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.

How to steal so that those who are robbed actually believe they are being made better off!


Keynesian economics defined and explained: an economic theory whereby the rich steal from the poor who are made to feel grateful because they are led to believe they are benefitting from the money taken from them and parcelled out by governments to be spent by their friends.

It may create misery, but it is a stable sort of misery in its own way.

Carbon taxes may be a new means of achieving the same end but through a different form of deceit.

The political class is the new aristocracy.

Oxford University Press from out of nowhere quotes Mill’s fourth proposition on capital

This is a tweet sent out by Oxford University Press Economics.

“Demand for commodities is not demand for labour.” – John Stuart Mill


From Oxford University Press with Mill’s fourth proposition on capital – demand for commodities is not demand for labour – just thrown out for comment. So I commented:

Replying to 

The statement is true, much to the shame of modern economics. I have written an article on just this: “Mill’s Fourth Proposition on Capital: a Paradox Explained”, published in the March 2015 JHET. Ever wonder why no stimulus has ever led to recovery? Mill explained it in 1848.

As I wrote to my friend and colleague who had spotted the OUPE tweet and forwarded it to me:

From out of nowhere, really, that OUP should suddenly bring forward that quote of all quotes from Mill. Wondrous that you even saw it and thank you for sending it along. I have now added my own tweet to the rest. The destructiveness of Keynesian economics ought to be perfectly evident everywhere except that it’s not. Sad and yet funny that virtually no one today can even work out what Mill had meant even though it had been the universal view of every economist right up to the publication date of the General Theory. And I don’t mean that people disagree with Mill. I mean that no one can even explain why Mill and all of his contemporaries thought this was true so just end up befuddled but leave it alone.

Need I add that Leslie Stephen thought that Mill’s Fourth Proposition was “the best test of a sound economist”? Well, of course I don’t need to, but I will, and also add that Stephen was right and it is.

LET ME ALSO ADD THIS: From The Oz today, via David Uren:

“Average household incomes have not improved significantly since the global financial crisis in 2008-09.”

We are talking about a decade in which real incomes have not risen and during which the unemployment rate has hardly budged. I wrote this in 2008 (and published Feb 2009).

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.

Mill’s fourth proposition is pure macro (or theory of the business cycle if you want to think in classical terms). You cannot generate a recovery from the demand side is how you might say it today. In the 82 years since The General Theory was published there has not been a single instance where this has been shown to be untrue.

The wages of waste

Personally, I care not at all about the headline issue: At $528,000 a year, Turnbull’s pay is highest of any leader in OECD. PDT is not taking any salary at all so the price mechanism doesn’t always reflect relative value in any absolute sense. But this is what interests me:

The figures come as the Reserve Bank warns Australians to expect historically low levels of wage growth for some time yet, setting up a policy showdown with Labor before the next election over efforts to tackle the rising cost of living.

Both are trying to ameliorate the impact of torpid wage growth through offering billions of dollars in income tax cuts.

Workers have been starved of pay rises in real terms, with wage growth stuck at the rising cost of living for the past year. Inflation hit 1.9 per cent in March and private sector wages have barely kept up at the same rate but public sector workers have done better, lifting the rate to 2.1 per cent Australia-wide.

The reality is that both parties are deeply into Keynesian idiocies with some kind of belief that public spending makes an economy grow. I am not all that fussed about the deficit as such, but am very much concerned with the level of public spending which is almost invariably wasted. For every dollar spent, you get less than a dollar’s worth of value, often much less. That is why real wages don’t rise, and until that changes, real wages won’t either.

PDT understands that. Does anyone else?

The difference between Keynesian and classical economics

Just posted on Quora in answer to the question: What is the difference between Keynesian and classical economics? There are 13 other replies which not much more than prove to me that no one without a truly specialist knowledge of classical theory would have the slightest idea what an economist between the late eighteenth and nineteenth centuries would have understood about anything in relation to the operation of an economy. Their ignorance of what classical economists believed is matched by their ignorance of how an economy actually works. Anyway, this is what I wrote.

The differences between classical and Keynesian economics are so vast that to accept one version of how an economy works means you must reject the other. Classical economic theory is the theory that was developed between let us say 1776 and the 1870s, almost entirely by philosophers and business people who were actually looking at the economy. Modern economic theory has almost entirely been developed within universities by people who have neither a philosophical training nor have ever run a business as their primary mode of earning a living.

