It is possible that economics could once again become useful

The entrepreneur is the missing ingredient in economics about which I have written. What cannot be linked is the paper I did on “The Absence of the Entrepreneur in the Economic Theories of the English-Speaking World”. What there is a link for is Origin and Evolution of the Term “Entrepreneur” in English, unpublished alas but available online.

But when it comes to the study of entrepreneurship, the names that matter are William Baumol and Israel Kirzner. Baumol has unfortunately gone to his reward, but Kirzner, bless him, at 88 has now been formally recognised by the American History of Economics Association. The citation below virtually leaves out his work on the entrepreneur but still does focus on his Austrian perspective. But even in awarding him the Distinguished Fellow Award, they also added, “our recommendation is, of course, based on his scholarly contributions and not on his political views”. Heaven forfend that that anyone should think that his political beliefs should matter, but you may be sure that they did. Nevertheless, here we are. There is also finally recognition that mainstream economics has no penetration in allowing us to understand how an economy works. A straw in the wind, but a good sign all the same.

The 2018 HES Distinguished Fellow Award was presented to Israel Kirzner at the recent HES conference at Loyola University, Chicago. Several strong candidates were proposed by the membership this year. The nominating committee, formed by Robert Leonard, Jeff Biddle and Mauro Boianovsky (chair), unanimously agreed that the most deserving of these candidates was Israel Kirzner and recommended to the HES Executive Committee that he should be the recipient of the HES Distinguished Fellow Award in 2018. The nominating letter was submitted by Peter Boettke, together with supporting letters by Bruce Caldwell, Karen Vaughn and Mario Rizzo. Our recommendation resulted from our consideration of several aspects of Kirzner’s work and career.

Born in 1930, Kirzner is well known as a leading scholar in the Austrian economic tradition. His work forcefully illustrates how the history of economics can be used as an important heuristic tool to cast light on current economic research. In that sense, Kirzner shares with members (e.g. Stigler, Robbins, Dobb, Viner, Galbraith, Schumpeter, Hayek, Patinkin and Sraffa) of what Craufurd Goodwin used to call the “Golden Age” of the history of economic thought (HET) a commitment to understanding economic problems through the use of HET as an analytical device instead of a separate sub-discipline. As put by Bruce Caldwell, “precisely because he works within the Austrian tradition, Kirzner often draws on history to make comparisons between the view he endorses and those he criticizes, and often the criticisms are methodological”. This shows especially in his main books The Economic Point of View (1960), Essay on Capital (1966) and Competition and Entrepreneurship (1973).

The highlights of Kirzner’s specific contributions to the history of economics are his 1994 edition of Classics in Austrian Economics (which includes a number of essential translations) and several essays on Von Mises and particularly Carl Menger. As pointed out by Karen Vaughn, Kirzner has been instrumental not only in explaining Menger’s ideas as the founder of Austrian economics, but also in encouraging a revival of interest in his writings. Moreover, as observed by Mario Rizzo, Kirzner is not just a historian of Austrian economics – for instance, in his works on the theories of profit and capital, Kirzner discusses carefully contributions by J.B. Clark, F.B. Hawley, F. Knight, I. Fisher, J. Schumpeter and others.

Kirzner has produced a body of work deeply imbued with a historical-philosophical sensibility. Although our recommendation is, of course, based on his scholarly contributions and not on his political views, it should be noted that Kirzner has shown that it is possible to combine political beliefs and scholarly scruple, and that this has been a source of inspiration for his followers, in whom we see that same attitude perpetuated.

Only one book written in the twenty-first century will explain the classical economics of the nineteenth

At Quora, this question: What are 25 economics books that you would recommend (preferably classical and neoclassical)? My answer:

If you are seriously interested in understanding economics you need to understand classical economic theory, the economics of the period from the publication of Adam Smith’s Wealth of Nations in 1776 until the marginal revolution began about a hundred years later in the 1870s. And if you are interested in understanding classical economic theory, you should read the third edition of my own Free Market Economics: an Introduction for the General Reader.

Modern economic theory has fallen into very hard times since its classical period, and is now incapable of explaining almost anything that matters. My FME third edition is entirely supply-side, explaining how classical economists understood the operation of an economy which is how an economy actually does work.

From the marginal revolution with its focus on marginal utility, through to the Keynesian Revolution of the 1930s with its introduction of aggregate demand, economic theory has looked at economies from the demand side. And while it has a superficial appeal, no economy is driven by demand. All economies are driven from its production side. People buy more where more is produced. If you want to understand what allows people to demand, you first have to understand what makes them capable of producing.

