Say’s Law and the failure of Keynesian economics

I am very happy to say that the best paper I have ever written was just yesterday accepted for publication. It’s on John Stuart Mill’s Fourth Proposition on Capital which he published as part of his Principles of Political Economy in 1848. In his own lifetime it was never challenged. Leslie Stephen (who incidentally was Virginia Wolf’s father) described it in 1876 as “the best test of a sound economist”. And yet by 1890 and ever since, although some of the great minds of economics have had a go at it, no one has been able to make straightforward sense of what Mill had meant. And when I say some of the great minds of economics, I am including Alfred Marshall, Friedrich Hayek and Allyn Young.

I should also add that understanding Mill may be amongst the most important issues of our time. Keynesian economic theory, which argues the exact opposite of what Mill had written, has had a devastating effect on every economy in which a Keynesian policy has been applied. Our economies are sinking under the weight of useless public spending and misdirected expenditures under the delusion that such spending will actually do us some good. Mill and every one of his classical contemporaries perfectly well understood that wasteful non-value-adding spending would not only do no good, it would actually do positive harm.

So what was this Fourth Proposition. It may not look all that formidable but in it there lies a truth that may yet save our economies. What Mill wrote was this: “Demand for commodities is not demand for labour.” Or restated using the jargon of today: an increase in aggregate demand will not lead to an increase in employment. The principle stated here is the classical pre-Keynesian meaning of Say’s Law, which has vanished from amongst economists and been replaced by the Keynesian theory which had been specifically designed to refute Say.

For me, the disastrous outcome of the application of Keynesian policies was a certainty. It was beyond any doubt in my mind that the stimulus would not just fail but bring ruin in its wake. I put my views into print in February 2009 just as the stimulus programs were being put into place and my five-year review was published in March this year. In 2009 it was mostly just theory although there had been plenty of Keynesian failures before that. By 2014, the evidence has become so overwhelming that there should no longer be the slightest doubt that a Keynesian stimulus will sink your economy into a coma and leave it that way for years on end. If you want to know why, you can read Mill, or if you find a thousand pages of mid-nineteenth century prose a bit on the heavy duty side, you can read this instead.

Where are the critics of Keynes?

I put the following post up at the History of Economics list the other day because it exactly reflects a problem I am having.

I am doing some work on Keynesian economics in the period following the Global Financial Crisis. It just may be that I do not know where to look but I am having trouble finding articles of any kind criticising Keynesian models and the theory behind public sector spending and the stimulus. Can anyone help?

And as an additional query, although Mises, Hayek and Friedman are seen as “anti-Keynesian” whatever that may mean, again there seems to be a dearth of articles by them critical of Keynesian theory as it relates to public sector spending and the stimulus. So again, can anyone help?

Responses both online and offline would be greatly appreciated.

There are other economic traditions, from Austrian to Marxist, but each keeps to itself without bothering to actually criticise explicitly what they think is wrong with Keynesian analysis. And for many of the traditions, public spending in recessions is the least of their aims in changing the nature of policy based on the theories proposed. And while there have been a number of useful suggestions that have been sent to me offline as well as discussed online, there is no great cache of anti-Keynesian material anywhere that anyone has been able to unearth.

It would be one thing if the stimulus had been a no-questions-asked success, or even a mid-level so-so success, but instead it has been the most abject failure with every economy struggling to untrack from the debt and deficits the stimulus has caused. So where are the critics?

FME 2nd ed book description

This is from a form I have just sent to the publisher on how to advertise the second edition of my Free Market Economics.

1. Please describe the book in non-technical layman’s terms (in no more than 150 words). Include brief details of the book’s main objectives and conclusions.

Have you ever wondered why no public sector stimulus has ever worked? You are holding in your hands a book that is unique in our times. It is a text on economic principles based on the economics before Keynesian theory became dominant in macroeconomics and equilibrium analysis became standard in micro. It looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation occurs at virtually every moment, and the future is being created before it can be understood.

Of particular significance, this book assumes Keynesian theory is flawed and policies built around attempting to increase aggregate demand by increasing non-value-adding public spending can never succeed but will only make conditions worse. The theories discussed are the theories that dominated economic discourse prior to the Keynesian Revolution and are thus grounded in the economics of some of the greatest economists who have ever lived.

I might also mention this which is a notice I received this week from the publisher:

I am delighted to be writing to all of our authors, contributors, customers and business partners with the exciting news that Edward Elgar Publishing has won another important industry award.

