Say’s Law makes it to the AFR

says law and the keynesian revolution

Is it possible that economic theory has regressed over the past hundred years. Well if you ask me, it’s a certainty. (For further confirmation, see Alan’s post on Larry Summers below.) An economist in 1914 knew more about how an economy worked than an economist in 2014. Less detail, fewer stats but a greater grasp of how it all fit together. How odd is that!

What’s the difference. Economics is now infused, both in it theory and in its practitioners, with socialists who simply refuse to believe that markets left to themselves will generally speaking produce the optimal economic outcome. The idea is now so outré that economics texts – aside from one or two that I am aware of – are no longer designed to explain how the market works. They instead start from the premise that markets will go wrong and that governments must take action at every turn to set things right.

Anyway, I have an article in the Financial Review today which is titled, “What Say’s Law has to say about the financial crisis” which really is, what pre-Keynesian classical theory has to say about the crisis.

There you have the core of the classical theory of the cycle which may be broken down into the following components.

• Misconceived production decisions are what starts the rot.

• These misconceived decisions lead to a greater output of particular goods and services than there is a market for them at prices that will repay all of the previous costs of production.

• The economy must therefore backtrack to remove those parts of economic activity in which production is greater than demand.

• And thus we have recessions.

Recessions are thus structural. Instead our textbooks teach Y=C+I+G and explain recessions as a result of too much saving and too little demand, the fallacious notions that Say’s Law was specifically designed to expose.

Macroeconomic theory is not just nonsense but dangerous nonsense. Using it to manage an economy will leave wreckage in its wake as it has consistently done everywhere and every time it has been used to solve some economic problem.

Economies are built up by genuinely value adding activities which most government forms of spending most definitely are not. That doesn’t say governments shouldn’t do them. It merely says they should not deceive themselves into believing that public spending is the road to rapid rates of non-inflationary growth. Public spending draws down on our productivity rather than building it up. If the last five years have taught us anything, hopefully at least it has taught us that.

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46 Responses to Say’s Law makes it to the AFR

  1. Angus Black

    There is no reason to be surprised that a modern economist [anything-ist] appears to know less than his historical counterpart:
    (i) university courses attract a far less competent cohort than in the past (a far higher percentage of students now attends university – I can’t see anyway to argue that the aptitude of the entrant population is not certain to decline under these circumstances)
    (ii) university qualifications have been debased:
    (a) a far far smaller percentage fail to complete their course
    (b) courses themselves have been debased as (i) academics simply cannot bear to to leave out the issue of the moment, but capped content leads to existing matter being “squashed” (rarely eliminated). Ultimately fundamentals are barely covered; and (ii) generally dumber students & lower failure rates require less demanding courses – so course content * quality must decrease
    (iii) visible/audible experts are increasingly (it is hard to see how this can continue to increase, but that was what I thought 1, 2, 5 10 years ago) chosen and amplified by the media on political correctness rather than competence grounds.
    Economists are one thing, but just think of the quality of your doctor (more frightening still, your surgeon); the guy who fixes your car; the guys who designed and built the bridge or aeroplane which is, for the moment, keeping you from crashing to a painful and certain death…

  2. Token

    There is no reason to be surprised that a modern economist [anything-ist] appears to know less than his historical counterpart:

    Are you talking about “eminent leadering thinkers” like the the lists of economists who famously went on record condemning the reforms of Thatcher & Reagan?

  3. Pedro

    “Economists are one thing, but just think of the quality of your doctor (more frightening still, your surgeon); the guy who fixes your car; the guys who designed and built the bridge or aeroplane which is, for the moment, keeping you from crashing to a painful and certain death.”

    That’s just nuts, all those people are way better than their equivalents in the early 20th century and before.

  4. philip j. fry

    Pedro, agreed – the trade and physical skills get better .. engineers, pumbers etc

    Where we seem to be going downhill is the narrow niche zones of some sciences and economics, the areas where you are not held to account (being an engineer it irritates the life out of me how “scientists” in the modelling area for instance, get away with such crap – how economists are not jailed for malpractice or bad advice that costs entire countries their money e.g. Nauru).

    Are universities dumbing down the easy courses, which have no accountability, so as to get more people in.

