“The best way to destroy the capitalist system is to debauch the currency”

Can you guess who said that?

Something that I have focused on in my Classical Economic Theory and the Modern Economy, but which is an otherwise unknown consequence of the Keynesian Revolution, was the shift in emphasis from the real side of the economy to the monetary side. If one is to understand the operation of an economy it is essential firstly to look at the actual real level of activity and only then look at the monetary side that lies above it and largely outside of it. Every classical economist understood the point. Virtually no modern economist does, and certainly no one without a serious study of economics ever does, which really does mean that near enough no one at all any longer understands this even slightly. Which leads me to this: Pandemic moves Modern Monetary Theory from the fringes to actual US policy.

[Modern Monetary Theory (MMT)] has received increased publicity over the past three years as politicians realized there was not a plausible plan to raise the funds necessary to fund “Healthcare for All,” the “Green New Deal,” free college and other initiatives through taxes alone.

The core principle of MMT is that sovereign governments with sovereign currencies can “print” or “coin” money to support full employment or essentially any government program that would benefit society in the here and now. Critics have labeled it the “Magic Money Tree Theory.” Those detractors include Keynesian and Monetarist economists, who cite Hungary in the 1840′s, Brazil in the 80′s, Mexico in the 90′s as examples of where easy money policies led to hyperinflation.

Warren Mosler was one of the founders of MMT, and what is known as `Mosler’s law’ states: “No financial crisis is so deep that a sufficiently large increase in public spending cannot deal with it.” These words fundamentally represent the actions our policy makers have taken in response to the virus. This pandemic has moved MMT from the fringes to the dead center as the actual monetary policy of the United States.

These are people with PhDs in economics who will comprehensively ruin us, and on this let me quote Keynes with absolute approval:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth….

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

It was Lenin who said it, but quoted by Keynes as a warning to us all. Are you that one in a million who sees the point? Well if you are, there are then the other 999,999 who do not, which includes every single political leader heading every single government across the Western world today, each one of whom is engaging “all the hidden forces of economic law on the side of destruction”.

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:


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.


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.”

Responses to The General Theory

From The HET Website. A typical revolution from below, led by the young who knew nothing but wished to make the presence felt. A conceptual disaster, along the lines of Aristotle’s arguments on the charging of interest.

The response to the publication of John Maynard Keynes‘s General Theory of Employment, Interest and Money (1936) was immediate and controversial – and a cleavage between young economists and their older counterparts was immediately carved.

From Cambridge, Keynes’s students rushed to publication to further explain his ideas: Joan Robinson (1937) and James E. Meade (1936, 1937), two of the members of Keynes’s “Circus”, produced particularly able “restatements” of the General Theory. The exposition of a third member of the Circus, Austin Robinson (1936, The Economist), reached a wider audience. Two of Keynes’s tutorial students also rushed to publish reviews:  W.B. Reddaway (1936, Economic Record) and D.G. Champernowne (1936, RES), with the latter being slightly more critical.

However, among the Cambridge professors, the consequences were grievously divisive (for an account, see Kahn, 1984; Skidelsky, 1992). J.M. Keynes almost completely ruptured his relationships with his old Cantabrigian colleagues – Arthur C. Pigou, Hubert D. Henderson, Dennis H. Robertson and Ralph G. Hawtrey. Although the strife was confined largely to personal exchanges within the Cambridge halls, some anger found its way into the printing presses. A.C. Pigou (1936, Economica), portrayed as the “villain” by the General Theory, tried to go immediately on the counterattack but his counterblast was feeble. H.D. Henderson (1936, Spectator) fired off an even more personally vindictive fusillade. In contrast, Dennis Robertson‘s (1936, QJE) reply had a bit more of substance and engendered a short journal debate with Keynes.

The generational differences in reception were also evident outside of Cambridge. Elsewhere in Britain, the youthful Abba Lerner (1936, Int Lab Rev),  John Hicks (1936, EJ) and Roy Harrod (1937, Econometrica) produced quite sympathetic reviews.

Surprisingly, neither of Keynes’s old rivals at the London School of Economics, Friedrich A. von Hayek and Lionel Robbins, reviewed or even responded to Keynes’s new book. But the damage was permanent: the enthusiasm for the General Theory by their most promising students – particularly  LernerHicks and, eventually, Kaldor – was the beginning of the end of the L.S.E.’s attempt to steal the crown of English economics from Cambridge.

