John Stuart Mill and the market economy

I have posted my own final note on the Liberty Fund website where I have had the great honour of writing the lead article and in which I have been joined by three great scholars: Richard Ebeling, Nicholas Capaldi and Sandra Peart. The entire discussion may be found here. One seldom has the opportunity of having one’s own work put before such an informed group and I cannot tell you how privileged I feel in having had such an intense discussion about issues that for the most part hardly anyone has any genuine understanding of. It has also given me an opportunity to focus wider attention on Mill, who is still to my mind the greatest economist who has ever lived.

And what may be the most astonishing thing I may have learned during this last month is that one of the greatest Mill scholars is now president of the Mont Pelerin Society. I read Pedro Schwartz’s New Economics of John Stuart Mill (1973) quite a while back and then Nicholas Capaldi’s intellectual biography of Mill (2005) when it came out. I felt I was dealing with kindred spirits with each yet never thought there was much else to it other than a similar regard. A a result of this symposium I appreciate that Nicholas and I have a similar understanding of the economics of Mill in much the same way for many of the same reasons. But I have also just found out, only yesterday in fact, that Pedro Schwartz is the recently elected President of the Mont Pelerin Society. I cannot tell you how astonished I am.

My assumption had always been that those with free market beliefs would shun Mill because of his promotion of economic experiment and his willingness to see “socialism” of some kind or other in a positive light. I would say to others that Mill has provided the best defence of the free market and the deepest understanding amongst anyone I have ever read. No one is exactly right about everything, or even if they were, since no two people see everything the same way, there will be differences that must come up. I only now feel an ability to insist even more than before, because of the example they have set, that if you would like to understand the nature of the market system, it is to John Stuart Mill you must go. Go through the posts on the Liberty Fund first to get you familiar with what you will find. But it is with Mill that you will find the best appreciation of the way an economy works and how it can be made to grow, than from any other of the great economists of the past. And for my own pale understanding of what he wrote, the second edition of my Free Market Economics is the closest attempt there is to bring the economics of Mill into the twenty-first century.

John Stuart Mill explaining what is wrong with Keynesian theory

I have just posted an article on “Mill’s Defence of Say’s Law and Refutation of Keynes” as part of the Liberty Fund discussion on “Reassessing the Political Economy of John Stuart Mill”. If you are interested in knowing how far economic theory has gone wrong since the Keynesian Revolution, you ought to have a look at this thread which includes not just me, but also Richard Ebeling, Nicholas Capaldi and Sandra Peart. However, my latest post is due to the editor at the Liberty Fund picking up an offhand comment of mine and asking me to expand. Why this did not occur to me on my own, I cannot say, but this is the first time in which I have written a condensed version of what is wrong with Keynesian macro using Mill’s Principles as the basis for understanding pre-Keynesian theory. This is the final para but I do encourage you to read it all.

Reading the three sections of the Principles together we find Mill arguing:

  • recessions do occur and when they do the effect on the labor market is prolonged and devastating;
  • recessions are not caused by oversaving and demand deficiency;
  • recessions cannot be brought to an end by trying to increase aggregate demand.

That is as complete a rejection of Keynesian economics as one is likely to find, and it was stated in 1848. These propositions and their supporting arguments were with near unanimity accepted by the entire mainstream of the economics profession through until the publication of The General Theory in 1936. Since then they have almost entirely disappeared resulting in a loss in our ability to understand the nature of recessions or what needs to be done to bring recessions to a timely end.

Mill is not hard to understand unless you have learned Keynesian macro first. And then it is very difficult indeed. But if your interest is in understanding things such as why the stimulus was such a catastrophe, I cannot think where better to go to find out than from Mill. And if you are interested in Mill, then you should read this Liberty Fund discussion first.

Still more on Say’s Law and Austrian economics

The debate on the Coordination Problem website continues but see here, here and here for the prior discussion. Personally, but what do I know, those on the attack have ground to a halt, with these the latest posts:

Oh, my. Where to begin?

Kates says that Say’s Law emerged out of the general glut debate. A debate requires two sides. So there were economists who advocated “Keynesian-type solutions.” Sismondi, to name just one.