I will just add that if you try to read classical theory without some preparation for the changes in the terminology between economics today and economics then, you will miss the point. This is a paper you can find at SSRN which will help you get past what is a quite formidable barrier.

Classical Economics Explained: Understanding Economic Theory Before Keynes

Steven Kates


Since the publication of The General Theory, pre-Keynesian economics has been labelled “classical,” but what that classical economics actually consisted of is now virtually an unknown. There is, instead, a straw-man caricature most economists absorb through a form of academic osmosis but which is never specifically taught, not even as part of a course in the history of economics. The paper outlines the crucial features that differentiate modern macroeconomics from classical theory, with the emphasis on what an economist would have understood as The General Theory was being published. Based on the differences outlined, a model of classical economic theory is presented which explains how pre-Keynesian economists understood the operation of the economy, the causes of recession and why a public-spending stimulus was universally rejected by mainstream economists before 1936. The classical model presented is an amalgam of the final edition of John Stuart Mill’s 1848 Principles of Political Economy published in his lifetime and Henry Clay’s influential 1916 Economics: an Introduction for the General Reader, a text which was itself built from the economics of Mill.

Here’s the link to the paper.

Classical Economics Explained: Understanding Economic Theory Before Keynes

“In case you are not familiar with Kates . . .”

The video is Economics for Independent Thinkers which discusses the way economics is discussed outside the mainstream. There are many many reason for watching the above video from end to end, but this especially works for me, starting at the 14:30 mark.

“The lesser known terms are mostly thanks to the Australian economist Steven Kates. In case you are not familiar with Kates, Kates wrote possibly the most thoroughly researched of the studies showing that there was a fairly strong consensus before the Keynesian Revolution about how the business cycle worked.”

And not only that, I explain in modern terms what that theory was. And as strange as you may find this, there is no other modern source where you can find classical theory explained.

The presentation was to The Heritage Foundation in Washington. This is the synopsis and I could not agree more with what he says:

Too many mainstream economists view the world as a collection of equilibrium models, without concern for when these models fail to explain real-world risks. In Economics for Independent Thinkers, author Daniel Nevins scours under appreciated corners of the economics and investment worlds for more realistic thinking. What results is a no-nonsense approach to economics that appreciates the importance of credit and banks in business cycles, and provides a different perspective on Keynesian stimulus and the consequences of government debt accumulation.

The speaker is Daniel Nevins.

Daniel Nevins, CFA, has invested professionally for thirty years, including more than a decade at both J.P. Morgan and SEI Investments. He is perhaps best known for his behavioral economics research, which was included in the curriculum for the Chartered Financial Analyst® program and earned him recognition as one of the founders of “goals-based investing.” He has an economics degree from the Wharton School of Business and a degree from the University of Pennsylvania’s engineering school.

And you know what? Till now I did not think it was possible but you never know the way things are going. We may yet rid ourselves of this Keynesian economic mess, but to do that we will need to understand economic theory before Keynes. Speaking of which, have I mentioned my introductory text before: Free Market Economics, now in its third edition?

Say’s Law and Austrian economics

Peter Boettke at Coordination Problem links to the Liberty Fund discussion on the economics of John Stuart Mill under the heading, Mill > Keynes, so says Steven Kates. Very pleasing, but more pleasing are the two comments, very critical of what I wrote, that have been sent in by Barkley Rosser.

Kates is obsessed with Say’s Law, how it is true basically by definition. Mill’s view of macroeconomics is very sophisticated indeed, and Keynes notoriously undervalued the knowledge of his predecessors. But one very big difference is indeed over Say’s Law, which Mill accepted and Keynes did not. Given Kates’s strong views on this, of course he says Mill > Keynes, but, in fact, Say’s Law is not true in general, and Say himself knew it, as Kates has had pointed out to him on numerous occasions, but…
Posted by: Barkley Rosser | July 16, 2015 at 04:45 PM

BTW, now that it seems I can post here again after a long period of not being able to, let me add that I do not see anything particularly Austrian about Say’s Law. I just scanned a few books by Hayek and von Mises I have here in my office, and there was not a single mention of Say’s Law in any of them. I did find a mention of Say in Mises’s Socialism, but about whether or not Ricardo was right about gross versus net product. No Say’s Law.

