Only supply constitutes demand

Other than straight out socialist plunder, no better way to comprehensively ruin an economy is to think public spending and monetary expansion can raise living standards and promote employment growth. Here’s an article by Richard Salsman published at The Hill in the US that tries to point out just that: Fiscal-monetary ‘stimulus’ is depressive.

Politicians, policy wonks and pundits like to classify as economic “stimulus” the $6 trillion in recent deficit spending and Federal Reserve money creation. But subsidies for the jobless, bailouts of the illiquid and pork for cronies are purely political schemes — and they depress the economy.

What is the case for “stimulus”? Many economists believe public spending and money issuance create wealth or purchasing power. Not so. Our only means of obtaining real goods and services is from wealth creation — production. Under barter no one comes to market expecting to buy stuff without also offering stuff. A monetary economy does not alter this key principle. What we spend must come from income, which itself must come from producing. Say’s Law teaches that only supply constitutes demand; we must produce before we demand, spend or consume. Demand is not a mere desire to spend but desire plus purchasing power.

Believers in “stimulus” also claim that government spending entails a magical “multiplier” effect on aggregate output, unlike most private sector spending. They tout a government’s greater “propensity to consume.” But consuming is the opposite of producing. Welfare states certainly consume and redistribute wealth. They divide it up. But math teaches that nothing – wealth included – can be multiplied by division. The so-called “multipliers” imagined by today’s economists are, in fact, divisors. Many studies have verified the principle.

It should become a pre-req for anyone to become a political leader to have successfully run a business for at least five years. Speaking of which I must also say how much I loved Tafkas’ post today.

Say’s Law and economic revival

Here’s an article worth your time: There Will Be No Recovery Without Production. To understand what needs to be done to get recovery going, you need to start with Say’s Law. Or as Richard Eberling puts it, you need to understand that ‘Our Ability to “Demand” Arises from Our Capacities to “Supply”’. This is from the text:

What the government lockdown policy response to the coronavirus has highlighted is the fundamental and inescapable truth of what the 19th French economist, Jean-Baptiste Say (1767-1832), called “the law of markets.” Contrary to the reawakened Keynesian mindset that all of our economic troubles are “aggregate demand failures” arising from a lack of spending due to people not having enough money in their pockets, the dramatic collapse in production, the massive rise in unemployment, and the falling off in people’s spending on final goods and services are all due to governments shutting down the “supply-side” of the economy.

As Jean-Baptiste Say, and those who followed his reasoning, argued, there is always work to be done, since there are always human wants that are as yet not fully satisfied; and as soon as one such human want has been significantly fulfilled to one degree or another, the human mind looks ahead and imagines other things that seem attractive and desirable to have. As a result, work merely of different sorts is there to be taken up in even greater amounts.

People may satisfy their wants and desires in one of two ways, Say explained. They may directly work and produce the goods they want for their own purposes. Few of our desires, however, can be fulfilled through our own personal efforts. So, the other way is to work and produce something that others might consider worth buying from us in exchange for what they can offer in trade; that is, goods that we want that either we do not have the ability to make for ourselves or only at higher costs than at which that potential trading partner can sell them to us.

There was then this I came across a couple of weeks ago: The COVID Stimulus is the Government’s Latest Rejection of Say’s Law. This is the final para:

Say’s timeless contribution to economics reveals that no matter what levers are pulled by the fiscal and monetary authorities, stones will not be turned into bread. The longer this economic shutdown lasts, the more critical it becomes to end it.

All this lost economic knowledge, available only on the fringes. The point is, if you hear any political leader discussing the need for an economic stimulus consisting of increased public spending, however bad things have been so far, you ain’t seen nothing yet.

A how-to guide to economic policy

For any single business, higher demand all other things being equal makes them more money and can often lead to an increase in the number of employees.

For an entire economy, higher demand has no bearing either on real incomes or on the level of employment.

This is straightforward and for me anyway, as obvious as the morning sun. It is the conclusion that comes from a proposition that now goes by the name Say’s Law.