From America, the initial response was cold: the main reviews by Jacob Viner (1936, QJE), Alvin Hansen (1936, JPE), Joseph Schumpeter (1936, JASA), Frank Taussig (1936, QJE), Wassily Leontief (1936, QJE), C.O. Hardy (1936, AER) and Frank Knight (1937, Canadian JE) were almost uniformly negative. Of all his reviewers, Keynes only deigned to respond to Viner’s in his now-famous article, “The General Theory of Employment” (Keynes, 1937, QJE).

With the unfortunate exception of Nazi Germany (where a translation was published “on paper rather better than usual and the price not much higher than usual”, as Keynes put it), Keynes’s General Theory was largely ignored on the European continent. The few reviews that emerged from there, particularly those by Gustav Cassel (1937, Int Lab Rev) from Sweden and Gottfried Haberler (1936, ZfN) from Austria, were quite hostile.  In France, the professional (and personal) hostility of influential conservative economists such as Jacques Rueff guaranteed that the book would not even be translated until 1948.

The Making of Modern Economics

From someone who gets Keynes and Say’s Law.

Greetings from Mark Skousen to my friends in the Mont Pelerin Society.

As you know, socialism has suddenly become all the rage with the rise of Senator Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez (whom I call Castro-lite) here in the United States and in Europe.

Don’t think for a moment that the New Socialists are a flash in the pan.

The Green New Deal, Modern Monetary Policy, Medicare for All, and Free College are all being taken seriously by students, politicians, and media, unworkable and inflationary as they are.

Sanders is running for President in 2020 and would consider Ocasio-Cortez as his running mate, if she were eligible (she’s only 29 years old).

How do you fight a bad idea? With a better idea!  It’s time to start a campaign to promote the best of capitalism and free-market economics.

The Economist is convinced that pro-market forces “have all too often given up the battle of ideas” (Feb 22 issue of “The Rise of Millennial Socialism”)

Let’s hope not!

How to fight back?   I’ve started a campaign to promote my book,

“The Making of Modern Economics: The Lives and Ideas of the Great Thinkers.”  

Now published by Routledge in a new third edition, it’s been endorsed by Milton Friedman, Roger Garrison, Peter Boettke, Ken Schoolland and many other members of the society.

It tells the unique story of Adam Smith, the founder of free-market capitalism, and how his “system of natural liberty” comes under attack by the Marxists, Keynesians, and socialists, and is often left for dead, but then is resuscitated by the French laissez-faire school, and the Austrians and the Chicago school, and triumphs in the end.

It has five chapters that rip apart the arguments that the Socialists and the Keynesians make.

It has converted many Marxists to free-market capitalists, and one reviewer calls it “the most devastating critique of Keynesian economics ever written.”

Most importantly, my book introduces the reader to the great defenders of free-market capitalism, including Adam Smith, the French laissez-faire school, and the Austrian and Chicago schools (as represented by Mises, Hayek and Friedman).

Last November, I started the campaign by purchasing a full page ad in The Economist and received hundreds of orders from around the world. You can see the ad here: http://mskousen.com/2018/11/the-economist-publishes-new-ad-for-making-of-modern-economics/.

The Ayn Rand Institute recently ranked it the #2 most important book ever written about economics (just behind Henry Hazlitt’s “Economics in One Lesson”).

It won the Choice Book Award for Outstanding Academic Excellence.

It’s been translated into six languages — in Chinese (twice), Spanish (Union Editorial), Turkish, Mongolian, Vietnamese, and Arabic.

Students, fellow economists, and business leaders are fans. Professor Roger Garrison (Auburn U) says, “My students love it.  Skousen makes the history of economics come alive like no other textbook.”

“Skousen gets the story ‘right’ and does it in an entertaining fashion, without dogmatic rantings.” – Peter Boettke, George Mason University.

The late Milton Friedman wrote, “All histories of economics at BS –Before Skousen!  Lively and accurate, a sure bestseller.”

John Mackey, CEO, Whole Foods Markets, said, “I have read it three times. It’s fun to read on every page. I love this book and have recommended it to dozens of my friends.”

And the late William F. Buckley Jr. told me, “I champion your book to everyone.  I keep it by my bedside and refer to it often.  Every student should have a copy.”

The story behind this book is quite extraordinary. You can read it here: http://mskousen.com/2018/10/adam-smith-and-the-making-of-modern-economics/.