I would suggest you all should not get yourselves too worked up about hanging your hats on Kates’s obsession, which he shares with the even more fanatical James Ahiakpor, whom those who follow HET know of. What is in it for you guys other than another way to bash Keynes?
Posted by: Barkley Rosser | July 16, 2015 at 04:53 PM

It’s as if criticising Keynes is some kind of thing in itself, and not one of the paramount economic issues of our time. Or that Say’s Law is not absolutely embedded in Austrian theory even if seldom mentioned. This is what I have replied:

It pleases me to see that Barkley Rosser has opened a second front on the issue of Say’s Law. And let me begin by noting where we agree, which is the absence of much discussion on Say’s Law among Austrian economists. But while there is not a lot, there is some, the most important one unfortunately going all the way back to 1950, in an article by Ludwig von Mises in The Freeman, “Lord Keynes and Say’s Law”. You can read the whole lot at this link but I will quote you the most relevant passage:

“The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.

“Neither did Keynes try to refute by discursive reasoning the teachings of modern economics. He chose to ignore them, that was all. He never found any word of serious criticism against the theorem that increasing the quantity of money cannot effect anything else than, on the one hand, to favor some groups at the expense of other groups, and, on the other hand, to foster capital malinvestment and capital decumulation. He was at a complete loss when it came to advancing any sound argument to demolish the monetary theory of the trade cycle. All he did was to revive the self-contradictory dogmas of the various sects of inflationism. He did not add anything to the empty presumptions of his predecessors, from the old Birmingham School of Little Shilling Men down to Silvio Gesell. He merely translated their sophisms—a hundred times refuted—into the questionable language of mathematical economics. He passed over in silence all the objections which such men as Jevons, Walras and Wicksell—to name only a few—opposed to the effusions of the inflationists. . . .

“In fact, inflationism is the oldest of all fallacies. It was very popular long before the days of Smith, Say and Ricardo, against whose teachings the Keynesians cannot advance any other objection than that they are old.”

Say’s Law is at the heart of Austrian theory without most Austrians being fully aware of it. I have spent a good deal of effort trying to get Austrians more interested in Say’s Law as a means to explain the fallacies of Keynesian economics. I will merely here provide a link to my “Ludwig von Mises Lecture” of 2010, where I tried to show just how important Say’s Law is if classical economic theory – of which Austrian economics is the only modern manifestation – is ever again to become central to our understanding of the way in which an economy works. Just let me apologise in advance for the way in which I pronounce Mises’s name; at the time I had read much of what Mises had written, but by the nature of things, had never actually heard his name said by anyone else. It’s one of the problems being a lonely scholar way off on the other side of the globe. But as you will see, there is no denying my extremely high regard for both Mises and Hayek which I discuss early on.

My lead article on John Stuart Mill at the Liberty Fund

It has been a great honour for me to have been asked to write the lead article for the Liberty Fund online discussion forum for July 2015, which is on the economics of John Stuart Mill. The article has now been published and may be found here. It will be followed by commentaries from three of the world’s great scholars on Mill, after which there will then be open discussion thread from readers. The following is the Liberty Fund’s introduction to my article and the three commentaries:

In this month’s Liberty Matters online discussion we reassess the economic ideas of John Stuart Mill as found in his classic work Principles of Political Economy (1st ed. 1848, 7th ed. 1871) and other writings. In the Lead Essay by Steven Kates of the Royal Melbourne Institute of Technology it is argued that in the light of the evident failures of Keynesian economics to solve the problems of the boom and bust cycle, and that of ongoing high unemployment and economic stagnation, that we should go back to Mill’s “Four Propositions on Capital” for enlightenment. In Kates’s view there is “more insight into the operation of an economy than any of the Samuelson clones that have been published to explain what Keynes meant in trying to raise aggregate demand.” The commentators are Nick Capaldi, the Legendre-Soulé Distinguished Chair in Business Ethics at Loyola University New Orleans; Richard M. Ebeling, the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina; and Sandra J. Peart, who is dean of the Jepson School of Leadership Studies at the University of Richmond.

If nothing else, this article and the three commentaries should alert you to the virtual certainty that modern economic theory is not even near being the best economics there has ever been.

