The Dunning-Kruger Effect and the ignorance of experts

Sent to me from an old friend. That I can still have friends who find this video appealing says more about them than about myself. The intent is to prove what a self-confident dunce the American president is. For myself, listening to the text leaves me colder than cold. Not to distinguish between immigrants and illegal immigrants is one of those slither-past issues that the video makes hay with. Or to think the issue over the EPA is anything other than the utter idiocy of global warming, and even quotes the 97% statistic! Having been put together in 2017, it was made before the overwhelming evidence that the American economy is booming and manufacturing jobs are returning, so on yet another score it misses the point. And what’s the latest opinion on bringing home troops from Syria? My friend writes in his accompanying email:

‘The tag line is “The enemy of knowledge is not ignorance, it is the illusion of knowledge”‘

which is the essence of the Dunning-Kruger effect, adding:

‘which may have direct implications for your continuing battles with orthodox academia.’

And so it might. But if I find any particular statement fits my mood in dealing with economic theory, it is from Richard Feynman:

Science is the belief in the ignorance of experts.

Which applies as much to modern macro as it does to the modern Administrative State. As for the illusion of knowledge, what I find more incredible is the absence of knowledge. The media’s main role has been to ensure that only one side of the case is ever freely available. If news reporting were ever to become unbiased and honest – which it won’t – the parties of the left would never win another election until they too became parties of the right.

President Trump is applying Say’s Law in managing the American economy

For almost everyone, Say’s Law is something they know nothing about, and especially among economists who are taught that Say’s Law is unambiguously wrong, who themselves not only do not know what Say’s Law is, but would not even know where to look to find out. But as the success of the American economy most clearly shows, Say’s Law is the most important single element in understanding how an economy can be made to grow. And as we find out, the American economy is being managed based on the application of Say’s Law.

The passage below begins at 13:13 of the video, and it is Donald Trump’s economic advisor, Larry Ludlow, specifically stating that the economic policies of the United States at the present time are based on the application of Say’s Law to the American economy. The greatest disaster in the history of economic theory was the Keynesian Revolution and the forced disappearance of Say’s Law. If you would like to see some of this, there is my article on Keynesian economics and Say’s Law that I published in February 2009 just as the stimulus was beginning across the world: The Dangerous Return to Keynesian Economics. It is not just about how damaging modern macroeconomics is, but how disastrous economic theory has become with the disappearance of Say’s Law. This is exactly what Donald Trump believes as is made clear in this discussion from Larry Kudlow.

I just want to note that we are in a boom. We had this blockbuster jobs number today. There is no inflation. There is no inflation. More growth, more people working does not cause inflation.

These old Federal Reserve models are outdated and have proven to be incorrect. Right now the inflation rate is probably less than one and a half percent even while unemployment is low and jobs are soaring and we are growing at three per cent. Why do I say that?

Because that is a point of view which the President holds and I think the President is exactly right.

This is supply side revolution. We’re creating more goods and services. We’re increasing the capital stock and business investment and that’s what creates incomes and jobs.

I’m sure you remember Jean-Baptiste Say. He wrote in the early part of the nineteenth century. He was a French economic philosopher. I met him awhile back, you perhaps did also.

Say’s Law: supply creates its own demand. This is not government spending from the demand side, this is lower tax rates from the supply side, and it is businesses that ultimately drive the economy.

I would like Jay Powell to hear that argument from President Trump who knows the argument very well. Now Jay I think does too – he’s a very smart guy. So I’m just saying that they can benefit from an exchange of views.

Let’s understand that more people working and solid percentage growth is not – IS NOT – causing higher inflation, and therefore Fed policies should take that into account.

Say’s Law. He may have to go and commune with him to fully understand it.

Everyone will need to commune with Say’s Law if they are going to understand how an economy works. If these sorts of things interest you, the third edition of my text, Free Market Economics, sets it all out in fine detail. And let me add this, the endorsement of the book found on the back cover from Art Laffer of Laffer curve fame, who drove the economic policies of the Reagan administration back in the 1980s.

