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.

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.

RMIT is the George Mason of the South

It was certainly never intended that way but the School of Economics, Finance and Marketing at RMIT has become one of the great free market universities of the world. This has been posted at Instapundit just today following the post you see below on The Blockchain Economy:

INTERNET 4.0: Chris Berg (Australia’s free speech champion), Sinclair Davidson (of Catallaxy Files fame), and Jason Potts have put together The Blockchain Economy: A beginner’s guide to institutional cryptoeconomics. If they’re right, regulators and taxmen have a lot to fear.

And allow me to add myself into this equation. I presented my paper on Tuesday on “Classical Economic Theory Explained” which discussed the many many many things wrong with Keynesian macro – that is, all of modern macro – that the classics got right. And while the number of people who get this is quite small at the moment it is not quite zero and the numbers are growing. Therefore, let me refer you to this paper by Per Bylund More Spending Does Not Drive More Employment in which the following passage may be found:

Economists prior to the Keynesian avalanche, which contemporary Say’s Law scholar Steve Kates argues was all about dismissing the organic view of the market economy, had the same understanding of the economy as Mises. What drives the economy is not demand or spending, but entrepreneurship and production.

Indeed, JS Mill famously notes that “Demand for commodities is not demand for labour” in his fourth fundamental proposition on capital. While this statement is subject to much debate and most modern economists cannot make sense of it, it is in effect very straight-forward if one recognizes the role of entrepreneurs.

And if you want to want to read about Mill’s Fourth Proposition, you can go here. This was its first defence in more than a century but as said by Leslie Stephen in 1876, “it is the best test of a sound economist”.

The Economist published my letter!

In the letters section of this week’s Economist

You don’t Say

The term “Say’s Law”, (Economics brief, August 12th) was invented by the American economist, Fred Taylor, and popularised in his introductory text, published in 1921. Moreover, the phrase “supply creates its own demand” is not classical in origin, but was first used in print by another American economist, Harlan McCracken, in a text that John Maynard Keynes is known to have read while he was writing the General Theory. Jean-Baptiste Say neither invented the concept nor was he its most staunch defender.

STEVEN KATES
Associate Professor
School of Economics, Finance and Marketing
RMIT University
Melbourne, Australia

And while you may think this is purely a factual statement about the construction of a book that was published more than 80 years ago, it is actually a suggestion that the mythological version of how Keynes came to write his book is many miles short of the truth. And as for the contents of the book, that falls even many miles shorter not just of the truth [how ridiculous to have argued that classical economists had no theory of involuntary unemployment] but of an understanding of how an economy first goes into recession and then recovers.

Not just about Say’s Law but also why almost the whole of modern economic theory is useless

You may think such a thing is impossible, and certainly impossible to prove, and even more certainly impossible for me to prove, but before you say that first you have to watch the presentation yourself. The venue is Los Angeles.

I also replied to the fellow who had invited me and sent the video because he wrote that “I suggest the phrase Supply Creates the Means to Demand” which is his own way of explaining Say’s Law to himself. And this is the way someone brought up in a Keynesian environment will understand these issues because it has become second nature to think in relation to demand. But unless you can break the habit that thinking an economy is driven by demand and not supply, it becomes impossible to understand classical theory, and in my view impossible to understand how a market economy works. So I wrote back with this:

Your note does remind me how difficult it is to understand since the issue of spending never seems to go away, which a supply-side economist, like Mill and myself, see as about as irrelevant to aggregate economic outcomes as it is possible to be. If you tell me that in a recession there is some kind of panic and credit freezes up and business ventures are not commenced at the same rate as in good times, I will say of course, but so too did JSM.