The Frankfurt Book Fair Academic & Professional Publisher of the Year 2014 award was presented to us by the Independent Publishers Guild at a ceremony on Thursday evening.

The judges commented that Edward Elgar Publishing turned in a very impressive sales growth in 2013, achieved on the back of a prolific publishing programme and successful Elgaronline platform. Judges liked its smart customer profiling and forays into international markets. “Edward Elgar is incredibly professional, responsive and imaginative. It is a great example of how a relatively small publisher can be at least as innovative as those many times its size.”

Say’s Law on the HES website continues

This is a continuation of my posting on the Societies for the History of Economics (SHOE) website. It follows from this and this. And note very carefully that Keynes might have read Ricardo’s letter to Malthus.

I certainly appreciate the replies to my previous postings by Daniele Besomi and Barkley Rosser.

Let me begin with a news item reporting on my testimony to the Australian Senate Economic References Committee. They were reviewing the effects of the stimulus and had invited me because of my views on Keynesian theory and policy. This is from the Sydney Morning Herald of 21 September 2009.

“Labor senator Doug Cameron said Prof Kates’ comments had certainly embedded in his mind that you should never let an ‘academic economist run the economy’.

“‘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?’”

I can now more clearly see Senator Cameron’s point about academic economists, but I draw you attention to the second of his statements.

Since J.-B. Say had put together what is in English called the law of markets, it does not surprise me that the phrase “Say’s Law” may have turned up on various stray occasions. But as someone who had been curious about the origins of this term, which is used by none of the major classical economists, it did finally dawn on me that it had come from Fred Taylor, not least because he specifically states that he is inventing the term. He used the phrase in his 1909 article on teaching economics; it is in his 1911 and six subsequent student editions of his for-students-only principles text distributed at the University of Michigan and buried in a chapter he titles, “Certain Fundamental Principles of Trade”. But by the time his text is released commercially in 1921, Say’s Law is a chapter on its own, titled “Say’s Law” in big letters, and in that chapter Taylor specifically says he is giving a name to what he describes as a yet unnamed principle. That someone used the term in 1920 is not a surprise but the phrase Say’s Law does not enter into economic discourse in a big way until after that. If it pleases you to think that Keynes took the name because of one of these stray mentions picked up by Daniele, be my guest as long as you accept that he took it from somewhere else. It just seems reasonable to me that Keynes used the term because it expressed exactly the point he was trying to make. Whether he was reading Taylor directly, or someone else who had read Taylor who had used the term, we cannot know. But that he was reading the mostly American literature on Say’s Law is as near certain as any such thing can be. And the only reason anyone resists this common sense, indeed obvious point, is that it is damaging to Keynes’s reputation since it suggests that his letter to Harrod, about how he had on his own by himself thought up one idea and then another, is not what actually happened at all.

And perhaps it is Daniel who has not understood my point. His point, he writes, is that “Say’s law was not ACCEPTED throughout the 19th century by writers trying to explain crises” (his emphasis). I don’t think that’s right. If you go the Haberler’s 1937 Prosperity and Depression, which is a compendium of all of the theories of recession that were then in existence, virtually all of the theories presented are about structural dislocations. In what was probably the most common theory of recession of the time, people had used their savings all right – hoarding was not the problem – but had produced non-saleable output leading to recession, with the reason for such dislocation often but by no means always related to financial mayhem of one sort or another. To the extent that classical economists had a view about saving as a cause of recession, it was that recessions might occur because the level of saving had been insufficient to complete all of the projects that had been commenced following the previous trough. There wasn’t too much saving, there was too little. Read Haberler discussing Hobson and under-consumption if you are looking for a dismissive view of oversaving as a theory of recession.

What Say’s Law said to economists was this: when trying to explain the causes of recession, “there is no deficiency of demand” (and that is a quote from Ricardo), so you should therefore look somewhere else. I will, for a change, let Keynes be my authority.

“Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. . . . The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature.” (GT: 32)

It may seem a negative conclusion but it is a crucial one. There is no such thing as a general glut. Overproduction never occurs. Demand deficiency does not cause recessions. And so far as policy is concerned, increases in non-value-adding public spending cannot lead to a recovery but will, instead, make them worse. That is what I was trying to say to our Senate. Five years later, who has the runs on the board? Is it the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, or is it our classical predecessors? Is it Keynes or Mill?