A review of my Free Market Economics

A review of the first edition of Free Market Economics, which is even more so than this now that it is in its second edition. This is how it starts:

Not since 1924 has there been a comprehensive yet readable book on economics aimed at the ordinary but intelligent citizen that defends and incorporates the field’s foundational principle, Say’s Law (named after Jean-Baptiste Say, 1767–1832) and its main corollaries: the primacy of production, the entrepreneur as prime mover, and prices as the commercial language that coordinates economies and their subsectors. Now we have such a book: Free Market Economics: An Introduction for the General Reader by Australian business economist Steven Kates. His prior books examined the prevalence of Say’s Law among top economists during the pro-capitalist 19th century and its abandonment by most economists in the anti-capitalist 20th century.

The handful of texts on economic principles since the 1920s that recognize the superiority of a free economy have been too technical, narrowly devoted to refuting economic fallacies, or tainted by dubious philosophy. This book avoids such flaws. Kates accomplishes what was last achieved by Oxford professor Henry Clay (1883–1945) in Economics: An Introduction for the General Reader (1924). Better still, Kates’s book offers a modern, more sophisticated, more pro-capitalist treatment than did Clay’s book, and it provides the ideas people need to grasp and refute the disastrous dogmas and policies of Keynesianism.

Economie du Libre Marché

Astonishing to come across this, my work on Say noted in French in France. To find others who think about Say in the same way as I do, is astonishing. Say along with JS Mill, are odd as it may seem, part of the road that must be travelled to put economic theory onto a solid foundation.

Steven KATES est professeur au Département « Economie, Finance et Marketing » de l’Université RMIT de Melbourne (Australie). Avant d’évoquer deux de ses récents ouvrages, citons quelques extraits de son analyse du livre d’Evert SCHOORL ci-dessus :

« C’est le genre de livre qui devrait faire de l’histoire de la pensée économique une part essentielle de l’éducation de tout économiste…
..le livre… présente donc la vie de l’un des économistes les plus influents qui ait jamais vécu et dont l’oeuvre a encore beaucoup à apporter à la fois aux économistes et aux historiens de la pensée…
… l’épisode de son affrontement à un Napoléon à l’apogée de sa puissance fait de la propre intégrité personnelle de SAY un réel sujet d’étonnement…Cela a quelque chose de surhumain…
…Le personnage mis à l’honneur est la même personne décrite par John Stuart Mill (penseur philosophe britannique de grande influence qui rencontra J-B SAY) :
« un homme réellement honnête, courageux, éclairé »
Le même John Stuart Mill a également écrit de J-B SAY :
« c’est un bel exemple du meilleur type de républicain français »

S. KATES a publié en 1998 (réédition en 2009 ) :
« La Loi de SAY et la Révolution Keynésienne »
[ Dans ce livre fascinant et bien documenté, KATES contredit l’interprétation bien connue de Keynes de la « Loi des Marchés de Say… ».
Ce livre est une critique des positions de Keynes hostiles à la « Loi des Marchés de SAY » ; il oeuvre donc en faveur d’une réhabilitation de cette dernière.]

S. KATES a également publié en 2011 :
« Economie du Libre Marché…. »
« Free Market Economics – An Introduction for the General Reader »
[Une contre-attaque théorique rafraîchissante face à la conception Keynésienne bien établie….
Le Professeur KATES a brillamment remis à l’honneur la Loi des Marchés

Getting Say’s Law exactly right

It is so rare for anyone to get Say’s Law exactly right that you must forgive me if I quote at length, specially since he quotes me. This is from an article by Steve H. Hanke, Professor of Applied Economics at the Johns Hopkins University in Baltimore, and titled, “GO: J.M. Keynes versus J.-B. Say”. It is found in the publication, Global Asia:

The French economist J.-B. Say (1767-1832) was a highly regarded member of the Classical School. To this day, he is best known for Say’s Law of markets. In the popular lexicon – courtesy of John Maynard Keynes – this law simply states that “supply creates its own demand.” But, according to Steven Kates, one of the world’s leading experts on Say, Keynes’ rendition of Say’s Law distorts its true meaning and leaves its main message on the cutting room floor.

Say’s message was clear: a demand failure could not cause an economic slump. This message was accepted by virtually every major economist, prior to the publication of Keynes’ General Theory in 1936. So, before the General Theory, even though most economists thought business cycles were in the cards, demand failure was not listed as one of the causes of an economic downturn.

All this was overturned by Keynes. Kates argues convincingly that Keynes had to set Say up as a sort of straw man so that he could remove Say’s ideas from the economists’ discourse and the public’s thinking. Keynes had to do this because his entire theory was based on the analysis of demand failure, and his prescription for putting life back into aggregate demand – namely, a fiscal stimulus (read: lower taxes and/or higher government spending).

