Comments, thoughts and suggestions welcome

You may have noticed my lack of regard for modern economic theory which the following might help you understand more clearly. This is the draft of the cover text for the book I have just completed and sent off to the publisher. Comments, thoughts and suggestions would be welcome. My disdain for Keynesian economics I have discussed on many occasions. My attitude to “marginal” analysis I mention far less often which is why certain passages below are highlighted in bold.

‘Classical Economic Theory and the Modern Economy’

The book starts with two premises: First, that economic theory reached its deepest level of understanding in the writings of John Stuart Mill and the classical economists of his time, and then, secondly, the author of this book has understood Mill and has accurately explained what the classical school of the late nineteenth century wrote. From these premises, this then follows.

If you are to have any hope of understanding how an economy works, and how modern economic theory became the dead end it has become, you will need to read this book.

The classical economists, and John Stuart Mill in particular, lived through the Industrial Revolution, saw its astonishing economic transformation before their eyes, and explained, so others could understand for themselves, how their prosperity had been created through the emergence of the market economy.

Mill, the greatest utilitarian philosopher of his age, refused to use utility as part of his theory of value. Mill explicitly and emphatically denied any role for aggregate demand in the creation of employment. In reaching these conclusions, there was no disagreement among the entire mainstream economics community of his time.

First through the Marginal Revolution of the 1870s, and then through the Keynesian Revolution of the 1930s, the entire edifice of classical theory has been obliterated. From a classical perspective, modern economic theory is Mercantilist trash nonsense. If you are interested in how economic theory became the wasteland it has become, and wish to understand the classical theory no one any longer has the slightest clue about, this is the book you must read.

If you are interested in understanding all this more completely, you will have to read the entire book when it is finally published sometime this year.

Invaders from planet stupid

A very interesting post by Steve Hayward at Powerline with the title, First they came for the Sociologists. But in spite of its title, the post is mostly about economics.

The one field in the social sciences where there is the least presence of post-modern oppression-“privilege” types is Economics, which prompts me to propose the theorem that the presence of politically correct nonsense in an academic department is inversely proportional to the emphasis placed on rigorous regression modeling in the discipline (or knowledge of ancient languages).

I personally think modern economics is well to the left as an academic subject. The veneer of bourgeois respectability is important to economists if their economics message is to influence the political class. Mainstream economics is no longer about the need for free markets, but the importance of controlling free markets. It may be disciplined by various sets of data, but economic theory is no longer Adam Smith. It is, instead, the nearest thing to Marxism that still retains that overlay of markets, best represented by Keynesian theory. Keynes disarmed the Marxists of his time by siding with them over Say’s Law, which had perennially been the province of the economics far left and central to their critique of capitalism.

I have half a chapter on this in my Free Market Economics, beginning with the notion of “perfect competition”. “Perfect” implies that this is the ideal, and is contrasted with “imperfect” competition. Perfect markets cannot exist, given its definition (e.g. perfect knowledge). All other markets are imperfect, which leaves much room for intervention at every turn.

But even with my continuous criticism of mainstream theory, I believe there is only one economics. The “political economy” department at Sydney is merely a cop out. Whatever sociological version of economics that might be taught, unless they also do supply and demand and marginal analysis along with the full panoply of mainstream theory, it is useless, other than as a leftist critique of markets. This is a quote from Greg Mankiw who was on the other end of these barbarian invaders:

Those who attended either of the sessions I was involved with at the ASSA meeting know that the audience included some hecklers. During the first session, I was the target. During the second, Larry Summers was. (At one point, the moderator Bob Hall threatened to call security.) Here is a Washington Post article about the hecklers.

After the first session was over, one of the hecklers came up to me and asked, “How much money have the Koch brothers paid you?” My answer, of course, was “not a penny.”

I don’t find it odd that people disagree with me. I am always open to the possibility that I am wrong about lots of things, and I much enjoy talking with students and colleagues who have views different from mine. But I do find it odd that people who disagree with me are sometimes quick to question my sincerity. If I am wrong, it is sincere wrong-headedness, not the result of being on some plutocrat’s payroll, as some on the left want to believe.

The hecklers probably limit their own effectiveness by questioning the motives of those who disagree with them. I have found that to convince other people, it is usually best not to assume your own moral superiority but rather to talk with them as equals who just happen to have a different point of view.

Personally I think Greg was too mild in his criticism of these know-nothings. I disagree about a lot, but I am never in doubt that the economists I deal with know a lot more about economies than their non-economist critics, a lot lot more and within a proper contextual setting. The true worry is how sympathetic the Washington Post article is to these invaders from the planet stupid.

The economics of John Stuart Mill

I have just sent this note off to a publisher about a book I would like to edit. I recently wrote a rejection for an article on John Stuart Mill that was sent back to me three times after which they asked me to write a reply since they were going to publish it anyway. I was coincidentally also refereeing another article at the time for a different journal which has come back for a second time since I think the other referee must have liked it and they will publish notwithstanding anything I might say which is also about Mill. It was then with the two of them together that I finally worked out that no one knows what Mill wrote or what he means. I very strangely fell into Mill’s economics as just part of my reading things that seemed interesting and was immediately captured by his logic and good sense. I didn’t read it the way most academics do, as a kind of deciphering exercise with modern economics as the standard of excellence. I instead read it with an open mind just for interest. My Free Market text is almost literally an amalgam of Mill, Henry Clay and a smattering of more modern gadgetry. So this is the note I wrote:

I copied you in on an earlier email in which I mentioned an idea I had proposed to you quite some time ago. As I noted, John Stuart Mill’s Principles of Political Economy is the least accessible economics text from amongst the whole of the economics literature. It is not just that it is long-winded, but it contains so much that is completely foreign to a modern economist that it is straightforwardly impenetrable. It also delves into vast oceans of explanation that exhaust even the most patient reader. And there are chapters one after another that deal with issues that might have been current in 1848-1871 but which are of no relevance today. My wish is to put together a more compact Mill that is directed at people who would like to understand what Mill was saying that is relevant today but do not have any idea where to start. And to tell the truth, I think there is hardly anyone else alive who could do it. I will attach an article of mine on Mill’s “Fourth Proposition on Capital” which I have described as economic theory’s version of Fermat’s Last Theorem. No one has been able to make sense of it since 1876 although many have tried, including Marshall, Pigou, Taussig, Keynes and Hayek, not to mention modern commentators such as Harry Johnson and Sam Hollander. No one can even make it make sense, whereas I just included it in my Free Market Economics and teach it to my students who find it perfectly straightforward. They wouldn’t even know there’s a controversy or why it’s controversial since really, it makes perfect sense. Therefore in editing Mill, each of the chapters that I would want to include would also require some kind of introduction so that someone could get past the 150-word sentences and see the point. It is, of course, hard for me to judge whether this would be a commercial proposition for you but for me it would represent an important contribution to the economics literature and for that reason may also sell.

What has made this seem more urgent than before was a paper I recently refereed which I rejected three times before being told that based on the other referee they had decided to publish but invited me to write a response which I have now done. You will see the kinds of things in the article that are found in Mill but which are incomprehensible today. Even scholars who write on these issues are unable to comprehend what classical authors believed and why it might be relevant today. But the thing is, Mill is the comprehensive answer to so much of what is wrong with economic theory today. I just find myself surprised to discover that I am one of the few people around who can explain what Mill wrote. I read others who write on Mill and almost no one seems to read Mill directly but only in second-hand form, much the same as with Adam Smith. Anyway, this would interest me to put together and I would like to think of this as my next major project.

What gets me is that if you merely apply Mill to current economic events and policies, the outcomes are perfectly obvious.