Tag Archives: keynesian economics

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

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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

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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.

Policy in the pub

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krugman and me july 2015

I will be debating the Chief Economist of the National Bank on Stimulus versus Austerity on August 19 at the Imperial Hotel in Melbourne on the corner of Spring and Bourke @ 5:30. These are the notes I am putting together, which will be added to as I go along. The picture is, of course, myself with Paul Krugman on 12 July at Freedomfest in Las Vegas. We were obviously separated at birth.

Using the term “Austerity” as the noun meaning sound finance and fiscal prudence already tips the debate, both here and internationally, in a negative direction

Back in the 1990s, before their ill-fated stimulus, I sat next to the Japanese Finance Minister at a lunch where I told him not to do it. His reply – “Don’t you care about the unemployed?”

I teach non-Keynesian economics and those who have never done economics before get it and those who have studied Keynes already find it difficult

Keynesian economics is a cult – believed in spite of the fact that it makes no economic sense and has never actually worked in practice

What’s the matter with you people?

The GFC was not, obviously, caused by a failure of demand. It was not caused by too much saving. In America, it was the product of a crash in the housing industry that fed into its financial system. In the rest of the world, the problem was entirely financial, with credit frozen across the globe.

The answer was the TARP which unfroze credit. The subsequent stimulus was not only unnecessary, but positively harmful.

See my Quadrant article from February 2009: The Dangerous Return to Keynesian Economics.

I also wrote my Free Market Economics, now in its second edition, to explain why the hysteria surrounding the GFC was misplaced and the stimulus would be a disaster

The notion of a “stimulus” is, of course, Keynesian. Economic theory always accepted a role for public spending as a palliative. No one thought of spending as a cure.

The idea of a stimulus is based on the belief that economies enter recession because there is too much saving. The government must therefore enter the picture and put those savings to use if the economy is not to enter a long drawn out recession and unemployment is to come down in a reasonable period of time.

The belief is that government must put those savings to work asap, even if the form in which the spending takes place is not in itself value adding. Even if the initial spending is not value adding, the multiplier will do the work of ensuring that the rest of the expenditure is properly based on profit-making activities.

The basis: Y=C+I+G. If C and I fall, G is raised to replace the missing expenditure.

C, I and G are final demand. The rest of the economy, the hinterland behind final demand, is ignored. It will simply structure itself to conform to whatever is being bought at the end of the production trail. Eventually everyone will be employed if there is enough spending on final goods and services.

Let’s take Bronwyn Bishop’s helicopter ride. It would be ludicrous to defend it as a way to stimulate demand. She could not claim that with a multiplier of three, let us say, she has added around $15,000 to GDP.

No one would think it would make sense if the Government said that every ministerial journey between 50 and 200 kms had to be by helicopter as a means to create jobs. We can all see straightaway how government waste of this kind has no positive economic effects.

Suppose we heard that entrepreneurially-driven construction activity with no government subsidy was to double over the next ten years, would we not all agree that the economy would be bigger and stronger at the end of that time, more jobs would be created and real incomes would rise.

But suppose, instead, we heard that over the next ten years there would be twice as many meetings of the Economic Society and the number of journal articles would double. What then would be the effect on output and employment, do you think?

Record 93,770,000 Americans Not in Labor Force…
Participation Rate 38-Year Low…
Record 56,209,000 Women Not Working…

Still more on Say’s Law and Austrian economics

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

Oh, my. Where to begin?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Say’s Law and Austrian economics

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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.

My lead article on John Stuart Mill at the Liberty Fund

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

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

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

Hiding the decline in employment

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Here’s a story I wouldn’t normally have looked at, Hillary Clinton to campaign in Hanover Friday, but seeing I will be in Hanover on Friday, am there now, it sprang off the page. More detail:

Democratic presidential candidate Hillary Clinton will visit Hanover this afternoon at 12:30 p.m. and speak at a “grassroots organization event,” according to Clinton’s campaign website.