So to come back to my original post. There may well be something to what classical economists had been saying, which is the point Francois Hollande has very bravely made. And it is brave since he will be opposed by his political enemies, by his political friends and by economists who refuse to think that just maybe perhaps Keynes was wrong.

Let me finish with a quote from another politician, the former Labour Prime Minister of the UK, James Callahagn, speaking to the Labour Party Conference in 1976 during the Great Inflation, which was also a period of persistently high unemployment:

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

It’s not as if our economies, as a result of these high levels of public spending in the period after the GFC, returned to rapid rates of economic growth and low rates of unemployment. We have seen the effects of the stimulus and they are dismal. Hollande, who is a first rate economist, went into government as a Keynesian but a Keynesian he no longer is. Why anyone else still is remains the central question in economic theory today.

My letter to the Financial Times on Say’s Law

I have just sent this letter to the Financial Times following their publication of a column on Say’s Law. This is what I wrote:

To the editor

The Australian Financial Review here in Australia published an article of mine last week, “What Say’s Law has to say about the financial crisis” which may be why they chose to publish Wolfgang Munchau’s “The Real Scandal is France’s Stagnant Thinking” from your pages. The meaning and significance of Say’s Law within economies that are trying to shed their Keynesian past and work their way through recession to recovery is simply an unknown as Munchau’s article demonstrates. I have written at enormous length on Say’s Law, even spoke at a symposium in Istanbul on the work of Alberto Alesina where at the end of my presentation, Alesina said to the entire room, “I agree with everything you say”. I will attach a copy of this article which was published in 2012.

I cannot emphasise this enough. The General Theory was written to show that Say’s Law was wrong. Economic theory has therefore, since 1936, rejected Say’s Law and continues to accept that economies are driven forward by demand. But because of my understanding of Say’s Law, it was obvious to me from the start that the stimulus packages introduced in 2009 would lead to disaster and things have unfolded almost exactly as I wrote they would at the time. I have published a book on Say’s Law itself, Say’s Law and the Keynesian Revolution (Elgar 1998); edited a collection of articles on Say’s Law, each article having been written for this collection, Two Hundred Years of Say’s Law (Elgar 2003); and I have edited a five volume set of readings on Say’s Law, Critical Assessments of Jean-Baptiste Say (Routledge 2000). I also gave the Ludwig von Mises Lecture to the Mises Institute in 2010 and a video of the presentation is attached.

My frustrations with the poverty of Keynesian theory, which has led our economies into one catastrophe after another, is enormous. Say’s Law seems so archaic because it seems to go back to 1803, but the term only emerged in 1921 only a few years before Keynes wrote The General Theory. It is not some musty old long-ago and rightly-forgotten piece of theory like the labour theory of value. It is, instead, the very core concept needed if one is to understand how an economy works and why it goes into recession from time to time.

I am writing to ask for space on your pages, in the same way that they were offered to me in the pages of the Financial Review, to try to explain the actual meaning of Say’s Law, why reducing public spending is so absolutely necessary today and why a Keynesian stimulus can never possibly work. It can be any length you like and I can have it to you within 24 hours.

With kind regards

Half way there

Yesterday I discussed a comment on the History of Economics website about the growing need to be wary about Keynesian economics and today there’s an article at the Wall Street Journal about the same thing, this one titled, Worse than Obamacare which it is. Let me pull out two bits before I get to my main point:

In February 2009, he got $831 billion of stimulus spending. Not even seismographs can detect the results. Every speech he outputs about “middle-class folks” offers them the same solutions: more public spending on education, on public infrastructure projects and, even now, on alternative energy. As he tirelessly repeats what remain promises, the Labor Department’s monthly unemployment-rate announcement on Friday mornings has become a day of dread.

No one any longer expects an upturn in the American economy. Long, slow and tortured is now the way things are. And finally people are getting around to thinking that it may well be Keynesian theory that is in itself the problem:

You know the theory here: Spend a public dollar and you get $1.50 of economic output. It hasn’t happened, but Barack Obama is gonna crank his old Keynesian Multiplier, created during the 1930s in the era of the Hupmobile, until it sputters to life.

Well, you’ve been hearing from me from the start that it was never going to work and for some reason it has taken five years for the penny to drop. It was never going to work because the underlying Keynesian theory is false from surface to core. But it’s only obvious if you understand the economics that existed before Keynesian economics entered the scene and return to the specific proposition that Keynes derailed.

