The level of employment is unrelated to the level of aggregate demand

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.

“Even as.”

“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?

If you want to understand how an economy works you need to understand classical economic theory

So long as Keynesian economics remains the mainstream, there is no possibility of taking down the crony capitalist system of economic management. Because Keynesian theory is the mainstream which everyone learns, economists are taught from their very first days in class, that routinely syphoning our wealth into the hands of governments and their friends will create a net increase in the number of jobs while making everyone better off. It isn’t true, and ought to be seen as obviously untrue, but since the pretence makes governments and their crony capitalist friends immensely rich, it just goes on. So more fool you for accepting Keynesian theory.

The argument that an economy is driven by the level of demand, irrespective of what is being demanded, works very well for those receiving handouts from governments, but harms everyone else. All production uses up resources while only a small proportion adds anything back in. It is now invisible in the way economics is currently taught why all of that matters. In writing as I do I am doing nothing more than repeating what was obvious to every great economist before The Keynesian Revolution but is utterly unknown other than to a handful of economists who have actually studied the classics.

At the link may be found a pre-print of an article of mine that will appear in the June 2018 issue of the Journal of the History of Economic Thought: Making Sense of Classical Theory. This is the description of its contents.

The fundamental problem discussed is the shifts in the conceptual base of economic theory that followed the publication of The General Theory, along with various technical terms being given different meanings, which have made it almost impossible for modern economists to comprehend classical theory. Yet it is in the classical theory of the cycle where the most profound understanding of the nature of recession and cyclical unemployment is found.

The paper’s not long but it takes you into the heart of the differences between modern economics and the classical theory that had existed prior to the publication of The General Theory in 1936. This is now the sixth paper in a series that began with the publication of my article on Mill’s Fourth Proposition on Capital in 2015. That earlier paper was criticised by an economist in the UK by name of Roy Grieve, whose criticism of my paper attracted a series of comments by an American economist, James Ahiakpor.

I can only hope that the core point found in the attached paper, explaining why classical theory works and Keynesian economics does not, will be clear. But as this brief paper points out, there have been so many changes in the terminology and presuppositions within economic theory since classical times that it remains almost impossible for a modern economist to follow what the great economists of the past had said. But not only can it be done, but you will only understand how an economy works if you do.

Mill’s lost ‘supply-side’ perspective has now been found

Here’s the subhead to an article on the editorial page of the AFR today with the title: Job creators don’t need subsidy.

The billions spent on industry support seems to make very little difference to new job creation.

This is the rediscovery of classical economic theory, and here let me quote John Stuart Mill:

“Demand for commodities is not demand for labour.”

Alas, the amount of unlearning that would have to happen for Mill’s point to be understood is an impossibility, but it is interesting that someone has noticed the actual facts on the ground even if they don’t understand why it’s true. As a wonderful example of someone who sees the point but doesn’t understand it, here is the abstract of a paper by an economist by name of Roy Grieve criticising my paper on Mill’s Fourth Proposition on Capital in which I have, for the first time in more than a century, explained what Mill and the classics meant:

Steven Kates has recently (2015a) attempted to explain and justify J S Mill’s paradoxical “fourth proposition on capital”, which states that “demand for commodities is not demand for labour”, a proposition which notoriously – over generations – has baffled many eminent commentators. Kates intends to resolve the puzzle by offering “a proper understanding of Say’s Law as it was understood by Mill and his contemporaries.” We conclude that Kates does indeed reveal the logic of Mill’s proposition, making it clear that from Mill’s lost “supply-side” perspective, it is in no way puzzling or paradoxical. However, at the same time it becomes evident that Mill’s whole position is undermined by his acceptance of the untenable belief that “demand is constituted by supply”, which leaves us with the clear understanding that his fourth proposition, despite Kates’s rationalisation and defence thereof, as well as certainly being paradoxical, is simply untrue.

I hadn’t even known the paper had been published until just now, but found it only because I was looking online for my own. But this is wonderful since he says five things I am extraordinarily happy to have said about what I wrote:

1) I really am the first economist in well over a century to understand Mill’s Fourth Proposition.

2) I do indeed “reveal the logic of Mill’s proposition”.

3) And what is shown by the Fourth Proposition on Capital is “Mill’s lost ‘supply-side’ perspective”.

4) Say’s Law is the central proposition of supply-side economic theory.

5) And what does Say’s Law teach: that “demand is constituted by supply”.

That Grieve thinks Mill’s Fourth Proposition is untrue only has him lining up with around 98% of modern economists. That it actually is true is demonstrated by the failure of every single peacetime stimulus package in history to increase the level of employment. There has never been an exception to this rule.

Economic theory’s version of Fermat’s Last Theorem now finally explained

I have just had an article published that has taken five years to finally see the light of day. More formally, “Steven Kates (2015). MILL’S FOURTH FUNDAMENTAL PROPOSITION ON CAPITAL: A PARADOX EXPLAINED. Journal of the History of Economic Thought, 37, pp 39-56.” This is the abstract:

John Stuart Mill’s Fourth Fundamental Proposition Respecting Capital, first stated in 1848, had become an enigma well before the nineteenth century had come to an end. Never challenged in Mill’s own lifetime and described in 1876 as “the best test of a sound economist,” it has become a statement that not only fails to find others in agreement, but fails even to find an internally consistent interpretation that would make clear why Mill found it of such fundamental importance. Yet the fourth proposition should be easily understood as a continuation of the general glut debate. Economists led by Malthus had argued that demand deficiency was the cause of recession and a body of unproductive consumers was needed to raise the level of demand if everyone who wished to work was to find employment. Mill’s answer was that to buy goods and services would not increase employment, or, in Mill’s own words, “demand for commodities is not demand for labour.”

That observation by Leslie Stephen in 1876 was literally the last time anyone had ever made such a positive statement about Mill’s Fourth Proposition. After that, it had been worked over by Alfred Marshall, A.C. Pigou, F.W. Taussig, Allyn Young, Friedrich Hayek, J.M. Keynes and Harry Johnson amongst many others, none of whom could make it make sense. I will write it down again, because it is the essence of Say’s Law. Understanding what Mill meant is the only means I can think of to refute Keynesian theory:

Demand for commodities is not demand for labour.

From the moment I read it in Mill, which I was just reading for fun, I was convinced by both the conclusion and the logic that had come before. I had no idea that it would change my life and give a shape to all of my economics thereafter. It simply says that buying of itself never creates economic momentum, but it is the logic of the argument that is required if you are to see the point. Everyone understood both the proposition and the logic for the entire period from the time of Adam Smith right through to the marginal revolution in the 1870s, but from that moment on has made no sense to anyone, other than me. How odd is that!

So now I have the paper in print, but I doubt anyone will get it anyway. You really do have to go back to Mill and the classics to see not just what they meant, but why it’s true. The alternative is to read my Free Market Economics which is classical economics for the twenty-first century. It is also the first book since the 1870s that has actually discussed and defended Mill’s fourth proposition, indeed all four propositions. I say this as honestly and sincerely as I can. You will never understand how an economy works unless you understand what Mill meant. There is no difficulty in seeing the point since I have been teaching it successfully as part of my course since the start of the GFC, but I also recognise how hard the point is to grasp and hold to in the midst of controversy. But if you can do it, it is worth the effort since Mill’s Fourth Proposition truly is the best test of a sound economist.