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

A restoration of Say’s Law is an essential if we are ever going to get our economies to thrive and grow.

An economic mystery

JOBS UP BIG!
+312,000
RECORD NUMBER WORKING
MANUFACTURING BEST IN 20 YEARS
HISPANIC UNEMPLOYMENT LOWEST EVER
DOW +747

 

There is not a modern textbook in macroeconomic theory that will explain what is happening in the American economy. The transformation from the Obama years, and of course from the previous Bush years, is astounding. Even the dreaded increases in rates have helped push things along although hardly anyone would appreciate their role.

SAY’S LAW ADDITION!!!!!! From Confused Old Misfit in the comments: “It’s no mystery to Larry Kudlow who, just in passing, mentions (at 14:14) Say’s Law with obvious relish!” This is the video and with endless thanks to COM.

National Economic Council Director Larry Kudlow discusses the December jobs report, U.S. economy, China trade, and the prospect of a meeting between President Donald Trump and Federal Reserve Chairman Jerome Powell. He speaks with Bloomberg’s Jonathan Ferro on “Bloomberg Markets.

How Keynesian economics came to dominate told by Keynesians

The papers from the History of Economics section at the US Conference of Economists during the session on “Keynesianism: Its Rise, Fall, and Transformation in Europe and North America”. So long as Y=C+I+G is central to how macro is taught at all levels of study, the notion that there has been any kind of a fall is ludicrous. No economists taught Keynesian macro ever finds their way to understanding how an economy actually works. These were the papers presented.

Keynesianism in France

Goulven Rubin

University Paris 1 Panthéon-Sorbonne

Abstract

According to Pierre Rosanvallon (1987), Keynesianism arrived very late in France but its triumph was complete. It offered a common language to a very large group of senior officers and engineers working in public administration and nationalized firms. It reconciled the French tradition of Colbertism with the necessity of a modern State. Richard Arena (2000) insists also on the fact that Keynesian ideas spread in a hostile context and initially outside universities and academia where typically French economic traditions dominated. The situation in universities started to change in the 1970s and 1980s when curricula in French universities began to incorporate macroeconomic courses based on IS-LM and with the development of disequilibrium economics. The paper retraces the unfolding of this historical process and insists on the variety of heterodox interpretations of Keynes that flourished in the French context like the works of Bernard Schmitt and the circuitists.

Keynesianism in Germany

Harald Hagemann
University of Hohenheim

Abstract

Keynes had been a central point of reference in debates on economic theory and policy in Germany ever since his Economic Consequences of the Peace (1919), as, e.g., in the controversial debates on the wage-employment relationship at the end of the Weimar Republic. No wonder that the first foreign-language translation of the General Theory was published in German. With the great resonance Keynes had in Germany in the interwar period it is no surprise that from the early 1950s onwards neoclassical synthesis Keynesianism became the dominant approach at West German universities. More astonishing is the fact that with Erich Schneider at Kiel, a former student of Schumpeter played a key role in this process. In economic policy, however, Keynesianism gained a rather late entry in the recession of 1967 and only lasted until 1974-75.

Keynesianism in Canada

Robert W. Dimand
Brock University

Abstract

Canada was one of the first countries to commit to a Keynesian goal of maintaining high and steady levels of employment after World War II with the 1945 White Paper. Keynes’s former students A. F. Wynne Plumptre and Robert Bryce were prominent in the Federal Government, notably the Department of Finance, in the quarter century after the war, but others, notably Mabel Timlin, author of Keynesian Economics (1942), also helped spread Keynesian ideas among Canadian economists. William A. Mackintosh, both as an academic and a wartime temporary civil servant, was a central figure, drafting the 1945 White Paper and seconding Keynes’s motion to accept the final act of the Bretton Woods conference. Bank of Canada Governor Gerald Bouey’s 1975 embrace of monetary aggregate targeting signaled the decline of Keynesian influence on Canadian public policy.