Kates fails to distinguish between long-run (equilibrium) and short-run (dynamic) propositions in classical political economy. JS Mill and many other classicals had a dynamic theory of economic crises. Barkley’s characterization is on the mark.

Then there is the problem of fifty years of missing economic history. Economists on the eve of the Keynesian Revolution were not classical economists, but neoclassicals. They were Austrians, Walrasians, Marsahllians, etc. so, Haberler was an Austrian, not a classical economist.

By the time of the GT, Keynes had an embarrassingly large number of precursors for Stimulative fiscal policy. Indeed, Keynes was a latecomer. The Chicago School was a hotbed of such policies. Friedman explains that Chicago was inoculated to Keynesian economics because of that.

In The New Economics and the Old Economists, J. Ronnie Davis details the pre-Keynesian origins of what we call Keynesian policy. Rothbard details how many economists supported pump-priming under Hoover and later under FDR. All before the General Theory. Ditto Steve Horwitz’s work on Hoover.

Fisher represented another strand of thought. His debt deflation theory of the cycle is one in which a fall in nominal values has real effects. The obvious solution is reflation. The issue is not whether Fisher was correct, but that there were many, many demand-driven policies to cure recessions before Keynes.

Kates seems to just leave out any ideas that do not fit his thesis. Other ideas are simply fitted onto his Procustean bed.

Posted by: Jerry O’Driscoll | July 19, 2015 at 09:51 PM

First let me thank Jerry O’Driscoll for dealing with some matters I would have otherwise. I agree in full with his remarks.

On Steve’s post before that, two things. One is that he is like Keynes in way overstating the importance of Say’s Law. It was never the “foundation of economic theory,” although maybe J.S. Mill thought it was.

The second is that Steve embarrassingly botches his discussion of Smith’s view. I think one can indeed find a variation of Say’s Law in WoN, but this is a joke. Productive versus unproductive labor has nothing to do with the idea of value added, beyong the trivial point that if something does not add value it does not add value, duh. In fact, Smith’s focus on material production was later carried over by Marx, and one could find this distinction between productive and unproductive labor in Soviet income and product accounts, although it might be useful in regard to rent seeking. As it is, one can easily imagine a “menial servant” providing valuable input even into a material production process. This whole thing is silly and has Kates making Smith look silly. Yikes!

On the later post, sorry, Steve, you do not remember your history. We debated this matter on the internet before your first book was out, and I told you then about Say’s views. But, this is just trivial and boring.

You continue to avoid the main arguments by both Mill and Keynes about the sources of macro fluctuations, which focused on financial crises and collapses of capital investment, not shortfalls of consumption. While Keynes ridiculed what he called Say’s Law and defended the possibility of general gluts, that was not really the focus of his theory, which had more to do with the collapse of animal spirits of business people.

Your efforts to dismiss Say simply look ridiculous. In fact, his examples against the law were already in his first edition. You have trouble reading, don’t you, for such a great scholar of Say. But we already know how worthless Say was and can ignore him, especially given that he actually supported government spending on public works projects during the downturn after the end of the Napoleonic wars.

Again, I am not going to bother arguing with you about the many cases where most economists would say that there was an increase in aggregate demand that pulled the economy out of a slump as we have already seen what you will say, which is simply to declare everything that happened that had any effect to be supply side.

I am glad, I guess, to see that you thought maybe something might be done by government to help get out of the Great Recession, although it would appear that you wish to get all worked up again about public spending that involves “value added” versus that which is not. Yeah, sure, pretty much everybody would prefer to see productive public spending on useful infrastructure or whatever rather than the old joke Keynes digging holes in the ground and filling them up again, although I suspect you have either forgotten or did not know what that famously repeated-out-of-context quote was really about.

And as for your big final question, why should anybody care and of what importance is it? Sorry, none, although I am not going to argue with your claim that it was Fred Taylor who first coined it, woo woo woo.

