Tag Archives: keynesian economics is junk

Economic theory and junk science

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You may have heard me mention once or twice before that Keynesian economics is junk science, but just in case you missed it I am going to mention it again. What has brought all this to mind is reading the front page story in The Oz in the context of the booming economy in the US. In The Oz we have this: Bill shock as standard of living slumps. In the United States we have this: US private sector added 250,000 jobs in Dec, vs estimate of 190,000: ADP. It also mentions that “the report helped send the Dow to break the 25,000 mark for the first time”. Of course, here in Australia we have something else instead:

Australians have endured their longest period of falling living standards in more than a quarter of a century as growth in costs outstripped earnings for the fifth consecutive quarter, leaving households worse off than they were six years ago.

The moronic focus on public spending to lift our economies is such dead stupidity, but even more dead stupidity is that economists continue with Y=C+I+G as the mantra of macroeconomic thought. I have just been sent my copyedited article that will be published in June: “Making Sense of Classical Theory”. It is an attempt to remind others that there was not only an economic theory before the publication of The General Theory in 1936, but that theory was vastly superior to the theory that disfigures our economic textbooks today.

As it happens, I have just been re-reading the third edition of my Free Market Economics. There is, unfortunately, nothing like it. Perfectly clear and as easy to read as a blog post but entirely framed around classical economic theory. The economics of John Stuart Mill, the greatest economist who has ever lived, recast for the 21st century. If you don’t want to buy it yourself, just get your library to buy a copy.

The reality remains that our living standards will continue to descend if those who make policy continue to believe that public expenditures like the Snowy Mountain Project Mark II will make the economy grow. It will, in exactly the same way as the NBN.

The world’s economy has gone into a bunker and isn’t coming out

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It was the headline that got me:

AP IMPACT: Families hoard cash 5 yrs after crisis

Now that would be interesting. As any good Keynesian would know, it is hoarding cash that is the evidence of consumers going into a bunker. So I looked at the article, which is a very long article, and finally found the actual statement about cash. I have added the bolding below:

HOARDING CASH: Looking for safety for their money, households in the six biggest developed economies added $3.3 trillion, or 15 percent, to their cash holdings in the five years after the crisis, slightly more than they did in the five years before, according to the Organization for Economic Cooperation and Development.

The growth of cash is remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts. They also poured money into bank accounts knowing they would earn little interest on their deposits, often too little to keep up with inflation.

People holding slightly more cash in the most recent five years in comparison with the previous five years is not headline news. It is what will happen anywhere as population and inflation rise. People hold more cash because the prices they are paying are going up more or less at the same rate as their nominal wages are going up. Slowly, but slightly higher all the same. What a useless measure but it does remind me once again how useless a Keynesian approach is in understanding what’s going on.

The article does, however, paint a grim portrait of the economic world in which we live. Things are going nowhere and living standards are falling. And why that is could not be more easily explained although not by using a modern macro text. Governments have taken over the spending from the private sector and the result is as dismal as one ought to expect. Governments only waste. Governments only divert resources into sub-optimal forms of production. Governments only follow, never innovate. Increased government spending in absolute terms and as a proportion of total national outlays will make an economy poorer and then if kept up long enough actually poor. This is such obvious common sense that you would have to be a Treasury Secretary not to understand what is going on right before your eyes.