay some people to dig a hole and then pay other people to fill them in again nothing of value has been created so no matter how much money you pay them thinking only of this group there is nothing for them to buy.

2) Every form of economic activity uses up resources. All economic activity draws down on the available productivity of the economy. Keynesian economic theory thinks of the drawing down as in and of itself stimulatory. No classical economist would have been so stupid. Drawing down on resources – even in some activity that will eventually provide you with a positive return – makes you worse off. You have used up resources and are less wealthy than you had previously been.

3) The need for economic activity to be value adding is essential. Production is value subtracting. It uses up resources. When whatever is being produced finally becomes available, it is either just consumed or it becomes part of the productive apparatus of the economy. It is those additions to the productive parts of the economy that are the essential for growth and prosperity. Only if the value of what these newly produced capital assets is greater than the value of the resources that have been used up can the activity be counted as value adding. And only if the net effect of such investment has left behind an economy capable of producing more than it previous could do can one say that the economy has grown.

4) Only value adding activities create growth and employment over anything other than the short term. Timing is everything, but the flow of new productive assets coming on stream (and it may take years of value subtracting investment for any particular project to become productive) is the only thing that can make an economy more productive, raise living standards, add to employment at the going real wage and then, thereafter, increase the real wage.

5) Why Say’s Law? Amongst the many lessons that Say’s Law provides, and this is from the classics, is that “demand is constituted by supply”. Because of the low state of economic theory today, I now make it explicit what classical economists had meant, “demand is constituted by value adding supply”. Unless what is produced is value adding – that is, it adds more to output than the resources that have been used up in their production – then it cannot add to employment at the going real wage.

6) No stimulus program in the world was value adding and was ever likely to be. Virtually no government activity, other than some roads and a few infrastructure projects, is value adding. All draw down on resources but do not provide a net addition either in the short term or in the long. NBN is such a prime example, as is the Desal plant in Victoria. We are not better off for spending the money and using up the resources because there is no return above the costs. That the construction workers went out and bought goods and services with the money they were paid do not make those projects in any way beneficial to the economy. They are pure waste.

7) Private sector activity often misfires on an individual basis which is what bankruptcy is about. But a properly structured free enterprise economy, where financial institutions lend to the most promising projects for which funds (ie resources) are sought, provides you with the only structure that will provide an overall net rate of growth and an accumulation of capital assets across an economy that will build prosperity.

8) You want to understand what’s wrong with Keynesian economics, it offends against Say’s Law which makes it absolutely clear that only value adding activity adds to growth – demand is constituted by supply.

A query on Say’s Law

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Here is a very pleasing letter I have received from someone who read my article in Quadrant on the fifth anniversary of the publication of the Dangerous Return of Keynesian Economics.

Dear Dr Kates

I read your article in the March Quadrant. It was a great source of information and I have used it to refute a couple of Keynesians on facebook discussions I am involved in. I have a few queries.

1. I have been thinking about Mill’s idea “demand for commodities is not demand for labour.” Initially I balked at it, but after a bit of pondering I think I may have it. I want to run my interpretation past you to make sure I’m correct. Here it its: ‘Just because someone wants a product or a service, doesn’t mean they will pay any price to get it. There is a limit to the amount of human labour, measured through paid wages – is worth. If you understand this, you’ll understand why demand for labour cannot be increased by increasing the demand for goods and services.’ Have I got that right? Was Mill talking about the concept of the law of diminishing returns?

2. What I want to be able to do in my little debates is make claims like:

*Keynesian economics doesn’t promote growth, it stifles it.

*Where Keynesian economics have been applied its been shown to not have worked.

*The economic consequences of Keynesian policies are disastrous.

Where can I find evidence to support those claims. A hyperlink to websites/studies would be particularly valuable.

Thanks in advance. Please keep writing these articles for Quadrant. They are great for laymen like me. If I may make one small, respectful suggestion when you make claims and affirmations about the negative consequences of Keynesian stimulus, please give some basic evidence or backing so that I can use this in discussions.