Posted by: Barkley Rosser | July 20, 2015 at 02:14 AM

BTW, I shall agree with Steve Kates that Ricardo’s discussion in the general glut debate does look somewhat Austrian in his emphasis on misdirected production that needs to be reallocated, and I have said that in a forthcoming paper on “History of Economic Dyhamics” to appear in the Handbook of the History of Economic Analysis and currently available on my website.

I should also say that while Jerry identifies Haberler as an Austrian, he is sort of as Schumpeter was. His great book is very eclectic and even handed in its accounting of many views, many of which have been forgotten even though quite interesting and worthy of reconsideration.
Posted by: Barkley Rosser | July 20, 2015 at 02:20 AM

It is hard to gauge where I stand since no neutral has bought in to indicate what they think themselves. Anyway, here is my reply to Barkely. I will reply to Jerry after.

Essentially, Barkley, what you have done is call the classical theory of the cycle “Keynesian” and declared victory. If I really do have to demonstrate that Keynes was trying to show that demand deficiency was the cause of recession, we are at such a primitive level of debate that it is almost impossible for me to work out where we can find some kind of solid ground on which we can agree so that we can work out between us where our differences lie.

This making it up as you go along version of Keynes is quite astonishing. Do you really believe that “while Keynes ridiculed what he called Say’s Law and defended the possibility of general gluts, that was not really the focus of his theory, which had more to do with the collapse of animal spirits of business people”? Here is what Keynes actually argued and right at the start of the book as he is trying to give an overview of what is to come:

“The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.” (GT: 32)

I think Keynes in this instance is absolutely right about the nature of economic theory right up to his own time. The General Theory is about deficient aggregate demand and designed to refute Say’s Law. For you not to know this you must somehow have avoided the Keynesian-cross diagram, leakages and injections, IS-LM, AS-AD along with Y=C+I+G, versions of which may be found in every single Samuelson clone and which are still taught to just about everyone. If what you call “Keynesian” is some package of inferences from the later chapters of The General Theory that ignore what you can find at the front, well feel free to go on with your private understanding of what Keynes really meant, but it is not the Keynesian theory that now disfigures virtually every first-year macro text in the world, nor the one that informs policy.

And as for ignoring what Keynes thought was the cause of the recession of his own time, he is perfectly clear about it in the GT:

“The post-war experiences of Great Britain and the United States are, indeed, actual examples of how an accumulation of wealth, so large that its marginal efficiency has fallen more rapidly than the rate of interest can fall in the face of the prevailing institutional and psychological factors, can interfere, in conditions mainly of laissez-faire, with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing.

“It follows that of two equal communities, having the same technique but different stocks of capital, the community with the smaller stock of capital may be able for the time being to enjoy a higher standard of life than the community with the larger stock; though when the poorer community has caught up the rich — as, presumably, it eventually will — then both alike will suffer the fate of Midas.” (GT: 219)

I know this is dead set stupid, and not at all like the sophisticated arguments of Mill, but if you are going to defend Keynes, this is what you must defend. “The fate of Midas” is, of course, a situation where everyone is so wealthy that they stop buying and save instead. This is why Keynes thought the world had gone into depression, because he sure wasn’t discussing the 1920s, or at least not the “roaring ‘20s” of the United States.

That you disdain the need for spending to be value adding is quite clarifying so far as this exchange of views is concerned. You do represent a modern view of what Keynesian policy makers believe. You do not think that such expenditure has to be value adding to lead to faster growth and employment. Economists have, indeed, been taught that spending on anything at all will add to growth and employment. And you say this even with the labour market in the US as moribund as it is, where the only reason for the fall in the unemployment rate is the even faster fall in the participation rate.

The economics of John Stuart Mill is so superior to this unbelievable nonsense that you make every effort you can to associate your views with Mill’s while disassociating yourself from what Keynes really wrote. And it is no wonder why, because what Keynes wrote is such nonsense. But it is this Keynesian theory that has informed the Keynesian policies that were tried 2009-2011, which are now being abandoned. There is a need for policy guidance that will explain to policy makers what needs to be done, since they certainly cannot find any such thing in our modern Keynesian-saturated texts. But they could find it in Mill, if they only knew enough to look.

