Category Archives: Law of Markets

Government must get out of the way

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Keynesian economic theory has turned out to be a device for the rich to rob the poor, for the unproductive to raid the incomes of those who work. We are supposedly all to be made better off through massive diversion of the wealth of our nations into the pockets of the crony capitalist friends of our ruling elites and union leaders who fleece their members in the name of protecting them from the employers who gave them their jobs.

Rupert Murdoch has spoken on this to the G20, the first person not from a government to be allowed to make such a presentation. Paul Kelly discusses Murdoch’s speech under the heading, Equality at risk in the West, says Rupert Murdoch. It’s a damned sight more than just equality that is at risk, but our very prosperity. We are being made poor across the broad expanse of our communities because governments are now the chief agents for dispensing purchasing power. Obama was right: you didn’t earn it. The government earned it, and you will only be allowed to keep what it decides you should keep. This is part of what Murdoch said:

“In America, the most highly paid 1 per cent now pay 46 per cent of all income tax.” . . . “In Britain, the top 1 per cent pay 28 per cent of all income tax. That is a massive shift from what our society looked like 30 years ago. We should all be concerned about this polarisation which was never the intent of policy but is certainty a consequence.

“Quantitative easing has increased the price of assets, such as stocks and real estate, and that has helped first and foremost those who already have assets. Meanwhile, the lack of any real wage increase for middle-income workers means growing societal divisions and resentment.”

Quantitative easing is a disaster but you will not find out why by reading any economics book that I know of, other than mine. The last two chapters deal with what had once been stock standard economics before the General Theory. Even Keynes dealt with the money rate of interest (the price of credit) and the natural rate of interest (the price of actual resources, such as bricks and mortar), but that was in his 1930 Treatise on Money, which he wrote before he was sidetracked by Say’s Law. We are ruining our economies in the belief that we are actually doing them good by higher levels of public spending and lower interest rates to encourage investment. But we are ruining them, which is a fact that is obvious to everyone. The only thing invisible is why. But what Murdoch proposed is absolutely right:

The significance of his nine-page speech is his argument about the limits to both monetary and fiscal policy and the imperative for a new approach based upon the need “for government to get out of the way”. Mr Murdoch called for: labour market reform; lower and more competitive corporate taxes; a crackdown on multinationals — naming Google — for not paying taxes where they make their profits; a rethink on excessive bank regulation, warning “you would have to be mad to join the board of a bank these days”; and recognition that high taxes and over-regulation were damaging economic growth and the public interest.

But if you start from Y=C+I+G you cannot make any sense of what he suggests. Read Chapters 16 and 17 of my Free Market Economics second edition if you would like to understand the classical explanation for what is happening right before your eyes and why these kinds of reforms are needed. I do find it odd that this is the only book I know of, at least one that has been written since the 1930s, that can explain what was once obvious to every economist in the world. But odd or not, that is how it seems to be.

If the government spends the money then you can’t

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When the government does the spending the rest of us are pushed out of the way. Governments cannot create demand, they can only divert it into the production of their own preferences instead of ours which are sometimes, but not always, the same. The notion that their soaking up our resources somehow magically adds to the sum total available to everyone is the most monstrous of all of the monstrous untruths now found in modern economic theory. Here is an article about the United States that would have a sharp resonance across the world. 7 things the middle class can’t afford anymore is its title. I will only reproduce the first of them. You can then read the whole thing for yourself.

Vacations

A vacation is an extra expense that many middle-earners cannot afford without sacrificing something else. A Statista survey found that this year 54% of people gave up purchasing big ticket items like TVs or electronics so they can go on a vacation. Others made sacrifices like reducing or eliminating their trips to the movies (47%), reducing or eliminating trips out to restaurants (43%), or avoiding purchasing small ticket items like new clothing (43%).

Keynesian theory pretends that if the government spends more of your money, you will end up better off. Are people really that stupid to believe such a thing?

Dealing with the inflexible grip of an intolerant orthodoxy

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This was a note posted to the Societies for the History of Economics three days ago.

The Guardian, Tuesday 21 October 2014

Ha-Joon Chang powerfully argues the case that it was “an economic fairytale” which “led Britain to stagnation” (Opinion, 20 October). It may be added that our universities bear a heavy responsibility for this situation. Certainly, it cannot be denied that the fairytale paradigm (“supply-and-demand”, competition in the market, and all the rest of it) can be applied to any economic issue. The point, however, is that the currently dominant adherents of this approach deny that any other approach can even claim to be economics at all; indeed, adherents of other schools of thought have very largely been purged from our university economics departments.