Kindest regards

So I have replied

Dear Matthew

The thing that is still astonishing is that there are any Keynesians left for you to argue with but I guess they’re still out there living in silent resentment about how little appreciated they are. I have, of course, written an entire book on this stuff – Free Market Economics – which is not all that expensive – paperback around $40 through the Elgar website. Alas, your approach to understanding Mill will not get you to what I think you need to understand if you are to have a solid foundation in dealing with Keynesian arguments. The order in which events happen in an economy is not people wanting things and then they are supplied. It is the way we teach micro, with demand first and then supply, but that is not the order in which events occur in reality.

The order in which everything occurs is that entrepreneurs come to conclusions about what they might produce and sell at a profit, then go through the many stages of setting up their businesses which requires a tremendous amount of outlay before they earn a single cent of positive return, and then, when the goods or services are brought to market, buyers may or may not choose to buy enough to repay all of the previous costs. Demand, to be strictly technical about it, is the relationship between price and quantity demanded for an existing product that is already on the market. All production, however, is future orientated and while past sales may provide some clues about what might sell in the future, it is hardly the most important consideration in the minds of entrepreneurs in trying to decide what they will do next. Wasting a tonne of money on pink batts and school halls is great in the short term for pink batt and school hall producers but distorts your economy away from productive activities, raises input costs across the economy and provides no clear direction about the nature of demand say eighteen months ahead.

As for Say’s Law here’s a brief outline.

1) If you pay some people to dig a hole and then pay other people to fill them in again nothing of value has been created so no matter how much money you pay them thinking only of this group there is nothing for them to buy.

2) Every form of economic activity uses up resources. They thus draw down on the available productivity of the economy. Keynesian economic theory thinks of the drawing down as in and of itself stimulatory. No classical economist would have been so stupid. Drawing down on resources – even in some activity that will eventually provide you with a positive return – makes you worse off.

3) The need for economic activity to be value adding is essential. Production is value subtracting. It uses up resources. When whatever has been produced becomes available, it is either just consumed or it becomes part of the productive apparatus of the economy. It is those additions to the productive parts of the economy that are the essential for growth and prosperity. Only if the value of what these newly produced capital assets is greater than the value of the resources that have been used up can the activity be counted as value adding.

4) Only value adding activities create growth and employment over anything other than the short term. Timing is everything, but the flow of new productive assets coming on stream (and it may take years of value subtracting investment for any particular project to become productive) is the only thing that can make an economy more productive, raise living standards, add to employment at the going real wage and then, thereafter, increase the real wage.

5) Why Say’s Law? Amongst the many lessons that Say’s Law provides, and this is from the classics, is that “demand is constituted by supply”. Because of the low state of economic theory today, I now make it explicit what classical economists had meant, “demand is constituted by value adding supply”. Unless what is produced is value adding – that is, it adds more to output than the resources that have been used up in their production – then it cannot add to employment at the going real wage.

6) No stimulus program in the world was value adding. Virtually no government activity, other than some roads and a few infrastructure projects, is value adding. All draw down on resources but do not provide a net addition either in the short term or in the long. NBN is such a prime example, as is the Desal plant in Victoria. We are not better off for spending the money and using up the resources because there is no return. That the construction workers went out and bought goods and services with the money they were paid do not make those projects in any way beneficial to the economy. They are pure waste.

7) Private sector activity often misfires on an individual basis which is what bankruptcy is about. But a properly structured free enterprise economy, where financial institutions lend to the most promising projects for which funds (ie resources) are sought, provides you with the only structure that will provide an overall net rate of growth and an accumulation of capital assets across an economy that will build prosperity.

8) You want to understand what’s wrong with Keynesian economics, it offends against Say’s Law which makes it absolutely clear that only value adding activity adds to growth – demand is constituted by supply. If you keep all that in mind, I can’t see how you could go wrong.

Kind regards

Classical economic theory and the modern world

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A post in two sections.

