First there was the material from the Heritage Foundation posted on this site last week. The data showed that the greater the Keynesian stimulus the worse performing an economy was.
And now we have in today’s Australian, Michael Stutchbury’s “Crisis puts nails back in Keynesian coffin”. The first paragraph of this story reads as follows:
Last year’s global financial crisis heralded the stunning return of Keynesian fiscal policy as governments pumped up their budgets to stave off a feared global depression. This year’s European sovereign-debt crisis signals its spectacular fall as governments are suddenly forced to cut their budgets even when their economies are weak.
Let me therefore quote myself from an article published in the March 2009 Quadrant. There I wrote:
But just as the causes of this downturn cannot be charted through a Keynesian demand-deficiency model neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
The bitter pill that will need to be swallowed by various governments will be matched by the need for the economics profession to renounce at long last the Keynesian infection that is burrowed deep within macroeconomic theory. And not for the first time do I mention that the problem is the loss of Say’s Law. No economist before Keynes would have been unaware of the impossibility of spending one’s way to recovery and they would have understood it because they understood in their bones what Say’s Law meant.
You can find any of this out in reading my Say’s Law and the Keynesian Revolution (Edward Elgar 1998, paperback edition 2009). And what you will find there are translations into modern forms of discourse the meaning that Say’s Law held for classical economists.
They used to write that there is no such thing as a general glut. In today’s jargon, this would be: demand deficiency is never the cause of recession.
Or they would say that demand is constituted by supply. To translate this into modern discourse: to increase demand in aggregate it is first necessary to increase value adding supply in aggregate. And I cannot stress the words “value adding” enough.
The evidence that Say’s Law is an absolutely necessary part of any economist’s understanding of the world is everywhere to be seen. The lessons of Say’s Law will come back, it seems, rather quicker than many had thought it would. An actual return to Say’s Law itself will unfortunately take much more time because of this Keynesian rot. But eventually back it will come.