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.