Classical economic theory presents perennial truths that economists once knew but have completely forgotten

The perfect statement of classical economic theory, from David Uren in The Australian today: Get used to the new normal – booming rates of growth are gone.

Over the year to December, growth was only 2.3 per cent and, short of massive revisions by the Australian Bureau of Statistics, Treasury’s forecast of 2.7 per cent growth this financial year looks unattainable

It is time Treasury let go of its vision of an extended burst of rapid growth around the corner.

After a decade in the slow lane, this may be as good as it gets.

It is not such a bad place to be — employment growth has been strong.

It was a staple within classical economic theory that economic growth is unrelated to employment. And there we see it before our eyes, low rates of economic growth and high levels of employment growth. All that is discussed in my Quadrant article this month: The Dangerous Persistence of Keynesian Economics. There at the very end of the article we find the then-Treasurer of the UK, Winston Churchill, discussing the futility of public spending to add to employment in the wake of their attempt in the 1920s to stimulate employment through high levels of public works:

“For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.”

Ninety years later we demonstrate once again what once upon a time every economist knew which now no one knows. Read the Quadrant article if for no other reason than to get another perspective.

The persistent failure of economic theory

I see the RBA today froze at the thought of raising rates in the midst of an economy as stone cold dead as this one. They are, of course, clueless about why this is, just as Treasury is equally clueless. So let me take you to my article just published at Quadrant on The Dangerous Persistence of Keynesian Economics. Here’s how it starts.

OUTSIDE the United States, no economy has fully recovered from the downturn that followed the Global Financial Crisis in 2008-09. The crisis came and went in half a year, but just about every economy continues to have problems generating growth, increasing employment and raising real incomes. As I was writing my article on “The Dangerous Return to Keynesian Economics” in 2009, I commenced working on an economic textbook, now in its third edition, to explain why modern macroeconomic theory is utterly useless, why no one using these economic models as a guide to policy would ever succeed. And here we are, ten years later, and everything discussed in that earlier article, explained in far more detail in my text, has come to pass.


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.
—Steven Kates, Quadrant, March 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?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009


Why did I get it so right? Because nearly everyone else thinks economies are made to grow through increases in demand, while in reality, as was once universally understood, economies can only be made to grow through improvements in supply-side conditions. Demand has absolutely nothing to do with making an economy grow. Demand of course is crucial to how many units of any particular good or service will sell, but has nothing whatsoever to do with how fast an economy in total will grow, or how many workers will be employed.

Does being right count for anything? Not a bit. Still, you can go back to my original article from ten years ago, The Dangerous Return to Keynesian Economics, and see how well what I said then stacks up with how things now are.

Let me add that if you are not already a subscriber, you should be. Subscribe here.

You heard it from me first

Here is what I have been writing about for years, finally confirmed: Low interest rates worldwide were killing productivity growth. Of course, this was from someone at the University of Chicago and not RMIT, so there’s a chance others might take it more seriously – although there is an even greater chance that they will pay no attention to any of it. Still, this is from the report picked up at Zero Hedge reprinted by Martin Hutchison from his website True Blue Will Never Stain.

The paper,“Low interest rates, market power and productivity growth” by Ernest Liu, Atif Mian and Amir Sufi, examines the behavior of firms in a competitive marketplace as interests decline, and demonstrates that, although lower interest rates at first increase competitiveness through increased investment, they also increase the comparative advantage of large firms, thus after a time discouraging the smaller firms from investing and making the market less competitive. If low interest rates persist and approach zero, eventually even the larger firms stop investing, because they are no longer subject to significant competition and thus do not need to invest.

The paper provides theoretical backing to and a possible mechanism for the observation set out in this column on several occasions in the last few years: that ultra-low interest rates in Japan, the Eurozone, Britain and the United States were closely correlated with unprecedented declines in the rate of productivity growth in those countries. In all the high-income industrial countries where interest rates were held artificially low after 2008, productivity growth by 2016 had effectively disappeared altogether, or close to it. The worst effects were seen in the eurozone and in Britain, where inflation continued, making real interest rates sharply negative. Even in Japan, where interest rates have been held artificially low for two decades, the productivity dearth worsened substantially after 2009.