Proponents of the fairytale justify this stranglehold by claiming that all former insights into the economy that have stood the test of time have now been incorporated into their own – narrowly quantitative – “modelling” framework: thus, Keynes’s discussions of uncertainty are reduced to “models” of expectations, Hayek’s alternative to neoclassicism into models of “price messages”, Marx’s heritage into models of inequality, Ricardo’s into “rent-seeking”, and so on. Consequently, so the argument goes, there is no longer any basis for the claim that there are different schools of thought in economics. There is only one.

It is the inflexible grip of this intolerant orthodoxy on university economics departments which has so signally distanced academic economics from engagement in discussion and debate outside the academic arena, much of which is directed towards questioning its fairytales. It is, by the same token, very encouraging that students who reject their approach have in the past year or more been reintroducing into university economics departments the kind of vibrant debate which ought to lie at the heart of academic life.

Dr Hugh Goodacre

Member of the academic board, University College London

I could not have agreed more so this was the reply I posted today:

I left Hugh Goodacre’s interesting post alone for the last few days to see if anyone else were interested. Apparently not, but I am. He made two points. First that the monopoly position of the economic mainstream, which he described as “this intolerant orthodoxy”, needs to be confronted so that other approaches to thinking about economic theory are brought into the curriculum. And then second, he notes that there has been the start of a kind of uprising amongst economic students who believe they have been deprived of the kind of broader education they would prefer but do not know how university departments can be encouraged to teach it.

I am in complete agreement with the need to bring these various other traditions into mainstream debate and am also working with the student movement, the so-called “Post-Crash Economics Society”, which coincidentally just last week had its first meeting in Australia.

There are many more ways to approach economic questions than those found in the confines of the mainstream. There has also been such a failure of the economic theory to provide much guidance in getting our economies out of the problems we are now in, that I find it a scandal how little effort has been made to have a post mortem on what went wrong. And when I think of what it is that went wrong, I am not referring to the frequently raised question about why was no one able to foresee the GFC, but the more significant question, which is, why are the policies that have been introduced to restore our economies to health not working?

The Post-Crash Economics approach is one way of going about it. But given my first experience here I have doubts about whether this is much of an answer even though the right questions were being asked.

The main speaker had come all the way from Manchester to discuss what they had in mind. And while there were various moments when his own underlying agenda was all-too-obvious to me as a long-ago member of the left, his final slide had the words “It’s time to challenge the orthodoxy” and showed a woman with a “power to the people” fist in the air.

I therefore asked the first of the questions from the floor, which was more of a comment than a question. And what I said was something like this

“If you would like to set up a group that widens the study of economics and introduces the full range of the various schools of thought to the education of economics students, then I am with you. But if you are going to just use this grouping as another version of the ratbag left, then you will do nothing other than create one more meaningless structure which someone such as myself will have nothing to do with. Your presentation was not neutral. You are a person of the left, which is all right since many people are. But you will only succeed if what you do really is neutral between all of the various groups that find neo-classical economics wrong in important respects. Economics, however, is not an easy subject that someone without formal training can choose amongst theoretical perspectives without serious study. If this is just one more self-indulgent anti-capitalist rant, then this will go nowhere. You cannot ‘democratise’ the study of economics as you described your ambition as if economics can be some kind of all-in enterprise where everyone’s opinion counts for one and no one’s counts for more than one. If you are genuinely interested in broadening the perspectives students receive, then, but only then, will you have the support of those of us from a more market-oriented perspective, or indeed, from anyone with an interest in the fullest development of economic theory.”

To be quite blunt about it, economic students are in no position to suggest how economic theory ought to be taught or what the content of their courses ought to be. And even while I agree with them that there is a large problem with mainstream economic theory, and I am pleased to find they are curious about other approaches, I cannot see how they can have much to say about which economic theories are the most appropriate. It is an issue to be decided within departments of economics and amongst economists themselves. They are absolutely right to seek a wider set of perspectives but I am not sure they are going about it in the right sort of way.