Keynesianism in the United States

Mathew Forstater
University of Missouri-Kansas City

Abstract

Two issues are at the heart of Keynesian economics in the United States, one theoretical and the other practical. The theoretical issue regards whether Keynes’s demonstration in the General Theory of Employment, Interest and Money that there can be involuntary unemployment in macroeconomic equilibrium requires an assumption that wages, prices and/or interest rates are “sticky” (inflexible) downward, or some other market imperfection. The practical issue is related to the theoretical one. Keynesians have tended to be pragmatic when it comes to economic policy, preferring to use fiscal and monetary policies to pursue macro goals of full employment, price stability, and stable economic growth rather than focusing on efforts to remove the imperfections, which would permit market forces to work out the short-term Keynesian troubles. The most recent mainstream incarnation, so-called “New Keynesian” economics, has all but abandoned the important remaining economic and political legacies of the tradition.

How to steal so that those who are robbed actually believe they are being made better off!

Santa-Unicorn

Keynesian economics defined and explained: an economic theory whereby the rich steal from the poor who are made to feel grateful because they are led to believe they are benefitting from the money taken from them and parcelled out by governments to be spent by their friends.

It may create misery, but it is a stable sort of misery in its own way.

Carbon taxes may be a new means of achieving the same end but through a different form of deceit.

The political class is the new aristocracy.

It’s more difficult to understand than you think

The reasons are explicable but they are very difficult to understand without a thorough knowledge of how economies work.

From Instapundit

GLORIA ALVAREZ ON REASON TV: Socialism Fails Every Time (Video):

It certainly has a lot of bad luck associated with it, for some inexplicable reason.

For an explanation, you need to go to what is known as the Socialist Calculation Debate, and then be prepared to spend a long time thinking it through. You can easily see that all such experiments have failed in the past, but that is empirical, and never convinces since it is always different next time, at least when it all begins. The end point is always The Soviet Union, Cuba, North Korea and Venezuela, but why?

Getting Say’s Law right is hard

This is an article on the great economist, Leland Yeager, who has just passed away. And in this article in memoriam, Market Grandmaster by James A. Dorn, there is a discussion on Say’s Law which is dangerously off centre as has been virtually every discussion since the publication of The General Theory in 1936. Here is what is right taken directly from the article: “there can be no problem of deficiency of aggregate demand”. That is precisely what Say’s Law means. To this principle there are no exceptions. But what is said is that “fundamentally” there can be no deficiency of demand, but that it does occur on some occasions. To accept an exception, especially this, you might as well be a Keynesian.

Say’s Law did not rule out recessions. The idea that classical economists had some principle that made recessions impossible is so loony it’s hard to understand how such an idea could ever have established itself, yet that is what Keynes did. Therefore, to refute Keynes, one must begin by showing how untrue this was. Say’s Law rules out only one thing. It rules out, and rules out absolutely, demand deficiency as a cause of recession but nothing else, and most especially recessions due to monetary disturbances which were recognised by classical economists as frequent and often devastating. The classical theory of the cycle, stretching back to the start of the nineteenth century, discussed monetary breakdown and their effects. Monetary disturbances are not a deficiency of demand but a structural deformation. The GFC was not caused by a deficiency of demand but a monetary disturbance. Nor did a public sector stimulus in any economy lead to recovery, which might have occurred had demand deficiency been the problem. The contour and causes of the GFC were not just consistent with the classical theory of recession, but so too was the failure of any recovery to gather momentum anywhere in the world. This description mis-states the conclusions reached by classical economists, which we now bundle together under the heading of Say’s Law.

When the supply of and demand for money do not mesh, monetary disequilibrium can upset the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

To describe this as a qualification to Say’s Law is simply wrong, but worse, concedes almost all the ground that Keynesians need to drive public spending upwards, and not just during recessions but in every phase of the cycle.