There have been many examples in history where Say’s Law was shown to be an absolute truth in an economy. There have been even more where attempts to raise an economy from recession through increased public spending – through an increase in aggregate demand – have been abject failures. No stimulus in history has ever succeeded in pulling an economy out of recession, NOT A SINGLE ONE! The sad story since the GFC is the most recent, but there have been lots. Every single one made economic conditions worse.

On the other hand, we had the Peter Costello/John Howard years from 1996 to 2007 of the best economic management ever seen, possibly anywhere. Not only did we balance the budget for years on end, we ended up with zero national debt! Because of the idiocies of modern economic theory, even though this was done right there before our eyes, bad theory remains. Modern macro is economic poison, but it’s often lots of fun for both governments and the people who they spend the money on. And for everyone else, it looks sensible since higher demand must create higher levels of production. In reality, it is higher levels of production that allow for an increase in demand. That is why we are so much richer than a century ago. We produce more so that we can demand more.

We were reminded of all this here: John Howard and Peter Costello urge PM to keep building budget surplus.

John Howard and Peter Costello have urged the Morrison government not to squander the budget surplus on a short-term stimulus, while doubting whether monetary policy is still a useful economic instrument given the reduction in interest rates to historic lows.

“The government is absolutely right to be returning the budget to surplus and I think it’s right to anchor­ its fiscal policy to producing surpluses over the next four years,” Mr Costello, the nation’s longest-serving treasurer, told The Australian.

Treasury is filled with people who have no idea why this is the way to prosperity. Reserve Bank as well. A bit more here:

As forecasts for economic growth, household consumption and wages have been downgraded, and $21.6bn wiped from future surpluses, Mr Costello said he doubted whether monetary policy was still a useful economic lever.

“Monetary policy has run out of puff,” he said. “Once you get interes­t rates at near-zero levels, whether they’re at 0.75 per cent, 0.5 per cent, 0.25 per cent, it just doesn’t matter, it’s lost its power as an economic instrument and that is why when the Reserve Bank cut rates during the course of (last) year it had no discernible effect.”

Low interest rates are the other side of the Keynesian economic model, a disastrous shambles of a policy, which inevitably puts money into the hands of many more people who will not earn a productive return on investment relative to the proportion of borrowers who will do so if rates are higher. Interest rates are near zero everywhere and no economy has found low rates of any benefit. Only value-adding investment can raise living standards. High levels of public spending and low rates of interest will not do that, just as they never have.

A thief walks into a store

Here is a question from Quora I have slightly changed which I leave for you to work out for yourself:

A thief walks into a store and steals $350. The thief then buys $350 worth of goods at the store. In the end, did the store lose any money and if so, how much?

To help you along, let me add in this quote from John Stuart Mill’s 1844 Essay, “Of the Influence of Production on Consumption”.

“The man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune.”

I need hardly add that Mill thought he was being fantastically ironic. But there is then this, the third iteration.

A government who taxes you to the hilt but then spends the money it took from you on whatever the government chooses to buy, provides a benefit to you and everyone else since it adds to the level of demand and therefore helps maintain full employment.

This is modern economic theory and practice to the back teeth. In looking at this third iteration, bear in mind the money spent on all of the various unproductive forms of stimulus spending that occurred following the GFC.

[My thanks to Tony for bringing this Quora question to my attention.]

Keynes’s 1933 letter to Harlan McCracken

 

The letter you see I uncovered in 2008 in the Harlan Linneus McCracken Archive at Louisiana State University, which has now been published in the March 2019 issue of the Journal of the History of Economic Thought. It has already been published by me, but only in black and white. Here we see the letter as it actually is. If you would like to read more fully of the letter’s significance, you can go to:

Kates, Steven. 2008. “A Letter from Keynes to Harlan McCracken Dated 31st August 1933: Why the Standard Story on the Origins of the General Theory Needs to Be Rewritten.” History of Economics Review 47: 20–38.

The letter would be momentous were it not for the fact that it reveals that Keynes with certainty was reading other sources than those he had previously owned up to in writing The General Theory which he commenced writing in 1932 and which was finally published in 1936. The letter substantiates virtually beyond argument – there is always an argument – that Keynes took up the notion of demand deficiency because he had been reading Malthus at the time. Malthus had been the single most important economist to have argued for the importance of demand deficiency as a cause of recession and unemployment during the nineteenth century. Virtually every other economist at the time and through to 1936 thought Malthus was completely wrong. It was unanimously agreed among mainstream economists that the notion of demand deficiency was totally false.