My own version of what these students have sought was proposed in my Defending the History of Economic Thought (Elgar 2013). In my view, the ideal place for debates among the various economic traditions is within the study of the history of economic thought. This is where it should be. Such discussions should be found on our websites, in our journals and as an important part of our conferences. Every one of these heterodox traditions has a history of its own that is an essential element in understanding these theories. Whether Austrian or Marxist or anything else between, each focuses on its own historical development as a way of understanding its own core concepts. It is, sadly, only the mainstream that ignores its history, which is why HET has almost disappeared from within most schools of economics.

I not only think this is part of the means to save the history of economic thought from extinction, but it would also be a valuable addition to the education of economists. The most important ability an historian of economic thought must have may be an ability to make sense of the views of others. It is why HET should be a forum for discussing the widest range of perspectives so that we can all learn new things from each other.

The academic equivalent to foreign travel

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Back in April I noted the birth of what is known as Post Crash Economics. You can read this previous post but basically there is a concern that modern economics, in the way it is taught, is too narrow and shuts out alternative perspectives. As stated in the initial Report that was initiated at the University of Manchester:

This lack of competing thought stifles innovation, damages creativity and suppresses the constructive criticisms that are so vital for economic understanding and advancement. There is also a distinct lack of real-world application of economic ideas, with the focus being on abstract modelling that often seems devoid from reality. Finally, the study of ethics, politics and history are almost completely absent from the syllabus. We propose that economics cannot be properly understood with all these aspects excluded.

Well I agree with all of that, but with me it was Pre-Crash Economics as well. There is a need for wider vistas and a recognition that the various heterodox schools within economics ought to be actively engaged within mainstream discussion of economic issues. With a Deputy Governor of the Bank of England and the endorsement of the Institute of Economic Affairs, there is at least a possibility that the PCE movement may not simply become another leftist rant of no consequence.

The first meeting of the Australian PCE Society was held today at the University of Melbourne and I went along. The chap who spoke, who had come all the way from Manchester to discuss what they had in mind. And while there were various moments when his own underlying agenda was all-too-obvious as a long-ago member of the left, his final slide had the words “It’s time to challenge the orthodoxy” and showed a woman with a “power to the people” fist in the air.

I therefore asked the first of the questions from the floor which was more of a comment than a question. And what I said was something like this:

If you would like to set up a group that widens the study of economics and introduces the full range of the various schools of thought to the education of economics students, then I am with you all the way. But if you are going to just use this grouping as another version of the ratbag left, then you will do nothing other than just create one more meaningless structure which someone such as myself will have nothing to do with. Your presentation was not neutral. You are without any doubt a person of the left. But you will only succeed if what you do really is neutral between all of the various groups that find neo-classical economics wrong in important respects. Economics, however, is not an easy subject that someone without formal training can choose amongst theoretical perspectives without serious study. If this is just one more anti-capitalist rant, then you can forget it. You cannot “democratise” the study of economics as some kind of all-in enterprise where everyone’s opinion counts for one and no one’s counts for more than one. But if you are genuinely interested in broadening the perspectives students receive, then, but only then, will you have the support of those of us from a more market-oriented perspective.

Unfortunately, Robert Conquest’s second law of politics seems destined to be repeated: “Any organisation not explicitly right-wing sooner or later becomes left-wing”. Given what I saw today, it will be sooner rather than later but I shall continue coming along at least for a while.

But let me stress this. The Australians who have done the organisation here are trying to make this work as it is intended to work. I was specifically invited and while only belatedly asked to bring along others, the invitation was sincere. If there is a proper spirit of inquiry – very rare but not unknown – then this could be a useful and interesting forum. There is never any doubt that those of a leftist persuasion will turn out. More difficult will be to find those of a free-market bent. Everyone who comes along does, of course, have their own agenda. But sometimes, as might be possible in this case, the mutual agendas will be reinforcing where each of us can get something of interest. And anyway, I like talking to others about economics and listening to what they have to say.

Which brings me to the lunch that followed the seminar. There I discovered one more reason to study the history of economic thought, one that had not occurred to me before. In studying HET, what you have to be able to do is make logical sense of what someone else has said. You have to be able to understand another person’s argument and make it coherent. You are not, of course, asked to accept this other argument but you have to be able to see why someone else might have thought it was true, and the circumstances that allowed them to think it is true. I don’t say it is easy but I do say it is a valuable skill. It is the academic equivalent to foreign travel. Some people go to other countries and learn not a thing other than how weird other people are and come back unchanged. And then some people go to other countries and find out how others live so that they can learn something about themselves by learning about these different cultures.