    On another note .. Can anyone tell me, why are so many young people doing psychology these days?

    Is there some big psychology factory in need out there? Who is advising them to do this?

  5. Petros

    Wouldn’t be the first time in history that people know less than previous generations. One example is Eratosthenes who knew the earth was spherical.

  6. Pedro

    I don’t know if there is a big increase in psychology students, but health and related personal services is naturally going to be a big part of future employment increases

  7. Lysander

    Big ventures always want the govt to fund roads to their projects, build their ports, extend the electricity grids and so forth.

    Such corporations are the largest proponents of Keynesian thinking! Its not welfare but Corpfare.

  8. They have no principles, only agenda. Anyone prepared to lie to perpetuate a fallacy is not worthy of consideration. They and their false theories should be pursued mercilessly.

  9. Dr Faustus

    Public spending draws down on our productivity rather than building it up. If the last five years have taught us anything, hopefully at least it has taught us that.

    I don’t see any evidence of that particular lesson, at least not in a strong form. Our current conservative governments appear just as reliant on public spending as Labor – although they talk a terrific game of efficiency, austerity and prudence.

    The sad reality is that, to survive in government, Parties have to give people goods and services paid for by somebody else. Enough voters to form a significant market don’t want small, minimalist government – they want free stuff.

  10. Driftforge

    The sad reality is that, to survive in government, Parties have to give people goods and services paid for by somebody else. Enough voters to form a significant market don’t want small, minimalist government – they want free stuff.

    Democracy – one step from anarchy, but no where near as obvious.

    That’s just nuts, all those people are way better than their equivalents in the early 20th century and before.

    Really? I question whether this is true. Yes, technological change has been dramatic. Yes, the fact that if you screw up people suffer or die keeps any deviance from reality to a minimum (unlike climate change and economics). But are the individuals involved ‘way better’ ?

    I’ve read the works of engineers and scientists a hundred years back. I wouldn’t be rushing to judgement on this, but I suspect that the proportion of truly capable people involved in the fields hasn’t varied much over that time. It’s just that less capable individuals can now get by given the advances in technology that have occurred, and the truly capable ones don’t have the breadth of expertise that they used to.

  11. Tator

    Pedro,
    that is one of the reasons I stay with my family doctor as he has a PhD in Microbiology as well as his MBBS. He says it was quite amusing at first to play with the lecturers heads when he initially insisted on them using his honorific. Can just imagine it in a crowded lecture theatre with the medical lecturer calling out the names for the first time:
    Mr Davis
    Mr Devine
    Miss Dinning
    Mr Donohoe
    and a voice with a great Irish lilt calls out “That should be Dr Donohoe”
    to which the lecturer replies “Not yet it isn’t”
    and the Irish voice says “Bugga, I knew doing that PhD was a waste of time”
    BTW, he is a lovely man with a great sense of humour, after all, he puts up with me, Boy child and the wife giving him a hard time along with nice goodies at Christmas.

  12. Steve Kates:
    >Economies are built up by genuinely value adding activities which most government forms of spending most definitely are not. That doesn’t say governments shouldn’t do them. It merely says they should not deceive themselves into believing that public spending is the road to rapid rates of non-inflationary growth.

    I believe that’s the full Katesian derp, right there in a nutshell.

  13. Tator

    Fry,
    it is not only the universities who are dumbing down degrees, the secondary school education from years 10 to 12 have been dumbed down to keep the people who in the past would have left for labouring jobs in years 9 and 10 once they had turned 15 at school to complete year 12.
    Compare that with when I went through school in the early to mid 80′s when only those with further education in mind did year 12 (or Matriculation back in those days). In my school, only 12 out of around 30 from the previous year 11 classes attempted year 12 the year I did it. And one of those was a repeater from the previous years cohort. Now back then the exam was worth 75% of your total marks for the year. In the year that I sat the Year 12 exams, there was a huge cockup with the Mathematics One paper where they had a failure to communicate with the teachers over the curriculum and thus the exam was full of questions on topics that we did not learn about. It made the front page of the Advertiser as a large percentage apparently walked out on reading the exam paper giving up without attempting it. I gave the exam a go and walked out thoroughly defeated thinking I had failed dramatically. When I saw the Advertiser the next day, I felt better and started praying that I got enough marks to be scaled up to at least a pass. Feeling a lot better, I sat the remaining exams and rocked and rolled them, scoring high enough marks to get into my second choice at uni, even with a bare minimum pass for Maths 1( I would love to see what my raw score was that day, reckon it could be mid 30′s or 40′s but got scaled up to a 60/100) But nowadays, there are bonus marks because of what school you go to if it is on the list of disadvantaged schools (would have copped a 40 mark bonus and gotten into my first choice by a long way as my old school qualified) or if you did subjects that are classified in the hard sciences and mathmatics, you get bonus points too to even up for the veggie subjects available for the masses who should be out working.