Going further, it was from McCracken that Keynes took his definition of Say’s Law: “supply creates its own demand”. These words are found for the first time ever as a definition of Say’s Law in the very book Keynes is thanking McCracken for having sent to him and which he had “now read”.

The article the letter is attached to, and now published in the Journal of the History of Economic Thought, was written to demonstrates that “Say’s” Law not was invented by J.B. Say. No understanding of the classical meaning of Say’s Law can be found other than by going through the literature that followed the publication of Malthus’s Principles in 1820, not by reading Say’s Treatise, whose first edition was published in 1803. Moreover, “Say’s Law” was the name applied to this concept for the first time by Fred Taylor in the twentieth century. It was not a classical term. Keynes took the phrase “Say’s Law” from Taylor or from one of Taylor’s contemporaries. I am near enough the only person from whom this can be found out. Virtually no one else will even repeat it, and certainly no one is capable of refuting it since the term never shows up anywhere until it was coined by Taylor. Beyond that, no one ever said “supply creates its own demand” in relation to Say’s Law until it was said by McCracken.

You would not think there would be such a cover-up in something as esoteric as the History of Economic Thought, but the implications are explosive, the more so to the extent that others might begin to appreciate there is more in pre-Keynesian economic theory than anyone since 1936 has given it credit for.

The Making of Modern Economics

From someone who gets Keynes and Say’s Law.

Greetings from Mark Skousen to my friends in the Mont Pelerin Society.

As you know, socialism has suddenly become all the rage with the rise of Senator Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez (whom I call Castro-lite) here in the United States and in Europe.

Don’t think for a moment that the New Socialists are a flash in the pan.

The Green New Deal, Modern Monetary Policy, Medicare for All, and Free College are all being taken seriously by students, politicians, and media, unworkable and inflationary as they are.

Sanders is running for President in 2020 and would consider Ocasio-Cortez as his running mate, if she were eligible (she’s only 29 years old).

How do you fight a bad idea? With a better idea!  It’s time to start a campaign to promote the best of capitalism and free-market economics.

The Economist is convinced that pro-market forces “have all too often given up the battle of ideas” (Feb 22 issue of “The Rise of Millennial Socialism”)

Let’s hope not!

How to fight back?   I’ve started a campaign to promote my book,

“The Making of Modern Economics: The Lives and Ideas of the Great Thinkers.”  

Now published by Routledge in a new third edition, it’s been endorsed by Milton Friedman, Roger Garrison, Peter Boettke, Ken Schoolland and many other members of the society.

It tells the unique story of Adam Smith, the founder of free-market capitalism, and how his “system of natural liberty” comes under attack by the Marxists, Keynesians, and socialists, and is often left for dead, but then is resuscitated by the French laissez-faire school, and the Austrians and the Chicago school, and triumphs in the end.

It has five chapters that rip apart the arguments that the Socialists and the Keynesians make.

It has converted many Marxists to free-market capitalists, and one reviewer calls it “the most devastating critique of Keynesian economics ever written.”

Most importantly, my book introduces the reader to the great defenders of free-market capitalism, including Adam Smith, the French laissez-faire school, and the Austrian and Chicago schools (as represented by Mises, Hayek and Friedman).

Last November, I started the campaign by purchasing a full page ad in The Economist and received hundreds of orders from around the world. You can see the ad here: http://mskousen.com/2018/11/the-economist-publishes-new-ad-for-making-of-modern-economics/.

The Ayn Rand Institute recently ranked it the #2 most important book ever written about economics (just behind Henry Hazlitt’s “Economics in One Lesson”).

It won the Choice Book Award for Outstanding Academic Excellence.

It’s been translated into six languages — in Chinese (twice), Spanish (Union Editorial), Turkish, Mongolian, Vietnamese, and Arabic.

Students, fellow economists, and business leaders are fans. Professor Roger Garrison (Auburn U) says, “My students love it.  Skousen makes the history of economics come alive like no other textbook.”