Here is Dorn’s text on Say’s Law.

Say’s Law Is Fundamentally Right

According to Yeager (1979), “There has been too much aggregation in macroeconomics, theoretical and applied—too much of the notion of aggregate demand confronting aggregate supply. Fundamentally, Say’s Law is right: supply of some goods and services constitutes demand for other goods and services; fundamentally there can be no problem of deficiency of aggregate demand.” However, “the exchange of goods and services against goods and services takes place through money.” When the supply of and demand for money do not mesh, monetary disequilibrium can upset
the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

Consequently, Yeager emphasized that students need “to understand the tremendous importance of money in facilitating exchange and thus in facilitating the division of labor in producing
the goods to be exchanged.” In particular, they need to recognize that “money facilitates economic calculation and the comparison of costs and benefits and the signaling function of price and
profit” (ibid.).

Yeager: Market Grandmaster

Yeager goes on to argue that it is “precisely because money is so important to the working of the economic system [that] monetary disorders can have fateful consequences.” Thus, there is a “hitch in Say’s Law: Although ‘fundamentally’ goods and services exchange against goods and services, money is the intermediary in this process; and if the demand for and supply of money get out of balance, these fundamental exchanges are impeded” (ibid.).

Yeager elaborated on this idea elsewhere, explaining that an

imbalance between the actual quantity of money and the total of desired cash balances cannot readily be forestalled or corrected through adjustment of the price of money on the market for money because money, in contrast with all other things, does not have a single price and single market of its own. Monetary imbalance has to be corrected through the roundabout and sluggish process of adjusting the prices of a great many individual goods and services (and securities). Because prices do not immediately absorb the full impact of the supply and demand imbalances for individual goods and services that are the counterpart of an overall monetary imbalance, quantities traded and produced are affected also. Thus, the deflationary process associated with an excess demand for money, in particular, can be painful [Yeager 1983: 307].

Oxford University Press from out of nowhere quotes Mill’s fourth proposition on capital

This is a tweet sent out by Oxford University Press Economics.

“Demand for commodities is not demand for labour.” – John Stuart Mill

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.
From Oxford University Press with Mill’s fourth proposition on capital – demand for commodities is not demand for labour – just thrown out for comment. So I commented:

Replying to 

The statement is true, much to the shame of modern economics. I have written an article on just this: “Mill’s Fourth Proposition on Capital: a Paradox Explained”, published in the March 2015 JHET. Ever wonder why no stimulus has ever led to recovery? Mill explained it in 1848.

As I wrote to my friend and colleague who had spotted the OUPE tweet and forwarded it to me:

From out of nowhere, really, that OUP should suddenly bring forward that quote of all quotes from Mill. Wondrous that you even saw it and thank you for sending it along. I have now added my own tweet to the rest. The destructiveness of Keynesian economics ought to be perfectly evident everywhere except that it’s not. Sad and yet funny that virtually no one today can even work out what Mill had meant even though it had been the universal view of every economist right up to the publication date of the General Theory. And I don’t mean that people disagree with Mill. I mean that no one can even explain why Mill and all of his contemporaries thought this was true so just end up befuddled but leave it alone.

Need I add that Leslie Stephen thought that Mill’s Fourth Proposition was “the best test of a sound economist”? Well, of course I don’t need to, but I will, and also add that Stephen was right and it is.

LET ME ALSO ADD THIS: From The Oz today, via David Uren:

“Average household incomes have not improved significantly since the global financial crisis in 2008-09.”

We are talking about a decade in which real incomes have not risen and during which the unemployment rate has hardly budged. I wrote this in 2008 (and published Feb 2009).

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.

Mill’s fourth proposition is pure macro (or theory of the business cycle if you want to think in classical terms). You cannot generate a recovery from the demand side is how you might say it today. In the 82 years since The General Theory was published there has not been a single instance where this has been shown to be untrue.