  14. .

    Daniel Barnes
    #1152268, posted on January 15, 2014 at 3:26 pm

    Steve Kates:
    >Economies are built up by genuinely value adding activities which most government forms of spending most definitely are not. That doesn’t say governments shouldn’t do them. It merely says they should not deceive themselves into believing that public spending is the road to rapid rates of non-inflationary growth.

    I believe that’s the full Katesian derp, right there in a nutshell.

    You’re a hoax Barnes, you have zero substance or ability to present an adult argument and thank Christ you will never have any influence or power.

  15. rickw

    “being an engineer it irritates the life out of me how “scientists” in the modelling area for instance, get away with such crap – how economists are not jailed for malpractice or bad advice that costs entire countries their money e.g. Nauru”

    Ditto

    In the field of modelling, the engineering disciplines of Solid Mechanics, Thermo Mechanics and Fluids Mechanics have really only got their computer modelling working well in the last 20 years. For scientists to suggest that they can get anywhere near modelling the planet is just outrageous.

    As for Nauru, I once heard someone make the comment that giving the royalties to the population would have probably resulted in 50% of the money getting blown, as compared to giving the money to the Government and Finance Experts which resulted in 100% of the money getting blown.

  16. John Montgomery

    I reached the same conclusion about macroeconomics in my own wee book, written in 2009 and published in 2011: Upwave: City Dynamics and the Coming Capitalist Revival. I agree with you that recessions are usually caused by ‘over-production’ of particular goods and services along the cycle. The Marxists refer to this as ‘under-consumption’ but go on from there to conflate cause and effect. However, this last recession in the USA, UK and parts of Europe was caused initially by the sub-prime mortgage panic and later government debt. What should have been a mild downturn became a large one.

    As I read it, Say’s Law means economies can grow the cake, and this periodically requires technological breakthroughs, new applications and processes and innovation. It is at work right now in the UK, even in the North. I think it is important too to recognise that economic development and wealth creation occur in real time and space, and especially in dynamic city regions where goods and services are produced, traded, exported and where innovation and import replacement are at work. This helps us understand why Western Sydney has a growing economy and Adelaide does not. The proper level of analysis should therefore be the city region with a focus on the supply side. As for macro, the only real need is to keep control of the money supply to prevent inflation.

  17. JC

    Can we stop saying macroeconomics is bunk. Forget the crap espoused about fiscal policy because of course that is pure bunk. However monetary policy isn’t bunk an monetary policy is macro. We don’t live in free banking world and while we do central banks will play a critical role.

    No one can possibly ignore the importance of central banking in today’s world. And yes, if they get it wrong they cause recessions by recessing demand.

    Says Law is important. It carries vitally important relevance as the supply side matters equally to the demand side and at present the western world is being choked by government interference.

    If there are people who honestly believe macro is bunk and it should be ignored, they need to explain what would happen to the Australian economy of the RBA woke up tomorrow and set the overnight rate at 20%. Would there be a demand or supply side shock? How would Says law fit into such a fiasco?

  18. JC

    oops … while we don’t…

  19. .

    JC

    The economics discussing fiscal policy is not bunk. Fiscal policy, is bunk.

  20. JC

    Of course it’s bunk, Dot. Sumner had a piece this today in fact basically calling it bunk and that the hidden agenda by those pushing “fiscalation” (as I call it) is basically peddling for more government spending (welfare to their preferred constituencies). He’s right, that’s the real story.

    In a just world anyone caught peddling fiscalation ought to be treated in the same way as someone saying the moon landing was a Hollywood hoax… that is the same way we treat Birdie and Homer Paxton (albeit Paxton has never discussed the moon landing. He’s too busy arguing Skanky Ho was an Asian warlord’s mistress… not wife).