Free Market Economics and Say’s Law

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This post is the second of a series I am writing on the second edition of my Free Market Economics that has been published in association with the Institute of Economic Affairs in London. This post focuses on the single most important principle in economics which now goes under the name Say’s Law. But it is a principle that was deliberately eliminated from within mainstream economic theory by Keynes in his General Theory and has disappeared from virtually all economic discourse since that time.

The book was itself written because there is literally no economics text of any kind anywhere that discusses Say’s Law. Yet it was this principle that made it perfectly obvious that the stimulus being applied across the world from the end of 2008 would lead to an economic stagnation that would last years on end. That is why I immediately began to write the book then and there, but it is also why I had published in February 2009, just as the stimulus was getting under way, an article with the title, “The Dangerous Return to Keynesian Economics”. The article specifically discussed the crucial disappearance of Say’s Law and included this forecast:

“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.”

While virtually the whole of the economics profession remains flummoxed by what has happened since the stimulus, neither my students nor myself have been in any doubt. It has been as obvious as the noonday sun, but invisible to anyone brought up on modern macroeconomics which has embedded the theory of aggregate demand, Keynes’s disastrous contribution to economic theory.

Say’s Law specifically stated that demand deficiency, that is, a deficiency of aggregate demand, could never be the cause of a recession (or in the archaic language of the classics, “there is no such thing as a general glut”). It then specifically told governments that while some additional public expenditure during recessions might do some small good, such a stimulus would never restore an economy to robust health but would, instead, do serious damage, and the larger the stimulus the more damage it would do.

The book explains the nature of Keynesian economics but also explains why a stimulus could not possibly have returned our economies to rapid rates of growth and low unemployment. The experience of the past six years ought to have made all this supremely evident in practice. But without an understanding of Say’s Law, there is not a chance in the world anyone will understand why the stimulus has been the colossal failure it has been.

Although named Say’s Law after the early nineteenth century French economist J.-B. Say, it was a principle that was part of the bedrock foundation of economic theory right up until 1936. But what will never be told to you by any Keynesian economist (in large part because they don’t even know themselves) is that the term Say’s Law was invented in the twentieth century by an American economist who thought it was absolutely essential for clear thinking in economics and brought into active use only in the 1920s.

If for no other reason, I commend my book to you because it is the only place where one can have Say’s Law explained in a way that makes you understand what economic theory has lost. It will also explain why the stimulus did not work and what must be done instead, reasons enough to buy the book I would hope. But there are also others which I will come back to in later posts.

The economics of John Stuart Mill

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I have just sent this note off to a publisher about a book I would like to edit. I recently wrote a rejection for an article on John Stuart Mill that was sent back to me three times after which they asked me to write a reply since they were going to publish it anyway. I was coincidentally also refereeing another article at the time for a different journal which has come back for a second time since I think the other referee must have liked it and they will publish notwithstanding anything I might say which is also about Mill. It was then with the two of them together that I finally worked out that no one knows what Mill wrote or what he means. I very strangely fell into Mill’s economics as just part of my reading things that seemed interesting and was immediately captured by his logic and good sense. I didn’t read it the way most academics do, as a kind of deciphering exercise with modern economics as the standard of excellence. I instead read it with an open mind just for interest. My Free Market text is almost literally an amalgam of Mill, Henry Clay and a smattering of more modern gadgetry. So this is the note I wrote:

I copied you in on an earlier email in which I mentioned an idea I had proposed to you quite some time ago. As I noted, John Stuart Mill’s Principles of Political Economy is the least accessible economics text from amongst the whole of the economics literature. It is not just that it is long-winded, but it contains so much that is completely foreign to a modern economist that it is straightforwardly impenetrable. It also delves into vast oceans of explanation that exhaust even the most patient reader. And there are chapters one after another that deal with issues that might have been current in 1848-1871 but which are of no relevance today. My wish is to put together a more compact Mill that is directed at people who would like to understand what Mill was saying that is relevant today but do not have any idea where to start. And to tell the truth, I think there is hardly anyone else alive who could do it. I will attach an article of mine on Mill’s “Fourth Proposition on Capital” which I have described as economic theory’s version of Fermat’s Last Theorem. No one has been able to make sense of it since 1876 although many have tried, including Marshall, Pigou, Taussig, Keynes and Hayek, not to mention modern commentators such as Harry Johnson and Sam Hollander. No one can even make it make sense, whereas I just included it in my Free Market Economics and teach it to my students who find it perfectly straightforward. They wouldn’t even know there’s a controversy or why it’s controversial since really, it makes perfect sense. Therefore in editing Mill, each of the chapters that I would want to include would also require some kind of introduction so that someone could get past the 150-word sentences and see the point. It is, of course, hard for me to judge whether this would be a commercial proposition for you but for me it would represent an important contribution to the economics literature and for that reason may also sell.