There are others who think they can see Keynesian economics off the lot through some other means but I don’t believe it. It is only if you understand the classical theory of the cycle and Say’s Law can you make sense of why the stimulus did not achieve a single one of its aims. Stimulating demand cannot work because you cannot stimulate demand by increased spending on anything at all. You can only increase economic activity through increases in value adding supply, the very thing no government can ever do. What governments do is waste and the effect is to deaden the economy, and the more waste there is, the deader it becomes.

In seeing that Keynes must go we are only half way there. The other half is to restore the economic theory that Keynesian economics replaced.

[My thanks to Julie for the WSJ link.]

The economics equivalent of Godwin’s Law

This is a correspondence that began on the Societies for the History of Economics (SHOE) website that originally dealt with wages and productivity. But as the thread developed, the issues drifted over towards Keynesian economics, and not I emphasise because of anything I had contributed. So on November 15, there was the following contribution which began with a quote from something that had been written by James Ahiakpor:

It was with much amusement that I read Michael Ambrosi’s comments. Amusement because I remain puzzled as to why some historians of economic thought can’t seem to shed their Keynesian beliefs in the face of analysis clearly contradicting them … I’m getting to the point of accepting that some people just can’t be helped with arguments or clarifications. It’s just a waste of time. Would that I did not encounter them in the academic refereeing process …

Following which the following question was asked:

There are ex-Marxists and ex-Keynesians: where are the ex-Austrians?

So on the very same day, I wrote the following response:

Rob asks an interesting question which I think is worth a thread of its own:

‘There are ex-Marxists and ex-Keynesians: where are the ex-Austrians?’

Austrian economics was one strand of pre-Keynesian classical economic theory but an important strand today since it is the only strand that survived the Keynesian Revolution. I don’t classify myself as an Austrian but as a classical economist which gives me an overlap of around 75% with the Austrian School and about 10% with modern neoclassical macro. And there is almost nothing in Mises and Hayek I ever find myself in serious disagreement with.

There are, no doubt, ex-Austrians but I suspect none of them end up in any of the modern strands of economic theory. I often mention Mill but a more modern and accessible version of the classical school can be found in almost any text pre-1930. My favourite for a variety of reasons is Henry Clay’s 1916 Economics: an Introduction for the General Reader but there are many to choose from. Haberler’s Prosperity and Depression published in 1937 moves you closer to the depth and breadth of the classical theory of the cycle.

I have for many years found Keynesian demand side analysis utterly wrong but where was the evidence? Now we have had a radical experiment in economic policy across the world and if it is not obvious beyond argument that a Keynesian stimulus will not work then I don’t know what conceivable evidence there could ever be that would convince anyone just how poorly structured the underlying Keynesian theory is. Y=C+I+G in my view and the view of many others provides no insights into either the causes of recession nor what to do when they happen.

There are therefore no ‘ex-Austrians’ in the same sense as ex-Marxists or ex-Keynesians because the world continues to behave more or less as we classical/Austrian economists expect it to. Classical theory does explain and it does provide policy answers which we are seeing put in place under the name of austerity as an attempt to restore balance after the Keynesian excesses of the past five and more years. Those who are taking this road are guided by intuition without textbook answers but are doing pretty well what a classical economist would have recommended. That is, they are doing exactly what the UK, Australia and others did to take our economies out of the Great Depression.

A series of responses followed this, some reply to Rob and others to me. But the largest complaint about what I had written was not about Keynesian theory but whether I had gone to far in stating that the failures of the Keynesian stimulus had been “obvious”. That the stimulus has made things worse in every economy it has been tried seems so self evident that I still don’t know how the obviousness of the mess the stimulus has caused can be question. Nevertheless, this is what I wrote in reply on 16 November:

I should not have said ‘if it is not obvious beyond argument that a Keynesian stimulus will not work etc etc’ since it is not obvious. But even here in Australia, where for a variety of reasons we probably experienced the least damaging downturn following the GFC, the general assessment is that the stimulus has left us with massive problems that will require a repair job going over many years. No one goes around talking about how well the stimulus turned out and even as unemployment has now returned to its post-GFC high and still heading north, our new government is attempting to cut spending and bring the budget into balance just as the previous government attempted to do. And on this we are not alone.

So it is not obvious what went wrong, merely a conundrum: this is what it says in the textbooks and this is what we feel we need to do. Why are they different?