At this stage, all I can hope is that some of those who pay attention can see the point, or at least that there is a point. It is beyond me how anyone can continue to defend modern textbook theory when it never delivers what it promises. But in this instance, the notion that Keynes was really arguing some dynamic theory of adjustment, that is, arguing what Mill had been arguing, and not trying to overturn Say’s Law is just ludicrous. But since no one knows any history any more, what someone might end up believing is anyone’s guess.

Say’s Law and Austrian economics

Peter Boettke at Coordination Problem links to the Liberty Fund discussion on the economics of John Stuart Mill under the heading, Mill > Keynes, so says Steven Kates. Very pleasing, but more pleasing are the two comments, very critical of what I wrote, that have been sent in by Barkley Rosser.

Kates is obsessed with Say’s Law, how it is true basically by definition. Mill’s view of macroeconomics is very sophisticated indeed, and Keynes notoriously undervalued the knowledge of his predecessors. But one very big difference is indeed over Say’s Law, which Mill accepted and Keynes did not. Given Kates’s strong views on this, of course he says Mill > Keynes, but, in fact, Say’s Law is not true in general, and Say himself knew it, as Kates has had pointed out to him on numerous occasions, but…
Posted by: Barkley Rosser | July 16, 2015 at 04:45 PM

BTW, now that it seems I can post here again after a long period of not being able to, let me add that I do not see anything particularly Austrian about Say’s Law. I just scanned a few books by Hayek and von Mises I have here in my office, and there was not a single mention of Say’s Law in any of them. I did find a mention of Say in Mises’s Socialism, but about whether or not Ricardo was right about gross versus net product. No Say’s Law.

I would suggest you all should not get yourselves too worked up about hanging your hats on Kates’s obsession, which he shares with the even more fanatical James Ahiakpor, whom those who follow HET know of. What is in it for you guys other than another way to bash Keynes?
Posted by: Barkley Rosser | July 16, 2015 at 04:53 PM

It’s as if criticising Keynes is some kind of thing in itself, and not one of the paramount economic issues of our time. Or that Say’s Law is not absolutely embedded in Austrian theory even if seldom mentioned. This is what I have replied:

It pleases me to see that Barkley Rosser has opened a second front on the issue of Say’s Law. And let me begin by noting where we agree, which is the absence of much discussion on Say’s Law among Austrian economists. But while there is not a lot, there is some, the most important one unfortunately going all the way back to 1950, in an article by Ludwig von Mises in The Freeman, “Lord Keynes and Say’s Law”. You can read the whole lot at this link but I will quote you the most relevant passage:

“The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.

“Neither did Keynes try to refute by discursive reasoning the teachings of modern economics. He chose to ignore them, that was all. He never found any word of serious criticism against the theorem that increasing the quantity of money cannot effect anything else than, on the one hand, to favor some groups at the expense of other groups, and, on the other hand, to foster capital malinvestment and capital decumulation. He was at a complete loss when it came to advancing any sound argument to demolish the monetary theory of the trade cycle. All he did was to revive the self-contradictory dogmas of the various sects of inflationism. He did not add anything to the empty presumptions of his predecessors, from the old Birmingham School of Little Shilling Men down to Silvio Gesell. He merely translated their sophisms—a hundred times refuted—into the questionable language of mathematical economics. He passed over in silence all the objections which such men as Jevons, Walras and Wicksell—to name only a few—opposed to the effusions of the inflationists. . . .

“In fact, inflationism is the oldest of all fallacies. It was very popular long before the days of Smith, Say and Ricardo, against whose teachings the Keynesians cannot advance any other objection than that they are old.”

Say’s Law is at the heart of Austrian theory without most Austrians being fully aware of it. I have spent a good deal of effort trying to get Austrians more interested in Say’s Law as a means to explain the fallacies of Keynesian economics. I will merely here provide a link to my “Ludwig von Mises Lecture” of 2010, where I tried to show just how important Say’s Law is if classical economic theory – of which Austrian economics is the only modern manifestation – is ever again to become central to our understanding of the way in which an economy works. Just let me apologise in advance for the way in which I pronounce Mises’s name; at the time I had read much of what Mises had written, but by the nature of things, had never actually heard his name said by anyone else. It’s one of the problems being a lonely scholar way off on the other side of the globe. But as you will see, there is no denying my extremely high regard for both Mises and Hayek which I discuss early on.