Here’s the difference. Classical economic theory begins from the existence of a market economy in which, on one side of the equation, there is a mass of people who would like to buy goods and services, and on the other side there are people who would like to earn their living by producing and selling things to others. The producers continually try to work out what to produce that others will buy, and do it by trying to decide what buyers will pay enough for in total to cover their production costs. These producers hire employees and the combined incomes of producers and wage earners become the purchasing power of the community.

Classical economic theory is thus entirely supply-side driven. And what is particularly interesting about reading the classical literature is that government regulation was an important part of how the economic system worked. The very first Factory Act in Great Britain was introduced in 1802, and there were many others that came after. The notion that classical economics was simply leave everything to the market is 100% wrong. If you look at the greatest economics text of the era, John Stuart Mill’s 1848 Principles of Political Economy, the final 200 pages are devoted to discussing the role of government in ensuring that economic activity was carried out in a morally acceptable way to the benefit of the entire community.

But crucially, classical theory assumes the role of the independent entrepreneur as the linchpin in making an economy work. Try to find a modern economic text that starts from there. Other than my own – Free Market Economics, Third Edition – none of the major mainstream texts starts from the supply side and none – as in zero – feature the role of the entrepreneur.

Keynesian economics assumes economies are driven from the demand side. That is, it is buying goods and services that makes an economy grow and employ, not their production. It is based on the total confusion between the demand for a single product – the greater the demand for shoes the greater the production of shoes will be along with the greater the level of employment for shoemakers. Demand affects individual products; demand in aggregate does not affect the level of output in total. The more that is produced, the higher the level of demand, for the obvious reason that the more that is produced, the more there is that buyers are able to demand. But if you are a Keynesian, you will go on believing that the cause of higher output is higher demand, whereas the reason more can be demanded is that more output is being produced. Public spending may have many benefits, but increasing the level of income and speeding up the rate of economic growth is not one of them. If anything, higher levels of public spending slow things down and lower real incomes below levels that otherwise would have been reached.

Keynesian economics is based on the fallacious belief that buyers will not buy as much as an economy can produce, and therefore demand must be stimulated to ensure everything produced is bought and that everyone who wants to work is employed. A great theory if you are in government and need a justification for taking as much money as you can get away with from income-earning citizens and spending it yourself. But a pernicious theory if you are interested in raising living standards as rapidly as possible.


The economic views of Marriner Eccles are with us still

I suppose the basic point is that economics remains in such a primitive state that it is impossible for anyone really to be sure what is true and what is not. Most people just make it up as they go along, with no true means to validate one version of reality in comparison with another.

These are excerpts from the Testimony of Marriner Eccles to the Committee on the Investigation of Economic Problems in 1933. And who is Marriner Eccles? Other than being in his time one of the richest men in Utah, he was appointed by FDR to the Chairmanship of the Fed in 1935 where he remained until 1951. A proto-Keynesian disciple of Foster and Catchings, this is how he is described at the first link by “The London Banker (TLB):

Below are excerpts from the testimony of Marriner Eccles to the Senate Committee on the Investigation of Economic Problems in 1933. It is an historic document – laying out the future terms of the Federal Deposit Insurance Corporation, the management of money supply nationally through open market operations, the Bretton Woods Accord on currency stability, mortgage refinancing as monetary stimulus, and reforms of the Federal Reserve System to eradicate the excesses of untamed capitalism and financial dominance of Wall Street. He proposes higher income and inheritance taxes as essential to promote economic growth, curb inequality and forestall political instability. He encourages federal regulation of child labor, unemployment insurance, social security and other farsighted reforms. And he avows himself a capitalist throughout.

The following are excerpts from the excerpts of the testimony printed by TLB.

We have all and more of the material wealth which we had at the peak of our prosperity in the year 1929. Our people need and want everything which our abundant facilities and resources are able to provide for them. The problem of production has been solved, and we need no further capital accumulation for the present, which could only be utilised in further increasing our productive facilities or extending further foreign credits. We have a complete economic plant able to supply a superabundance of not only all the necessities of our people, but the comforts and luxuries as well. Our problem, then, becomes one purely of distribution. This can only be brought about by providing purchasing power sufficiently adequate to enable the people to obtain the consumption goods which we, as a nation, are able to produce. The economic system can serve no other purpose and expect to survive. . . .