This is not, need I point out, Hanover in Germany, but Hanover in New Hampshire, where may be found the campus of Dartmouth University. I am here for a small symposium on Keynes, but was all set to abandon ship, except that this “grassroots” event is more like the “tallest poppies” event, in that it would cost thousands to get in the door. Will therefore stick to Keynes.

Which brings me to the latest news on the American economy, this from Drudge – and you will not find the first part of this anywhere near the front of The New York Times, or USA Today, but you will find the second.

Record 93,626,000 Not in Labor Force…
Unemployment rate drops to 5.3%…

Rush Limbaugh did a take on this today as well, where he discussed the disastrous labour market in the US, where the stats keep showing improvement despite the vast disappearance of jobs:

Twice as many people left the workforce in May as found jobs, which cancels out the 223,000 jobs created. If 223,000 jobs are created and 432,000 jobs were lost, would somebody explain to me where all this job creation is? Now, the AP and the rest of the Obama sycophant media is not telling you about the decline in the labor force. Some are talking about the labor force participation rate, and they’re relying on the fact that most in the low information category are not going to understand it. “Labor force participation, what’s that? It doesn’t matter to me, Mabel.” All they’re going to hear is the unemployment rate is 5.3%. (laughing)

I laugh too, but it’s not funny at all. But Obama has ramped up welfare so that people do not starve to death in the street, but the numbers are shocking.

And what’s it got to do with Keynes? Everything, alas, but where are the economists to point it out. They must be working at the bureau of stats in this massive effort to hide the decline.

I yam in the grate saten

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In New York, in fact. The main purpose of my trip was originally to debate the author of a book called Seven Bad Ideas in Economics about Say’s Law, which was bad idea Number 2. The venue was to be at Freedomfest in Las Vegas. In the end, he decided discretion was the better part of valour, and so, I will be having that debate, with me taking both sides. As I tell everyone else, I will be having a one-man show in Vegas.

But other stops along the way as well, which mostly includes meeting and discussing authors I am bringing together in my Modern Critics of Keynes, of which there are hardly any. These are economists who have each already written extensive critiques of Keynesian economics. If you can think of more than two, you are doing well. I am happy to say that on a previous such appeal, I was given one name that will now appear and star in this volume. Given how few there are, this was a reason for serious gratitude.

Meantime, blogging will be lighter than usual.

Onwards and downwards

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The problems caused by Keynesian theory is not that you end up with a sudden downturn, but that you squeeze the life out of the economy by a form of slow asphyxiation. If you have a job and a house, and you continue to work and live where you lived before, nothing much changes around you, other than a rise in prices and a slowdown in income after tax. You are affected but not a lot. Those in transitions, either entering the economy to work, looking for better jobs at higher pay or trying to buy a house, all these are at the pointy end. They notice, since the ability to rise up the income scale is obstructed by some invisible barrier. Things just don’t work out. Which brings me to this story: Americans Are Delaying Major Life Events Because of Money Worries. Life is getting harder so corners are being cut.

ABOUT half of American adults have postponed a major life decision in the past year for financial reasons, mainly because they lack sufficient savings or are worried about the economy, or both, a new survey finds.

The survey, conducted for the American Institute of Certified Public Accountants, found that the proportion of people delaying big decisions like buying a home or getting married had risen to 51 percent, from 31 percent in a similar survey in 2007, before the start of the financial downturn.

The change was striking, and the percentages more than doubled in some areas. Nearly a quarter said they had delayed higher education, up from 11 percent in 2007, and 18 percent said they had put off retiring, compared with 9 percent in the earlier survey. Twenty-two percent said they delayed buying a home in 2015, compared with 14 percent in 2007.

That’s the way it goes. And these are the people who might most at the front in encouraging governments to increase their spending to stimulate demand. So onwards and downwards, and no one has a clue why.