What has made this seem more urgent than before was a paper I recently refereed which I rejected three times before being told that based on the other referee they had decided to publish but invited me to write a response which I have now done. You will see the kinds of things in the article that are found in Mill but which are incomprehensible today. Even scholars who write on these issues are unable to comprehend what classical authors believed and why it might be relevant today. But the thing is, Mill is the comprehensive answer to so much of what is wrong with economic theory today. I just find myself surprised to discover that I am one of the few people around who can explain what Mill wrote. I read others who write on Mill and almost no one seems to read Mill directly but only in second-hand form, much the same as with Adam Smith. Anyway, this would interest me to put together and I would like to think of this as my next major project.

What gets me is that if you merely apply Mill to current economic events and policies, the outcomes are perfectly obvious.

Classical economics rediscovered

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I have come across a summary of David Simpson’s The Rediscovery of Classical Economics written by David Simpson himself and published by the Royal Economic Society. Before I quote more extensively, I will note where he wrote:

I refer to an intellectual tradition that began with Adam Smith, was continued by Marx, Menger and Marshall, Schumpeter and Hayek and in the present day is represented by theorists of complexity.

It never surprises me to see the name of John Stuart Mill missing from such lists since Mill is the most difficult of all of the classical economists to access for any one schooled in modern theory. Yet it was Mill who set the standard for the second half of the nineteenth century and was explicitly followed by Marshall and even Hayek even as they turned economics into the more familiar form we find today. I might also mention that what makes Marx interesting even now is found in Mill only with much more common sense as well as a far deeper economic understanding. Mill is the high point of classical thought, and in many ways the high point of economic thought. But who amongst any of you would be able to contradict me, you followers of Keynes and marginal analysis, who barely know Mill’s name never mind have any idea of what he wrote? This is Simpson’s description of the economics that has all but disappeared.

The hallmarks of this classical tradition are principally three. The first is the belief that the growth of the economy, rather than relative prices, should be the principal object of analysis. Coupled with that belief is an understanding of the market economy as a collection of processes of continuing change
rather than as a structure, and that the nature of this change is self-organising and evolutionary. Finally there is a conviction that economic activity is rooted in human nature and the interaction of individual human beings.

The differences between classical theory and equilibrium theory can be summarised in the following terms. Classical theory focuses on change and growth within open, dynamic nonlinear systems that are normally far from equilibrium. Equilibrium theory, on the other hand, analyses the theory of value within closed, static linear systems that are always in equilibrium. As to the essential nature of economic activity, classical economics makes no distinction between micro- and macroeconomics. Patterns of activity at the macro level emerge from interactions at the micro level. Evolutionary processes provide the economy with novelty, and are responsible for its growth in complexity. In equilibrium theory micro-and macroeconomics remain separate disciplines, and there is no endogenous mechanism for the creation of novelty or growth.

The behaviour of human beings in classical theory is analysed individually. People typically have incomplete information that is subject to errors and biases, and they use inductive rules of thumb to make decisions and to adapt over time. Their interactions also change over time as they learn from experience. In equilibrium theory, individual behaviour is assumed to be homogeneous and can be modelled collectively. It is assumed that humans are able to make decisions using difficult deductive calculations, that they have complete information about the present and the future, that they make no mistakes and have no biases, and therefore have no need for adaptation or learning.

Simpson finishes by discussing where economics now needs to go under the heading, “The Implications for Economic Theory”. I think this is both very limited in what is sought but also almost impossible to imagine being taken up within the profession. I’m not so sure about the need for non-linear algebra, but at least with this we have the commencement of a program for change:

First of all, courses in economic history and in the history of economic thought should be a required part of the curriculum for every student of economics. The study of economic history, like the study of complex systems, reveals the importance of context in understanding economic behaviour. The study of the development of economic thought helps us to appreciate the weaknesses as well as the strengths of a theory. Macroeconomics should be downgraded, and give way to the study of business cycles.