Mill and the marginalists

There was a list of papers put up on the History of Economics website this week dealing with the History and Philosophy of Economics, of which the first was this, from which I have also excerpted the relevant bits for what I comment on:

Sraffa’s Silenced Revival of the Classical Economists and of Marx.
Guglielmo Chiodi (Sapienza University of Rome (IT))

The standpoint of the old classical economists as well as of Marx “has been submerged and forgotten since the advent of the ‘marginal’ method” – to borrow Sraffa’s own words. The neoclassical (or ‘marginal’) paradigm, in fact, triumphantly dominated over the twentieth century (and is still dominating even now). A serious step towards the rehabilitation of the paradigm of the old classical economists was made by Sraffa (1951) with his remarkable ‘Introduction’ to Ricardo’s Principles, his seminal 1960 book Production of Commodities by Means of Commodities (PCMC) followed a few years later, as a logical completion of his long-standing work.

After long contemplating whether I should stir up this particular hornets’ nest, in a went with my own reply. Here then is what I wrote.

A very interesting list, but I was quite struck by the first of these on Sraffa since I have been attempting the same resurrection, except that I would replace Marx with John Stuart Mill and would write:

The standpoint of the old classical economists as well as of Mill has been submerged and forgotten since the advent of the ‘marginal’ method.

The latter half of the nineteenth century was, in my view, the high point of economic theory, which is why Marx still attracts so many since he constructed his theories on the framework that had been crafted by the classical economists of his time. But much more acute was Mill whose economics may never have been surpassed. The “marginal method” shifted economics from the supply side to the demand side, bad enough in itself since it set up the advent of the Keynesian Revolution, but beyond that, removed the moral and ethical side of economic theory from the way economics was taught and understood and replaced it with a mathematical approach based on an unmeasureable and largely mythical entity called utility. The entrepreneur disappears and everything ends up determined by the relative addition to utility of increased units of particular forms of output. The human, moral and philosophical dimensions of life have vanished. Thus, if the aim is to provide “a genuine alternative perspective and a radically different representation of the economy, compared with that provided by neoclassical theory” you have no need to go to Marx, but can do it in a more sure-footed way by going to Mill.

As an example of what we might find in such a change in direction, let me provide this quote from Volume II of The Growth of English Industry and Commerce in Modern Times by W. Cunningham. Volume II is titled “Laissez-Faire” and at pages 745-46 of my copy (CUP 1912 but written much earlier) we find this:

“The economist of the early part of last century was ready to explain how the greatest amount of material wealth might be produced but not to discuss the uses to which it might be applied; he was prepared to show on what principles it was distributed among the various individuals who formed the nation, and to leave the question of consumption to each personally. But philanthropic sentiment and religious enthusiasm were not content to leave the matter there, and public opinion was gradually roused to demand that practical statesmen and their expert advisers should look farther ahead. Under the influence of these larger views, John Stua

The question really comes down to what questions a modern economist can answer that a classical economist could not, and I cannot think of any at all. As for the questions that a classical economist tried and did answer, there were many that no modern economist is able to answer, at least not within the confines of economic theory as it now is.rt Mill gave a new turn to economic study. He was not satisfied with discussing mere material progress. He could contemplate a stationary state with calmness; he could not but dwell with bitterness on the great misery which accompanied increasing wealth; and he tried to formulate an ideal of human welfare in his chapter On the Probably Futurity of the Working Classes. In this way he succeeded in indicating an end towards which the new material resources might be directed, and thus restored to Economics that practical side, w

hich it had been in danger of losing since the time of Ricardo. It is important that we should have a method of isolating economic phenomena and analysing them as accurately as may be, and this Ricardo has given us; but it is also desirable that we should be able to turn that knowledge to account, – to see some end at which it is worthwhile to aim, and to choose the means which will conduce towards it; this we can do better, not merely intuitively and by haphazard, but on the reasoned grounds, since the attempt was first made by Mill.