Criticising Keynes – four years later nothing has changed

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The following are four notes I wrote to the Societies for the History of Economics website back in November 2011. Brad Bateman and Roger Backhouse had written a book on Keynes and Keynesian economics – Capitalist Revolutionary-John Maynard Keynes – and had put up a note to let others know. I had also written a book just then, so thought I would mention it since there are alternative ways of looking at things. As it happens, even four years later, six years following the dead hand of the stimulus was first applied – no one else has written a book explaining what is wrong with Keynesian economics and laying out the alternative. These four posts could have been written yesterday, given how economic theory has dug in and refuses even to so much as notice how useless its advice has been. In reading these, please note that others had written comments as as well, only some of which I mention.

Professors Backhouse and Bateman invite us to indulge in a visionary perspective in dealing with the Global Financial Crisis and the subsequent recession that will not go away. They wish us to look at alternative ways of thinking about the economy and how it works.

As it happens, I have done just that. In August this year, Edward Elgar published my Free Market Economics: an Introduction for the General Reader which outlines the mechanics of an entrepreneurially-driven market economy embedded within a political structure where the rules and regulations that businesses work within are determined by others. And what is particularly notable about the book is that while it explains Keynesian economics as accurately as any other introductory text on the market, it is also at the same time the most relentlessly anti-Keynesian book written in the past forty years. Moreover, if you would like to have an economics text that explains the classical theory of the cycle – the best alternative I know to Keynesian theory – my book does that as well, and I think in this regard, it may be the first book to do so in over three-quarters of a century. To my knowledge, there is no other book like it, although I truly do wish the market was flooded by hundreds of alternative titles along the same lines.

Let me therefore highlight one of the sentences in the Backhouse-Bateman article:

“Even Keynes himself was driven by a powerful vision of capitalism. He believed it was the only system that could create prosperity, but it was also inherently unstable and so in need of constant reform.”

Well I can agree with half of this but the other half is plain wrong. Capitalism is without question the only system that can create prosperity. But as the existence in 1936 of the by then hundred year old classical theory of the cycle should tell you, there has never been much doubt that capitalist systems are subject to instability. Nor was Keynes intention to explain to his fellow economists that our economies were in need of constant reform, whatever that might mean. The point of The General Theory was to introduce into mainstream economic theory the notion of aggregate demand. (Read page 32 of the GT on Malthus and Ricardo if you are in any doubt). There is nothing else in the book that is novel or that has spread like a weed throughout the discipline the way this concept has. And its adoption has been the single most disastrous mistake economic theory has ever made. Because economists now think in terms of aggregate demand we are no longer capable of explaining even the basics of the cycle and cannot provide sound advice to governments when economies fall into recessions as they inevitably will.

Let me finally say that I endorse everything written by James Ahiakpor in his earlier post. But let me also add that while the tremendously faulty structure of the bailouts can only be explained by the need to do something straightaway, that there was a need for government action could have been found by reading Bagehot’s Lombard Street which was published in 1873. It was the stimulus that came after, pure Keynes in both structure and intent, that is the core problem we are dealing with right now. The stimulus packages themselves are the most important cause of the prolonged recession most economies are facing today. It is the problems of debt and deficit that are the major problems we must find answers to, not a failing financial system which was the problem in 2009. So where Backhouse and Bateman ask:

“How do we deal with the local costs of global downturns? … If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.”

OK, I’m in. Let’s find a solution to all of this and more. But if you think Keynesian theory is any part of the answer, then my friends, you are in my view part of the problem and in no way part of the solution.

Second tranche.