Every economist seems to be in some ways eclectic. They put their own worldviews together built around one of the existing frameworks that for individual reasons appeal to themselves. And over time they shift and change as they learn more and observe. But with macro just about everyone starts from AS-AD which has now become a major dividing line. Keynesians versus Austrians is the way it is often portrayed but this is a short form which leaves out much of what is relevant.

But however you would like to describe the nature of this divide, we as economists should in my view be having some kind of in-house review on the relevance of AS-AD to the formation of policy. It’s true that AS-AD is a very seductive concept, not obviously wrong. But still, starting from casual empiricism and then working through the econometric work of Alesina, say, but also others, and with theoretical considerations also then brought into this discussion, alternatives to AS-AD might eventually emerge in our textbooks. In the meantime, ever fewer policy makers are willing go near AS-AD to work out what ought to be done in the real world. That much anyway is obvious. Given that our economic texts ought to be a guide to economic policy, all this should be seen as something of concern to the profession.

The only reply since then has been to say this:

If I may offer just one more quote from some people who care about the evidence. Jordà, Òscar and Alan M. Taylor, 2013:

The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy

[W]e have a measure of the multiplier that explicitly accounts for failures of identification due to observable controls. Our estimates … suggest even larger impacts than the IMF study when the state of the economy worsens. … It appears that Keynes was right after all.

As Steve now allows, it is *not* obvious that the fiscal responses to the Great Recession invalidate Keynesian claims about the role of aggregate demand. Not in the least.

To prove using a Keynesian model that Keynesian theory delivers the goods in the face of the massive disasters that ought to be the unarguable evidence that the US economy is sinking, only proves there are some people who cannot see because they will not see.

There really needs to be an equivalent to Godwin’s Law in economic discussion. Whoever is the first to bring empirical results into an argument about economic theory automatically loses.

The Keynesian walking dead

keynesian walking dead

Megan McArdle has an article on Bloomberg they’ve titled, Why It’s So Hard to Kill Keynesianism. And in spite of the arguments you find in the article which are from a rather diverse crew of supposedly anti-Keynesian economists, it’s straightforward why Keynesian theory continues to lurch forward.

  • It is taught in virtually every introductory economics textbook in the world.
  • No economist would even consider giving up on aggregate demand as the driver of economic activity.

So we have John Cochrane quoted as saying:

Since about 1980, if you send a paper with this model to any half respectable journal, they will reject it instantly.

I don’t know what “this model” consists of but if he is saying that employing aggregate demand is instant death for any article, I would have my doubts. But it’s not the articles supporting Keynes that interest me. Where are the ones that point out that Keynesian theory and policy are nonsense? Articles along those lines would be a radical departure but where are they? And let me add, as a personal experience, that it is not all that easy to get them published if you write them.

But then, what would be the exact point of these articles so far as policy is concerned? As McArdle says herself:

New Keynesian models do predict stimulative effects from government spending. But they do so through a completely different channel from the old Keynesian models that are still popular with most of the public intellectuals who support stimulus.

No one at the political level, trying to work out what to do as recession comes crashing through the wall, is going to be interested in the channels that cause a stimulus to work. They just want an answer, and if the answer is a stimulus then off they go. And off they did go. They have now spent in haste and are repenting in leisure but it was some variant version of Keynesian theory that drove them to take the actions that they took. But where are the post mortems on what went wrong? Plenty on what caused the Global Financial Crisis. Almost nothing on why the stimulus that followed has been such a disaster.

And for McArdle to say that Keynesian theory represents “an economic model with zero percent mindshare among professional macroeconomists” just cannot be true. The reality is that economists know virtually nothing else. I have scoured the article for the alternative theory the people she spoke to have in mind and can find nothing. The most you hear is that we should abandon macro and leave everything to micro which is as nonsensical an idea as the Keynesian theory it would replace. I would merely point out that The Wealth of Nations was entirely macro, classical macro. That is where the action is and the answers begin. Economic theory around 1916 say, would be something like the high point and a good place to start over from.

McArdle does, however, go into “supply side economics” but restricts it to the notion of tax cuts. She unfortunately goes nowhere near the underlying theory or discusses any of the wider implications. And there is nothing on the absolute necessity found within supply-side theory which explicitly requires starting over from classical presuppositions and a return to Say’s Law.