“The Making of Modern Economics” is a 500-page book available in hardback, paperback, Kindle, or audio.  The quality paperback retails $53.95 by Routledge and $43.74 on Amazon, but you can buy it for only $35 directly from Skousen Books, including postage. I will autograph each copy and mail it for free. (For orders outside the US, add $30 for airmail shipping.) To order, call Harold at Skousen Books, 1-866-254-2057. Or order online at www.skousenbooks.com.

I was interviewed on C-SPAN Book TV about “The Making of Modern Economics.” Watch the 20-minute interview here:  https://www.c-span.org/video/?307279-1/the-making-modern-economics.

We can win the battle of ideas. Let the campaign begin!

Yours for peace, prosperity, and liberty, AEIOU.

Ho hum; trillion dollar deficit

us fed debt

Here’s the US debt story with a bit of historical perspective. Here we find an example of Change You Can Believe In care of the blessedly departed Barack Obama. Consequences include slower growth, limited if not actually negligible increases in the real wage, additional upwards pressure on the price level and some additional increases in rates of interest. But really, where’s the constituency to do anything else? How many non-Keynesians are there, never mind anti-Keynesians?

Remember this? Remember how it ends?

What’s changed and how you gonna change it? Still, there are  regulations going and public spending is being better targeted. Large numbers are being peeled from the welfare rolls. Not good, but if the deficit is rising and you’re a Keynesian, what’s the problem? And if you’re not, what are you going to say to convince them otherwise?

Of course, there is then this from Drudge yesterday:

Then there’s this from today:

But then there’s this also from today.

Really, you only wish people knew how things worked, as in some business comes up with an idea, borrows some money to buy in some capital and labour, and then produces that are sold on the market for a profit. There is endless entrepreneurial drive in the US. With a President who is an entrepreneur, who knows what’s possible.

Classical theory explained

I’ll be in Canberra for the first three days of next week for the meeting of the History of Economic Society of Australia where I will be giving a presentation on the actual meaning and significance of “classical” economic theory. I am therefore putting up a post from way back in history that I did in 2011, so ancient that Maurice Newman was the Chairman of the ABC and I was still being published at The Drum. The rest of this post is what I said then. But before I get to that, I will put up this quote from a brief article on me [my name even comes first in the article’s title!] which you may find in the latest edition of the Journal of the History of Economic Thought:

“Steven Kates is probably the best-known present-day proponent of the old ‘classical’ macroeconomics of Jean-Baptiste Say, James Mill, David Ricardo, and John Stuart Mill.”

But as I say in the heading in the slide, I am probably the “best-known” because I am probably the only one in existence. It was also, let me assure you, not intended as a compliment. Anyway, here is what I wrote back then.


I have an article up at The ABC’s Drum website where I again look at the statement by the ABC’s Chairman, Maurice Newman, on the value of classical economic theory in comparison with the modern. Here was the full quote from his speech:

We may think we are all Keynesians now, but perhaps contemporary teachings of Keynes are not faithful to the original doctrine, or, maybe, Keynes is now a defunct economist. Perhaps post modernist economics has so captivated our journalists that they have suspended the spirit of enquiry, open-mindedness and scrutiny that an informed democracy so desperately needs.

Under relentless pressure, classical economics has become all but a relic of a bygone era. Yet the work of classical economists most likely holds the solution to today’s economic ills.

The point that Maurice Newman was making was that journalist really ought to take a look at the economic ideas of the classical economists, which using the modern Keynesian definition incorporate every economist before Keynes himself, with the exception of Malthus, Hobson, Major Douglas and Gesell (who these last three are you might very well ask, but this is Keynes’s very own and very short list). As for the rest, they were consigned by Keynes to the dustbin of history, whose theories are only kept alive by a very small band of economists scattered across the world.

In the article, I quote Alfred Marshall, arguably the greatest economist to emerge from the nineteenth century. As I wrote on The Drum, Marshall “was very specific about not mistaking an economic recession for a failure to spend and he very much thought of himself as following in the tradition of the classical economists. This is what he wrote in his Principles of Economics:

[This is] the attitude which most of those, who follow in the traditions of the classical economists, hold as to the relations between consumption and production. It is true that in times of depression the disorganization of consumption is a contributory cause to the continuance of the disorganization of credit and of production. But a remedy is not to be got by a study of consumption, as has been alleged by some hasty writers … The main study needed is that of the organization of production and of credit.