Section I

The March issue of Quadrant has an article of mine which has just been put up online. In the magazine itself the title is, The Dangerous Return of Keynesian Economics – Five Years On. What it is five years on from is an article of mine that found its way into the March 2009 issue which dealt with that very dangerous return of Keynesian economics in the form of the worldwide stimulus that economies across the world were beginning to apply. The original title was The Dangerous Return to Keynesian Economics for which this was the single most important passage:

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

That this outcome was absolutely assured in my own mind is, of course, not the same as it being absolute assured in reality. And indeed, it is not too much to say that 99% of the economic opinion of the world went quite the other way. The best example of this attitude may be seen in this comment made to me by Senator Doug Cameron during my appearance before the Senate Economic References Committee in September 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?

This is, of course, a question I ask myself but also one for which I have an answer. The odd part is that no one else asks this question although it is the question that ought to go to the heart of the matter. Which takes me to the second part of this post.

Section II

The economics I use I did not invent but am near enough unique in applying it to economic questions in the modern world. This is the economic theories of the cycle as developed by classical economists which was the theory accepted universally across the profession prior to the coming of the Keynesian Revolution in 1936. So to see things as I see things about the nature of this theory, let me take you to the opening part of a form I have just sent to my publisher on how to advertise the second edition of my Free Market Economics. It was a book whose first edition I wrote at white heat over the twelve weeks of the first semester in 2009, from March to May, to explain in more detail why the stimulus would with certainty fail, as fail it did.

1. Please describe the book in non-technical layman’s terms (in no more than 150 words). Include brief details of the book’s main objectives and conclusions.

Have you ever wondered why no public sector stimulus has ever worked? You are holding in your hands a book that is unique in our times. It is a text on economic principles based on the economics before Keynesian theory became dominant in macroeconomics and equilibrium analysis became standard in micro. It looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation occurs at virtually every moment, and the future is being created before it can be understood.

Of particular significance, this book assumes Keynesian theory is flawed and policies built around attempting to increase aggregate demand by increasing non-value-adding public spending can never succeed but will only make conditions worse. The theories discussed are the theories that dominated economic discourse prior to the Keynesian Revolution and are thus grounded in the economics of some of the greatest economists who have ever lived.

It is, of course, possible that I might have been right for the wrong reasons, but it might also be the case that I was right for the right reasons. I go on about Say’s Law, John Stuart Mill and classical theory, but you know, when have they ever let me down? The world, so far as the evidence shows, works exactly like their theory says it does. And it’s not even that I picked this downturn as a one-off instance, but I also picked the upturn that followed the massive cuts to public spending after the Costello budget in 1996. Who else did that then? What theory is there other than the classical theory of the cycle that could even explain it let alone predict it? And there is no other text anywhere in the world written more recently than the 1920s that can tell you what that theory is other than mine.

You could, of course, buy the first edition right now or you can wait until the much improved second edition is published in July or August.

FME 2nd ed book description

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This is from a form I have just sent to the publisher on how to advertise the second edition of my Free Market Economics.

1. Please describe the book in non-technical layman’s terms (in no more than 150 words). Include brief details of the book’s main objectives and conclusions.

Have you ever wondered why no public sector stimulus has ever worked? You are holding in your hands a book that is unique in our times. It is a text on economic principles based on the economics before Keynesian theory became dominant in macroeconomics and equilibrium analysis became standard in micro. It looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation occurs at virtually every moment, and the future is being created before it can be understood.

Of particular significance, this book assumes Keynesian theory is flawed and policies built around attempting to increase aggregate demand by increasing non-value-adding public spending can never succeed but will only make conditions worse. The theories discussed are the theories that dominated economic discourse prior to the Keynesian Revolution and are thus grounded in the economics of some of the greatest economists who have ever lived.

I might also mention this which is a notice I received this week from the publisher:

I am delighted to be writing to all of our authors, contributors, customers and business partners with the exciting news that Edward Elgar Publishing has won another important industry award.

The Frankfurt Book Fair Academic & Professional Publisher of the Year 2014 award was presented to us by the Independent Publishers Guild at a ceremony on Thursday evening.

The judges commented that Edward Elgar Publishing turned in a very impressive sales growth in 2013, achieved on the back of a prolific publishing programme and successful Elgaronline platform. Judges liked its smart customer profiling and forays into international markets. “Edward Elgar is incredibly professional, responsive and imaginative. It is a great example of how a relatively small publisher can be at least as innovative as those many times its size.”