  21. .

    Idiots…she was his concubine and commanded his third legion!

  22. JC

    Paxton of course is the biggest fiscalator this side of the equator. Proponents are siding with that complete meathead. Great company they want to keep.

  23. Toiling Mass

    Can anyone tell me, why are so many young people doing psychology these days?

    Psychology is an indispensable tool lefties, activists etc.

    Sophistry can be used to explain away all that is marvellous and dire about people, clump them together into groups with characteristics no individual member possesses, without individual consciousness, ideas, or value.

    How else could a 17 year old look at their parents who scrimped and saved to provide a comfortable home, an education, vacations, and money to help them at uni – how else could this 17 year old look at them and declare that their father has too much money and should have more taken off him and that he only became a father (automatonlike) because social norms required it and marriage provided a means of sublimating the ‘rape’ impulse, while mum is a small minded homebody who only really exists as an extension of patriarchy?

  24. JC

    It would actually be hysterical to have that imbecile do a summer appearance on this thread. Can you just imagine the Paxmeister drooling away.

  25. .

    Well JC I say good economics leads you to conclude that we need to cut spending in tough times and generally spend only what is necessary to conduct utilitarian policy and have revenue raised from the most efficient tax system possible which allows for opportunity and equity.

    Which we are a long way from now.

  26. JC

    Lol.. it would be something pretty similar to that, but a couple of words would have upper case lEtters in them for no paRticular reason.

    On second thoughts, I take it back. It’s best not to have the idiot here as I’d want to rap his ears red raw from his first stupid comment on.

  27. blogstrop

    I was recently accused by Mrs. B of spending my life “doing deals”. She said it as if it was a bad thing.

  28. . writes:
    >You’re a hoax Barnes, you have zero substance or ability to present an adult argument and thank Christ you will never have any influence or power.

    Well, the Katesian derp is in a nutshell, so it will take a bit of unpacking see just how derpy it is.

    But to start, seeing you brought it up, let’s digress a little first and talk about presenting arguments properly, because it looks like Kates really needs to learn about this. He’s consistently terrible at it. So bear with me, we’ll come back around to how this relates to the para I quoted above.

    Let’s use as our example of how *not* to present an argument one put forward by Ayn Rand, a woman who is a kind of gold standard for how not to argue. She tried to build a whole philosophy based on “selfishness”, and in brief her argument ran like this:

    “In popular usage, the word “selfishness” is a synonym of evil; the image it conjures is of a murderous brute who tramples over piles of corpses to achieve his own ends…Yet the exact meaning and dictionary definition of the word “selfishness” is: concern with one’s own interests.”

    So obviously Rand is seeking here to contrast what she considers a popular misconception of “selfishness” with true meaning of “selfishness” as defined by the dictionary (incidentally, there’s some A-grade derp right there, but anyway…). So on this rock she builds her church.

    But here’s the thing: there is no such dictionary definition. Rand never cited her source. A later scholarly search of over 200 contemporary dictionaries was unable to find any such definition. It has not been found to date. In fact, the typical dictionary definition is something like Merriam-Webster’s: concerned excessively or exclusively with oneself : seeking or concentrating on one’s own advantage, pleasure, or well-being without regard for others – just like the popular version. Her “dictionary definition” had simply been elided of key elements, such as the excessive concern for oneself, to suit her purposes better.

    In short, Rand just…made it up! And she based her whole confused philosophy on this straw man. Did she do it deliberately? We’ll never know, but I suspect not. I think she simply really, really wanted it to be true, to say sensational things, play the fearless intellectual, predict the decline of Western Civilization, be the lone voice against the mindless masses etc, and of course, always plug the supreme importance of her own writings. She could have opened any dictionary at any time and have her fundamental argument evaporated instantly. But she never dared, perhaps because it would also have exposed how much she actually had in common with her enemies. And then who would she be?

    Now what has all this got to do with Kates? Well, let’s look in particular at the sentence quoted at the end:
    “…they should not deceive themselves into believing that public spending is the road to rapid rates of non-inflationary growth.”

    Now, is this “dictionary definition” of Keynesianism? Or is he just…making it up?