“Skousen gets the story ‘right’ and does it in an entertaining fashion, without dogmatic rantings.” – Peter Boettke, George Mason University.

The late Milton Friedman wrote, “All histories of economics at BS –Before Skousen!  Lively and accurate, a sure bestseller.”

John Mackey, CEO, Whole Foods Markets, said, “I have read it three times. It’s fun to read on every page. I love this book and have recommended it to dozens of my friends.”

And the late William F. Buckley Jr. told me, “I champion your book to everyone.  I keep it by my bedside and refer to it often.  Every student should have a copy.”

The story behind this book is quite extraordinary. You can read it here: http://mskousen.com/2018/10/adam-smith-and-the-making-of-modern-economics/.

“The Making of Modern Economics” is a 500-page book available in hardback, paperback, Kindle, or audio.  The quality paperback retails $53.95 by Routledge and $43.74 on Amazon, but you can buy it for only $35 directly from Skousen Books, including postage. I will autograph each copy and mail it for free. (For orders outside the US, add $30 for airmail shipping.) To order, call Harold at Skousen Books, 1-866-254-2057. Or order online at www.skousenbooks.com.

I was interviewed on C-SPAN Book TV about “The Making of Modern Economics.” Watch the 20-minute interview here:  https://www.c-span.org/video/?307279-1/the-making-modern-economics.

We can win the battle of ideas. Let the campaign begin!

Yours for peace, prosperity, and liberty, AEIOU.

President Trump is applying Say’s Law in managing the American economy

For almost everyone, Say’s Law is something they know nothing about, and especially among economists who are taught that Say’s Law is unambiguously wrong, who themselves not only do not know what Say’s Law is, but would not even know where to look to find out. But as the success of the American economy most clearly shows, Say’s Law is the most important single element in understanding how an economy can be made to grow. And as we find out, the American economy is being managed based on the application of Say’s Law.

The passage below begins at 13:13 of the video, and it is Donald Trump’s economic advisor, Larry Ludlow, specifically stating that the economic policies of the United States at the present time are based on the application of Say’s Law to the American economy. The greatest disaster in the history of economic theory was the Keynesian Revolution and the forced disappearance of Say’s Law. If you would like to see some of this, there is my article on Keynesian economics and Say’s Law that I published in February 2009 just as the stimulus was beginning across the world: The Dangerous Return to Keynesian Economics. It is not just about how damaging modern macroeconomics is, but how disastrous economic theory has become with the disappearance of Say’s Law. This is exactly what Donald Trump believes as is made clear in this discussion from Larry Kudlow.

I just want to note that we are in a boom. We had this blockbuster jobs number today. There is no inflation. There is no inflation. More growth, more people working does not cause inflation.

These old Federal Reserve models are outdated and have proven to be incorrect. Right now the inflation rate is probably less than one and a half percent even while unemployment is low and jobs are soaring and we are growing at three per cent. Why do I say that?

Because that is a point of view which the President holds and I think the President is exactly right.

This is supply side revolution. We’re creating more goods and services. We’re increasing the capital stock and business investment and that’s what creates incomes and jobs.

I’m sure you remember Jean-Baptiste Say. He wrote in the early part of the nineteenth century. He was a French economic philosopher. I met him awhile back, you perhaps did also.

Say’s Law: supply creates its own demand. This is not government spending from the demand side, this is lower tax rates from the supply side, and it is businesses that ultimately drive the economy.

I would like Jay Powell to hear that argument from President Trump who knows the argument very well. Now Jay I think does too – he’s a very smart guy. So I’m just saying that they can benefit from an exchange of views.

Let’s understand that more people working and solid percentage growth is not – IS NOT – causing higher inflation, and therefore Fed policies should take that into account.

Say’s Law. He may have to go and commune with him to fully understand it.

Everyone will need to commune with Say’s Law if they are going to understand how an economy works. If these sorts of things interest you, the third edition of my text, Free Market Economics, sets it all out in fine detail. And let me add this, the endorsement of the book found on the back cover from Art Laffer of Laffer curve fame, who drove the economic policies of the Reagan administration back in the 1980s.