To identify with the left ought to be a mark of great shame

I will merely link to this story, but won’t quote from it since it is so disheartening. The title tells you what it’s about and you can read it for yourself: ISIS’S SEX SLAVES COMMIT SUICIDE: WESTERN FEMINISTS SILENT.

They of the progressive label, the members of the left, think of themselves as the best the world has produced and they are amongst the worst. The civilisation that grew out of the Judeo-Christian tradition is now dying, inherited by an anti-Christian horde who do not deserve the great good fortune they live in but are bringing to ruin.

My lead article on John Stuart Mill at the Liberty Fund

It has been a great honour for me to have been asked to write the lead article for the Liberty Fund online discussion forum for July 2015, which is on the economics of John Stuart Mill. The article has now been published and may be found here. It will be followed by commentaries from three of the world’s great scholars on Mill, after which there will then be open discussion thread from readers. The following is the Liberty Fund’s introduction to my article and the three commentaries:

In this month’s Liberty Matters online discussion we reassess the economic ideas of John Stuart Mill as found in his classic work Principles of Political Economy (1st ed. 1848, 7th ed. 1871) and other writings. In the Lead Essay by Steven Kates of the Royal Melbourne Institute of Technology it is argued that in the light of the evident failures of Keynesian economics to solve the problems of the boom and bust cycle, and that of ongoing high unemployment and economic stagnation, that we should go back to Mill’s “Four Propositions on Capital” for enlightenment. In Kates’s view there is “more insight into the operation of an economy than any of the Samuelson clones that have been published to explain what Keynes meant in trying to raise aggregate demand.” The commentators are Nick Capaldi, the Legendre-Soulé Distinguished Chair in Business Ethics at Loyola University New Orleans; Richard M. Ebeling, the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina; and Sandra J. Peart, who is dean of the Jepson School of Leadership Studies at the University of Richmond.

If nothing else, this article and the three commentaries should alert you to the virtual certainty that modern economic theory is not even near being the best economics there has ever been.

Looking for a corporate sponsor with a sense of history

John Stuart Mill’s library is falling to bits because of a lack of funding. There cannot be a lot of money required, and some corporate philanthropist ought to be able to come up with the needed money out of petty cash. Mill wrote the greatest book ever written on the market economy, his Principles of Political Economy. Now is the time for some business to return the favour. The following is a note that has been sent out alerting the rest of us to the problem.

Dear Colleagues

I have received an appeal which I think is worth communicating to you. I hope many will heed it and make a donation, it is well worth it.

Oxford’s Somerville College was given John Stuart Mill’s library by Harriet Taylor’s daughter, Helen Taylor. The collection contains books which had belonged to John Stuart Mill and, even more, books which had belonged to his father; many books contain ample marginalia by one or other of them. Unfortunately the books are in a state of decay and an appeal has been launched to raise the funds necessary to their restoration. I hereby copy part of a message I have received from Dr Anne Manuel, librarian of Somerville College:

“we are now getting serious about preserving the Mill Collection and the marginalia contained therein. I am going to be putting in for some grants over the summer but we are starting off with a student-organised crowdfunding campaign to enable us to get started with a preservation survey and some initial boxing and box-shoeing of delicate volumes. As you expressed an interest in the annotated collection, I wonder whether you might promote the campaign to anyone you felt might be interested in supporting this? We are hoping to set up a Friends of the John Stuart Mill Library group with speakers/events/news updates etc and I can give you more detail about this as we go if you would be interested (or indeed any of your colleagues)

The link to the crowdfunding site is here.

Thank you for any help you can give us with this – it would be very much appreciated!”

