Rudd returns to defend his economics because no one else will

There was a letter to the editor in The Oz yesterday which they have not even preserved on their editorial page so I have had to re-type it so that you can see it in full. The heading is “Conservative no radical”.

Janet Albrechtsen accuses me of executing a “canny con job” by campaigning as an economic conservative.

As Peter Costello has said, John Howard had become a serious big spender by 2007. Our election commitments tallied about 75 per cent of the Liberals’; hence my statement I would not match his reckless spending promises. Indeed, in May 2008, we budgeted for a surplus of 1.8 percent of GDP. Then came the global recession in September. We took the mainstream conservative approach, learning from the Great Depression by reaching for the proven lever of fiscal stimulus and leaving a legacy of productive infrastructure.

The economic radicals of the Liberal Party voted against the stimulus. If they had succeeded, there would have been a 15-month recession with 210,000 more unemployed according to Treasury and the OECD. Instead, we were the only advanced economy to avoid a recession. Conservative does not mean reactionary.
Kevin Rudd, Sunshine Coast, Qld

The point of a “stimulus” is to reduce unemployment, which other than trivially never occurred. And if he thinks there was no recession in Australia following the GFC, he ought to take a look at the rise in the unemployment rate which has remained more or less at the same elevated rate it reached at the height of the GFC. Meanwhile productivity growth has been dismal, and real wages have continued to stagnate.

So to remind us of just how conservative K. Rudd was, I attach for your interest two articles I published in Quadrant. First, Reflections of a Neo-Liberal, which discusses an article by Rudd published at the time giving his economic philosophy. In my response to Rudd, there was this.

To capture as least some of the rhetorical overdrive, I reproduce the two insert quotes displayed in large print across the page. The first:

The great neo-liberal experiment of the past 30 years has failed … the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy.[ellipses in the original]

And then there’s this:

The stakes are high: there are the social costs of long-term unemployment; poverty once again expanding its grim reach across the developing world; and the impact on long-term power structures within the existing international political and strategic order. Success is not optional. Too much now rides on our ability to prevail.

We are here not discussing whether some policy or another might make the economic system work more effectively. This is not about whether there ought to be a stimulus package and if so, how it ought to be structured. This is beyond the technical side of economics and into the realm of good and evil. It is a psycho-drama in which Frodo and his mates take on Gollum in a bid to save the world.

That was in April, 2009. In July I wrote another, also in Quadrant, The Neo-Socialism of the Twenty-First Century. Here are the final two paras:

We in the West once understood how to develop strong economies. Kevin Rudd’s article reminded me that such knowledge is not possessed by all. The coin of the political realm is now the creation of jobs irrespective of what those jobs actually do. The Soviet Union had no unemployment for almost all of its seventy-odd-year history, but those who had “jobs” produced next to nothing because they did not have the market to guide them, either in what to produce or over which inputs to use.

Why these questions are important was one of the major ideas developed by Friedrich Hayek, the arch “market fundamentalist” [Rudd’s phrase] to whose good advice and sound counsel our Prime Minister has closed his mind. On the surface Rudd appears to be guided by some defunct academic scribbler, but in reality looks to be making it up as he goes along.

And let me just refer to this comment by Rudd in his letter, that in trying to roll back the Great Recession, they were “reaching for the proven lever of fiscal stimulus and leaving a legacy of productive infrastructure”.

Since all that has been proven by the stimulus spending across the world following the GFC was that public spending never brings an economy out of recession, it is astonishing that no one ever seems to learn from experience. Neither here, nor in Obama’s America, nor anywhere else did public spending lead to a recovery. If anything has been proven it is that Keynesian economics is economic nonsense. This was the great Keynesian experiment, adopted across the world, and it was an absolute failure whose dismal legacy remains with us to this day.

And then to have suggested that left behind from the stimulus was “a legacy of productive infrastructure” you really do have to wonder what kind of fantasyland Rudd is living in. The Pink Batts and School Halls programs left nothing productive behind. Only left behind were the debts and deficits which remain with us still, more than a decade later.

“No permanent additional employment can be created by State expenditure”

A review of the following book was put up on the Societies for the History of Economics online discussion thread:

Robert W. Dimand and Harald Hagemann, editors, The Elgar Companion to John Maynard Keynes. Cheltenham, UK: Edward Elgar, 2019. xxi + 648 pp. $250 (hardcover). ISBN: 978-1-84720-008-2.