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

A restoration of Say’s Law is an essential if we are ever going to get our economies to thrive and grow.

Getting Say’s Law right is hard

This is an article on the great economist, Leland Yeager, who has just passed away. And in this article in memoriam, Market Grandmaster by James A. Dorn, there is a discussion on Say’s Law which is dangerously off centre as has been virtually every discussion since the publication of The General Theory in 1936. Here is what is right taken directly from the article: “there can be no problem of deficiency of aggregate demand”. That is precisely what Say’s Law means. To this principle there are no exceptions. But what is said is that “fundamentally” there can be no deficiency of demand, but that it does occur on some occasions. To accept an exception, especially this, you might as well be a Keynesian.

Say’s Law did not rule out recessions. The idea that classical economists had some principle that made recessions impossible is so loony it’s hard to understand how such an idea could ever have established itself, yet that is what Keynes did. Therefore, to refute Keynes, one must begin by showing how untrue this was. Say’s Law rules out only one thing. It rules out, and rules out absolutely, demand deficiency as a cause of recession but nothing else, and most especially recessions due to monetary disturbances which were recognised by classical economists as frequent and often devastating. The classical theory of the cycle, stretching back to the start of the nineteenth century, discussed monetary breakdown and their effects. Monetary disturbances are not a deficiency of demand but a structural deformation. The GFC was not caused by a deficiency of demand but a monetary disturbance. Nor did a public sector stimulus in any economy lead to recovery, which might have occurred had demand deficiency been the problem. The contour and causes of the GFC were not just consistent with the classical theory of recession, but so too was the failure of any recovery to gather momentum anywhere in the world. This description mis-states the conclusions reached by classical economists, which we now bundle together under the heading of Say’s Law.

When the supply of and demand for money do not mesh, monetary disequilibrium can upset the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

To describe this as a qualification to Say’s Law is simply wrong, but worse, concedes almost all the ground that Keynesians need to drive public spending upwards, and not just during recessions but in every phase of the cycle.

Here is Dorn’s text on Say’s Law.

Say’s Law Is Fundamentally Right

According to Yeager (1979), “There has been too much aggregation in macroeconomics, theoretical and applied—too much of the notion of aggregate demand confronting aggregate supply. Fundamentally, Say’s Law is right: supply of some goods and services constitutes demand for other goods and services; fundamentally there can be no problem of deficiency of aggregate demand.” However, “the exchange of goods and services against goods and services takes place through money.” When the supply of and demand for money do not mesh, monetary disequilibrium can upset
the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

Consequently, Yeager emphasized that students need “to understand the tremendous importance of money in facilitating exchange and thus in facilitating the division of labor in producing
the goods to be exchanged.” In particular, they need to recognize that “money facilitates economic calculation and the comparison of costs and benefits and the signaling function of price and
profit” (ibid.).

Yeager: Market Grandmaster

Yeager goes on to argue that it is “precisely because money is so important to the working of the economic system [that] monetary disorders can have fateful consequences.” Thus, there is a “hitch in Say’s Law: Although ‘fundamentally’ goods and services exchange against goods and services, money is the intermediary in this process; and if the demand for and supply of money get out of balance, these fundamental exchanges are impeded” (ibid.).

Yeager elaborated on this idea elsewhere, explaining that an

imbalance between the actual quantity of money and the total of desired cash balances cannot readily be forestalled or corrected through adjustment of the price of money on the market for money because money, in contrast with all other things, does not have a single price and single market of its own. Monetary imbalance has to be corrected through the roundabout and sluggish process of adjusting the prices of a great many individual goods and services (and securities). Because prices do not immediately absorb the full impact of the supply and demand imbalances for individual goods and services that are the counterpart of an overall monetary imbalance, quantities traded and produced are affected also. Thus, the deflationary process associated with an excess demand for money, in particular, can be painful [Yeager 1983: 307].