The rest of the article deals with the new statistic that has just been released by the Bureau of Economic Analysis in the United States which has largely been undertaken because at the instigation of the great Austrian economist, Mark Skousen. The notion that consumption drives an economy is so nonsensical since consumer demand is the end of all forms of production, from mining coal to generating electricity and so to focus on consumer demand is focusing on nothing at all other than the end of the production process. But if we are looking at value added, as we ought to be, only about 5% of economic activity is directed at selling directly to consumers. The new supply side statistic that has been developed, which at long last gets this balance right, will make a great difference in how the economy is perceived, which should also make a difference in how it is managed, or at least it is to be hoped. Let me finish with one further quote from Professor Hanke:

Even though the always clever Keynes temporarily buried J.-B. Say, the great Say is back. With that, the relative importance of consumption and government expenditures withers away. And, yes, the alleged importance of fiscal policy withers away, too.

Contrary to what the standard textbooks have taught us and what that pundits repeat ad nauseam, consumption is not the big elephant in the room. The elephant is business expenditures.

If you really want to stimulate the economy, it is business at every stage of production you have to go through and not the consumer. How different that kind of economic policy would need to be, but at least it will have the merit of actually producing positive results.

Me at Powerline

For me it was a moment to treasure to find myself quoted by Scott Johnson at Powerline. I, of course, told everyone I know and only later realised that no one else but me amongst the people I know have even heard of Powerline never mind read it (this is Australia, after all). But for me, the four contributors are the four bloggers closest to my own way of thinking about things (although to them you’d have to add Mark Steyn, Glenn Reynolds (the Instapundit) and although she’s not a blogger, Ann Coulter). So a special moment for me was one that could not really be shared. Such is life. But a special moment it most certainly was.

The title was, “HITLER GETS TRAPPED IN SEA ICE”. This was the introductory text:

At Catallaxy Files Professor Steven Kates et al. have been following the Ship of Climate Fools with a gimlet eye as a local (Australian) story — in “The rest of Chris Turney’s life mapped out,” for example. Most recently, in “The spirit of Turney,” Professor Kates draws attention to Andrew Bolt’s Herald Sun Post “Something’s cracking, and it’s not the ice around the warmists’ ship” and to the video below

And this was the text of the story:

At Catallaxy Files Professor Steven Kates et al. have been following the Ship of Climate Fools with a gimlet eye as a local (Australian) story — in “The rest of Chris Turney’s life mapped out,” for example. Most recently, in “The spirit of Turney,” Professor Kates draws attention to Andrew Bolt’s Herald Sun Post “Something’s cracking, and it’s not the ice around the warmists’ ship” and to the video below contributing to the Hitler Discovers genre (rated R for language).

And then there was the video, the best version of these satires I have seen. I have watched a lot of these over the years but this was the best ever. Not only did it get the politics right but the words are perfectly coordinated to the visuals. No other has made me laugh out loud and this one continually does. I only wish I knew who did do it since it is attributed to Tony Ice. My suspicion is that whoever did it is an Australian since he gets the nuances right, although I must say he spells not just “hocky” wrong but also “Abbot” which may mean he’s not an Australian. But citizenship he should be immediately granted if not here already. So once more into the breach dear friends:

DHT – a sensible review of the book

A review of Defending the History of Economic Thought by someone who is not involved in the issues and therefore sees the common sense point of the book and its arguments.

The Economic Studies Shelf
Defending The History Of Economic Thought Steven Kates
Edward Elgar Publishing
9 Dewey Court, Northampton, MA 01060-3815
9781848448209, $99.95, .com

The principle focus of “Defending the History of Economic Thought” is the crucial importance of the history of economic thought in the study of economics itself; without its history at the core of the curriculum, academician and economist Steven Kates (School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia) persuasively contends that economics is “a lesser subject, less penetrating, less interesting and of much less social value” . A 160 page treatise, “Defending The History Of Economic Thought” is organized and presented in five major chapters (Preliminary thoughts; Why study the history of economic thought; Debating the role of the history of economic thought; Teaching the history of economic thought; and Defending the history of economic thought. As informed and informative as it is thoughtful and thought-provoking, “Defending The History Of Economic Thought” is enhanced with an bibliography and a comprehensive index, making it an impressive contribution to professional and academic library Economic Studies collections and supplemental reading lists.