The Venezuelan economy is in a mess. Everyone knows it; no one denies it. There has been a catastrophic fall in real incomes and wealth. Why?
Is it because everyone has decided to save rather than spend? Is it because there has been a fall in aggregate demand? Is there not enough public spending?
Here’s the real question. Is there anything in modern mainstream macro that will explain what has gone wrong in the Venezuelan economy? If so, how does modern theory explain what has happened?
In my view there is hardly a thing in the way we teach economics that will explain the problems of the Venezuelan economy. Nor would a modern text tell you what to do or to change if the problems are to be fixed.
I do think economists do understand why it has gone so badly wrong. I just don’t think we teach any of it any more. We certainly don’t spell it out.
AND I’VE JUST COME ACROSS THIS: I’ve just been reading through John McVickar’s illuminating Outlines of Political Economy written in 1825, and a wonderful book it is. And there I found this sentence.
The capitals of England and of France have not increased, because of the vast expenditure of their governments, but in despite of it. [p 33]
The language is a bit archaic but then so too is the economics. Perfectly clear, however, both the syntax and the economics.
Mill’s Fourth Proposition on Capital is the element of classical economic theory most foreign to the modern mind. In seven words, Mill stated a truth that has stood the test of time and has never been refuted by any event in history.
Demand for commodities is not demand for labour.
Or in modern words, the level of employment is unrelated to the level of aggregate demand. It is refuted every time public spending is raised to lower unemployment, which has never succeeded on even a single occasion. It was refuted when Peter Costello cut public spending in 1996 and 1997 eventually eliminating not just the deficit but the actual existence of public debt while unemployment disappeared and personal incomes grew at record rates.
And now here from John Hinderaker at Powerline is another instance showing the validity of classical theory over modern macroeconomic junk science: AMAZINGLY, ECONOMY DIDN’T CARE ABOUT “SHUTDOWN”.
I never did notice the extremely-partial government “shutdown,” but some people thought it was a big deal. Not private employers, apparently:
Private payrolls grew in January at a much faster pace than expected as the labor market shrugged off the longest U.S. government shutdown in history, according to data released Wednesday by ADP and Moody’s Analytics.
“Shrugged off”? I don’t know, maybe they welcomed it.
Companies added 213,000 jobs this month, the data show. Economists polled by Refinitiv expected payrolls to grow by 178,000.
The strong jobs growth comes even as the U.S. government was shut down for 35 days in a standoff between President Donald Trump and congressional Democrats over his demand for a wall along the U.S.-Mexico border.
“The job market weathered the government shutdown well. Despite the severe disruptions, businesses continued to add aggressively to their payrolls,” said Mark Zandi, chief economist at Moody’s Analytics.
“Weathered.” “Despite the severe disruptions.” Really? What disruptions were those? Did they consider that a brief respite from a small portion of government heavy-handedness may have been irrelevant to job growth, or even a positive factor? Evidently not.
There is more good sense in Mill’s 1848 Principles of Political Economy than in any Keynesian text written since 1936. The evidence is overwhelming, but when has evidence ever counted for anything when ideology said something else?