All of this, including what follows below, can be found in much greater detail in the last two chapters of all editions of my Free Market Economics, and of course, in the third edition. If economic management and good economics is of interest to you, go to the link and read it all, but here are bits that you can also find in my text, embedded within the economic theory of the great classical economists. There you will also find a discussion of the natural rates of interest discusses in the article, along with my own diagrammatic explanation of what it is and how it matters.

Economies work best when interest rates are at or close to their natural level, that would be set in a free market. In a Gold Standard system with free banking, interest rates naturally stay close to that level. However, if as in modern economies governments have taken over the money creation and interest-rate-setting functions from the market and move rates a substantial distance from their natural level, then investment decisions become distorted and suboptimal. In such a situation, productivity growth will naturally decline; if the distortion of the interest rate curve is prolonged, productivity growth may even disappear as investments are made into entirely the wrong assets.

Not content with the damage they have already done, some extreme aficionados of low interest rates are devising schemes to drive them even lower, confiscating ordinary people’s cash holdings so that there was no longer any alternative to their diabolical financial schemes. Truly Ben Bernanke’s inspiration of 2002 to drop money from helicopters, uttered at a meeting of the National Economists Club at which I was present, has been among the most economically damaging ideas in all of history.

The article then goes on to discuss who has destroyed more value than the monetary theories advanced by Bernanke while he ran the Federal Reserve, we come to this.

Perhaps the most likely competitor to Bernanke’s contribution as a destroyer of economic value is Maynard Keynes’ “General Theory.” It unmoored us from the established truths such as the Gold Standard and balanced budgets and enabled greedy and unscrupulous politicians to waste ever more of our money in the name of “stimulus.” The California High Speed Rail scheme was just one $77 billion example of such folly; to misquote Oscar Wilde, a man would need a heart of stone not to laugh at its demise this week.

We do not yet know whether negative real interest rates or trillion-dollar budget deficits will be more ultimately destructive of our civilization, and Keynes, not Bernanke, is responsible for the latter. Unlike Marxism and like Bernankeism, Keynesianism has affected the entire planet; indeed, it seems irrefutable, the fallacy that will not die. However, Keynesianism’s effect on productivity is indirect; it merely grows government, a low-productivity activity, rather than destroying productivity directly.

I’m not going to get into an argument over who was worse, as long as we can agree that Keynesian theory has been a disaster (although I think he may have been more charitable to the growth potential of government activities in the modern world).

The point though, is that if you want an economic theory that will guide you in the right direction, no textbook – other than my own – written in the last eighty years will be of any help at all.

Classical economic theory and employment

At the very core of the classical arguments against public spending as a means to raise employment is John Stuart Mill’s 1848 Fourth Proposition on Capital: “Demand for commodities is not demand for labour”. There is no relationship between the level of employment and the level of aggregate demand. Everything that matters happens on the supply side, with the only role of demand being what gets produced, but not how much or how many people are employed. It’s always been difficult to understand, but with macro now specifically stating that demand for commodities does raise the demand for labour, there is virtually no one who any longer even knows what Mill and the classics had said, never mind actually being able to explain why that might be. So with this in mind, there is a quite interesting story that just appeared the other day at Zero Hedge: Finland Abandons ‘Helicopter Money’ Experiment: No New Jobs Created. He’s the whole thing:

With socialists rising to the calls of the ‘free shit army’ and the ever-more-left-leaning liberal intelligentsia imagining ever-more-creative ways to pretend to fund their massive government interventions (Modern Monetary Theory), the topic of “QE for the people” or “helicopter money” or the more academic-sounding “Universal Basic Income” is becoming ever-more-prevalent.

Well, we have some more results in on the impact of Universal Basic Income (UBI) experiments – handing out free money to citizens with no strings attached.

As part of its experiment, in Finland 2,000 unemployed people aged 25-58 were paid a tax-free €560 (£490) monthly income. This was independent of any other income they had and not conditional on looking for work.

As Valuewalk reports, UBI-expert from the Institute for Policy Research at the University of Bath (UK), Dr Luke Martinellicomments:

“Universal basic income has ascended policy debates in recent years, motivated by the shortcomings of existing welfare systems, and our rapidly changing – and increasingly dysfunctional – labour markets.