The question really comes down to what questions a modern economist can answer that a classical economist could not, and I cannot think of any at all. As for the questions that a classical economist tried and did answer, there were many that no modern economist is able to answer, at least not within the confines of economic theory as it now is.

It is possible that economics could once again become useful

The entrepreneur is the missing ingredient in economics about which I have written. What cannot be linked is the paper I did on “The Absence of the Entrepreneur in the Economic Theories of the English-Speaking World”. What there is a link for is Origin and Evolution of the Term “Entrepreneur” in English, unpublished alas but available online.

But when it comes to the study of entrepreneurship, the names that matter are William Baumol and Israel Kirzner. Baumol has unfortunately gone to his reward, but Kirzner, bless him, at 88 has now been formally recognised by the American History of Economics Association. The citation below virtually leaves out his work on the entrepreneur but still does focus on his Austrian perspective. But even in awarding him the Distinguished Fellow Award, they also added, “our recommendation is, of course, based on his scholarly contributions and not on his political views”. Heaven forfend that that anyone should think that his political beliefs should matter, but you may be sure that they did. Nevertheless, here we are. There is also finally recognition that mainstream economics has no penetration in allowing us to understand how an economy works. A straw in the wind, but a good sign all the same.

The 2018 HES Distinguished Fellow Award was presented to Israel Kirzner at the recent HES conference at Loyola University, Chicago. Several strong candidates were proposed by the membership this year. The nominating committee, formed by Robert Leonard, Jeff Biddle and Mauro Boianovsky (chair), unanimously agreed that the most deserving of these candidates was Israel Kirzner and recommended to the HES Executive Committee that he should be the recipient of the HES Distinguished Fellow Award in 2018. The nominating letter was submitted by Peter Boettke, together with supporting letters by Bruce Caldwell, Karen Vaughn and Mario Rizzo. Our recommendation resulted from our consideration of several aspects of Kirzner’s work and career.

Born in 1930, Kirzner is well known as a leading scholar in the Austrian economic tradition. His work forcefully illustrates how the history of economics can be used as an important heuristic tool to cast light on current economic research. In that sense, Kirzner shares with members (e.g. Stigler, Robbins, Dobb, Viner, Galbraith, Schumpeter, Hayek, Patinkin and Sraffa) of what Craufurd Goodwin used to call the “Golden Age” of the history of economic thought (HET) a commitment to understanding economic problems through the use of HET as an analytical device instead of a separate sub-discipline. As put by Bruce Caldwell, “precisely because he works within the Austrian tradition, Kirzner often draws on history to make comparisons between the view he endorses and those he criticizes, and often the criticisms are methodological”. This shows especially in his main books The Economic Point of View (1960), Essay on Capital (1966) and Competition and Entrepreneurship (1973).

The highlights of Kirzner’s specific contributions to the history of economics are his 1994 edition of Classics in Austrian Economics (which includes a number of essential translations) and several essays on Von Mises and particularly Carl Menger. As pointed out by Karen Vaughn, Kirzner has been instrumental not only in explaining Menger’s ideas as the founder of Austrian economics, but also in encouraging a revival of interest in his writings. Moreover, as observed by Mario Rizzo, Kirzner is not just a historian of Austrian economics – for instance, in his works on the theories of profit and capital, Kirzner discusses carefully contributions by J.B. Clark, F.B. Hawley, F. Knight, I. Fisher, J. Schumpeter and others.

Kirzner has produced a body of work deeply imbued with a historical-philosophical sensibility. Although our recommendation is, of course, based on his scholarly contributions and not on his political views, it should be noted that Kirzner has shown that it is possible to combine political beliefs and scholarly scruple, and that this has been a source of inspiration for his followers, in whom we see that same attitude perpetuated.