And while the efficient market hypothesis is fine as far as it goes, what it does not do and cannot do is rule out recessions. In my view, there is nothing in the EMH that is not fully discussed in classical business cycle theory (and who amongst the entire history-deprived economics profession could tell me whether I am right or wrong on this). Just because you believe that information gets fully used as soon as it is available is no reason to think recessions cannot happen. There are the known unknowns and the unknown unknowns that will get you every time. Even the known knowns can sometimes put an economy into recession. No one can prepare for everything.

The Keynesian walking dead are anyone who uses aggregate demand to explain how an economy works. If that’s not 100% of the profession, it’s near enough.

[My thanks to I.D. for bringing this article to my attention.]

I’m not a Niallist

I read Niall Ferguson’s three posts on Paul Krugman which are generally summarised in this critique of Krugman and titled, “Much Bigger Than The Shutdown: Niall Ferguson’s Public Flogging Of Paul Krugman“. And you may be sure that nothing would be of greater interest to me than a proper take down of Krugman and the Keynesian theory that lies behind it. But while this critique may work in the world of non-economists it doesn’t work for me. There is nothing in it I feel I can refer to as an actual dissection of Krugman’s views. It certainly won’t affect any of Krugman’s own beliefs nor that of any modern economist.

Krugman’s position might really be brought down to three propositions:

1) To get out of our current recession it was, and is, necessary to have a full blown Keynesian stimulus.

2) Obama’s actual stimulus was too small. It was large enough to appear large enough but it was too small to actually achieve its ends and so will only discredit Keynesian theory and policy rather than demonstrate its effectiveness.

3) And for Austrian critics, where’s the inflation that is supposed to follow this wasteful expenditure since prices have been dead flat if not tending towards deflation? You may have pointed out that inflation that followed the spending of the 1970s but now there’s none so an Austrian analysis is completely wrong.

Ferguson made no headway on any of this. Instead, he stepped back and wrote:

I am not an economist. I am an economic historian. The economist seeks to simplify the world into mathematical models – in Krugman’s case models erected upon the intellectual foundations laid by John Maynard Keynes. But to the historian, who is trained to study the world ‘as it actually is’, the economist’s model, with its smooth curves on two axes, looks like an oversimplification. The historian’s world is a complex system, full of non-linear relationships, feedback loops and tipping points. There is more chaos than simple causation. There is more uncertainty than calculable risk.

Well great. This is not just Keynesian economics it is all economics that Ferguson takes aim at. By its nature, economics is about simplification, sometimes using smooth curves on two axes (e.g. supply and demand). And while I am a critic of economic theory along many dimensions, including the way in which the uncertain future is almost invariably swept away by many forms of modern analysis, this is so superficial and wrong headed that it leaves me absolutely cold. Krugman can ignore it because it in no way touches anything that matters in his economics and analysis. This is no answer at all.

But then to go on about how beastly Krugman is in how he attacks his opponents, and to praise Keynes as the contrast, is to show a fantastic ignorance of Keynes and the polemical nature of The General Theory. This is Ferguson attacking Krugman:

Finally – and most important – even if Krugman had been ‘right about everything,’ there would still be no justification for the numerous crude and often personal attacks he has made on those who disagree with him. Words like ‘cockroach,’ ‘delusional,’ ‘derp,’ ‘dope,’ ‘fool,’ ‘knave,’ ‘mendacious idiot,’ and ‘zombie’ have no place in civilized debate. I consider myself lucky that he has called me only a ‘poseur,’ a ‘whiner,’ ‘inane’ – and, last week, a ‘troll.’

Here Krugman is doing no less than Keynes did himself. Keynes famously initiated a slash and burn on the economics of his predecessors and attacked them not just intellectually but personally, most notably his own mentor at Cambridge, A.C. Pigou. Keynes said it was to ensure that attention was paid to his book since the issues were so important, but Pigou was clearly aggrieved and said so in the opening words of his review of the The General Theory:

WHEN, in 1919, he wrote The Economic Consequences of the Peace, Mr. Keynes did a good day’s work for the world, in helping it back towards sanity. But he did a bad day’s work for himself as an economist. For he discovered then, and his sub-conscious mind has not been able to forget since, that the best way to win attention for one’s own ideas is to present them in a matrix of sarcastic comment upon other people. This method has long been a routine one among political pamphleteers. It is less appropriate, and fortunately less common, in scientific discussion. Einstein actually did for Physics what Mr. Keynes believes himself to have done for Economics. He developed a far-reaching generalisation, under which Newton’s results can be subsumed as a special case. But he did not, in announcing
his discovery, insinuate, through carefully barbed sentences, that Newton and those who had hitherto followed his lead were a gang of incompetent bunglers. The example is illustrious: but Mr. Keynes has not followed it. The general tone de haut en bas and the patronage extended to his old master Marshall are particularly to be regretted. It is not by this manner of writing that his desire to convince his fellow economists (p. vi) is best promoted.

