Keynes, laissez-faire and coming out of lockdown

This was put up at the Societies for the History of Economics discussion thread:

The Wall Street Journal has a review by Ben Steil of Zachary Carter’s upcoming book, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes:

https://www.wsj.com/articles/the-price-of-peace-review-the-economic-engineer-11588947478

The review is behind a paywall, but I thought many on this list would be interested and would have access to it through a library or other provider.

And behind a paywall it remains, so this is all I could read, but it was quite enough:

“The more troublous the times, the worse does a laissez-faire system work.” Spoken in London in 1923, these words, among the lesser known of the most quotable economist of the 20th century, are perhaps his most important for these, our most troublous of times. For it is now, in the midst of a global pandemic the likes of which we have not seen since 1918, that the importance to life and livelihood of bold, informed and competent government becomes apparent. And no one wrote as originally and forcefully about what such a government does, faced with the prospect of economic collapse, than did John Maynard Keynes.

So let me draw your attention to a pamphlet published in 1926 by that self-same John Maynard Keynes: The End of Laissez-Faire where we find this passage:

From the time of John Stuart Mill, economists of authority have been in strong reaction against all such ideas. ‘Scarcely a single English economist of repute’, as Professor Cannan has expressed it, ‘will join in a frontal attack upon Socialism in general,’ though, as he also adds, ‘nearly every economist, whether of repute or not, is always ready to pick holes in most socialistic proposals’. (Theories of Production and Distribution, p. 494). Economists no longer have any link with the theological or political philosophies out of which the dogma of social harmony was born, and their scientific analysis leads them to no such conclusions.

Cairnes, in the introductory lecture on ‘Political Economy and Laissez-faire’, which he delivered at University College, London, in 1870, was perhaps the first orthodox economist to deliver a frontal attack upon laissez-faire in general. ‘The maxim of laissez-faire’, he declared, ‘has no scientific basis whatever, but is at best a mere handy rule of practice.’

I have noted before that the least understood grouping of economists in history are the later-classical economists from John Stuart Mill through to the end of the nineteenth century, from around 1848 with the publication of Mill’s Principles of Political Economy till around 1890 with the publication of Marshall’s Principles of Economics. I will just mention here that I hope to have at least in part remedied this major deficiency with a book that will be published by Elgar in June, Classical Economic Theory and the Modern Economy [https://www.e-elgar.com/shop/gbp/classical-economic-theory-and-the-modern-economy-9781786433565.html ]. That an economist can still get away with suggesting that economic theory prior to Keynes was rife with notions of laissez-faire shows so little awareness of the history of economics even among historians of economics is a scandal.

Just to focus on Mill, his Principles runs for almost 1000 pages, with the last 200 on the role of government, at the end of which he declares that the role is so extensive and the circumstances of the world so diverse, that even after those 200 pages he could not cover everything a government might find itself in need of doing so that no definitive limitations can be introduced. The only addition to the scope of economic policy introduced by Keynes was the notion of demand deficiency and with it the utility of public spending during recessions to lower unemployment, a policy universally opposed by classical economists but almost universally endorsed today. The historical record since the publication of The General Theory seems to show that the classics were completely right on that score. I cannot think of a single thing written by Keynes that would provide the slightest insight into how to bring our economies out of the lockdowns we have all experienced across the world.

I will also add that I have read the whole review and I will let you judge the book by this one quote from the review:

Mr. Carter seems to believe that Keynes, were he alive today, would be advising Sen. Bernie Sanders. But if we want to know what Keynes would do, we cannot simply extrapolate from his most radical writings.

If it is not immediately obvious how off the planet such an observation is, then I cannot help you further. Nothing I have ever written on Keynes is as discrediting as those words, since Keynes, if nothing else, was a serious scholar who tried to make sense of how an economy worked from a small-l liberal, that is from a classical liberal perspective. I believe he was wrong in his economic theories, but I would never have placed Keynes on the far left of the political spectrum, not only in his own time, never mind today.

HERE IS THE FULL REVIEW FROM THE WSJ:

The Price of Peace
By Zachary D. Carter
Random House, 628 pages, $35

“The more troublous the times, the worse does a laissez-faire system work.” Spoken in London in 1923, these words, among the lesser known of the most quotable economist of the 20th century, are perhaps his most important for these, our most troublous of times. For it is now, in the midst of a global pandemic the likes of which we have not seen since 1918, that the importance to life and livelihood of bold, informed and competent government becomes apparent. And no one wrote as originally and forcefully about what such a government does, faced with the prospect of economic collapse, than did John Maynard Keynes.

With the U.S. Congress having authorized $3.5 trillion in new spending over the past five weeks, it is tempting simply to conclude that we are all Keynesians now. Yet Keynes was hardly the crude advocate of deficit spending that he is too often made out to be. His writings on how to pay for World War II, and how Britain could avoid financial dependence on the U.S. in its aftermath, for example, reflect the careful workings of a brilliant and subtle mind, with the fullest appreciation for detail and circumstance. Were Keynes alive today, he would have much to say not just about what to spend on what but about how to manage the financial burden efficiently and fairly.

Timing, paradoxically, can be critical to a history book, and “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes” couldn’t have appeared at a more opportune moment. Journalist Zachary Carter has crafted a timely, lucid and compelling portrait of a man whose enduring relevance is always heightened when crisis strikes. If there is a conspicuous blemish in the book, it is the polemical turn of its last third, which goes well beyond the life of his subject. Still, readers of all political persuasions will, in the biographical material at least, find plenty of insight for our time.