“Yet despite the idea’s widespread appeal, there remain substantial and unanswered questions about its economic viability and political feasibility. This is why all eyes will be on Finland this Friday and why the results of its UBI experiment will be so revealing.

“We expect these results will provide us with the first really robust evidence on how UBI could affect changes in employment and people’s overall finances, as well as wider measures of wellbeing.”

So what were the results?

Simple (and Dr Martinelli – and the left – won’t like it):

1) People were happier, and

2) No new jobs were created.

As Yahoo reports, this was the widest such study to be conducted in recent years in Europe

“The recipients of a basic income had less stress symptoms as well as less difficulties to concentrate and less health problems than the control group,” Minna Ylikanno, lead researcher at Finland’s welfare authority Kela, said in a statement.

“They were also more confident in their future and in their ability to influence societal issues,” she added.

Results at this stage are preliminary and relate only to the first year of the study, meaning Friday’s findings are far from conclusive. But a hoped-for stimulus to levels of employment has not yet materialized, the project’s researchers said.

“The recipients of a basic income were no better or worse than the control group at finding employment in the open labour market”, Ohto Kanninen, research coordinator at the Labour Institute for Economic Research, said in a statement.

Shocker!!  Who could have seen that coming?

Give people free money for doing nothing, with no conditions, and they will be happier to sit around all day in non-productive utopia.

Finally, we note that, based on these results, Finland’s social affairs minister, Pirkko Mattila, conceded on Friday that the government has no plans to roll out the scheme across the whole country.

And let there be no doubt that whoever might have received this helicopter money would have spent it, to the last Euro.

How to explain why socialism leads to poverty

It is a common mis-perception on the right side of the political divide that they understand and can explain why socialism leads to poverty. The reality is that virtually no one can do this. I had made it part of many conversations over the years, especially after the Venezuelan economy had collapsed, to ask what exactly the problem with socialism is, but it is a much more difficult question than most people seem to understand. There is no doubt that every attempt to introduce socialism anywhere has led to economic ruin. It is as plain as day that socialism rapidly leads to a major reduction in living standards. Absolutely inevitable, but why? There is a relatively small but important literature on this question, but it is complex and is mostly for specialists who have a deeper understanding of the nature and operation of a market economy. You won’t get it unless you have studied economics already, or are prepared to put in the time. You are more than welcome to enter into the intricacies of the Socialist Calculation Debate which explains why without a free market an economy cannot determine either what to produce, and more importantly so far as the certain failure of a socialist economy is concerned, how to produce. Which is why every such economy must fall into an abyss from which they cannot even begin to emerge until their socialist institutions are removed.

I have therefore written an article, that I hope will be accessible to anyone, on why all socialist economies are doomed. I have based it on an earlier classic article published in 1958, I, Pencil which is why I have titled my own version, I, Mechanical Pencil. This is how I, Mechanical Pencil begins, which will explain what I wrote, and the connection with its earlier predecessor.

Many years ago, one of my early ancestors wrote his own life story in a wonderful autobiographical tale titled I, Pencil. He told the story of how he came to be, how he had been the result of thousands of many independent decisions made all over the world by many tens of thousands of individuals. Their collective actions explained how he came to be the pencil he was.

His aim was to explain why socialism doesn’t work. Whatever name you associate the idea of ‘socialism’ – whether it is ‘democratic’, ‘scientific’, ‘utopian’ or something else – socialism inevitably brings poverty and privation to the vast majority who are robbed of their political freedom as well. His aim had been to explain how our free market economic system brings us both freedom and prosperity; how a market economy is indispensable if we are to live our lives as we wish and in our own way, while also becoming more prosperous with each passing year.

Yet I fear his message has been lost in the modern world; in part because we live in different times with different kinds of problems, but also because many fail to separate out the political side of socialism from the economic. Socialist economies are always run from the centre and inevitably become a dictatorship with democratic constraints on the government crushed by those who take control. That is the certainty of it. Political freedom disappears when a socialist government takes over. The loss of freedom is straightforward and unmistakeable. There are no exceptions.