I appreciate Mason Gaffney’s query about the nature of my book. And if I could, I will reply using the text of a note I sent to Roger Sandilands after reading his brilliant compilation of some of the more difficult-to-find works of Allyn Young. Two of the longer parts within Roger’s compilation were Kaldor’s notes of Young’s LSE lectures which were delivered in 1927-29, and the various entries Young wrote in the 1920s for the Encyclopaedia Britannica. If you would like to see how economists thought about economic issues prior to the publication of The General Theory, this is the place to go. Hopefully, Roger will be able to let us know how to obtain copies of his compilation of Young’s work. But to explain what my book is about, I hope this note I wrote to Roger will explain how I think of this book myself:

“I have been meaning to write to you for some time. I took Allyn Young’s LSE lectures and Britannica entries with me as my morning train reading for many many mornings in a row and it was fantastic. The first thing that it confirmed for me was that the book I have written on Free Market Economics is actually what I wanted it to be. It is the book that an economist schooled in the classical tradition would have written in the absence of the arrival of the General Theory. I learned an immense amount from Young but all of it merely deepening my own understanding of things that I had absorbed from the classical literature generally. I attach the flyer for the book which you should ask your library to buy anyway, but if you look at it, you will see that it is classical theory right down to its downward sloping supply curves and its discussion of the theory of the cycle in an almost identical way to Young’s.

“The theory of the cycle as Young portrays it (discussed pp 76-84) is not just the classical stuff in general, but is explicitly soaked through with Say’s Law. He notes that J.-B. Say “pointed out” that “what is commonly called overproduction is merely ill-balance production” (p 77). And then on the next page, “people do not over-save, they miscalculate” (p 78). Where can you find that written in a textbook any more, other than in mine, of course.

“And if you look at my book, you will even find the history of economics discussed more or less in the same place, just half way past the middle (pp 85-88). He not only feels the need to say these things, but the logic of when to put the history into the text occurs to him in just the same way and at just the same point as it occurred to me.

“But it is not merely coincidence that our work is so in parallel, but it is that he and I both think about things in the same sort of way. I have the advantage of actually having seen Keynesian economics in action whereas one can only conjecture just how savage Young would have been about the GT had he seen it for himself. Given what he has written here, there is little doubt he would have found the GT nonsense from end to end. And now, today, instead of discussing Mises and Hayek alone, we would be also discussing Young.”

That is where my letter to Roger ends. But to supplement your reading of Young, for an explanation of the nature of the business cycle as understood by classical economists, the first edition of Haberler’s Prosperity and Depression is hard to beat. That is what I built my own chapters on. But if you go to Young, who unfortunately died at 53 in 1929, you will see these same theories described in more or less exactly the same way by someone writing before there was even a hint of the Great Depression to come.

Third tranche.

It is interesting to see just how relentlessly Roger Backhouse and Brad Bateman choose to ignore what I wrote. That was the reason I thought I would bring Allyn Young into the conversation since I understand perfectly well that some faraway economist living in the antipodes would have no standing in such discussions but I thought Allyn might. Nevertheless, I do wish to impress upon them once again that what I am writing about is a direct response to the issues raised. And since the only compass in which these issues can be properly discussed is the evolution of economic theory over the past hundred years, in every way this is a subject matter for this site.

Going back to the original NYT article, let me take the final sentence as the core point Backhouse and Bateman wished to make. What they wrote was: “If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.” To do this, they argued, economic theory should include a major recognition of government and its role. To emphasise how important this point is, they criticised Hayek and Friedman for ignoring the important contributions of government, writing:

“In the 20th century, the main challenge to Keynes’s vision came from economists like Friedrich Hayek and Milton Friedman, who envisioned an ideal economy involving isolated individuals bargaining with one another in free markets. Government, they contended, usually messes things up. Overtaking a Keynesianism that many found inadequate to the task of tackling the stagflation of the 1970s, this vision fueled neoliberal and free-market conservative agendas of governments around the world. That vision has in turn been undermined by the current crisis.”

Well, what I am trying to tell them is that I have attempted to do in my book on “Free Market Economics” exactly what they have argued needs to be done. It is not perfect but what is? And because of its hostility to Keynes and what he stands for, I fear that if they read it they would unlikely find much in it that would give them pleasure. But (a) it is obviously about capitalism (although the word does not appear anywhere in the book) and (b) it provides a vision of the world in which economic actions are of necessity buried inside a political structure. Don’t believe it? Here are the opening three paragraphs of the book:

“This is a book about the market economy.

