The Australian School of Economics has begun to take shape. I have written an article in this week’s Australian Spectator which is a review of Peter Smith’s Bad Economics. There you may find the most important principles that underpin this school of thought. As I mention in the article, you would be lucky to find these mentioned, never mind given prominence, in any economics text, introductory of otherwise. Yet these really ought to be the fundamental principles of good economics for every economist. The serious shame is that they are not.
a) Trying to make an economy grow from the demand side can never succeed (this being a re-statement of Say’s Law).
b) Saving not only does an economy no harm, it is essential if there is going to be faster growth and rising incomes – more saving is always better than less.
c) Entrepreneurial capitalism is the only way to create prosperity.
d) Business decisions, indeed all economic decisions, are based on expectations about the future with only some of those expectations based on past experience while the rest are based on pure conjecture and the spirit of adventure.
e) The allocation of goods and services through the price mechanism (ie supply and demand) is the only way to ensure that resources are used to their best advantage, innovation will occur and rapid growth will be the norm.
f) Government spending does have an important role but what governments should not do is produce what could be produced more efficiently by the private sector and should especially not drive their economies deep into debt as a way to generate recovery from recession.
g) Recessions are inevitable but if properly managed, that is, if no attempts are made to “stimulate” demand but other actions are taken to assist businesses to recover, a return to faster growth and low rates of unemployment should take not much more than a year.
The Australian school is similar to the Austrian but they are not the same. Our ancestry moves through an English tradition in Adam Smith and John Stuart Mill but does also include Mises and Hayek. But the Australian School moves in a decidedly anti-Keynesian way and incorporates Say’s Law not just as an additional concept amongst many but as one of the fundamentals. If you do not understand Say’s Law of Markets, and apply it when macroeconomics is discussed, you will never make sense of how an economy works and adjusts.
This is the same attitude as found in Mill. Here is Mill criticising nineteenth century attempts to use demand deficiency as an explanation for recession while ridiculing the belief that increases in unproductive spending are a sensible way to generate growth and employment:
The point is fundamental; any difference of opinion on it involves radically different conceptions of Political Economy, especially in its practical aspect. On the one view, we have only to consider how a sufficient production may be combined with the best possible distribution; but, on the other, there is a third thing to be considered — how a market can be created for produce. . . .
A theory so essentially self-contradictory cannot intrude itself without carrying confusion into the very heart of the subject, and making it impossible even to conceive with any distinctness many of the more complicated economical workings of society.
Confusion has indeed reigned across the length and breadth of economics since its takeover by Keynesian thought. Who can explain why the Keynesian stimulus did not work? That is what the Australian School does.
I will now be taking the Australian School to London where I will be speaking to the Institute of Economic Affairs on the topic of “The Australian School of Political Economy – Old Ideas Revived”. From there it will be to the Mont Pelerin Society meeting in Prague where the Australian core text, Free Market Economics, will be on sale and available to any and all.