As Mr. Carter makes clear, Keynes’s life mission was to find the keys to sustaining democracy and economic liberty in the face of challenges from authoritarians of the left and the right—and not when times were easy but when they were most troublous. Now, with economies around the world struggling to emerge from a devastating, unprecedented shutdown, we who have been blessed to live in liberty will need to reflect on what will be needed to preserve it once the present crisis passes (assuming we are wise enough to surmount it).

Like it or loathe it, we are not going back to globalization as we knew it—the globalization that emerged with the rise of China and the internet after the end of the Cold War. Five years after the end of World War I and the start of the Spanish flu epidemic, Keynes was similarly aware that Britons were not going back to the glorious globalization of the late 19th century and the heyday of the British Empire. The task as he saw it, then, was to create a less glorious but more durable regime.

Born in Cambridge in 1883, Keynes had followed in the footsteps of his academic parents, securing, at age 26, a prestigious life fellowship at Cambridge’s King’s College. There he was regarded with awe by some of the greatest minds of the early 20th century. “Keynes’s intellect was the sharpest and clearest that I have ever known,” wrote Bertrand Russell. “When I argued with him, I felt I took my life in my hands.”

Keynes did not, however, make his name as a scholar until relatively late in life. He published his first major economics work (“A Tract on Monetary Reform”) in 1923, at age 40. He initially came to prominence as a British government financial adviser during World War I, accompanying Prime Minister David Lloyd George to the Paris peace talks. His scathing account of those talks (“The Economic Consequences of the Peace”) and his premonitions of political disaster to come, however, instantly transformed him into a major public intellectual. Mr. Carter ably weaves the narrative of Keynes’s personal life—his association with the Bloomsbury set, his male relationships before marrying a Russian ballerina in 1925—into that of his rise to professional fame during these years.

It is as an economic thinker, of course, that we primarily know Keynes today. Yet Keynes, a polymath with an abiding interest in philosophy, art and politics, would have had difficulty even gaining admission into today’s math-obsessed Ph.D. programs. Though an able mathematician himself, he had only disdain for those who sought precise solutions to big, imprecise problems. As an economics major in college, I learned “Keynesian” methods, yet was never asked to read Keynes. Those methods had been formulated by later American disciples and would mostly have been dismissed by the master as misleading and factitious.

It is difficult to overstate the effect that Keynes’s 1936 masterwork, “The General Theory of Employment, Interest and Money,” had on the economics profession, particularly in the U.S. The book—his effort to unearth the deeper causes of, and solutions to, Britain’s stubbornly high unemployment—virtually established macroeconomics as a discipline, both in the academy and in government. But the unusual style of “The General Theory” made it hard for even expert readers to separate out its “true” substance. It is only slightly outlandish to liken this work to the Bible. It is full of memorable, mellifluous passages. It is also, at times, obscure, tedious and tendentious. It is a work of passion driven by intuition, with tenuous logic and observation offered as placeholders until faithful adherents could unearth the proofs.

The central contention of “The General Theory” was revolutionary (at least to economists): that the economy had no natural tendency toward full employment. If governments did not intervene forcefully to boost consumption demand, Keynes argued, high unemployment could persist indefinitely. Cheap money provided by the central bank would not suffice to alter the circumstances decisively. This contention was wholly contrary to classical economics, which held that protracted involuntary unemployment was a result of some interference in the workings of the price mechanism. In classical economics, full employment required flexible wages; Keynes showed why, with different assumptions, falling wages could actually worsen unemployment. These different assumptions were related to the nature of money, to human psychology and to the conventions of contemporary society. Each of these on its own would do to support Keynes’s argument, and he was not that particular about which he credited at any time.

There is also much contradiction in Keynes’s thought, and between his thought and his behavior—contradiction that provides endless opportunity for fans to claim him as their own, or for detractors to dismiss him entirely. He was “too mercurial and impulsive a counsellor for a great emergency,” groused Lloyd George. “He dashed at conclusions with acrobatic ease [and] rushed into opposite conclusions with the same agility.” He eagerly speculated in securities, for himself and his college, particularly abroad, while calling for a policy to limit speculating in securities, particularly abroad. He further expressed biting disdain for those who supported both the orthodoxies and the heresies he himself had espoused in earlier times.

Yet it was not fickleness but a keen sensitivity to political contexts that typically drove Keynes’s shifts in economic thought. “When the facts change,” he famously told a critic of his volatile views on monetary policy, “I change my mind. What do you do, sir?” Unusually for an economist, he took the shifting mores of society seriously when prescribing policy and didn’t seek to mold humanity to his models or preferences. He was also more an internationalist Englishman than an English internationalist, so that the trajectory of his thinking tracked the trials and tribulations of his country as it struggled, from 1914 to his death in 1946, with war, inflation, deflation, unemployment, indebtedness and the growing demands of the masses for greater voice and security.

As a government adviser and diplomat, he was perspicacious and farsighted, yet rarely converted an intellectual adversary. In Washington, where he represented the U.K. during both world wars, he was all too often “dogmatic and disobliging,” making “a terrible impression for his rudeness”—and this according to his own British colleague. At the 44-nation Bretton Woods conference in 1944, which established the International Monetary Fund, the World Bank and the dollar-based global monetary system, he became the first celebrity economist, captivating the American press—yet infuriating the U.S. Treasury, which sidelined and outmaneuvered him. It is a testament to the influence of Keynes’s ideas, however, that so many policy thinkers around the world still want to create a legitimate supranational currency, modeled after his “bancor” proposal at Bretton Woods, to supplant the international role of the dollar.