Giancarlo de Vivo

Dipartimento di Economia, Management, Istituzioni
Università di Napoli “Federico II”
via Cinthia – Monte S. Angelo
80126 Napoli

The moribund state of economic theory

I wrote about Hugh Goodacre’s post on the History of Economics discussion thread under the heading, How many economists can dance on the head of a pin?. This is what he said in his post:

Sir, The moribund orthodoxy that currently exercises such an inflexible grip on university economics departments will, as Wolfgang Münchau comments, inevitably face a challenge, and this “will come from outside the discipline and will be brutal” (“Macroeconomists need new tools to challenge consensus”, April 13). The orthodoxy has brought this dismal prospect on itself through the brutality with which it has purged those departments of any other school of thought than its own.

Indeed, in its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”.

This is indeed a 1984 situation, in which the very idea that debate could exist on how to approach economic issues is regarded as a mere historical memory, and consequently of purely antiquarian interest.However, economics students are increasingly demanding a pluralistic curriculum, as discussed by Martin Wolf in “Aim for enlightenment, technicalities can wait” (April 11). Similarly, the “fossilised habits of thought” entrenched in much of the economics professions are facing increasing criticism from within the academic world (see, for example, “The world no longer listens to the deaf prophets of the west”, Mark Mazower, April 14). Let us hope that all this pressure from students, from the worlds of journalism and of interdisciplinary debate, will combine to bring university economics departments back into the world of liberal academic life from which they have for so long isolated themselves.

I left a very substantial space in time for others to say their piece, but after almost a week, I felt I had waited long enough. This is what I wrote:

I have let six days go by to see if anyone else was interested in Hugh Goodacre’s message on the moribund state of economic theory. The more time goes by, the more I am convinced there is this subject taught at universities called “economics”, and there is this aspect of the world that is called “the economy”, but the first has only a remote relationship to the second. And I could not agree more about the following in the letter Hugh quoted, with two minor qualifications which I will come to:

‘In its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”.’

My first qualification is the exclusion of John Stuart Mill and second is the inclusion of John Maynard Keynes. Mill is excluded because he has become so far off the beaten track that virtually no one even thinks of his contribution to economic theory, which was massive and arguably a good deal greater than Ricardo or Bentham. Ricardo could no longer be read to gain insights into the operation of an economy, while with Mill you certainly can.

But the inclusion of Keynes is a mystery. Virtually all macro is Keynesian. Who nowadays writes contra-Keynes? Is there any economist in the world writing today – other than myself – who is associated with a strident anti-Keynesian perspective? I can think of hardly a one, and there are not many more than a dozen. Following the dismal failures of fiscal and monetary policies to restore growth – both of which I consider Keynesian to their roots – I cannot understand why there has been so little interest in a post mortem of some kind and the investigation of alternatives.

I can only wish Hugh and his associates the best of luck in their quest to broaden the spectrum of opinion that are considered worth consideration within schools of economics. It is long overdue.

If I knew how to write these things without antagonising the others, I would. But years in the midst of a political environment, and then all this blogging, has left me with a style of writing not necessarily perfectly equipped for the academic world. But following my post was this one from one of the great economists of the world, Professor Richard Lipsey, from whose world class introductory text I had previously learned and taught. And this is what he said:

I agree completely with the others who say that many modern economics departments (but not, I think, mine) admit of no conflicts among, or even the existences of, various modern approaches. It is a mystery how anyone can hold to this view in the light of institutionalists who emphasise the importance of institutions, ‘Newtonians’ of various sorts who use maximising equilibrium models and evolutionists who emphasis evolving systems without static equilibria. And this only mentions a few of the competing visions of how best to study the economy.

I do not suppose this is the place to dwell on the contentious additional point raised by Steve Kates but I would observe that there is a world of difference between traditional Keynesian, New-Keynesian, and post-Keynesians. The econometric models of my country’s Department of Finance and its Central Bank use updated and expanded Keynesian income-flow models. So, like it or not, updated traditional Keynesian concepts, insights and measurement categories are still useful in the work of applied economists.