Alas, it did turn out that this was indeed the best way to influence his fellow economists and it is a template that Keynesians have followed ever since. Krugman’s style and form of attack – stupid, ignorant, incompetent bungler that he is (two can play at this game, I suppose) – is patterned after Keynes who was as arrogant as anyone who has ever written on economic matters as well as being amongst the most incompetent. An actual economic ignoramus who did his undergraduate degree in philosophy and notoriously, on Joan Robinson’s say so, never understood basic micro – “Maynard never spent the half hour necessary to learn price theory” – which is a pretty large gap in any economist’s knowledge base. That in trying to refute Say’s Law he fell right into the oldest fallacy in economics but then took the entire profession along with him is just one of those very unfortunate events that history is filled with. Every economist of his generation with no exception thought The General Theory was end-to-end nonsense. But the economics they knew has now disappeared as have those economists and is now replaced with the poisonous nonsense peddled by Krugman.

This is what Niall Ferguson does not discuss because he doesn’t understand it himself. But you would need a combination of an actual historical understanding of the development of economic theory up to the publication of The General Theory along with a reasonably sound understanding of why it was superior to what we find today. Alas, it is a relatively rare combination but some at least do have it. But if you try to say this to Keynesians in public, they will shout you down and threaten to remove your license to practise economics. Yet it is the Keynesians of the modern text – the people who think Y=C+I+G actually makes economic sense – who are the barbarians ruining our economies right before our eyes.

The black knights of Keynesian economics

July Sloan has an article in today’s Australian she titles, “Robust views build better debate, so let’s have them“. I don’t mean to quibble but there is plenty of debate, just little engagement. No one who visits this site can be in any doubt that there are critics of economics around as not a few of us here bound into the various inanities that are prevalent everywhere.

I have written books and papers and blog posts about Keynesian economics but no one amongst those economists wishes to take me up on any of it or at least not for the past three years. Even Judy, in her article, never mentions Keynes and Keynesian economics although she lists “the wisdom of the fiscal and monetary policies implemented in the US since the global financial crisis” as her number one problem and uses Paul Krugman as Exhibit A of an engaged economist.

In fact, both so far as politics and policy are concerned, the Keynesians have been routed. I would be glad to hear from any of them who in 2013 would like to repeat in public all of that nonsensical “Keynes the Master” we not so long used to hear about ad nauseum. The stimulus has been an unmitigated disaster everywhere it has been applied with no exception. And slowly everyone is withdrawing the spending (except in the basket case economy of the US), even though all have high rates of unemployment, as they edge their way towards a return to prosperity. From Greece to China, in Australia and across the world, Keynesian theory is dead except in our economics texts.

And it’s not just in macro that the academic world of economics is fading. In my Free Market Economics I go after the marginal revenue-marginal cost analysis as shallow to the point of vacuous. I teach marginal analysis, of course, but heaven forfend that I should inflict any of that on my poor unsuspecting students. I also get not a little vexed about the term “perfect competition” which so far from being perfect (not to mention literally impossible as defined) is the kind of world in which no Microsoft, Apple or BHP could every exist. In my view I teach one of the finest economics courses in the world. But engagement from other economists over anything I write, never a word is said or written.

And then again re Keynes, I have written in a published article how he poached immense amounts from others in putting together The General Theory. No one has ever written a reply. I bring it up in conversations and no one even thinks even to attempt to rebut what I say. Try this on yourself if you are an economist. The term “Say’s Law” and the phrase “supply creates its own demand” are not classical in origin. Both are twentieth century, the first entering into common discourse in 1921 and the second first found in a book published in 1933 which Keynes is absolutely 100% certain to have read while writing The General Theory. So how did they get into the book? You tell me without having to acknowledge that there are things about how The General Theory was written that I know and no one else does or if they do know feel free to ignore.

And lastly, as far as individuals declaring themselves Democrat or Republican in the US, everyone registers with one side or the other so that they can vote in the primaries.