Productivity growth and classical economics


I wasn’t going to bother with the story because its title was so ridiculius – Britain’s Productivity Decline Is the Worst in 250 Years – as if you could measure productivity going back even sixty years. But what they show in the chart is true enough, and about which I have been writing quite a bit. The Keynesian “stimulus” has been a disaster everywhere it has been tried, with the example here the UK. To compound their idiocies, this is what they wrote:

Productivity was almost 20% below its pre-2008 path in 2018 — the worst slowdown since 1760-1800, as the Industrial Revolution took hold. The present-day malaise may have been caused by the end of the information and communications technology boom, the financial crisis, and Brexit.

And the authors are, of course, part of the mainstream and at its very heights:

It’s a “shockingly bad” performance, said Nicholas Crafts, who co-authored the paper with Terence Mills, researchers at the University of Sussex and Loughborough University. The findings will published by the National Institute Economic Review on Feb. 6.

Productivity is here measured as output per hour worked. If the government diverts production from the private sector to its own public agenda, you inevitably get a vastly diminished level of value-adding production, even though employment continues to increase because the real wage adjusts. Why people cannot see this is amazing to me, but here is yet more evidence of just how out of it economists now are. That the period in question is the period following the GFC ought to have been a clue, but Keynesians – i.e. modern macroeconomists – are notoriously clueless.

Let me again mention the cover description for my next book:

‘Classical Economic Theory and the Modern Economy’

Steven Kates

Economic theory reached its highest level of analytical power and depth in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains classical economics when it was at its height, followed by an analysis of what took place as a result of the ensuing Marginal and Keynesian Revolutions that have left economists less able to understand how economies operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, clouding to the point of near invisibility the theories they had developed. Kates offers a thorough understanding of the operation of an economy within a classical framework, providing a new perspective for viewing modern economic theory from the outside. This provocative book not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’s pathway in writing The General Theory. It provides a new look at the classical theory of value at its height that was not based, as so many now wrongly believe, on the labour theory of value.

A crucial read for economic policy-makers seeking to understand the operation of a market economy, this book should also be of keen interest to economists generally as well as scholars in the history of economic thought.

My book is premised on the belief that a modern economist is incapable of understanding what’s wrong with modern economic policy. This paper proves it all once again.

Missing the point perhaps

John Cochrane published an article a few weeks back on The Failure of Macroeconomics which you tend not to see much of even though its failures are manifest and undeniable. Here is the first para of his article which refers to the US but the story is hardly better anywhere else:

Output per capita fell almost 10 percentage points below trend in the 2008 recession. It has since grown at less than 1.5%, and lost more ground relative to trend. Cumulative losses are many trillions of dollars, and growing. And the latest GDP report disappoints again, declining in the first quarter.

He is down on Keynes and Keynesian theory but his analogy is sus to me. If I read him right, he is saying that climate science is all right because it is using modern evidence unlike macroeconomics. Anyway, he writes:

The climate policy establishment also wants to spend trillions of dollars, and cites scientific literature, imperfect and contentious as that literature may be. Imagine how much less persuasive they would be if they instead denied published climate science since 1975 and bemoaned climate models’ “haze of equations”; if they told us to go back to the complex writings of a weather guru from the 1930s Dustbowl, as they interpret his writings. That’s the current argument for fiscal stimulus.

I take it that the “guru from the 1930s Dustbowl” is Keynes. I suppose then that Cochrane wouldn’t like to go back to my own set of authorities which are the economists of the mid-nineteenth century, John Stuart Mill in particular. But whether he knows it or not, that is what he’s doing in pushing structural reforms while abandoning attempts to increase aggregate demand:

These views are a lot less sexy than a unicausal “demand,” fixable by simple, magic-bullet policies. They require us to do the hard work of fixing the things we all agree need fixing: our tax code, our cronyist regulatory state, our welter of anticompetitive and anti-innovative protections, education, immigration, social program disincentives, and so on. They require “structural reform,” not “stimulus,” in policy lingo.

Economists once knew this, since that was the core element of what an economist knew that had been passed down through the first century of economic thinking, starting from Adam Smith in 1776. Yet even though Cochrane can see there are problems with a stimulus, I don’t myself think he really gets it himself since it never occurs to him to suggest that cutting the level of public spending might actually do some good.

[My thanks to J.B. for sending this article along.]