Since as a text book writer, I am often accused of accepting the modern no-differences view, I mention below three of my recent publications that put forward alternative visions to the prevailing one. This is not only to set the record straight but in the belief that they might be of some interest to those who agree that creative criticisms of the prevailing view are needed.

I would also say that in going ahead, we should not throw the maximising baby out with the bath water of its overuse. Partial equilibrium, maximising models of some markets, such as foreign exchange and wheat, are useful.

Recent non-orthodox recent publications by Lipsey

“Does History Matter: Empirical Analysis of Evolutionary versus New Classical Economics” (with Kenneth I Carlaw), Journal of Evolutionary Economics, 2012.

“Some Contentious Issues in Theory and Policy in Memory of Mark Blaug,” in Mark Blaug: Rebel with Many Causes, M. Boumans and M. Klaes (eds.), (Cheltenham: Edward Elgar), 2013

“The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium” Simon Fraser University Discussion Paper, 2014

He may not agree with my anti-Keynesian views, but sees it properly as a legitimate perspective. More importantly, if Richard Lipsey sees the moribund nature of economic theory as a genuine issue to be considered, there are some very influential people who have seen the problem and are willing to add their names to the list of those who are dissatisfied with standard economic teaching and practice. I don’t know how much dynamite it will take to break up the logjam, but this is certainly a very much needed assist.

The best test of a sound economist

A friend and colleague has written a fascinating paper on the various interactions amongst later classical economists from the late middle of the nineteenth century through to the end. Part of his paper dealt with Mill’s Fourth Proposition on Capital – “demand for commodities is not demand for labour” – on which I have just published a paper explaining its meaning which no one else has been able to do since Leslie Stephen at the end of that century. Most intriguingly for everyone since, in 1876 he described it as “the best test of a sound economist” which no one, until me this year, has been able to make sense of. Here is my reply to his note to me. I also have put this up since I think it is a perfect example of why the study of the history of economic thought makes someone a better economist. Where is the standard issue economist who would even begin to know what any of this is about?

As always, it was a fascinating paper from which I learned a great deal, even some things I didn’t want to know, such as Cairnes form of rheumatism which sounds like a kind of torture you would wish on no one. But being almost entirely like Leslie Stephen in the issues you discuss, I can stand in as a proxy to see things from his point of view.

On your three points:

(1) It is perfectly clear to everyone that Mill’s Fourth Proposition (MFP) is a restatement of Say’s Law. The problem is that they don’t understand Say’s Law which I have translated thus: demand deficiency does not cause recessions and a demand stimulus will lead neither to recovery nor higher employment. That is the point, and the words support my view. Economists since 1936 have been trapped in the belief that classical economists always assumed full employment, on the assumption, I guess, that they were idiots. Once you see that they never thought any such thing, you are able to take the first steps in understanding Mill and MFP.

(2) You say that the issue came up again in the 1870s because of a rekindling of interest in the wages fund doctrine. This may well be, but whatever may have rekindled the issue, the arguments in support of the Fourth Proposition have nothing to do with the wages fund doctrine. I don’t teach the wages fund, but I do teach all four propositions. But you have to understand Mill, which no one, absolutely no one in my view, does.

(3) You say that Stephen’s statement that it was the best test of a sound economist was not an offhand comment as I do. I thought of it as offhand given the nature of the book he was writing. It was far from being a book on economic theory and while it is in context, it is not essential to the point he was making over all.

On your paper, let me make a few points related to these matters.

(i) You quote the proposition incorrectly, but it is this error that is part of the problem. The proposition is “demand for commodities is not demand for labour”. You wrote, “a demand for commodities is not a demand for labour” (p 9 and 13). This is fundamental and was the same problem that Simon Newcomb had. It is not micro. It is classical macro. Mill is looking across the entire economy and pointing out that lifting the level of aggregate demand does not lower the unemployment rate. I can see that, but no one else can see that. Aside from myself, no one, so far as I know, opposed the stimulus because it would not create jobs. To me, because I understand Mill, and therefore believe because of that that I understand how an economy operates, the failure of the stimulus was an absolute certainty. I listen to Krugman-style blather about how the stimulus was not large enough or that we are beset by secular stagnation and it is all ridiculous. Mill makes it clear, but to understand Mill you must absolutely give up on modern macro (and on Real Business Cycle theory as well). Stephen says it precisely right as you quote him (14-15) where he points out that expenditure by the rich will not lower unemployment. Substitute the government for the rich and you will see what he is getting at. I say the same and have more than enough evidence given the past six years. What evidence does a Keynesian have that they know the first thing about any of it?