We could do business on the basis of any dollar value as long as we have a reasonable balance between the value of all goods and services if it were not for the debt structure. The debt structure has obtained its present astronomical proportions due to an unbalanced distribution of wealth production as measured in buying power during our years of prosperity. Too much of the product of labor was diverted into capital goods, and as a result what seemed to be our prosperity was maintained on a basis of abnormal credit both at home and abroad. The time came when we seemed to reach a point of saturation in the credit structure where, generally speaking, additional credi was no longer available, with the result that debtors were forced to curtail their consumption in an effort to create a margin to apply on the reduction of debts. This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction, but what in reality was underconsumption measured in terms of the real world and not the money world. . . .

What the public and the business men of this country are interested in is a revival of employment and purchasing power. This would automatically restore confidence and increase profits to a point where the Budget would automatically be balanced in just the same manner as the individual, corporation, State, and city budget would be balanced. . . .

Mr Eccles: Of course, the way I look at this matter is that we have the power to produce, just as in the period of prosperity after the war demonstrated when we had a standard of living for a period from 1921 to 1929 which, of course, was far in excess of what it is now. Yet in spite of that standard of living we saved too much a I have previously tried to show.

Senator Gore: You have got Foster in the back of your head?

Mr Eccles: I only wish there were more who had. We saved too much in this regard, that we added too much to our capital equipment. Creating overproduction in one case and underconsumption in the other because of an uneconomic distribution of wealth production. . . . Of course, we are losing $2,000,000,000 per month in unemployment. I can conceive of no greater waste than the waste of reducing our national income about half of what it was. I can not conceive of any waste as great as that. Labor, after all, is our only source of wealth. . . .

The program which I have proposed is largely of an emergency nature designed to bring rapid economic recovery. However, when recovery is restored, I believe that in order to avoid future disastrous depressions and sustain a balanced prosperity, it will be necessary during the next few years for the Government to assume a greater control and regulation of our entire economic system. There must be a more equitable distribution of wealth production in order to keep purchasing power in a more even balance with production. . . .

Such measures as I have proposed may frighten those of our people who possess wealth. However, they should feel reassured in reflecting upon the following quotation from one of our leading economists:

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

This was reprinted by TLB because of his full agreement with Eccles which was mirrored by all of the comments, except for one, by Ron Paul who wrote:

What a load of statist drivel and what a bunch of Roosevelt worshiping sycophants. I’ll bet Krugman and the entire Nobel prize committee would love this post too.

Statist drivel isn’t the half of it, but it is clearly not the majority view, not then and not now.

Alan Kohler on central banks and Keynesian economics

This is Alan Kohler explaining why “Central Banks Are Destroying The World”. There’s no doubt they are doing everything they can, and there are not a lot of people around who will say this in public. But I mention his comments since it is nice to see myself mentioned in despatches.

These days our “patrician overlords” are central bankers, benignly manipulating our behaviour (“aggregate demand” they call it) by adjusting the price and availability of the thing we all so crave – credit.

The question for this week is: what should they, and you, do instead? Bearing in mind the old joke that if you wanted to get to Dublin, you wouldn’t start from here.

Well, there’s no doubt in my mind that “they” – the Fed, ECB and Bank of Japan – need to start raising interest rates pronto, and stop worrying about inflation being too low. It’s caused by technology reducing costs and debt suppressing consumption and investment – not by a shortage of demand that can be reversed by monetary policy. Specifically they should allow the market to set interest rates, just as the market sets most other prices. But these are not, to say the least, mainstream opinions.

As an old friend of mine, Steve Kates of RMIT University, wrote in his book Free Market Economics:

“Today, there is no aspect of an economy’s structure that governments do not believe themselves capable of making a positive contribution towards. … Such actions are not undertaken with a sense of dread at the possible unintended consequences. They are undertaken with a confidence that is simply unwarranted…”

“To believe that some central agency can plan ahead for entire economy is one of the major fallacies often associated with economic cranks. No single person, no central body, no government agency can ever know anything remotely like what needs to be known if an economy is to produce the goods and services the community wants, never mind being able to innovate or adjust to new circumstances.”

In my view, those “goods and services” include credit. Our patrician overlords at the central banks believe themselves capable of determining how much of it we need and at what price.