Macro Follies returns

The only movie that has ever been made from a book I wrote. The movie was put together by that genius, John Papola, producer of the greatest economic video ever, The Keynes-Hayek Rap. And as noted in the credits for Macro Follies, there I am found in truly stellar company:

Special Thanks to Russ Roberts, Steven Kates, Larry White, Steve Horwitz, James Adams and Steve Fritzinger

As for the book, if you are looking for a Christmas present, let me recommend my Free Market Economics which is the book from which the movie was made. It is the only economics book written in approximately the last 150 years that is built on classical economic principles. As it says at the Book Depository website

“In this thoroughly updated third edition of Free Market Economics, Steven Kates assesses economic principles based on classical economic theory. Rejecting mainstream Keynesian and neoclassical approaches even though they are thoroughly covered in the text, Kates instead looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation is a continuous process and the future is being created before it can be understood. Key Features include: * analysis derived from the theories of pre-Keynesian classical economists, as this is the only source available today that explains the classical pre-Keynesian theory of the business cycle * a focus on the entrepreneur as the driving force in economic activity rather than on anonymous `forces’ as found in most economic theory today * introduces a powerful though simplified model to explain the difference between modern theory of recession and classical theory of the business cycle * great emphasis is placed on the consequences of decision making under uncertainty * offers an introductory understanding, accessible to the non-specialist reader. The aim of this book is to redirect the attention of economists and policy makers towards the economic theories that prevailed in earlier times. Their problems were little different from ours but their way of understanding the operation of an economy and dealing with those problems was completely different. Free Market Economics, Third Edition will help students and general readers understand classical economic theory, written by someone who believes that this now-discarded approach to economic thought was superior to what is found in most of our textbooks today.”

You can order a copy here. For anyone who wants to get a sense of how an economy works, and also why government intervention beyond a minimum creates harm, this is the place to go. Of course, you might instead decide to save your money and have an even better Christmas next year, but you might also instead just think of it as helping to build your own human capital, as well as helping you to contain your rage watching Malcolm and Co butcher economic policy before Bill and Co are allowed to take over who will do even worse.

Say’s Law @ Zero Hedge

I asked Dan Nivens, my new best friend, where he had come across what I had written and he sent me here, to Zero Hedge: Say’s Law And The Permanent Recession. There we find the following:

Steven Kates explains in his book Say’s Law and the Keynesian Revolution (subtitled How Economics Lost its Way), Keynes failed in his attempt to overturn Say’s Law. Kates shows beyond any dispute that Say and his fellow classical economists were well aware that there could be unemployed resources, and that Say’s Law was still valid in that case.

In the book I actually go much further. I outline just how wrong Keynes, and just about every economist since his time, has been about classical economic theory. There is virtually nothing discussed in the Zero Hedge post that is not found in my book and there’s plenty more that’s not mentioned. Any economic theory that does not specifically start from the entrepreneur is almost certainly deeply misleading and more than likely false. There are no market forces not embodied in individual decision making on the supply-side of the economy. It is the role of entrepreneurs to work out, in advance, what buyers would buy if it were supplied at prices that covered all production costs and then supply them. The role of buyers is merely to choose amongst the products available once entrepreneurs have put them up for sale. Their role is no greater than that. That is how a market system works.

But the second aspect of the Zero Hedge post I find significant is that it was “submitted by Robert Blumen via the Ludwig von Mises Institute”, meaning that it had come from an Austrian source. That is truly pleasing as far as it goes, but it is a major problem that only a minority among Austrian economists understand the major significance of the disappearance of Say’s Law. Hayek’s first foray into these issues was written in German in 1929 and published in English over two parts in 1931 and 1932. This is what these articles were about:

Chronic underconsumption is an idea most often associated with Keynes. But while the infamous English economist published his General Theory in 1936, Hayek’s 1929 article “The ‘Paradox’ of Savings” analyzes a similar theory advanced by two Americans a decade before. While the two authors have nearly vanished from history, the insights contained in Hayek’s nearly forgotten article are more necessary today than ever.

Unfortunately, it is also Hayek’s article that has vanished from history as well. Yet there he explained in great detail why demand deficiency as a theory of recession and unemployment is nonsensical. Because it is so deeply wedded to marginal utility, it is a problem for many Austrians to focus on supply-side theory to the extent that is required if a revolutionary shift in economic theory is to happen.