Reviewed for EH.Net by Bradley W. Bateman, Randolph College.

To get the flavour of the review, this was its first line:

Rarely does one read a reference work for pleasure. After all, would you take the Encyclopedia Britannica or the New Palgrave to the beach for your holiday? Not likely. And yet, there are reference books that one not only depends on, but enjoys. These might be surveys of the literature such as G.C. Peden’s little gem, Keynes, the Treasury, and British Economic Policy (1988); or they might be traditional multi-volume works like the Dictionary of National Biography. A good reference work can take many forms; but when you find a well-written and authoritative work that can help you in your research, you turn to it regularly and, yes, can even come to enjoy it.

I therefore wrote a note to put my own perspective forward.

I hear all the time that Keynesian economics has been transcended, that it is a thing of the past, but the evidence, both from the way our textbooks are written and in the way policy is conducted across the world, is that the very core of macro theory and policy remains Y=C+I+G. I am in no doubt that this collection is indeed a valuable collection in that it consolidates a great deal of writing on Keynesian economics and its history into a single volume. Yet the issue for me remains, that economists continue to trundle down this Keynesian path without the slightest evidence that it accurately explains how economies work, or that there has ever been a single instance where a Keynesian fiscal expansion has actually succeeded in bringing an economy out of recession and restoring full employment. You might have hoped that the failure of every stimulus in the world to succeed following the GFC might have created some kind of learning experience, but so far there is little evidence that economists are even beginning to rethink these macro models. Since the bibliography includes G.C. Peden, I will add in my favourite quotation from his writings, and leave it at that. And what this quote shows is that it’s not as if pubic spending didn’t have a constituency before Keynes, and yet, when it was tried, it turns out that the “Treasury View” was absolutely correct, as it has been every time a “fiscal stimulus” has been tried. Winston Churchill was the British Chancellor of the Exchequer and this is from his Budget Speech in May 1929, from well before the stock market crash in October.

“Churchill pointed to recent government expenditure on public works such as housing, roads, telephones, electricity supply, and agricultural development, and concluded that, although expenditure for these purposes had been justified:

‘For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.’” (Peden 1996: 69-70)

I just wonder whether this volume has an entry on Critics of Keynesian Economics. I doubt that it does, but in any case it would undoubtedly and unfortunately have to be a very short entry.

So far no rejoinder to my response, but will let you know if there ever is.

How to describe my next book

This was the outline of my next book that has been proposed to me by the publisher.

‘Classical Economic Theory and the Modern Economy’

Exposing the zenith of analytical power and depth of understanding that economic theory reached in the middle of the nineteenth century, this book discusses the importance of John Stuart Mill and his contemporaries. Steven Kates explains what took place in the ensuing Marginal and Keynesian Revolutions that hindered economists’ understanding of how economies truly operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, providing a route into the theory they developed. Kates offers a theoretical understanding of the operation of an economy within classical economic theory by classical economists, providing a new perspective for viewing modern economic theory from the outside. This provocative book also not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’ pathway in writing The General Theory.

A crucial read for economic policy-makers seeking to better understand the key policies needed to generate economic recovery, this book will also be of keen interest to economics and economic history scholars. It offers an alternative theory to modern macroeconomics for those studying economic theory and policy.

OK, but not what I think is needed. This is what’s needed.

‘Classical Economic Theory and the Modern Economy’

The book starts with two premises: First, that economic theory reached its deepest level of understanding in the writings of John Stuart Mill and the classical economists of his time, and then, secondly, the author of this book has understood Mill and has accurately explained what the classical school of the late nineteenth century wrote. From these premises, this then follows.

If you are to have any hope of understanding how an economy works, and how modern economic theory became the dead end it has become, you will need to read this book.

The classical economists, and John Stuart Mill in particular, lived through the Industrial Revolution, saw its astonishing economic transformation before their eyes, and explained, so others could understand for themselves, how their prosperity had been created through the emergence of the market economy.

Mill, the greatest utilitarian philosopher of his age, refused to use utility as part of his theory of value. Mill explicitly and emphatically denied any role for aggregate demand in the creation of employment. In reaching these conclusions, there was no disagreement among the entire mainstream economics community of his time.

