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]

A Triumph for Supply-side “Austrian” Economics and Say’s Law

The almost total inability of economists of the mainstream to make sense of the macroeconomy is because they look only at final demand. To them, the rest of the economy is a black box about which they know next to nothing. And emphasising how little they even understand about what they need to know, the most important statistic for the past seventy years has been the national accounts which measures how much final output is produced. It is why there are still economists who think that our economy is 60% consumption, when that part of the economy is around 5% at best. The rest is that vast hinterland of productive efforts that move resources from the ground and the forest through various stages of processing to the distributors and then, but only then, to retail outlets for final sale. The man who has done the work of Hercules in overturning this shallow and narrow approach is Mark Skousen. Do you wish to know more about this approach and how better to understand how an economy works, this is the go-to book, now released in its third edition. The title of this blog post is also the title on his own press release, so for a change it’s not just me.

Mark Skousen, The Structure of Production. New York University Press

Third revised edition, 2015, 402 pages. $26 paperback. Available on Kindle.

From the cover:

In 2014, the U. S. government adopted a new quarterly statistic called gross output (GO), the most significance advance in national income accounting since gross domestic product (GDP) was developed in the 1940s. The announcement comes as a triumph for Mark Skousen, who advocated GO twenty-five years ago as an essential macroeconomic tool and a better way to measure the economy and the business cycle. Now it has become an official statistic issued quarterly by the Bureau of Economic Analysis at the U. S. Department of Commerce.

To buy the book: NYU, Amazon
Quarterly data for Gross Output can be found at the BEA site here.
For Skousen’s latest quarterly report on GO, see this.

Since the announcement, Gross Output has been the subject of editorials in the Wall Street Journal, Barron’s, and other financial publications, and is now being adopted in leading economics textbooks, such as Roger Leroy Miller’s new 18th edition of Economics Today. Economists are now producing GO data for other countries, including the UK and Argentina.

In this third printing of Structure of Production, Skousen shows why GO is a more accurate and comprehensive measure of the economy because it includes business-to-business (B2B) transactions that move the supply chain along to final use. (GDP measures the value of finished goods and services only, and omits most B2B activity.) GO is an attempt to measure spending at all stages of production.

As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in “A New Architecture for the U. S. National Accounts,” “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen concludes, “Gross Output fills in a big piece of the macroeconomic puzzle. It establishes the proper balance between production and consumption, between the ‘make’ and the ‘use’ economy, between aggregate supply and aggregate demand. And it is more consistent with growth and business cycle theory. Because GO attempts to measure all stages of production (known as Hayek’s triangle), it is a monumental triumph in supply-side ‘Austrian’ economics and Say’s law.”

Using GO, Skousen demonstrates that consumer spending does not account for two-thirds of the economy, as is often reported in the financial media, but is really only 30-40% of total economic activity. Business spending (B2B) is over 50% of the economy, and thus is far larger and more important than consumer spending, more consistent with economic growth theory, and a better measure of the business cycle. (See chart below.)

About the Author

MARK SKOUSEN is a Presidential Fellow at Chapman University in California. He has taught economics and finance at Columbia Business School, and is a former economic analyst for the Central Intelligence Agency. He received his Ph. D. in economics at George Washington University (1977). He is the editor-in-chief of the investment newsletter Forecasts & Strategies, and author of several books, including The Making of Modern Economics.

Reviews

“Now, it’s official. With Gross Output (GO), the U.S. government will provide official data on the supply side of the economy and its structure. How did this counter revolution come about? There have been many counter revolutionaries, but one stands out: Mark Skousen of Chapman University. Skousen’s book The Structure of Production, which was first published in 1990, backed his advocacy with heavy artillery. Indeed, it is Skousen who is, in part, responsible for the government’s move to provide a clearer, more comprehensive picture of the economy, with GO.” — Steve H. Hanke, Johns Hopkins University (2014)

“This is a great leap forward in national accounting. Gross Output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy.” –Steve Forbes, Forbes magazine (2014)

“Skousen’s Structure of Production should be a required text at our leading universities.” (referring to second edition) –John O. Whitney, Emeritus Professor in Management Practice, Columbia University

“Monumental. I’ve read it twice!” (referring to first edition, published in 1990) — Peter F. Drucker, Clermont Graduate University

“I am enormously impressed with the car and integrity which Skousen has accomplished his work.” — Israel Kirzner, New York University

Why don’t economists get it?

China, India, Japan, US and Europe have weakening or underperformaning GDP growth. And by no coincidence at all, these are all economies that have tried a Keynesian expenditure program to end recession. The thing that is most astonishing is that there is virtually no economist of the mainstream who could even explain it. And as the article points out, this is even happening as the price of oil has plummeted.

Here’s a clue about what’s wrong with modern theory. Our economies are not saving too much. Our economies are being plundered of their savings by our governments who are wasting our resources on projects that will never bring a positive return. Go back to the stimulus packages and other government-directed expenditures of 5-6 years ago – some of which were even ludicrously described as infrastructure investment. What you are seeing today is the absence of the private sector projects that were forestalled back then. We are ruining our economies, and the economics profession is at the heart of the problem. Aggregate demand does not make an economy grow. Economies only grow if there is value adding investment. Seems obvious. Why don’t economists get it?

Waffle Street the movie is coming

Waffle Street the book is a true life adventure in which the author learns about the meaning of Say’s Law by going from an investment house to working the night shift at a Waffle House. Waffle Street the movie is now about to be released which, as it says, is based on a true story along the lines, no doubt, of what is found in the book. I have been following both book and movie from the start, and while I cannot take even an ounce of credit for any of it, I have to admit there is a very great pleasure in being able to tell you that my Say’s Law and the Keynesian Revolution is sitting on Jimmy’s desk in the final scene, right beneath a copy of Jean-Baptiste Say’s Treatise on Political Economy. To understand why you will probably have to read the book, which along with a great story will explain to you the meaning and significance of Say’s Law. But for a movie in the true Hollywood style, you should see the film as well when it comes out. How extraordinary it must also be for Jimmy Adams to find that being fired from his job in finance led to his ending up writing a book that was turned into a movie with Jimmy himself played by James Lafferty!

UPDATE: I’ve just had a look at the interview with Jimmy linked at the start. A good question from the interviewer, which led to this reply drenched in the logic of Say’s Law:

Too often, white-collar financial service workers forget that any given good or service can only be obtained by 1) producing it yourself or 2) by creating something of value which can be exchanged for it. Instead, we’re prone to think the major impediments to our individual and collective prosperity can be readily removed by tweaking interest rates, the tax code, or deficit spending.

My restaurant co-workers, in contrast, were under no such delusions. With the exception of the manager, I was the only person working third shift who hadn’t spent considerable time in a state or federal correctional facility. Most of them were extremely grateful for the opportunity to perform honest work at a market wage, and took a very proactive, customer-service-oriented approach to their financial lives after parole. Generally speaking, they were great examples to me. In the book, I use a number of my interactions with them as commonsense illustrations of economic principles. I really intended the narrative to be wholly humorous self-deprecation, but I had so many financial epiphanies on the job that I couldn’t help but share them with my readers.