I find modern economic theory so empty of useful ideas that it amazes me that it still survives. Nothing in a modern text ever seems to be of much value in assessing what’s going on or in deciding what policies to pursue. The Economist has put out a series it titles, Six Big Ideas which are standard forms of theory that either state the obvious in complicated ways or state what is almost certainly false in beguilingly simple ways. It is undated so may be quite old. I can only say that once economics ended up in the hands of academics, rather than being the preserve of people engaged in business and the practical realities of life (Ricardo, James and John Stuart Mill), it went off the rails. The one part that makes me think this is a bit old is the discussion of the Stolper-Samuelson theorem, which they describe in this way:

The paper was “remarkable”, according to Alan Deardorff of the University of Michigan, partly because it proved something seemingly obvious to non-economists: free trade with low-wage nations could hurt workers in a high-wage country.

Since this is what Donald Trump is trying to say, seems unlikely they would say it right now.

Still in Shanghai where the G20 is about to be held today and tomorrow and this is the story on the front page of The Weekend China Daily: Slow global growth sets challenges. From which:

How to revitalize a slowing global economy when many policy tools have been exhausted will be a key challenge for leaders at the G20 summit. . . .

Eight years after the global financial crisis, growth has failed to return to anything that would have been considered normal before the crisis.

Of course, it is those very policy tools that have been the problem. I presented my paper on the classical model to a group who would know be more likely to know whether I had deviated from the original texts than any other group alive, here at the UK History of Economics Conference, and the only criticism was that it is too wide to call it “the” classical model, but it would be OK to call it the John Stuart Mill model. Good enough for me. But what did not seem to occur to anyone is that if that is what Mill did say, and if you take his model seriously, as I do, you would never do the things we have been doing to make the economy come right.

For more on this, in the latest Quadrant, there is an article on classical interest rate policies in contrast to what you see today. More on this when I return.

It is a wonder that people who write about interest rate policy don’t bother to actually read what they have written. This is from All eyes on Yellen interest rate dilemma in today’s AFR.

When US Federal Reserve chair Janet Yellen speaks at the Fed’s annual Jackson Hole central banking conference on Friday, investors and economists will want to know how low she thinks interest rates should be set in this brave new world of lacklustre economic growth, weak productivity and soft inflation.

All this with interest rates as low as possible. Whatever low rates have or have not done, they most clearly have not set the economy on fire. So we then have this three paras later:

Policymakers worry that with rates stuck not far above zero in the US, at record lows in Australia and in negative territory in Europe and Japan, central bankers will have little firepower up their sleeves to stimulate the economy in a future economic downturn or crisis.

It was once understood that low interest rates actually cause an economy to stall. And even if you didn’t know this, you think that someone might just begin to consider that low rates do not provide much “firepower” at all. I would actually go further and argue that low interest rates make the economy perform far worse than it otherwise would.

It’s like public spending. If you don’t understand the economic dynamic, increased spending, like lower rates, sounds just like what the economy needs. Both make things worse, but who is ever going to go through the pain of adjustment that cutting spending and raising rates would require? Since no one will, it’s hard to see a genuine recovery any time soon.