Robert Skidelsky’s renowned biography of Keynes ran to three volumes, the last of which was published in 2001. As Mr. Carter notes in his acknowledgments, “all modern Keynes scholars begin their journey” from this foundational work. But wholly apart from his auspicious timing, Mr. Carter has, with this fresh reappraisal, made an outstanding authorial debut. The financial and economic questions with which Keynes wrestled, both as scholar and adviser, were complex, and it is tempting for an author writing for a wide audience to gloss superficially over the more difficult ones. But whether the subject is war reparations or interest-rate policy, Mr. Carter leaves no reader behind, and he writes with wit and clarity. Capturing in a single sentence why Keynes persisted with abstruse theoretical writing long after becoming a major public intellectual, Mr. Carter explains that “if Keynes wanted to reach the sovereigns, he would first have to convert the priesthood.” Keynes had set out to change the very foundations of economic policy-making. And to do that he had to change economists themselves. By any reasonable measure, he succeeded.

This book covers considerably more than the life and labors of his subject, however. Keynes expires on page 368, but his legacy, or Mr. Carter’s version of it, carries on for a further 166 pages. For this reader, at least, the later material constitutes a mixed blessing. Mr. Carter nicely narrates the story of the bitter and consequential split between the “left” Keynesians, led by Joan Robinson in Britain and John Kenneth Galbraith in the U.S., and the “right” Keynesians, led by Paul Samuelson and his fellow mathematical economists. But Keynes and Keynesianism disappear for long stretches of text, as the discussion devolves into an ever-angrier assault on “neoliberal” trade and market-liberalization policies, which Mr. Carter blames for growing inequality. The author reserves his harshest treatment for Democrats, with Bill Clinton bearing the brunt of his wrath for championing the North American Free Trade Agreement, the World Trade Organization and greater economic ties with China.

Mr. Carter seems to believe that Keynes, were he alive today, would be advising Sen. Bernie Sanders. But if we want to know what Keynes would do, we cannot simply extrapolate from his most radical writings. Keynes as diplomat—at Bretton Woods and in Washington the year following, begging for a loan—didn’t choose splendid isolation. Instead, he adapted his policy positions to the reality of America’s rise to economic dominance, however repugnant he found it. He would, today, surely not spit into the winds gusting from a rising China. He would get his country the best deal he could, understanding that China was going to reshape the world, peacefully or otherwise, with or without his cooperation. Mr. Carter himself, in the end, believes that Washington should engage in “cooperative economic diplomacy.” But what was China’s WTO accession if not “cooperative economic diplomacy”?

Mr. Carter is also too dismissive of contributions to economic policy thinking from the center and the right, particularly from Nobel Prize winners Friedrich Hayek and Milton Friedman—both of whom he paints, in his more charitable moments, as tools of reactionary and moneyed interests. During the present economic crisis—as during the financial crisis a decade ago—unprecedentedly bold monetary interventions have been more important in preventing economic collapse than fiscal ones. And it was Friedman’s analysis, not Keynes’s, that stimulated this reaction from the Fed and other central banks. It was Friedman to whom Ben Bernanke, the former Fed chair (and Great Depression scholar) paid homage for his seminal analysis of the monetary causes of the Depression and to Friedman’s work that Bernanke turned for guidance when faced with the challenge of preventing another one. Current Fed Chairman Jay Powell is following the same script, but with even more gusto.

In the end, readers who admire the anti-“market fundamentalism” of Nobel economist Joseph Stiglitz, whom Mr. Carter quotes approvingly, will delight in this book’s extended epilogue; those who don’t, won’t. In any case, Mr. Carter might have been wiser to write two books, letting his fine and eloquent analysis of Keynes’s life and thought stand alone as the best single-volume biography of this intellectual giant.

—Mr. Steil is director of international economics at the Council on Foreign Relations and the author of “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.”

The need for sense and proportionality

Following my post on the History of Economic website, The presumption must always be in favour of individual rights and personal freedom, I received a number of comments off line which have made me think about how different the political world we live in is from Mill’s. The economics is still the same but the political philosophies that surround us are quite quite different.

I have had a number of comments sent to me offline that have made me think more deeply about the use of Mill’s principle in regard to the way in which the notion of “actions that are prejudicial to the interests of others” can be manipulated for sinister purposes. As our moderator noted right at the start of this discussion, this is an economics discussion forum, and with this in mind, let me note it is disturbing to see the way in which this entire episode surrounding the coronavirus has morphed into a form of centralised, socialist, and indeed fascist totalitarian outcome in which our economies have become, for all practical purposes, a centralised command economy in which the principles of Modern Monetary Theory seem to have become the means of organising production and providing incomes. Beyond that, parts of the food production industry have been ordered to stay open and to continue to produce even though their own individual profitability positions would have induced them either to reduce production or even close down. What is more worrisome still is that there seems to be only a small constituency who recognise the immense dangers to our political freedoms and to our longer-term economic prosperity. The billions and trillions of public sector outlays that have flowed out into the economy in a matter of months, while major enterprises such as our airlines have been closed down, suggests such a massive lack of understanding about how our societies operate and provision themselves, that I fear we will wake up in the not too distant future within economies that are no longer anything like as wealthy as they were, and find ourselves living within communities that are no longer anywhere as free as they once had been.