First through the Marginal Revolution of the 1870s, and then through the Keynesian Revolution of the 1930s, the entire edifice of classical theory has been obliterated. From a classical perspective, modern economic theory is Mercantilist trash. If you are interested in how economic theory became the wasteland it has become, and wish to understand the classical theory no one any longer has the slightest clue about, this is the book you must read.

If that’s your interest, then you should certainly read this book.

Geoff Mann in a Marxist critique of Keynesian economics

The video is found at the book launch of Geoff Mann’s In the Long Run We are All Dead.

Geoff Mann lives in Vancouver, where he teaches political economy and economic geography at Simon Fraser University, and he directs the Centre for Global Political Economy.

In the ruins of the 2007–2008 financial crisis, self-proclaimed progressives the world over clamoured to resurrect the economic theory of John Maynard Keynes. The crisis seemed to expose the disaster of small-state, free-market liberalization and deregulation. Keynesian political economy, in contrast, could put the state back at the heart of the economy and arm it with the knowledge needed to rescue us. But what it was supposed to rescue us from was not so clear. Was it the end of capitalism or the end of the world? For Keynesianism, the answer is both. Keynesians are not and never have been out to save capitalism, but rather to save civilization from itself. It is political economy, they promise, for the world in which we actually live: a world in which prices are sticky, information is asymmetrical, and uncertainty inescapable. In this world, things will definitely not take care of themselves in the long run. Poverty is ineradicable, markets fail, and revolutions lead to tyranny. Keynesianism is thus modern liberalism’s most persuasive internal critique, meeting two centuries of crisis with a proposal for capital without capitalism and revolution without revolutionaries.

If our current crises have renewed Keynesianism for so many, it is less because the present is worth saving, than because the future seems out of control. In that situation, Keynesianism is a perfect fit: a faith for the faithless.

Far-left, all about Hegel and Marx, but not an ounce of economic understanding from what he has to say. But the book is coming and will see what we find then. His conclusion is that “poverty is produced by the system itself”. This is the kind of drongo idiocy only a self-satisfied utterly pampered member of the academic bourgeoise would believe.

Ever wonder why real wages are falling?

METRO TUNNEL COSTS COULD BLOWOUT TO $3B
A messy fight is looming over who will pay the huge extra costs of the Metro Tunnel, with the Andrew Government reportedly warned the total blowout of..

The Metro Tunnel is Victoria’s very own NBN, although there are quite a few others like it but not quite as draining although very bad as well. There was the desal plant, and the billion spent on the Miki Card, getting rid of level crossings in the city, others too, but this one is big big time. Infrastructure spending at its absolute stupidest. The above story is a snippet from the H-S this morning.

There are economic idiots everywhere, but the biggest ones are the ones who think government infrastructure projects like this are good for the economy. Even the Premier is beginning to see what a black hole this is. Construction everywhere you turn in the City, whole city blocks turned into construction sites, billions of dollars being spent, and not a dollar’s worth of actual value-adding output anywhere to be seen. We are looking here at immense costs, for which there will NEVER be a single cent of profit ever earned.

Keynesian economics was once only about getting an economy out of a recession. Now it’s about massive and permanent deficits coupled with massive and permanent forms of public waste. Now they have overrun their original costs to $3 billion, but there is more than just the tunnel that comes with all of this. Victoria is bankrupt in the same way that economic theory is bankrupt. I was just up in Sydney and they are about to finally start running their idiotic streetcars down George Street. That, too, will never turn a dollar of profit, which means it will never ever repay its costs in the benefits it provides. Pure waste but presented as a public benefit. My biggest query is always why isn’t this obvious?

Modern economic theory is a disaster for anyone whose government believes any and all of it. Public spending has its role, but is a drain on an economy’s productivity. Oddly because of the Keynesian nature of the National Accounts, all of this will show up as growth in GDP even though it is nothing of the kind. And there will be many people employed, except not employed on projects that will add to the economy’s net level of real production. They are not value adding. They may create a dollar’s worth of value, but for each dollar of value created it will cost much much more than a dollar. Why does this make sense to anyone?

Idlers and good-for-nothings

I’m in the midst of a book on the coming of Keynesian economics into the world and the disappearance of classical theory. I have just now finished a section discussing the first Keynesian textbook ever written, Lorie Tarshis’s The Elements of Economics, which I thought I might share a bit of which with you.