Demand deficiency was not an idea discovered by Keynes. It was an idea about as old as economics itself and had been thoroughly debated and rejected for a hundred years before Keynes came along. And the fact of the matter is, there is not an economist in a hundred who could tell you in a convincing way why demand deficiency had been seen by classical economists as the province of cranks. They would also be unable to tell you what the classical theory of recession actually was. All they have is what they were told by Keynes, the very last man in the world from whom anyone should try to learn what classical economists had said.

Newman’s point is exactly right. Why don’t our journalists (and economists) show enough curiousity to find out what those classical economists said and wrote. We might still reject classical theory when we have examined their theories and ideas. But then again there is the possibility, a possibility that grows stronger by the day as we move towards another downturn, that classical economists actually did know more about the causes of recessions and their cures than we are currently led to believe.

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.

Shifting in a Keynesian direction

First there were two articles, one by Paul Krugman with the title, Keynes is slowly winning and the other by Tyler Cowen in reply to Krugman titled, Keynes is slowing losing (winning?). There is now a third, Krugman’s reply to Cowen, In Front Of Your Macroeconomic Nose, in which he says what I believe myself:

Cowen seems to have missed my point; I wasn’t talking about the merits of the Keynesian case, which I believe have always been overwhelming, but about the way macroeconomics is discussed in the media and among VSPs in general. My sense is that this is shifting in a Keynesian direction.

There is no other theory known to anyone other than Keynesian. You can talk about debt and deficits until the end of time, but unless you can relate it to a theoretical understanding of what needs to be done and more importantly why, there is nothing to grab onto when trying to craft policy. Keynesian economics may be ruinous, but you can find it in a million texts and it has been taught for three generations, coming up to four. Even Cowen in his pussycat weak attack on Keynes can do no better than this at the end:

It would be wrong to conclude that Keynes was anything other than a great, brilliant economist. Rather these citations, plus many of Krugman’s points, give you some beginnings for this issue. It’s not nearly “Keynes’s time” as much as many people are telling us, after all his biggest book is from 1936 and that is a long time ago. Keynes is both winning and losing at the same time, like many other people too, fancy that.

Economies are not driven from the demand side. But other than myself and a handful of others, you will find hardly anyone else to say it across the wide expanse of economics. So on we go, tilting back to public spending while real incomes descend and our economies weaken with not a clue why that might be. So at least there is Johnny Cochrane writing this in a discussion of the articles by Cowen and Krugman:

I posted this last week, but I was unaware at the time of the Paul Krugman’s “Keynes is slowly winning” post; Tyler Cowen’s 15-point response, documenting not only Keynesian failures but more importantly how the policy world is in fact moving decidedly away from Keynesian ideas, right or wrong (that was Krugman’s point); and Krugman’s retort, predictably snarky and disconnected from anything Cowen said, changing the subject from Keynesian ideas are winning to the standard what a bunch of morons they’re not Keynesians though I keep telling them to be. . . .

In that context, I added two “Facts in front of our noses.” Keynesians, and Krugman especially, said the sequester would cause a new recession and even air traffic control snafus. Instead, the sequester, though sharply reducing government spending, along with the end of 99 week unemployment insurance, coincided with increased growth and a big surprise decline in unemployment. And ATC is no more or less chaotic than ever. Keynesians, and Krugman especially, kept warning of a “deflation vortex.” We and Europe still don’t have any deflation, and even Japan never had a “vortex.” These are not personal prognostications, but widely shared and robust predictions of a Keynesian worldview. Two strikes. Batter up.

But still no theory to explain why cuts to public spending will raise economic growth while increased public spending will slowly but surely reduce our standard of living. If, however, you are interested in understanding why, there is always the second edition of my Free Market Economics.

UPDATE: One of the great anti-Keynesians has written an article for this month’s Standpoint in the UK, Don’t let the Keynesians Wreck the Recovery. He discusses the famous letter signed by 364 economists across Britain warning of the consequences of Thatcherism, that is, the consequences of fiscal discipline:

Famously or notoriously, depending on one’s viewpoint, the 364 were wrong. To quote Nigel Lawson, who would become Chancellor of the Exchequer in 1983, the timing of the recovery was “exquisite” in refuting the 364’s prognoses. Demand and output started to move upwards in the second quarter of 1981, just as the debate about the Times letter was at its most intense. Although unemployment remained high for some years, the economy gathered pace and in the late 1980s entered another boom. If this was a laboratory experiment for Keynesian economics, its results suggested that the textbook formulas were flawed. Old-fashioned principles of sound finance returned to favour in the UK, while the ratio of public debt to gross domestic product fell to manageable levels. For more than 25 years Keynesian fiscal activism was ignored or even forgotten.