Secondly, more space should be found for the analysis of dynamic processes at the expense of static theory. The study of the processes of economic growth should be restored to centre stage. This probably means a greater emphasis on nonlinear algebra.

At the same time, the limitations inherent in applying mathematics to economics need to be acknowledged. The importance of the human factor and of human institutions in economic activity means that more attention needs to be given to non-quantitative methods of analysis.

With the scale of disaster that has befallen us since the GFC, there is something radical that needs to be done. And if you are interested in seeing a twenty-first century update on Mill and classical theory, you can always try this.

Saving and investment as understood in 1886

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This is from a note I have just written discussing the 2nd ed of my Free Market Economics. What is most interesting perhaps is the question that was found at the back of a chapter in an economics text published in 1886. Note the assumption that higher saving leads to higher growth, and more mysteriously, that money placed in a bank is not what savings really consist of. All very routine in 1886, now near incomprehensible.

The book being so far from the standard, even people who are potentially sympathetic to what it is trying to explain will be puzzled because of the way in which economic theory is currently taught. I have had the experience now for the past ten semesters in seeing students who don’t get it at the start, specially if they have done economics before, suddenly catching on. What now establishes the course material is that everyone is perfectly aware that neither the stimulus nor the low interest rate regime have brought recovery with it but cannot understand why. So I point out that if you were a classical economist, the economics you would have been taught would have explained all that already, and then I explain what every good classical economist would have known. The question below is one of my favourite questions for this part of the course.

What did Simon Newcomb mean when he asked this question in his 1886 Principles of Political Economy text:

“Trace the economic effect of the frugal New England population putting their money into savings banks. What do such savings really consist of?”

a) for a community the amount of money in banks is not what is meant by saving
b) the economic effect is that a larger proportion of its resources are made available for investment
c) high saving would mean high unemployment
d) money facilitates exchange but resources are what matters
e) the New England economy would be expected to grow only very slowly

It’s useful to me since I try to emphasise that I didn’t make this up but that there is a long pedigree to what I teach. It’s only that since 1936 there has been such a discontinuity in economics that the kind of question found at the end of an introductory text in 1886 would be virtually unanswerable using modern theory. “What do such savings really consist of?” is near on incomprehensible to anyone who has only learned modern macro.

Economics a wasteland

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The front page story in The Australian today comes with the title, Economics course is ‘beyond redraft’. The story begins:

THE national economics curriculum is unsalvageable, with ­errors in key definitions and omissions of fundamental concepts that make it “misleading, unbalanced, too imprecise to be useful and … beyond redrafting”, experts have concluded.

Griffith University economics professor Tony Makin and lecturer Alex Robson, in their advice to the federal government’s ­curriculum review, say the cur­riculum incorrectly defines some fundamental concepts including gross domestic product, ­effici­ency and productivity.

They argue that the curriculum omits key concepts, such as the difference between micro­economics and macroeconomics or between recessions and booms.

It also fails to include the great economic thinkers, including the father of economics Adam Smith and his coinage of the term “invisible hand” to describe the forces of the free market.

What can I say, and if you ask me, they may be a little light in their criticism. It is for this reason that I built my own economics course and wrote my own text to go with it, Free Market Economics, now in its second edition. You may think of this as an ad for my book (and my course), but really I am only about to point out the ways in which my own text exactly matches what Makin and Robson are looking for. There is more in the book than just this:

Definitions: The opening is a chapter with the very title “Definitions”. And rather than being at the end of the book as most glossaries are, it is the first thing you come to. Moreover, it is not alphabetic but thematic. If you go through the definitions in order, you are provided with an overview of everything the rest of the book will say but in a condensed form (and not all that condensed since it goes on for 24 pages).

Micro­economics and macroeconomics: I am surprised to find that other texts leave out the micro/macro division, but whatever others may do, I do not. It lays the foundation of the macro side by starting from the most micro of micro concepts, the role of the entrepreneur, a category, I might add, found in virtually no text on economics I am aware of other than perhaps for a sentence or two. If you want a reason to disqualify most courses on economics, leaving out the role of the entrepreneur would be high on my list.