More news on the economy

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From The Oz today, Tony Abbott eyes $5bn for new road funding:

ROAD funding will surge again in the federal budget in May as the Abbott government casts an “eager eye” on new projects to lift faltering economic growth.

The budget plans include billions of dollars to upgrade old road and rail infrastructure in outer suburbs, on top of the Coalition’s existing $35.5 billion list of public works.

The new spending will come with tough conditions on the states to hasten construction after a federal audit revealed $3bn in cash sitting idle in state coffers.

I guess with the state of economic theory being what it is, the worst that the ALP can say is this:

The Coalition agenda is being criticised by Labor infrastructure spokesman Anthony Albanese on the ground it ignores public transport projects such as urban rail.

Meanwhile:

Investment spending will dive from $167bn this year to $125bn next year, according to figures released on Thursday by the Australian Bureau of Statistics, adding to the case within the government for outlays on public works.

If these are projects that can show a net positive return, then there is a case to be made. Otherwise it’s just more waste.

The end of the age of austerity even before it began

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detroit

The US is heading the way of Detroit. Is there really no stopping this pillage. The headline is just as mad as the text of the story: With 2015 budget request, Obama will call for an end to era of austerity.

President Obama’s forthcoming budget request will seek tens of billions of dollars in fresh spending for domestic priorities while abandoning a compromise proposal to tame the national debt in part by trimming Social Security benefits.

With the 2015 budget request, Obama will call for an end to the era of austerity that has dogged much of his presidency and to his efforts to find common ground with Republicans. Instead, the president will focus on pumping new cash into job training, early-childhood education and other programs aimed at bolstering the middle class, providing Democrats with a policy blueprint heading into the midterm elections.

Does anyone in the United States think that public spending has actually been restrained? Do they actually also think that more spending will give them faster growth and higher employment? And the policy blueprint is a series of unproductive, wasteful projects that will waste more value than it creates. Early childhood education is just so value adding, in about twenty years when these children finally start to work and are so much more productive because of their early start on the education treadmill.

By the time of the next election, there will be a much reduced USA for others to salvage. It’s clearly a train wreck that no one can stop.

Not quite the last and there are more every day

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This was the original post from Thomas Humphrey:

I would like to nominate Professor James Ahiakpor for the position of “Last of the Classical Economists.” This honorific title recognizes James’s stalwart and unceasing insistence that all monetary theorizing since the classical era of Hume, Smith, Thornton, Ricardo, and others has been a snare and a delusion, a retrogression not an advance. It honors James for never saying die, for never admitting defeat, for always pressing on, and for keeping alive the flame of classical monetary theory in this age of heretics, doubters, and dissenters.

I know James and think of him as one of the very few on my classical side of the fence. We have disagreed on things as friends might often do. But we are on the same side. Nonetheless, he is not the only classical economist, so I put up a follow up post to say so:

I think there are more classical economists around than Thomas Humphrey might have taken into account. I always call myself a classical economist to differentiate my views from those who have come later. And given my partiality to John Stuart Mill and Say’s Law, I don’t think there should really be any doubt where my views might be placed.

But let me also say there are more of us classical economists around than you might think. Not a lot but definitely more than just one. Can I therefore recommend to you David Simpson’s extraordinary and excellent, The Rediscovery of Classical Economics: Adaptation, Complexity and Growth (Elgar 2013). This is exactly what the title discusses, the importance of thinking about economic issues with the concepts that had existed amongst the genuinely classical economists at a time before the emergence of marginal analysis and our modern focus on equilibrium. If you read it, you will find modern economic theory not only a pallid imitation of what a true economic theory ought to be but also understand why our textbook version of economics has become near useless in either comprehending or managing our economies.

Following which James himself added this:

Delighted to see Steve’s post regarding the “Last Classical Economist.” I wonder why Tom thinks he has seen the last of the classical economists? Sure, J.M. Keynes used that term almost as a slur. That is why several upholders of the classical tradition, including Dennis Robertson and Ralph Hawtrey, shied away from it. But I embrace that label with pride, just as Steve and some others do.