Thinking in money flows and in relation to spending will stop you from understanding Mill and thus, in my view, from understanding how an economy adjusts. Once you are thinking about whether people will spend their money and not whether entrepreneurs will try to open new businesses and expand old ones, you fall into the Keynesian trap from which economic theory has been unable to emerge for more than eighty years. A financial crisis stops the flow of credit but does not stop the desire of business people to set up new firms or expand the ones they already run, nor does it stop wage earners from trying to find jobs. A really bad downturn can take 2-3 years to get back to normal but things do re-arrange themselves. Having a government stimulus on top of all of the other disruptions in the flow of capital and labour into their most productive forms of contribution can extend the recession outwards for a much longer period of time, and like the situation right now everywhere round the world, it can prevent a serious recovery from ever gathering pace. The Japanese lost decade of the 1990s is now 25 years long! The notion that buyers will stop buying for years on end and businesses will stop trying to find ways to earn profits because there has been a downturn is not just incoherent but contrary to every historical situation in which a downturn has ever occurred. It might be what an academic would do – just give up and wait for a government subsidy – but it is not the kind thing people who make a living by running businesses are apt to do. A stimulus can kill off a recovery but it can never cause one. All this is perfectly obvious to me, but very difficult to explain. This is my own variant on demand for commodities is not demand for labour: employment varies directly with productivity and inversely with the real wage. I developed the theory as an employer advocate in our national wage cases in the 1980s and then when I found the same thing in Mill, which is his explanation for his fourth proposition on capital*, I had found the parent stem for everything which I now believe, and see demonstrated everywhere I go.

Mill noted that even in his own time how difficult it was to keep these things straight, and every economist of his time had read his text. Much more difficult now because of the Keynesian presuppositions and terminology that infuse modern theory with virtually no supply-side economics to be found anywhere at all.

* Mill’s fourth proposition on capital – the Fermat’s Last Theorem of economics – states that “demand for commodities is not demand for labour”. Universally accepted by mainstream economics in Mill’s lifetime, even described in 1876 as “the best test of a sound economist”, which it is. You can read my entire paper on it if you are interested: MILL’S FOURTH FUNDAMENTAL PROPOSITION ON CAPITAL: A PARADOX EXPLAINED.

Economic theory has been hollow for a long long time

The secret is getting out. Modern economic theory is a pseudo-science. So let me give you some recent discussions of what ought to be obvious to anyone living in an economy in which economists are advising governments. First this: The new astrology: By fetishising mathematical models, economists turned economics into a highly paid pseudoscience. From which:

The economist Paul Romer at New York University has recently begun calling attention to an issue he dubs ‘mathiness’ – first in the paper ‘Mathiness in the Theory of Economic Growth’ (2015) and then in a series of blog posts. Romer believes that macroeconomics, plagued by mathiness, is failing to progress as a true science should, and compares debates among economists to those between 16th-century advocates of heliocentrism and geocentrism. Mathematics, he acknowledges, can help economists to clarify their thinking and reasoning. But the ubiquity of mathematical theory in economics also has serious downsides: it creates a high barrier to entry for those who want to participate in the professional dialogue, and makes checking someone’s work excessively laborious. Worst of all, it imbues economic theory with unearned empirical authority. . . .

Romer is not the first to elaborate the mathiness critique. In 1886, an article in Science accused economics of misusing the language of the physical sciences to conceal ‘emptiness behind a breastwork of mathematical formulas’. More recently, Deirdre N McCloskey’s The Rhetoric of Economics (1998) and Robert H Nelson’s Economics as Religion (2001) both argued that mathematics in economic theory serves, in McCloskey’s words, primarily to deliver the message ‘Look at how very scientific I am.’ . . .

Romer believes that fellow economists know the truth about their discipline, but don’t want to admit it. ‘If you get people to lower their shield, they’ll tell you it’s a big game they’re playing,’ he told me. ‘They’ll say: “Paul, you may be right, but this makes us look really bad, and it’s going to make it hard for us to recruit young people.”’

There was then this in The Wall Street Journal a couple of days ago: The Great Economics Debate. Here is the bit before the paywall.

Friedrich Hayek and John Maynard Keynes worked at a time when the study of economics was concerned with society and its values. Richard Vedder reviews ‘Hayek vs Keynes’ by Thomas Hoerber. By Richard Vedder

Today economics is a fundamentally quantitative pursuit, dominated by abstract mathematics and complex modeling, largely removed from the realities of human interaction. But it was not always thus. Economic theory . . .