It really is, moreover, a worry how easily such major restrictions were accepted on our wandering down the street in the middle of the day, going out to shop, or showing up at a cafe with friends. Behind all of these restrictions are businesses that are going to the wall, people who have lost their livelihoods and public sector deficits that are mounting that will inevitably lead to some kind of major fiscal retribution and possibly even to an uncontainable inflation. Governments can certainly act on our behalf in restricting some of our freedoms as a matter of principle, such as by imposing a military draft. But there is also the need for some kind of sense and proportionality. The world in which Mill lived could not have contemplated the actions we have taken. Today, with our massive bureaucracies, and with our media unable, or perhaps even unwilling, to explain the major risks we have taken on, we seem to be blundering into a Venezuelan future that may become impossible to reverse.

You know what? No one knows.

The presumption must always be in favour of individual rights and personal freedom

This was posted at the Societies for the History of Economics website a couple of weeks back.

Of course, with the spread of the COVID virus, I have been thinking of the libertarian arguments of the constraints of government on liberty. But now the constraint on liberty is not from the government but from nature where one’s individual actions can harm others. I would assume that for a responsible libertarian, they would recognize their behavior affects the liberty (health) of another, and change their behavior. Besides having rights, liberty also means individual responsibility to protect the liberty of others from one’s actions. But what if individuals don’t and add to the tragedy of the commons?

If one believes ecological economists, individual constraints are going to increase with global warming. It is only by acting collectively to control global warming that we will be able to protect personal liberty from the constraints that nature will force on us. The point I’m getting at is that besides demanding rights, individuals need to act responsibly. If not, then collective action needs to step in to protect the common good. The libertarian argument for me has only made sense if individuals besides demanding rights are also willing to respect and act to protect the rights of others. If not, you get too many tragedies of the commons.

Irritating, specially when he brought global warming into the picture, and then another pair blew in to support this same argument. But before I could buy in myself three others joined in to argue the other side so I let it go, until yesterday. Then I posted this:

I am sorry to be buying back into this exchange of views after so long, but in editing something today I came across a passage in John Stuart Mill from his On Liberty. These are the first two paragraphs of Chapter V, “Applications”, which I believe discusses the point made in this earlier post.

The principles asserted in these pages must be more generally admitted as the basis for discussion of details, before a consistent application of them to all the various departments of government and morals can be attempted with any prospect of advantage. The few observations I propose to make on questions of detail, are designed to illustrate the principles, rather than to follow them out to their consequences. I offer, not so much applications, as specimens of application; which may serve to bring into greater clearness the meaning and limits of the two maxims which together form the entire doctrine of this Essay, and to assist the judgment in holding the balance between them, in the cases where it appears doubtful which of them is applicable to the case.

The maxims are, first, that the individual is not accountable to society for his actions, in so far as these concern the interests of no person but himself. Advice, instruction, persuasion, and avoidance by other people if thought necessary by them for their own good, are the only measures by which society can justifiably express its dislike or disapprobation of his conduct. Secondly, that for such actions as are prejudicial to the interests of others, the individual is accountable and may be subjected either to social or to legal punishments, if society is of opinion that the one or the other is requisite for its protection.

If, during a pandemic, wandering down the street in the middle of the day, going shopping, or showing up at a cafe with friends, is deemed to be “prejudicial to the interests of others, the individual is accountable” then our individual rights may in such circumstances be abridged. Being restated was what John Stuart Mill had already made clear in 1859. With this found not just in Mill, but in his On Liberty, then it is hard to argue this undefined belief system he described as “libertarian”, whatever this may in reality be, is opposed to communal action of this kind on principle. Even so, the presumption must be in favour of individual rights and personal freedom. At the beginning when this virus had only begun to have an effect on individuals and our communities, no one had any clear idea of the extent of the problem we were dealing with. Now that the smoke is clearing, and we have become aware of how much of an exaggerated concern there originally was, the issue must surely have become not whether but how soon the restrictions that have been placed on society ought to be lifted. That too would be consistent with the arguments made by Mill, whose argument must be the terms in which these issues are discussed if we are to continue to live in a free society.

What would an historian of economics know about John Stuart Mill?

Classical Economic Theory and the Modern Economy

I posted the note below onto the Societies for the History of Economics website in regard to François Quesnay, an eighteenth century French economist, but it’s really about John Stuart Mill. No one has responded among the 1200 who are part of this website. Lots here that is scandalous to me, but the easy peasy way it is to demonstrate that at the very centre of the study of the history of economic thought, there is no one who has the slightest idea what Mill said about the theory of value which they nevertheless continue to ridicule. This is part of the reason I wrote my Classical Economic Theory and the Modern Economy.

I found this, from Spencer Banzhaf, the most astonishing sentence I may have seen in quite some time, and I could not agree more.

“One cannot possibly discuss what happened to the role of agriculture/nature in value between Quesnay and today without talking about what happened to the meaning of “value,” conceived of as a moving target.  Rival theories of surplus value from Quesnay to Jevons will have to come into play.”

I often go on about the disastrous effect on economic theory of the Keynesian Revolution, but almost equally disastrous was the Marginal Revolution which undermined the classical theory of value, which was outlined comprehensively by John Stuart Mill in Book III Chapter VI of his Principles. Before I state my conclusion, I will just mention this, which comes from the brief profile of Mill that is on the HET website:

“John Stuart Mill’s greater economic performance was his magnificent 1848 Principles of Political Economy, a two-volume extended restatement of the Classical Ricardian theory.  He believed  Ricardo’s labor theory of value to be so conclusive that, in the beginning of a discussion on the theory of value, Mill confidently notes that:

‘Happily, there is nothing in the laws of Value which remains for the present or any future writer to clear up; the theory of the subject is complete: the only difficulty to be overcome is that of so stating it as to solve by anticipation the chief perplexities which occur in applying it.’ (J.S. Mill, Principles, 1848: Book III, Ch. 1).