The Keynesian economic central planners went into hiding after the Berlin Wall came down in 1989 and the failure and corruption of Soviet style Marxism became evident. After that, and after the recession of 1991, the world had 10 years of spectacular growth due, in part, to interest rates being left to find their own level. However after the tech crash of 2000, the real Fed funds rate was taken negative – what Keynes called “the euthanasia of the rentier” – on the basis that wealth creation through rising assets prices would lead to economic growth.

Charles Gave of GaveKal Research calls this “one of the stupidest ideas ever put forward in economics”. It led to an explosion in debt and speculation on housing, which led, in turn, to the 2008 credit crisis, and Great Recession.

Instead of learning from this mistake, the central bankers then went all the way – reducing nominal rates to zero and keeping them there for six years.

To a large extent the current thinking is based on the proposition that we face “secular stagnation” a phrase rediscovered by former US Treasury Secretary Larry Summers (it was originally coined by Alvin Hansen in 1938, in a book called “Full Recovery or Stagnation?”).

Those promoting this idea today don’t remember that it’s the same incorrect argument that was floated towards the end of the 1930s, and they don’t believe that if left to its own devices the economy would go back to normal. Instead they think the world’s entrepreneurs, business people and consumers would somehow remain comatose if central bankers et al didn’t poke at them to wake up. Central bankers have never run a business themselves but are totally confident in their ability to goad businesses and consumers into action and then distributing the proceeds.

These are the misguided vanities of what Lewis Lapham calls our patrician overlords. Economic growth is failing to recover because central bank actions have increased the stock of debt, which is weighing on the world’s economy like a heavy blanket. It needs to be cleared, through being priced correctly and borrowers and lenders recognising their losses. In other words, the free market must apply.

As Steve Kates wrote: “The problem lies in the belief that that the natural state for an economy is for it to be growing with unemployment low, when the reality is that the natural state for an economy is that it is adjusting to new circumstances during every moment of every day.”

The greatest of all Keynesian disasters was to promote the idea that economists have any idea on what to do to make economies grow. As it happens, our growth over the past sixty years has been in spite of our economists, but I think the economic cranks are now in such control that they are pushing our economies backwards at unprecedented rates.

Is it still the GFC from 2009, you numbskull kidders?

It it is hard, indeed it seems impossible, to get across the message that using up resources to produce loss-making forms of output causes an economy to slow, lowers the standard of living and reduces employment. Keynesian economics is driven by C+I+G; whatever you spend on makes no difference. So here’s an interesting story, about which Malcolm Turnbull has had an important role to play:

The company building the National Broadband Network could blow its budget by as much as $15 billion after revealing that revenue flow will slow and the costs of construction are far greater than it first expected.

The government-funded company revealed that its peak funding will now come in between $46 billion and $56 billion, up from the $41 billion assumption it previously held.

The company is aiming to complete the build — which will pass eight million homes by 2020 — for $49 billion, which is 20 per cent more than its original forecast. A worst-case scenario would see costs blow out by 36 per cent or $15bn.

The increased funding has smashed the rate of return that the project will generate for the government, which will now come in the range of 2.7-3.5 per cent. The previous rate of return was around 5 per cent. Despite the low return the project will remain off the budget.

The funding increase has been brought on by increases in the capital and operational costs of the build as well as increases in the costs to roll out of fibre to the node technology.

This is the final para of the story, which for some reason did not mention Malcolm.

The NBN received another $4.7bn of government funds in the past year to take its total equity to $13.2 billion in equity at end of financial year 2015. Total government equity contributions are capped at $29.5 billion.

This is just one example of the worldwide waste of resources in one government stimulus project after another. No modern textbook, other than mine, can explain to you why our economies are heading over the cliff. As the latest news has it, Aussie stockmarket tumbles amid growing fears over health of global economy. You’ll have to remind me again what it is that has caused all these problems? Is it still the GFC from 2009, you numbskull kidders? Meanwhile, a bit of whistling by the graveyard:

Treasurer Joe Hockey said that while markets would fluctuate, the fundamentals were still good for the global economy, particularly the US.

He said several factors would cause volatility in the markets in the next few months, particularly any decision by the US Federal Reserve to move on interest rates in September.

“If they do increase their interest rates, then you will see movement of money from equity markets, probably into bond markets,” he said.

He said such volatility would hit confidence in Australia and that’s why the government had to keep reminding people that their economy is one of the fastest-growing in the world right.

The fundamentals are disastrous in the US and not so good here either. These Treasury advisors do not have a clue.