Tarshis’s text made Samuelson and other economic writers more cautious in how they discussed Keynesian theory. A passage such as the following would never again enter a Keynesian text, as accurate a reflection of the theory though it may actually have been.

“To put it bluntly, employment and income, in money terms, can be expended to respond equally whether the government sponsors useful public works like highway construction, or completely useless ones like digging ditches and filling them up again. In either case, because the income of the newly employed would be higher than before, they would increase their spending, so that the output of consumers’ good would be expanded and the upward swing begun. Naturally we should prefer projects which directly add to our real wealth. Flood-control projects, highways, parks, school buildings, research projects, housing, and so on are better than leaf-raking and useless excavations. But the latter are better than nothing, for even though the projects are useless, carrying them out leads to an increased output of consumers’ goods. And even though the men responsible for the increased demand were idlers and good-for-nothings, their dollars, in our economy, are as powerful as any others in increasing consumption, income, and employment.” (Tarshis 1947: 518)

Possibly the most revealing passage in the entirety of Keynesian literature.

It was overrun the following year by the first edition of Samuelson’s Economics, in part because Samuelson’s was a much better book, but also because he was a bit more candid about what Keynesian theory meant in practice.

Told ya so

Here’s the front page story in The Oz today: Aussies no better off since GFC: household incomes stagnant for past decade. From which:

“Over the eight-year period from 2009 to 2017, average household income grew by only $3156, or 3.5 per cent, while the median in 2017 was $542 lower than 2009,” the report, which has tracked the circumstances of more than 17,500 Australians since 2001, finds.

The share of households in relative poverty — living on less than half the median income — rose to 10.4 per cent, according to analysis released today by the Melbourne Institute that will add to the controversy about the adequacy­ of Newstart, the govern­ment’s jobless payment.

All as obvious as the morning sun, if you can do away with modern macroeconomic trash and return to pre-Keynesian theory. From my tenth anniversary warning on the stimulus published in Quadrant:

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

— Steven Kates, Quadrant, March 2009

Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?

— Question to Steven Kates from Senator Doug Cameron,
Senate Economic References Committee, September 21, 2009

I caught on to classical economic theory in 1980 and have spent the years since watching in every circumstance how accurate the economics of John Stuart Mill actually is, from the failure of every single “stimulus” put in place to stimulate through to watching the recovery that followed the massive cuts to public spending brought on by Peter Costello’s budget in 1996 and the return, not just to balanced budgets but zero debt. Modern Keynesian economics is junk science and has never worked on a single occasion during the entire period since The General Theory was published in 1936.

Read my text if you are interested: Free Market Economics, now in its third edition. And here is the endorsement from Art Laffer, the genius behind the Reagan recovery and now also complicit in the recovery in the United States:

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

The persistent failure of economic theory

I see the RBA today froze at the thought of raising rates in the midst of an economy as stone cold dead as this one. They are, of course, clueless about why this is, just as Treasury is equally clueless. So let me take you to my article just published at Quadrant on The Dangerous Persistence of Keynesian Economics. Here’s how it starts.

OUTSIDE the United States, no economy has fully recovered from the downturn that followed the Global Financial Crisis in 2008-09. The crisis came and went in half a year, but just about every economy continues to have problems generating growth, increasing employment and raising real incomes. As I was writing my article on “The Dangerous Return to Keynesian Economics” in 2009, I commenced working on an economic textbook, now in its third edition, to explain why modern macroeconomic theory is utterly useless, why no one using these economic models as a guide to policy would ever succeed. And here we are, ten years later, and everything discussed in that earlier article, explained in far more detail in my text, has come to pass.

________________

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
—Steven Kates, Quadrant, March 2009

.

Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009

________________

Why did I get it so right? Because nearly everyone else thinks economies are made to grow through increases in demand, while in reality, as was once universally understood, economies can only be made to grow through improvements in supply-side conditions. Demand has absolutely nothing to do with making an economy grow. Demand of course is crucial to how many units of any particular good or service will sell, but has nothing whatsoever to do with how fast an economy in total will grow, or how many workers will be employed.

Does being right count for anything? Not a bit. Still, you can go back to my original article from ten years ago, The Dangerous Return to Keynesian Economics, and see how well what I said then stacks up with how things now are.

Let me add that if you are not already a subscriber, you should be. Subscribe here.