“Thus putting a stone on the matter, and burying supply-and-demand theory for another quarter-century.  When Jevons’s later grumbled at the ‘noxious influence of authority’ preventing the development of economics, there is little doubt he was referring to J.S. Mill.”

That is all we think we know about the classical theory of value and it could not be more completely wrong. Mill did not restate “Classical Ricardian theory”. He explicitly discussed supply and demand. If you go to Mill, the first two of the seventeen elements in his theory of value are firstly, that the issue is not price as such, but relative prices, and then secondly, that the “temporary or market value” of something can be determined by supply and demand. There is no labour theory of value to be found anywhere. This is what Mill wrote:

“I. Value is a relative term. The value of a thing means the quantity of some other thing, or of things in general, which it exchanges for. The values of all things can never, therefore, rise or fall simultaneously. There is no such thing as a general rise or a general fall of values. Every rise of value supposes a fall, and every fall a rise.

II. The temporary or Market Value of a thing, depends on the demand and supply; rising as the demand rises, and falling as the supply rises. The demand, however, varies with the value, being generally greater when the thing is cheap than when it is dear; and the value always adjusts itself in such a manner, that the demand is equal to the supply.

The shallow reasoning and lack of depth in a modern textbook is a scandal, but is kept from most of us because no one knows what the economic theory of the past actually consisted of. If Spencer Banzhaf intends to be stating that “rival theories of value from Quesnay to Jevons” will need to be examined, then that is absolutely the case. What astonishes me is that both macro (which has replaced the classical theory of the cycle) and micro were much more profound among the later classical economists than amongst the majority of the economics profession today. We have more diagrams, they had a deeper understanding.

Mill and marginalism

A conversation based on John Stuart Mill and the theory of value.

PETER:

Obviously I don’t find this stuff as interesting as you do. But have just, admittedly quickly, looked at JSM’s theory of value. I can’t see how this stacks up: “almost equally disastrous [as the Keynesian Revolution] was the Marginal Revolution which undermined the classical theory of value”. Which of Mill’s 17 propositions does it undermine?

ME:

The Marginal Revolution starts with Marginal Utility. And let me mention that Mill was the greatest and most influential utilitarian philosopher in history, yet he absolutely refused to incorporate utility into his economic analysis, as noted here. The abstract begins:

“The concept of utility, which stood at the heart of J. S. Mill’s utilitarian moral philosophy, played only a minor role in his account of economics. The economic idea of (individual) utility, as is well known, neither inspired Mill directly nor excited his attention when developed in the work of other economists.”

And the reason in part, as discussed in my forthcoming book, was, and I argue from plenty of evidence, that the introduction of utility took the analytics of the economy from the supply side to the demand side. Lots of other things I could say and do say, but I hope this is enough for you to see my point. In my textbook I go into it in much more detail but do preserve cost-benefit analysis as part of what an economist needs to understand.

There are around 1200 economists on that website but I doubt any of them will want to buy into any of this and they are typically a fractious lot. Not that it’s the reason I bought into this query, but it did stoke my annoyance that it is the editor of our local journal, who want to dispose of the two papers, including mine, that he has held in his hands for two years, that asked the initial query which began thus:

My long message emerges from a series of papers I have received from a retired physicist, Kevin Wilks, who is 95 and argues (as physicists are wont to do) that laws of physics underlie economics, in this case production itself and the industrial structure. Economies capture energy and convert it into value (my summation). He draws on Quesnay and the primacy of agriculture, which I [is] why I write to SHOE for help, both to advise Kevin and to sort things out in my own head. And perhaps Kevin is onto something; if so, it is not straight HET, so what journals or outlets cater for speculative papers by intelligent amateur economists? The main concern here is not what Quesnay really said, but why what is valid in Quesnay is absent from textbooks. Wilks argues that introductory economics should locate the dependency of what we now call the secondary and tertiary sectors on the primary sector. Textbooks would be written differently. Of course, what is valid in a body of thought need not be regarded as important, but I press on.

This chap is a complete economic illiterate who thinks that economics should be reduced to energy flows – an old and idiotic economic concept that completely omits the notion of value and pricing. My article on Mill is however beyond his ken. Is it any wonder that economics has stagnated for the past hundred years, if not actually going backwards? Actually it has gone backwards, but who is this cretin to notice? This is why it is so difficult to get published when trying to say anything against modern textbook theory runs such obstacles as this. It’s only fortunate that I am now beyond the realm of publish or perish.

PETER:

Marginal utility is a demand concept for sure but I would have thought the fault which led to Keynes was the focus on demand as an aggregate not on demand per se.

ME:

Want more? Utility cannot be measured and in any case has nothing to do with relative prices, whereas the supply side of the economy and the cost structure of the economy is the way in which the resource base is allocated to different outputs.

No classical economist bought the marginal stuff in the English speaking world until Joan Robinson and Edward Chamberlain turned the concepts into diagrams.

And fwiw, marginal utility has disappeared from our texts and been replaced by indifference curves, which are just as useless, and also unmeasurable.

PLUS THIS:

And this from “The Physiocrats and Say’s Law of Markets”. I by Joseph J. Spengler.