Recessions and booms: My text is the only text anywhere in the world that discusses the classical theory of the cycle. And by being about the cycle, it’s not like that junk Keynesian rubbish which only discusses recessions and what causes them, it discusses why the cycle is actually cyclical. Downturns reach a trough and then economies turn up. Everyone once knew that, but it has been more than three quarters of a century since these have been discussed at any level, never mind within an economics text.

The great economic thinkers: There are two entire chapters on the history of economics which take you from the earliest times through until the Keynesian Revolution. I have written an entire book on how essential studying the history of economic thought is for an economist. It is, but virtually no one does it any more which makes economists less able to think through economic issues. Without a grasp of history, economics has no anchor in anything that truly matters.

The Invisible Hand: In studying Adam Smith, there is, of course, a discussion on the invisible hand. But the book is itself a discussion on the very essence of what a free market is based around the notions of an invisible hand. No economics book that I know of teaches the way a market economy works. The most you get is a bit on supply and demand and from that moment on it is all about how market failures of one kind or another are there at every turn. It is the nature of the way economic theory is presented. To take just one example, I go on myself about how inane calling the one form of market that by definition cannot exist “perfect” competition and how everything after that is described as “imperfect” competition. Not really all that subtle, but the basic point is there is much work for governments and economists to fix.

I am therefore pleased that Tony and Alex have taken on this monster. The failures of the Keynesian stimulus might, you would have thought, started some kind of soul searching within the profession about how badly served we are with the economic theory we now teach. But a billion dollars or more now tied up in textbooks which carry received economic theory into every classroom, wrong though they may be, misleading page after page, they will nevertheless continue onwards. I will merely mention the first of the quotes on the back of my book:

Free Market Economics is virtually a must read for serious economists. . . . Highly recommended.

The book is a synthesis of the economics that existed prior to the Keynesian Revolution. It is where economic theory must go if we are to salvage the study of economics.

General gluts and laissez-faire

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The European Society for the History of Economic Thought has proposed the following as an issue that might be investigated during its next meeting in May:

First, over the issue as to whether a market-based economy tends naturally to use its resources in the best possible way without any State intervention beyond that of providing basic infrastructure and protecting property rights: a matter of concern from the times of the General Glut controversy that saw Malthus opposed to Ricardo down to the debates that have marked the evolution of macroeconomics since the publication of Keynes’ General Theory.

I suppose with the words “from the times of” they are not with absolute certainty suggesting that there is any relationship between the general glut debate and laissez-faire, but let’s face it, they are. And I realise that just because I stated in my Say’s Law and the Keynesian Revolution that “the issue in regard to Say’s Law is not laissez-faire” (p 16) doesn’t mean (1) that anyone interested in this issue read the book or that (2) even if they read it, that they had accepted my argument even if they noticed it.

The conclusion reached at the end of the general glut debate was that demand did not affect the level of economic activity and therefore did not affect the level of unemployment. That may or not be true but was accepted almost without dissent from around 1808 through to 1936, during which time the role of the state became ever more large. In 1935, no one thought of economic policy as laissez-faire but there was even so an almost universal denial of overproduction as a cause of recession and mass unemployment. Indeed, just how far apart the two concepts are may be seen in this comment by John Stuart Mill, the most relentless defender of the impossibility of a general glut amongst classical economists, in his volume, On Socialism. How much farther from the notion of laissez-faire could this be:

The kind of policy described is sometimes possible where, as in the case of railways, the only competition possible is between two or three great companies, the operation being on too vast a scale to be within the reach of individual capitalists, and this is one of the reasons why businesses which require to be carried on by great joint-stock enterprises cannot be trusted to competition, but, when not reserved by the State to itself, ought to be carried on under conditions prescribed, and, from time to time, varied by the State, for the purpose of insuring to the public a cheaper supply of its wants than would be afforded by private interest in the absence of sufficient competition.

Thus roping the two together only demonstrates how little is understood about the nature of the general glut debate – which in our own time being about whether the GFC was due to demand deficiency and a stimulus is the proper response is the central economic question of our time. If I argue that the poor economic conditions of the present are not caused by an absence of demand that makes absolutely no claim about whether there are a chain of government policies and interventions that might help to improve the state of the economy. The possibility of general gluts and laissez-faire are independent concepts.

That governments may base their interventions on the belief that they have to increase aggregate demand is something else. But even if governments finally eventually do reduce their own level of expenditure and did somehow balance their budgets, the notion that we would then be living in a laissez-faire economy would remain unmistakeably wrong. They are not the same issue and should not be confused.