“A market economy is one in which overwhelmingly the largest part of economic activity is organised by private individuals, entrepreneurs, for personal profit. Such entrepreneurs are private citizens not government employees. They make decisions for themselves on what to produce, who to hire, what inputs to buy, which machinery to install and what prices to charge.

“There are, of course, in every nation state legislative barriers put in place by governments which limit every one of these decisions. No market is or ever has been even remotely laissez-faire. Entrepreneurial decisions are circumscribed by the laws, rules and regulations that surround each and every such decision.”

My aim in writing the book was to explain to governments, and to their citizens, how an economy can be run so that prosperity for the largest number is the result. This is not a book about how governments should be kept away from economic interactions, a completely weird and self-defeating idea. This is a book that embeds within the text the very necessity for governments to intervene to make free markets work. The point that I try to make is that since governments not only are going to intervene but must, they should do so in a way that actually does some good.

But Backhouse and Bateman do not just say we need a new vision and leave it at that. In their article and subsequent post, they are promoting a book with the title, “Capitalist Revolutionary: John Maynard Keynes”. In their view, it is in Keynes that we are to find that vision. Well the point I wish to make is that it is precisely in Keynes that we will not find that vision, and that if we economists had any sense we would abandon Keynesian theory and policy root and branch. To draw some inference from Keynes that capitalism is in constant need of reform is about as vacuous a statement as I can imagine. The need for institutional adjustment to the changing nature of the world is hardly some great insight.

Fourth tranche.

Roger Backhouse and Brad Bateman have done us all an immense favour by opening up an issue that really ought to be at the top of the economics agenda today, and that is, given what we have discovered in the past two years, whether the Keynesian policy vision still makes much sense. They think it does, which is why they wrote their book, wrote their article for the NYT, and finally initiated this thread to alert the rest of us to what they have done.

Unless they were of the opinion that no one disagrees with them about Keynes and his vision, they must take it as a rightful expectation that there are some who are of a different persuasion and that they will actually say so in reply. And what seems to trouble some is this comment of mine and particularly the word “rancid”:

“The Keynesian policy vision has created a global nightmare both politically and economically, a nightmare whose end is nowhere in sight. There may be an old guard that wishes to cling to such rancid and outdated ideas but by now it ought to be obvious beyond argument that Keynesian policies do not work. There is not a single economy in the entire world that is safe from the ravages that the stimulus has caused.

“By all means, let us find a new vision, but for heaven sake, the last place we should be looking for that vision is in the works of John Maynard Keynes.”

There is nothing ad hom in this. It is, as Brad Bateman has himself noted, the ideas which I describe as rancid. It may not be a typical word used by economists but it gets my point across. Keynesian economic theory, assuming it was ever valid which I do not, should be seen by now as well past its use-by date and recognised as having become stale and moldy over the past three-quarters of a century. But in the use of this word, it is quite clear that it is the sin and not the sinner being attacked.

Thomas Humphrey has entered into this discussion thread in exactly the right way. A great scholar and one whose writings I admire, he has posted to say that the way Keynesian economic theory has developed since the 1930s has created a macroeconomic theory of immense power and penetration and that my approach would throw baby out with bathwater. And with this, the issues thatI think are important are engaged. And unless there were anything further for me to say on the issue of Keynesian theory and vision, I would have feel there is nothing else to add. I have said my piece. Keynes, yes or no. We report; you decide.

Rob Leeson has now, however, suggested that the moderator not only determine whether something ought to be published depending on its relevance, but also dependant on the choice of words used, on the number of words used and on some determination of the degree of ad hominem involved. I take it that Rob would not therefore have published my posts had he been the moderator which makes me grateful that he is not and Humberto is.

Of course we are all bad judges in our own case but I don’t think any of my posts, nor any of the others on this thread, have been too long. I have read each one through with great interest. And if they are too long, it is only the writer who loses out since eventually others stop reading what they have to say.