  29. .

    What a load of piffle.

    Barnes doesn’t know:

    1. How dictionaries are compiled, or that this doesn’t trump reason, and:
    2. About a concept going back to A B Lerner but wants to accuse people of making stuff up about economics.

    Go away you useless fool.

  30. JC

    Stop the incoherent babbling Barnes. Dot is right. You’re a hoaxer and a fraud. Fuck off.

  31. .,
    Reading comprehension was never your strong point. No wonder you have a pinhead as an avatar…;-)

    JC, tell . to stop babbling. His 1. in particular is completely senseless…;-)

  32. Louis Hissink

    I agree with you that recessions are usually caused by ‘over-production’ of particular goods and services along the cycle. The Marxists refer to this as ‘under-consumption’ but go on from there to conflate cause and effect.

    Of course they refer is as underconsumption because in their world, no one errs except other people.

    Crikeys, the number of times I had to sell stuff under wholesale prices to get rid of it because we overestimated demand…..

  33. .

    Barnes is trolling like a 15 year old kid now in light of having an argument from authority being revealed as opinion and being exceptionally out of his depth.

    As for our comprehension of your piffle, that speaks for itself.

  34. .

    Louis

    The stimulus cheques in Australia were saved at such a high rate, they would have made the (alleged) net multiplier effect of increased consumption effectively zero.

  35. JC

    Barnes

    You were an idiot when you were here years ago and still one now. Nothing’s changed. Nothing.

  36. Louis Hissink

    Dot,

    Really ? My sources indicate that those stimulus cheques were spent on pissups etc. And in any case one thing you don’t do is base demand estimates on windfalls which stimulus spending basically is. Stimulus spending is always on stuff already produced. But if people start saving and banks start raising interest rates to attract more savings, then that signal tells me that people are saving up to spend in the future, and what could possibly be manufactured to take advantage of that.

    One really interesting market phenomena I check is the production of high end sound gear – stuff like $12K CD players, and $50K speakers etc. That market has gone crazy – the amount of new product being made and shown at the CES and the Munich High End show later on this year – who is buying this stuff? And hi-res music files, exploding in number of albums being produced or converted from the original analog masters. US companies in this area are simply increasing in number – Magico, company makes loudspeakers out of aluminium and 100K$ price tags – insane but no shortage of orders.

    So some where there is economic good news, and probably China and India? Russia? Who is buying this stuff because you don’t manufacture stuff like that on spec. (I can afford the brochures :-) )

  37. danno

    KH “My sources indicate that those stimulus cheques were spent on pissups etc.”

    My PA spent hers on a tattoo of wings on her back, even though she has a mortgage and credit card debt.

    Fitting really, like money flying away

    (Her Arts degree is in medieval literature)

  38. .

    Louis – most that was spent was wasted but a lot was saved. It failed dismally.

  39. Steve Kates

    Says Law is important. It carries vitally important relevance as the supply side matters equally to the demand side and at present the western world is being choked by government interference.
    .
    If there are people who honestly believe macro is bunk and it should be ignored, they need to explain what would happen to the Australian economy of the RBA woke up tomorrow and set the overnight rate at 20%. Would there be a demand or supply side shock? How would Says law fit into such a fiasco?

    I’m afraid that it is on two counts that I disagree. So far as Say’s Law is concerned, for the macroeconomy the demand side does not matter an inch. Demand is constituted by supply. If you built it they will come. There is no such thing as a general glut. But the suppliers have got to get it right if demand is going to soak up everything that suppliers decide to supply. Recessions happen when suppliers get it wrong, such as in the housing industry in the US 2004-2009 which then pulled the finance industry into its black hole.
    .
    As for high interest rates, put them up to 20% and the effect will be on production which will cascade down. Business will go into a shell but I would not call the outcome a fall off in demand. This would be straightforwardly a supply side shock, no different from the rise in oil prices in the 1970s. All of this is discussed in the last two chapters of Free Market Economics.
    .
    No classical economist ever thought the demand side mattered at the aggregate level which is why the economics they promoted was directed at encouraging business. Now we almost seem to think that the supply side doesn’t matter at all. If QEn goes bad, we may yet come to think of 2008 as the good old days.