In fact, after I’ve introduced my students to the evolution of modern macroeconomics that includes the seven schools of thought that I identify, they often ask to know to which I belong. Some express surprise when I tell them, “None!” The schools are (1) Neoclassical Keynesianism, (2) Post Keynesians, (3) New Keynesians, (4) Monetarism, (5) New Classicals, (6) Real Business Cycle Theorists, and (7) Austrians. (I leave out the Marxists.) I also mention that all but the post Keynesians have Nobel Prize winners among them. Several students also tend to ask me why not many economists, including our textbook authors, appear to be aware of the classical macroeconomic principles, including definitions of such terms as saving, capital, investment, and money, that I explain to them and they can clearly understand. My response tends to vary from “I don’t know” to “I’m still trying to find out myself.” You should the surprise look on their faces.

So, I believe there are more classical economists yet to emerge on the debating scene, Tommy!

And now Thomas Humphrey has re-entered, who is himself in many ways one of us:

Steve,

My sincerest apologies for the oversight. I agree that there exist today more than one, and perhaps a sizable number of, classical economists, you being prominent among them.

And it was not the classical theory of distribution and growth, which, as you say, still has much going for it, that I was referring to. On the contrary, I’m a fan of Smithian and Ricardian distribution and growth theory. Rather I was referring to classical monetary theory, some of whose doctrines (but certainly not all, quantity theory and price-specie-flow ideas especially) have, it seems to me, been rendered obsolete, marginalized, and superseded by Chester Phillips-James Mead demand-deposit expansion analysis as well as by Keynesian, New Keynesian, and Post Keynesian doctrines.

I realize that you, as a major critic of Keynes and Keynesianism, will dispute all this. And you may be right in doing so. I’m just enunciating one view, namely my own and others like mine. In the spirit of letting a thousand flowers bloom, I hope you will indulge us even as you disapprove. That’s the beauty of doctrinal-historical conversations. They are willing to tolerate different views.

I might well dispute what Thomas wrote but it is a major advance even to see “Smithian and Ricardian distribution and growth theory” mentioned in a positive light. And to find Wicksell discussed, whichever side one might be on, is a return to some of the important debates of the past that have major implications today. And I do think James is right that it has taken three generations for economists to become brave enough to identify with pre-Keynesian economics which up until recently has been a no-go area for anyone interested in a career in economics, specially an academic career. But things are changing and it is very pleasing to see these shoots beginning to come up.

Out of his depth in every way known to politics

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In how many ways is the American President out of his depth? In fact, are there any ways in which he is not out of his depth? Turns out, according to the White House, that the stimulus was a big success:

President Barack Obama marked the five-year anniversary of a controversial economic stimulus plan by releasing a report on Monday saying that government spending averted a second Great Depression, setting off a new round of partisan debate about the decision.

Obama had been in office only a month when he signed the American Recovery and Reinvestment Act of 2009, a $787 billion stimulus that Democratic majorities in both the Senate and House of Representatives passed over the objections of Republicans.

Many Americans remain doubtful about how helpful the stimulus was for an economy that still struggles to recover from a deep recession that took hold in 2008.

The White House, eager to lay to rest those doubts, issued a five-year report that said the stimulus generated an average of 1.6 million jobs a year for four years through the end of 2012. (Report: http://r.reuters.com/xat86v)

The stimulus by itself raised the level of gross domestic product by between 2 percent and 3 percent from late 2009 through mid-2011, said the report, issued by the White House Council of Economic Advisers.

Jason Furman, chairman of the council, said the Recovery Act had a “substantial positive impact on the economy, helped to avert a second Great Depression, and made targeted investments that will pay dividends long after the act has fully phased out.”

Does anyone at all believe this other than those who are professionally compelled to because of political affiliation? Whatever needed to be done to calm financial markets was done even before George Bush left office. What happened after belongs to Obama. And given the monetary policy that has come since, there is no reason to think the US will leave its present troubles before an even bigger crunch than the one in 2008-09.