But the events of the 1980s have been ignored, particularly by writers of textbooks. As Tim notes:

But university economists continued to teach Keynesian macroeconomic as if nothing had happened. Sure enough, in Britain many academics realised from the sequel to the 1981 Budget that something was wrong with Keynesianism or, at any rate, with the naive versions of Keynesianism which emphasised the blessings of fiscal fine-tuning. But in the American East Coast universities — notably the Ivy League establishments — the UK’s 1981 Budget was too parochial an event to justify rewriting textbooks and lecture notes. Such influential figures as George Akerlof and Robert Shiller of Yale, Paul Krugman of Princeton and Joseph Stiglitz of Columbia, all now Nobel prize laureates, continued to teach that an increase in the budget deficit adds to aggregate demand and a decrease deducts from it.

And so here we are, dragging our economies down by pretending we are doing them good.

The great discontinuity in Keynes’s economic thought

This is an extract from a note I have written to an economist in the United States whose work I have only just come upon. I am beginning to become aware of the various attempts by a number of economic schools to abandon modern neo-classical theory which, in my view anyway, mostly means trying to rediscover what the classical economists already knew. Perhaps there is more to it but so far I cannot see what. The interest in this letter, however, is in the nature of the Keynesian Revolution. I have no in-depth knowledge of Keynes’s Treatise on Money although am reasonably familiar with it. But it was published in 1930 while my interest begins in 1932 with Keynes’s discovery of demand deficiency as the explanation of recession and involuntary unemployment.

The paper I am commenting on treats Keynes’s ideas as if there had not been the great disruption at the end of 1932 when Keynes came upon Malthus’s 1820 letters to Ricardo. It was these that instantly converted him into a Keynesian theorist which he had not previously been, even though he had always sought to increase public spending to reduce unemployment during recessions. That virtually all of his contemporaries understood how thin Keynes’s arguments are is now just of historical interest and of interest to hardly anyone at all. Only by going back to those moments of transition, and by understanding what economic theory was like before 1936, is there any hope for again turning economic theory into something useful for analysing economic events. This then is what I wrote:

I would have written back straight away but Tuesdays is my heavy duty teaching day and I also didn’t want to clutter your inbox until I had read your brilliant article on Keynes. You cannot imagine how similarly we see the world and what a treat it is for me to read something like what you wrote. I will, of course, include this paper in my Anti-Keynesian Reader, but I must also beg your indulgence if I explain to you the 1932-1933 shift in Keynes’s thinking which is my speciality. I have also ordered your macroeconomics text which I am looking forward to since it came after your paper and must therefore incorporate the same ideas.

You have also made me even more aware than I was before that I have not been keeping up with the literature as well as I should. I found the scholarship of your article exhilarating and finished it at one go. I just sat down and read it and was only sorry that after thirty pages it turned out to be so short. My own excuse for not being aware of the most recent literature is that I spent the years from 1980-2004 as the Economist for the Australian Chamber of Commerce and Industry. I therefore think that my economic interests were driven by an eclectic interest in arguments that could be used to explain economic issues from the perspective on an entrepreneur. It is why the classical economists so appealed to me since that was their aim. From the marginal revolution on, I find almost nothing of much value in framing issues, specially since post the marginal revolution economics went micro and into equilibrium analysis, both of which are utterly contrary to what I could see right before my eyes being the need to make sense of an economy in which every business decision is fraught with the uncertainty of spending tonnes of money before the outcome of each of those decisions could be known. And while I may have been feeding on the classics, nothing I ever wrote looked archaic to those to whom our submissions went. Classical economics makes perfect sense and is much more logical and insightful than the kinds of economic theory we find today.