The Physiocrats and Say’s Law of Markets. I
Author(s): Joseph J. Spengler
Source: Journal of Political Economy, Vol. 53, No. 3 (Sep., 1945), pp. 193-211

The physiocrats always expressed their theory of circular flow in interclass, rather than in interindividual, terms. Notwithstanding, their theory of circular flow forced upon them several conclusions of importance. They looked upon money as an instrument whose essential function it is to facilitate the circulation of goods and services, to serve as a medium of exchange. In consequence, they recognized that commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services. They thus laid the ground work for the formulation of Say’s law of markets and evoked its actual statement by their treatment of consumption and expenditure. They recognized, too, that if money ceases to perform its function, the nexus between potential purchasers and potential sellers is broken, thus anticipating Keynes; but they did not develop this theory, for they supposed that in a healthy economy founded upon their principles money would always perform its proper function. (p. 205)

 
Notable here is that goods exchange for goods and the circular flow is in real terms with money facilitating the exchange. This is what Say himself would include in his Treatise in 1803. What Keynes did was recast the entire process into a circular flow of money forgetting to separate out and on their own the real exchanges that simultaneously occur. In a Keynesian model, and therefore in modern macro, the real half of the process is no longer distinguished and discussed.

John Stuart Mill and the theory of value

I have just posted this note onto the Societies for the History of Economics website in regard to François Quesnay, an eighteenth century French economist.

I found this, from Spencer Banzhaf, the most astonishing sentence I may have seen in quite some time, and I could not agree more.

“One cannot possibly discuss what happened to the role of agriculture/nature in value between Quesnay and today without talking about what happened to the meaning of “value,” conceived of as a moving target.  Rival theories of surplus value from Quesnay to Jevons will have to come into play.”

I often go on about the disastrous effect on economic theory of the Keynesian Revolution, but almost equally disastrous was the Marginal Revolution which undermined the classical theory of value, which was outlined comprehensively by John Stuart Mill in Book III Chapter VI of his Principles. Before I state my conclusion, I will just mention this, which comes from the brief profile of Mill that is on the HET website:

“John Stuart Mill’s greater economic performance was his magnificent 1848 Principles of Political Economy, a two-volume extended restatement of the Classical Ricardian theory.  He believed  Ricardo’s labor theory of value to be so conclusive that, in the beginning of a discussion on the theory of value, Mill confidently notes that:

‘Happily, there is nothing in the laws of Value which remains for the present or any future writer to clear up; the theory of the subject is complete: the only difficulty to be overcome is that of so stating it as to solve by anticipation the chief perplexities which occur in applying it.’ (J.S. Mill, Principles, 1848: Book III, Ch. 1).

“Thus putting a stone on the matter, and burying supply-and-demand theory for another quarter-century.  When Jevons’s later grumbled at the ‘noxious influence of authority’ preventing the development of economics, there is little doubt he was referring to J.S. Mill.”

That is all we think we know about the classical theory of value and it could not be more completely wrong. Mill did not restate “Classical Ricardian theory”. He explicitly discussed supply and demand. If you go to Mill, the first two of the seventeen elements in his theory of value are firstly, that the issue is not price as such, but relative prices, and then secondly, that the “temporary or market value” of something can be determined by supply and demand. There is no labour theory of value to be found anywhere. This is what Mill wrote:

“I. Value is a relative term. The value of a thing means the quantity of some other thing, or of things in general, which it exchanges for. The values of all things can never, therefore, rise or fall simultaneously. There is no such thing as a general rise or a general fall of values. Every rise of value supposes a fall, and every fall a rise.

II. The temporary or Market Value of a thing, depends on the demand and supply; rising as the demand rises, and falling as the supply rises. The demand, however, varies with the value, being generally greater when the thing is cheap than when it is dear; and the value always adjusts itself in such a manner, that the demand is equal to the supply.

The shallow reasoning and lack of depth in a modern textbook is a scandal, but is kept from most of us because no one knows what the economic theory of the past actually consisted of. If Spencer Banzhaf intends to be stating that “rival theories of value from Quesnay to Jevons” will need to be examined, then that is absolutely the case. What astonishes me is that both macro (which has replaced the classical theory of the cycle) and micro were much more profound among the later classical economists than amongst the majority of the economics profession today. We have more diagrams, they had a deeper understanding.

 

And this from “The Physiocrats and Say’s Law of Markets. I” by Joseph J. Spengler.
 

The physiocrats always expressed their theory of circular flow in interclass, rather than in interindividual, terms. Notwithstanding, their theory of circular flow forced upon them several conclusions of importance. They looked upon money as an instrument whose essential function it is to facilitate the circulation of goods and services, to serve as a medium of exchange. In consequence, they recognized that commerce consists, not in buying and selling, but in the ex- change of goods and services for goods and services. They thus laid the ground- work for the formulation of Say’s law of markets and evoked its actual statement by their treatment of consumption and expenditure. They recognized, too, that if money ceases to perform its function, the nexus between potential purchasers and potential sellers is broken, thus anticipating Keynes; but they did not develop this theory, for they supposed that in a healthy economy founded upon their principles money would always perform its proper function.

John Stuart Mill on Laissez-faire

This is John Stuart Mill in his Principles of Political Economy, Book V, Chapter XI, Para 7 [Ashley edition p 950]:

Laissez-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil.