  40. John Montgomery

    Steve, the 2008 crisis was not a normal recession but one caused by government policy on sub-prime mortgages, the actions of Fannie and Freddie and the merchant banks who bought and sold on junk securities. The countries worst hit in 2008/9 were thus the USA, UK, Iceland, Ireland and a handful of failed banks in Holland and France.

    Following this and having to deal with government debt, many countries in the Eurozone have seen economies decline and job losses rise in order to save the Euro.

  41. Andrew

    Louis – most that was spent was wasted but a lot was saved. It failed dismally.

    Unfortunately what was spent was the worst of all, as the $900 TVs were low end Chinese imports. Domestic value add was negligible – Gerry Harvey666 (who we now hate, because we’ve remembered that he’s rich) was happy but it did nothing for the economy, and actually worsened it because of the effect on the current account. Multiplier could hardly have been smaller.

    Then we did the Batts – good multiplier, as $1000 of batts meant you had to replace a $250,000 house when it burned down. Then, as the economy recovered, stockmarkets surged and interest rates rose over and over, we did the BER stimulus. No wonder we fucked the economy for 3 years after that.

  42. Andrew

    Good article Steve – I finally caught up with the AFR a day later.

    I don’t think ALL recessions are structural. Sometimes a central bank just decides to fuck the economy to produce a downstep in inflation. Sort-of like when Keating used the levers to set interest rates 700bp above our peers in 1990 (The Goose only managed 450bp, so we didn’t have the Goose Recession yet).

  43. Pedro

    “Business will go into a shell but I would not call the outcome a fall off in demand. This would be straightforwardly a supply side shock, no different from the rise in oil prices in the 1970s.”

    You might not call it a fall of in demand, but it still is. If interest rates suddenly jump there will be a lot of people not buying things they previously planned to buy.

    I don’t really understand the reluctance to think about AD. Recessions are not purely supply-side. Indeed, it’s hard to see how you could get cycles of long-run and matching build ups in in supply side problems resulting in a recession caused by all of those problems having to be unwound.

  44. The Pugilist

    But the suppliers have got to get it right if demand is going to soak up everything that suppliers decide to supply. Recessions happen when suppliers get it wrong, such as in the housing industry in the US 2004-2009 which then pulled the finance industry into its black hole.

    In essence, the structure of production needs to match the profile of consumer preferences both in terms of the types of goods and services and the timing of their arrival in markets.
    When summed up this way, to me at least, it seems obvious that it is ridiculous for governments to try and somehow alter consumption preferences as governments can really only control the timing through interest rates, changes in the money supply, changes in taxation or transfer payments. Of course governments can intervene directly in markets and produce things directly (think ABC!). However the structure of production can be altered through monetary and/or fiscal policy or direct government provision. For better or worse. Usually worse. There is a chance that governments will get lucky and ‘beat the entrepreneurs’ to satisfying consumer preferences, but how likely is this? Not very.
    Thus governments trying to alter the timing of aggregate consumption all too often neglect the impact on the supply side and end up setting in motion the very thing they should be trying to avoid. That is, false expectations of producers/suppliers that lead to erroneous investment decisions, misallocation of capital and labour resources and a distorted structure of production. There is a degree of path dependence too, so the larger the errors in expectations about the future consumption profile becomes, the more costly it is to unwind.
    Of course the finance sector can misread the future and fund garbage investments (of which there are always and excess supply!), but, left to their own devices, they will get burnt before they can unleash systemic distortions that are propagated throughout the system.
    What is needed is a system where mistakes get punished harshly and early while good investment decisions get rewarded. What’s that called? I know – CAPITALISM!!!

  45. The Pugilist

    No one can possibly ignore the importance of central banking in today’s world. And yes, if they get it wrong they cause recessions by recessing demand.

    I would say they get it wrong and causing recessions by disrupting/misreading the demand for money and causing monetary disequilibrium. Either deflationary or inflationary – either way, central banks can set in motion a chain of events that disrupts the structure of production relative to consumer preferences. As money is traded in virtually all markets, yet has no real market of its own, these errors are the most costly.
    Yet we grant a monopoly over money creation to a select few…if they screw up, we all get burned…
    I don’t deny the importance of central banks but it really does all come back to the supply-side JC…

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