A brief history of Say’s Law – which was not invented by Say

I have just done an interview for a podcast with Tom Woods on my first book, Say’s Law and the Keynesian Revolution which has as its subtitle, How Economic Theory Lost its Way. Some reflections on the interview about what is not well understood about Say’s Law. I will, of course, put the podcast up online when it is broadcast next week. Here are some reflections on that interview.

First, although it was called “Say’s” Law, the name was only given in the 1920s. Say had his law of markets (loi des débouchés), but this was that goods buy goods. Everyone knew that, going back to at least Adam Smith and probably well before. The relevant sequence of events to understand this issue is this:

1803 – Say publishes his Treatise in which he points out that goods buy goods which he did in trying to explain why recessions are not caused by a lack of money.

1808 – James Mill replies to William Spence who had argued that demand is the core necessity in creating employment and economic activity. Mill in his comprehensive reply, emphasises the impossibility of demand deficiency as a cause of recession and unemployment, but picks up Say’s point about goods buying goods.

1813 – Say publishes the second edition of his Treatise in which he re-writes his entire chapter on the law of markets to pick up James Mill’s point that demand deficiency does not cause recession – but gets it wrong by arguing that if Good A doesn’t sell then more of Good B needs to be produced to create an increased demand for Good A. No one thinks of it this way.

1820 – Malthus publishes his Principles in which he argues that recessions and unemployment are caused by general gluts (demand deficiency)

1820s – General Glut debate – virtually the entire mainstream comes to the conclusion that general gluts are never a realistic possibility – but the policy conclusion is that if Good A doesn’t sell, it should stop being produced. Say never gets it and continues to the end with his version that more of other goods (Good B) is the solution

1848 – John Stuart Mill’s Principles is published in which the full explanation of Say’s Law properly understood is found. It becomes the universal position of mainstream economics through until 1936. The conclusion universally held was that demand deficiency never causes recessions and increased demand will not lower unemployment. Only those on the left, especially amongst the followers of Marx, argued on the other side.

1921 – Fred Taylor publishes his Principles text in which he discusses demand deficiency and also notes that although a crucial point, the argument contra demand deficiency has never before been given a name and is therefore often overlooked. He gives it one: Say’s Law.

1920s – By giving this principle a name, it becomes the focus of much criticism but only on the American side of the Atlantic.

1936 – Keynes publishes his General Theory in which he attacks Say’s Law. He defines Say’s Law as “supply creates its own demand”, as close to a meaningless phrase as it is possible to find. But there is no doubt he is really in every way attacking the underlying principle, which he very accurately understands. He explains exactly what he is getting at on page 32 in the para which begins, “The idea we can safely neglect the aggregate demand function . . .”.

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.

[As an additional note, the question I like to ask all my Keynesian friends is where did Keynes get the phrase “Say’s Law” from since he never mentions anyone else from whom he took so much as a single idea. I wrote an entire paper on Keynes’s plagiarism which was rife.]

Second, the most complete statement of the demand deficiency side of Say’s Law was produced by John Stuart Mill in 1848. The Liberty Fund just last month ran a series of papers on The Economics of John Stuart Mill for which my paper was the lead article. As I note in one of these articles [#16], Mill’s specific statements on these principles, which did not have a name in his own time, is scattered around his Principles of Political Economy. But in classical times these were the hardest of hard principles, an absolute bedrock and foundation for economic thinking. These were the conclusions:

1. recessions do occur and when they do the effect on the labor market is prolonged and devastating;

2. recessions are not caused by oversaving and demand deficiency;

3. recessions cannot be brought to an end by trying to increase aggregate demand.

After the marginal revolution of the 1870s, while these conclusions remained in place, economics shifted to the demand side (marginal utility) and the theory of the cycle almost went into hibernation. By the time Keynes writes the General Theory, virtually all of the anti-bodies against demand deficiency as a cause of recession had disappeared from amongst economists, especially those under forty. The conclusions of the General Glut debate had been washed completely away.

Alas, it does get me down that there is so much of this story that no one knows. If we are going to finally reverse the Keynesian Revolution and its poisonous policy prescriptions, we are going to have to reverse the notion of demand deficiency which Keynes introduced into economic theory. There is no issue more important than Say’s Law if we are going to get macro principles and policy right, but as I have found, it is almost impossible to get these things right because of the way the issue has developed over the years. In my view, you have to understand both the principle and its history to see the point given all the mystification that has entered into it over the past 200 years.

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.