This is William D. Grampp in his Economic Liberalism: , Volume II: The Classical View, Chapter 3, titled “Liberalism in the Great Century” [New York: Random House 1965]. The chapter begins:

The nineteenth century usually is thought to have been the greatest age of economic liberalism, greater than any other, from its origins in Stoicism down to the present time. Economists think of the century as the long afternoon of the ideology. They believe it then meant laissez-faire and that laissez-faire was the policy of Great Britain, the major economy of the world. In fact, the century was not like that, and historians have tried to tell us so. They have reported the many ways in which the British government intervened in the market. The historians also have said the intervention was inconsistent with liberalism. In this, they are in my opinion, mistaken. (Grampp 1965: 73)

From the introduction to the chapter he continues with his first section on “The Importance of the Nineteenth Century”. He lists six reasons, this is the fourth:

“(4) The first effort to make a comprehensive statement on its principles was in 1848.” (Grampp 1965: 74)

1848 was the date of publication of the first edition of Mill’s Principles. He makes what he means absolutely clear on the following page:

“John Stuart Mill was the first to do this – to enunciate a theory of policy – and he did it in his Principles, which was published in 1848.” (Grampp 1965: 75)

He makes clear its significance in the very first para in which he discusses the notion of laissez-faire.

“1. The idea of economic liberalism, which had been gathering force for centuries, came to their full power in the nineteenth century…. Liberalism had many different meanings to these people. But one generalization can be made. To almost all who believed in it and to some who did not, liberalism did not mean laissez faire – that is, it did not mean a policy of non-intervention by the government and of allowing the major economic decisions to be made on unregulated markets. The rejection of laissez faire was one of the few ideas on which there was nearly complete agreement among the economists and between them and the political leaders.” (Grampp 1965: 74)

In that quote from Mill, the most important word is “unless”, “unless required by some great good”. His Book V is “On the Role of Government”, and in the 185 pages that follow he makes clear just how extensive he believed that role is.

John Stuart Mill at Econ Lib

This is the EconLib (The Economics of Liberty} online biography of John Stuart Mill. The greatest defender of freedom and liberty in history, this is what they come up with. They really have no idea about the economics of Mill or about the economics of freedom for that matter, but it is sadly par for the course in our day and age.

The eldest son of economist James Mill, John Stuart Mill was educated according to the rigorous expectations of his Benthamite father. He was taught Greek at age three and Latin at age eight. By the time he reached young adulthood John Stuart Mill was a formidable intellectual, albeit an emotionally depressed one. After recovering from a nervous breakdown, he departed from his Benthamite teachings to shape his own view of political economy. In Principlesof Political Economy, which became the leading economics textbook for forty years after it was written, Mill elaborated on the ideas of David Ricardo and Adam Smith. He helped develop the ideas of economies of scale, opportunity cost, and comparative advantage in trade.

Mill was a strong believer in freedom, especially of speech and of thought. He defended freedom on two grounds. First, he argued, society’s utility would be maximized if each person was free to make his or her own choices. Second, Mill believed that freedom was required for each person’s development as a whole person. In his famous essay On Liberty, Mill enunciated the principle that “the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.” He wrote that we should be “without impediment from our fellow-creatures, so long as what we do does not harm them, even though they should think our conduct foolish, perverse, or wrong.”

Surprisingly, though, Mill was not a consistent advocate of laissez-faire. His biographer, Alan Ryan, conjectures that Mill did not think of contract and property rights as being part of freedom. Mill favored inheritance taxation, trade protectionism, and regulation of employees’ hours of work. Interestingly, although Mill favored mandatory education, he did not advocate mandatory schooling. Instead, he advocated a voucher system for schools and a state system of exams to ensure that people had reached a minimum level of learning.
Although Mill advocated universal suffrage, he suggested that the better-educated voters be given more votes. He emphatically defended this proposal from the charge that it was intended to let the middle class dominate. He argued that it would protect against class legislation and that anyone who was educated, including poor people, would have more votes.

Mill spent most of his working life with the East India Company. He joined it at age sixteen and worked there for thirty-eight years. He had little effect on policy, but his experience did affect his views on self-government.

 
Let us in particular look at this: “Surprisingly, though, Mill was not a consistent advocate of laissez-faire.” Not only was he not a consistent advocate, he was no advocate of laissez-faire at all. No economist has ever been an advocate of laissez-faire, not Adam Smith, not David Ricardo, not anyone else. If you mean in all cases, leave it to the market, no one has ever advocated such a hands-off approach. Going further, Mill was an advocate of using government agency and regulation in a wide variety of instances. Yet his economics was the most hands-off approach to economic policy of any economist since the middle of the nineteenth century. This was from my own discussion of Mill that appeared on the EconLib website back in 2015: John Stuart Mill explaining what is wrong with Keynesian theory. My book on the economics of Mill will be published this year: Classical Economics and the Modern Economy.

This is overview of the book found on the Elgar website:

Economic theory reached its highest level of analytical power and depth in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains classical economics when it was at its height, followed by an analysis of what took place as a result of the ensuing Marginal and Keynesian Revolutions that have left economists less able to understand how economies operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, clouding to the point of near invisibility the theories they had developed. Steven Kates offers a thorough understanding of the operation of an economy within a classical framework, providing a new perspective for viewing modern economic theory from the outside. This provocative book not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’s pathway in writing The General Theory. It provides a new look at the classical theory of value at its height that was not based, as so many now wrongly believe, on the labour theory of value.

A crucial read for economic policy-makers seeking to understand the operation of a market economy, this book should also be of keen interest to economists generally as well as scholars in the history of economic thought.

I never worry that anyone will be able to contradict me about Mill since the most certain statement I can make is that no one, but no one, has read Mill in the past fifty year to find out how an economy works, and virtually no one has read him sympathetically – other than myself and a handful of others – in over a century. But you do have to wonder about those who tell you about freedom and liberty who don’t read the author of On Liberty for some insights into how an economy works and his views on the role of government in making an economy work.