But hidden away beneath the political dimension are the reasons behind the economic catastrophe that follows the introduction of a socialist regime. These outcomes are visible at every turn. There is no disguising the massive reductions in income and personal wealth that are inflicted upon virtually everyone in a socialist economy, other than, of course, those who run the country. Everyone sees it, but virtually no one understands why so many things go so wrong everywhere within the economy and almost all at once.

I have therefore set out to explain why this happens, because we take the prosperity we have so much for granted. We now live in far and away the richest communities that have ever existed. Even the poor are only relatively poor, and live better than all but the royalty of earlier ages – in fact, probably even better than royalty then did as well. I won’t say things are perfect or could not be improved. But I will say that any solution to our problems that tries to make things better by introducing a socialist program of some kind is not only doomed to failure but is absolutely certain to make conditions far worse. Of this, there should be no doubt whatsoever.

I commend the article to you and feel free to pass it along as far and wide as you like.

Socialist calculation debate

From Wikipedia: Criticism of socialism.

Distorted or absent price signals[edit]

The economic calculation problem is a criticism of central economic planning. It was first proposed in 1854 by the Prussian economist Hermann Heinrich Gossen.[8] It was subsequently expounded in 1902 by the Dutch economist Nicolaas Pierson, in 1920 by Ludwig von Mises, and later by Friedrich Hayek.[9][4][10] The problem referred to is that of how to distribute resources rationally in an economy. The free market relies on the price mechanism, wherein people individually have the ability to decide how resources should be distributed based on their willingness to give money for specific goods or services. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows—on the basis of individual consensual decisions—corrections that prevent shortages and surpluses. Mises and Hayek argued that this is the only possible solution and without the information provided by market prices socialism lacks a method to rationally allocate resources. Those who agree with this criticism argue it is a refutation of socialism and that it shows that a socialist planned economy could never work. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by economic historians as “the Socialist Calculation Debate”.[11]

Ludwig von Mises argued in a famous 1930 [actually 1920] article “Economic Calculation in the Socialist Commonwealth” that the pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not “objects of exchange”, unlike final goods, therefore they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[11] This led him to declare “that rational economic activity is impossible in a socialist commonwealth“.[4] Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.

Friedrich Hayek argued in 1977 that “prices are an instrument of communication and guidance which embody more information than we directly have” and therefore “the whole idea that you can bring about the same order based on the division of labor by simple direction falls to the ground”. He further argued that “if you need prices, including the prices of labor, to direct people to go where they are needed, you cannot have another distribution except the one from the market principle”.[12]

Ludwig von Mises argued that a socialist system based upon a planned economy would not be able to allocate resources effectively due to the lack of price signals. Because the means of production would be controlled by a single entity, approximating prices for capital goods in a planned economy would be impossible. His argument was that socialism must fail economically because of the economic calculation problem—the impossibility of a socialist government being able to make the economic calculations required to organize a complex economy. Mises projected that without a market economy there would be no functional price system, which he held essential for achieving rational and efficient allocation of capital goods to their most productive uses. According to Mises, socialism would fail as demand cannot be known without prices.

The socialist planner, therefore, is left trying to steer the collectivist economy blindfolded. He cannot know what products to produce, the relative quantities to produce, and the most economically appropriate way to produce them with the resources and labor at his central command. This leads to “planned chaos” or to the “planned anarchy” to which Pravda referred…. Even if we ignore the fact that the rulers of socialist countries have cared very little for the welfare of their own subjects; even if we discount the lack of personal incentives in socialist economies; and even if we disregard the total lack of concern for the consumer under socialism; the basic problem remains the same: the most well-intentioned socialist planner just does not know what to do.

The heart of Mises’ argument against socialism is that central planning by the government destroys the essential tool – competitively formed market prices – by which people in a society make rational economic decisions.[13]

These arguments were elaborated by subsequent Austrian economists such as Friedrich Hayek[14] and students such as Hans Sennholz.