(ii) The notion that MFP has been “exploded” is news to me. Marshall and Hayek tried to show that it was true, if you just made these wee adjustments. Of course, they made it completely incomprehensible and leached out of it any reason to see it as a “fundamental” proposition. They just couldn’t understand it for reasons I explain in my paper. That is why, I also think it is the “best test of a sound economist” which is why I think there are so few sound economists left. No Keynesian is a sound economist since each and every one would fail this test.

(iii) You seem to think that Stephen and Ruskin couldn’t agree on economic issues because of their different philosophies, and that Ruskin was shoveled out because he was not amongst the professional economic elite. I went back to read Ruskin’s Munera Pulveris after watching Mr Turner and even with the best will in the world, which I then had, could not bear it. Ruskin is a rotten economist. He asks the wrong questions and comes up with stupid answers. Mill, and I presume Stephen, were concerned about the poor and wished to raise living standards and see them employed (as I wish to do myself). It’s not even that I disagree with him but that Ruskin had literally nothing to contribute to any serious debate about how economies work. It wasn’t that they disagreed but that Ruskin’s views were irrelevant since he wasn’t looking at serious questions.

But these differences aside, your paper was very stimulating reading. Could you send me in the direction of this additional debate over MFP that followed from the debate over the wages fund. There may be something there that I should follow up on.

I am very pleased to find myself cited by you in this excellent paper.

Kind regards

How many economists can dance on the head of a pin?

This is a letter by Hugh Goodacre to the editor at the Financial Times on 16 April which came with the heading, Bringing economics back into liberal academic life. As you read the letter, you need to appreciate that the deeper reality is that the effort to marginalise alternative ways of looking at the economy goes beyond just putting such heterodox ideas into the history of economic thought. The further aim is to fully remove the history of economic thought as even being a component of the study of economics. I wrote a book on this very subject – Defending the History of Economic Thought – but these movements have a grinding relentlessness that will not be turned back unless there is the will to do so. I can see that for an academic, it may not much matter what is taught as long as doing whatever it is can get your paper published. That the university economics we actually apply to the real world have little value in curing any of the problems that exist, seems of only minor importance. I will also note that the one economist that was left out of the list is the one I think is the most important, being John Stuart Mill. I am also curious why Keynes is on the list since “Keynesian theory” is the very core of what we do teach. Pretty well every economist I know thinks they are teaching Keynesian models of one sort or another. Here is the letter that has been posted on the history of economics website with, so far, not a single comment from any one of the more than one thousand subscribers from around the world.

Sir, The moribund orthodoxy that currently exercises such an inflexible grip on university economics departments will, as Wolfgang Münchau comments, inevitably face a challenge, and this “will come from outside the discipline and will be brutal” (“Macroeconomists need new tools to challenge consensus”, April 13). The orthodoxy has brought this dismal prospect on itself through the brutality with which it has purged those departments of any other school of thought than its own.

Indeed, in its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”. This is indeed a 1984 situation, in which the very idea that debate could exist on how to approach economic issues is regarded as a mere historical memory, and consequently of purely antiquarian interest.

However, economics students are increasingly demanding a pluralistic curriculum, as discussed by Martin Wolf in “Aim for enlightenment, technicalities can wait” (April 11). Similarly, the “fossilised habits of thought” entrenched in much of the economics professions are facing increasing criticism from within the academic world (see, for example, “The world no longer listens to the deaf prophets of the west”, Mark Mazower, April 14). Let us hope that all this pressure from students, from the worlds of journalism and of interdisciplinary debate, will combine to bring university economics departments back into the world of liberal academic life from which they have for so long isolated themselves.