 

Mill’s Principles reviewed by Bonar in 1911

In 1911, James Bonar wrote a review on the publication of the Ashley edition of Mill’s Principles of Political Economy which was published in The Journal of Political Economy, titled: The Economics of John Stuart Mill. It perfectly summarises the consensus view of Mill’s economics at the start of the twentieth century, which shows just how far from the centre Mill’s economics had already by then moved.

If John Stuart Mill’s eminence is not supreme, it is great enough to make almost every utterance of his worth considering. His was rarely a hasty judgment; and what he says of his fellow-enthusiasts of the year 1825 might be applied to himself on most occasions: he never left a subject he had taken up until he had (to the best of his ability) untied every knot in it.

Another century later, there is virtually no economist who reads Mill today for instruction. And it’s not just their loss, we all lose because of the inanity of modern theory. It is the residuals from the economics of Mill and his contemporaries that allow our economies to limp along and innovation to continue. It was also interesting to discover how Mill came to write The Principles:

The success of the Logic drew him back into political economy by making the publishers willing (perhaps anxious) to print what they had refused before, namely, the Essays on Some Unsettled Questions in Political Economy, Mill’s part of the work projected in 1831 [he had originally intended to co-author a series of papers on economics which is why it was “Mill’s part”].

As he was setting out to write his Political Economy, he wrote the following to Auguste Comte in 1844:

I know what you think of the present political economy. I have a better opinion of it than you; but, if I wrote something about these things, I should never forget the purely provisional character of all its concrete conclusions and I should devote myself more especially to separating the general laws of production, necessarily common to all industrial societies, from the principles of distribution and exchange, which assume a particular state of society. Such a treatise could have a great provisional utility, especially in England.”‘ It might appear to you essentially anti-scientific; and it would be so as a matter of fact, if I were not taking great pains to establish the purely provisional character of every doctrine (about industrial phenomena) which made abstraction from the general movement of humanity. I think that if this plan is at all adequately executed it would give a scientific education (education positive) to many who are now studying social questions more or less seriously; and in taking as my general model the great and brilliant work of Adam Smith I should find good opportunities for spreading directly one or two principles of the new [positive] philosophy, as Adam Smith found them for spreading most often those of negative metaphysics in his social applications, yet without awakening dark misgivings by waving any flag.

I find this especially enlightening since quite a number of Mill’s views that have been superseded according to Bonar are views that I believe are of premier importance.

There are many details of economic doctrine in respect of which Mill has probably few followers now. Occasionally his positions, instead of being solemnly refuted, are quietly dropped as purely Ricardian. Many of the pages devoted to wages and profits are so treated. His particular form of Malthusianism has gone out of doors into the hands of an energetic sect of reformers. Without adopting the sweepingly adverse verdict of Jevons, we may admit that there is at once too much and too little in Mill’s Political Economy for most of us now. We should not confine wealth to exchange value, or believe that nothing remained to be added to the theory of value. We should not say that without competition there is no economics. We should not say so broadly that industry is limited by capital. We should not make so much of the distinction between productive and unproductive labor or try to prove that a demand for goods can never in any sound sense be a demand for labor. We cannot be induced to rank land, labor, and capital as co-ordinate factors in production, or to adopt Senior’s view that abstinence is rewarded in interest. We should probe further into the cause of interest. We might ratify the general principle of Malthus without making all progress turn on the practical recognition of it. We should be more chary than Mill in the use of the word ” laws.” We should not, all of us, admit that the “laws” of production were purely physical and the “laws” of distribution “of human institution solely.” Mill was probably aware that the abandonment by him in I869 of the wages fund carried consequences reaching into the heart of his arguments on profits and wages reducing them largely to useless dialectic.

But once we have removed Malthusian pessimism on population from the list, the rest of Mill’s judgements stand, even if few [no] modern economists any longer understand or subscribe to Mill’s position.

Much more to read at the link if these things interest you. But there is this one error that should be a reminder that no one can write anyone else’s life without error. This was the dates of Mill’s life stated by Bonar: “(May 20, 18o8, to May 8, 1873)”. Mill was, in fact, born in 1806.

Productivity is dead

Just got to the AFR at the end of the day, and what do we find: Falling productivity numbers cloud economic recovery. The headline front-page story too.

The weakest productivity numbers in at least 25 years have unsettled the outlook for an economic recovery, a pick-up in wage growth and a string of budget surpluses predicted by the Morrison government and the Reserve Bank of Australia.

Former Productivity Commission chairman Gary Banks said that while he was cautious about the poor productivity reading, it “caps off what has been consistently weak productivity performance” in Australia and the serious need for structural reform to lift economic output.

“Trying to stimulate demand through monetary and fiscal measures won’t cut it, I’m afraid, and these pose risks of their own,” Mr Banks said. “The causes of [economic weakness] require regulatory and other reforms to enhance the supply side of the economy.”

Public sector spending is notoriously non-value-adding. You can have all the fake GDP growth you like, building train lines in Melbourne and streetcars in Sydney, and who know what everywhere else, but if they do not repay their production costs in higher levels of output, they are taking your economy backwards. And like with the trains and the trams, since neither is even carrying a single passenger as yet, there is absolutely nothing on the ground taking place that creates any value whatsoever. All for very classical reasons, but you’d have to read Mill and not Mankiw to see the point.

Liked this bit too, also for very classical reasons:

While the figures are likely to reflect strong jobs growth at a time of weakened economic activity, including a drop in farm production because of the drought, many economists blame structural problems, such as a distinct lack of business investment, especially outside the resources sector.

My favourite line from Mill, the most radicalising phrase I ever read, was “demand for commodities is not demand for labour”. To translate: there is no connection between the level of demand and employment. With real wages there is a major connection, but with employment none at all.