The anarcho-capitalist economist Hans-Hermann Hoppe argues that in the absence of prices for the means of production, there is no cost-accounting which would direct labor and resources to the most valuable uses.[15] Hungarian economist Janos Kornai has written that “the attempt to realize market socialism […] produces an incoherent system, in which there are elements that repel each other: the dominance of public ownership and the operation of the market are not compatible”.[16]

Proponents of laissez-faire capitalism argue that although private monopolies do not have any actual competition, there are many potential competitors watching them and if they were delivering inadequate service, or charging an excessive amount for a good or service, investors would start a competing enterprise.[17][18]

In her book How We Survived Communism and Even Laughed,[19] Slavenka Drakulić claims that a major contributor to the fall of socialist planned economies in the former Soviet bloc was the failure to produce the basic consumer goods that its people desired. She argues that because of the makeup of the leadership of these regimes, the concerns of women got particularly short shrift. She illustrates this in particular by the system’s failure to produce washing machines. If a state-owned industry is able to keep operating with losses, it may continue operating indefinitely producing things that are not in high consumer demand. If consumer demand is too low to sustain the industry with voluntary payments by consumers, then it is tax-subsidized. This prevents resources (capital and labor) from being applied to satisfying more urgent consumer demands. According to economist Milton Friedman: “The loss part is just as important as the profit part. What distinguishes the private system from a government socialist system is the loss part. If an entrepreneur’s project doesn’t work, he closes it down. If it had been a government project, it would have been expanded, because there is not the discipline of the profit and loss element”.[20]

Proponents of chaos theory argue that it is impossible to make accurate long-term predictions for highly complex systems such as an economy.[21]

Pierre-Joseph Proudhon raises similar calculational issues in his General Idea of the Revolution in the 19th Century, but also proposes certain voluntary arrangements, which would also require economic calculation.[22]

Leon Trotsky, a fierce proponent of decentralized economic planning, argued that centralized economic planning would be “insoluble without the daily experience of millions, without their critical review of their own collective experience, without their expression of their needs and demands and could not be carried out within the confines of the official sanctums” and “[e]ven if the Politburo consisted of seven universal geniuses, of seven Marxes, or seven Lenins, it will still be unable, all on its own, with all its creative imagination, to assert command over the economy of 170 million people”.[23]

Mises argued that real-world implementation of free market and socialist principles provided empirical evidence for which economic system leads to greatest success:

The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: that the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism.[24]

According to Tibor R. Machan: “Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals”.[25]

The level of employment is unrelated to the level of aggregate demand

Mill’s Fourth Proposition on Capital is the element of classical economic theory most foreign to the modern mind. In seven words, Mill stated a truth that has stood the test of time and has never been refuted by any event in history.

Demand for commodities is not demand for labour.

Or in modern words, the level of employment is unrelated to the level of aggregate demand. It is refuted every time public spending is raised to lower unemployment, which has never succeeded on even a single occasion. It was refuted when Peter Costello cut public spending in 1996 and 1997 eventually eliminating not just the deficit but the actual existence of public debt while unemployment disappeared and personal incomes grew at record rates.

And now here from John Hinderaker at Powerline is another instance showing the validity of classical theory over modern macroeconomic junk science: AMAZINGLY, ECONOMY DIDN’T CARE ABOUT “SHUTDOWN”.

I never did notice the extremely-partial government “shutdown,” but some people thought it was a big deal. Not private employers, apparently:

Private payrolls grew in January at a much faster pace than expected as the labor market shrugged off the longest U.S. government shutdown in history, according to data released Wednesday by ADP and Moody’s Analytics.

“Shrugged off”? I don’t know, maybe they welcomed it.

Companies added 213,000 jobs this month, the data show. Economists polled by Refinitiv expected payrolls to grow by 178,000.

The strong jobs growth comes even as the U.S. government was shut down for 35 days in a standoff between President Donald Trump and congressional Democrats over his demand for a wall along the U.S.-Mexico border.

“Even as.”

“The job market weathered the government shutdown well. Despite the severe disruptions, businesses continued to add aggressively to their payrolls,” said Mark Zandi, chief economist at Moody’s Analytics.

“Weathered.” “Despite the severe disruptions.” Really? What disruptions were those? Did they consider that a brief respite from a small portion of government heavy-handedness may have been irrelevant to job growth, or even a positive factor? Evidently not.

There is more good sense in Mill’s 1848 Principles of Political Economy than in any Keynesian text written since 1936. The evidence is overwhelming, but when has evidence ever counted for anything when ideology said something else?

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

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.