But what started me on the trajectory I travelled was a minor issue in the National Wage Case of 1980. I was brought on to write the economic submission to our industrial relations court on behalf of employers. It was explained to me that every argument in a court of law must be controverted so I had to go through the union submission, identify each argument they had made and then explain why it was wrong. Believe me, this was the easiest task I have ever been given, but one of them was easiest of all. This was the argument that wages had to be raised as a means to stimulate demand. So I just pointed out that you could not stimulate an economy by making employers pay an extra $100 a week so that employees could then spend that extra $100 in their shops. And then, in 1982, I was reading John Stuart Mill’s Principles, for no other reason than because I was interested in what he might have to say, and came across his Four Propositions on Capital which literally, on the spot, ended my days as a Keynesian. (And now, 32 years later, I am about to finally have an article published on these four propositions.) From there, I continued reading more of Mill and found a passage in which he pointed out how ridiculous it was that people thought an economy could be driven forward by demand. And the example he gave of how ridiculous this argument is was of someone who might steal from the till of the business they are working in, go out the back door and come back in the front and spend the money, and that the more this was done, the faster the business would grow. This was so exactly my own argument that it completely dumbfounded me. And yet, it was probably not until another couple of years later that I worked out that the notions that Mill was discussing are the actual meaning of “Say’s Law”. It has been coming to terms with Say’s Law and what it meant and all of its implications that has been the pole star for all of my economic writing ever since. And so, my Free Market Economics, which is me trying to do in my own fashion right now what Mill had done in 1848.

I have tried to explain over and again that Say’s Law is the Rosetta Stone for understanding The General Theory, and is also the foundational principle for understanding how an economy works. For the second, you can read my text when it gets to you. But the first is what you have written your article about which has been in so many ways a revelation to me. My speciality is the Keynesian Revolution and know less than perhaps I ought to about The Treatise and Keynes’s original monetary theories. You have perfectly situated Keynes’s arguments for me and his original conception which fits into everything I already know and understand. It is a tour de force, and I have tried to read everything I can on the critics of Keynes. But this is what I can add to what you have written. I have, of course, published things on this but to say that it has been ignored is something of an understatement. It so badly fits the narrative others wish to promote, and truly undermines Keynes as an original thinker and an honest purveyor of ideas, that it just cannot be allowed into the canon. Perhaps, however, you will see my point.

Keynes was doing exactly what you write all the way up to the end of 1932. He was going to write a book about the Monetary Theory of Production, almost certainly along the lines you set out. Unfortunately, it was just then that he came across Malthus’s long-lost letters to Ricardo which had just been discovered by his best friend, Piero Sraffa. In updating his “Essay on Malthus” for inclusion in his Essays in Biography, he read through those letters and discovered demand deficiency, the issue of the general glut debate of the 1820s. He therefore stopped writing about the monetary theory of production and began to write about Say’s Law. And rather than requiring a form of disequilibrium analysis, he is forced by what he wishes to argue, to adopt the most rigid form of equilibrium analysis. This may seem a conundrum to others who work forward from Keynes’s previous writings, but working backwards from The General Theory as I do, it seems perfectly clear to me what he had done.

The enduring legacy of Keynes

us unemployment jan 2014

After a while the dismal state of the world’s economies becomes merely background. We forget the better times and accustom ourselves to how things now are.

I am, however, in the process of putting together the second edition of my Free Market Economics and have just been through the Keynes versus the classics section. And let me tell you, there has been a lot to add based on our experiences over the past five years but there is nothing that needs to be revised. And the most interesting part that needs no revision is the way that macro continues to be taught which is Keynesian from end to end. How anyone can still think that a public stimulus has anything to offer in bringing recessions to an end after what we have gone through is beyond me. But they do, and Y=C+I+G remains in every text and is taught as the best explanation economists have for how economies work and what needs to be done when an economy is in recession.

Anyway, the data are from the US which is the epicentre of economic policy death. From an article on the last six years of the American Labour Market and picked up at Powerline. It’s a measure I often used to do myself since the labour market data only include as unemployment people who are actively looking for work. After a while you just give up so the unemployment rate falls even while the labour market remains stagnant. That’s what the picture all too clearly shows about the US.

There is more to it than just the deadly effects of the stimulus but most of it starts from there. It’s almost as if the US had never heard about free enterprise and the private sector the way they are going about things.

Meanwhile, at Drudge the main headline highlights a new record of sorts:


And those subheadings beneath add to the picture:

Record Number of Women Not In Labor Force…

Growth slumps…

Slowest in three years…

1,500 people camp out for chance to apply for job…

‘For Every One Job Added, Nearly 5 People Left the Workforce’

MSNBC: ‘Awful,’ ‘Very bad,’ ‘Ugly’…

If you are interested in finding out about Say’s Law and the classical theory of the cycle, or what a classical economist would do when an economy is in recession, so far as I know there’s only one place where you could find any of that out. I may, of course, be wrong but what I write is in accord with the way economists looked at things from 1776-1936 and that includes a very large number of very cluey people. If there really is such a thing as evidence-based policy as opposed to ideologically-based policy, you could do worse than to see what the book has to say.