You can undoubtedly guess the rest. Meanwhile, here at RMIT, Imad Moosa, one of my professorial colleagues, has just had a book published with the quite direct title: Econometrics as a Con Art. Here is a summary of the book:

Imad Moosa challenges convention with this comprehensive and compelling critique of econometrics, condemning the common practices of misapplied statistical methods in both economics and finance.

After reviewing the Keynesian, Austrian and mainstream criticisms of econometrics, it is demonstrated that econometric models can be manipulated to produce any desired result. These hazardous analyses may then be relied upon to support flawed policy recommendations, ideological beliefs and private interests. Moosa proposes that the way forward should instead be to rely on clear thinking, intuition and common sense rather than to continue with the reliance upon econometrics. The mathematization of economics has limited the accessibility of and participation in economic discussion by converting the area into a complex ‘science’ when it should not be.

Economic theory has been hollow for a long long time, but good economics exists. Unfortunately you would have to go back near a hundred years to find a time when economic theory was consistently sound. Nor is it just the maths that has ruined theory but the diagrams as well. That, however, is for another day.

In the meantime, I have just sent out a final draft of an article I have written to a number of colleagues and friends with this note attached.

I have written that it is almost impossible for an economist raised on Keynesian models and presuppositions to understand how classical economists approached economic issues. I also say, which is a bit more provocative, that they understood the processes of an economy better than we do, which of course implies that I think I understand how an economy works better than most economists today. Which, to tell the truth, I do. This is the article in which I try to explain why I think that in less than 2000 words. It is therefore not long, and I also think not very hard to understand, but then I think that about everything I write on classical theory which turns out to be immensely difficult.

I will just bring this joke out of the paper since I think it’s clear what I’m saying, but perhaps it is a bit too enigmatic. In any case, I think this is also true if you see my meaning:

Grieve mentions that I must think of myself as the only one in step. The joke I actually see myself in the midst of is about the impossibility that there could be a twenty dollar bill on the ground because if there were someone would already have picked it up. But there are others [who understand Say’s Law and classical theory], with Bylund (2017) a particularly fine example.

And if you would like to look at Bylund’s article, you will find it here: Rick Perry — and His Critics — Still Don’t Understand Say’s Law.”

Communism for Kids v Economics for Infants

Just like the article says, this is MIT’s new publication ‘COMMUNISM FOR KIDS’. You can pick it up at Amazon where you can find the following blurb:

Once upon a time, people yearned to be free of the misery of capitalism. How could their dreams come true? This little book proposes a different kind of communism, one that is true to its ideals and free from authoritarianism. Offering relief for many who have been numbed by Marxist exegesis and given headaches by the earnest pompousness of socialist politics, it presents political theory in the simple terms of a children’s story, accompanied by illustrations of lovable little revolutionaries experiencing their political awakening.

It all unfolds like a story, with jealous princesses, fancy swords, displaced peasants, mean bosses, and tired workers–not to mention a Ouija board, a talking chair, and a big pot called “the state.” Before they know it, readers are learning about the economic history of feudalism, class struggles in capitalism, different ideas of communism, and more. Finally, competition between two factories leads to a crisis that the workers attempt to solve in six different ways (most of them borrowed from historic models of communist or socialist change). Each attempt fails, since true communism is not so easy after all. But it’s also not that hard. At last, the people take everything into their own hands and decide for themselves how to continue. Happy ending? Only the future will tell. With an epilogue that goes deeper into the theoretical issues behind the story, this book is perfect for all ages and all who desire a better world.

You would hope that it’s all intended to be ironic but given the way of the world, every word is meant just as it is written. “Happy ending?” they ask. Complete idiots which often comes with high IQ grade stupidity.

So I will just mention that I have written my own little book which is titled Economics for Infants, the first children’s book ever premised on the classical economics of Say’s Law and John Stuart Mill’s On Liberty.

More details to come.

[The story on The Children’s Guide to the Gulag comes via Instapundit]