Each and every one of these economic propositions is WRONG

I am doing a presentation in Los Angeles at the end of the week which I have titled “A Beginner’s Guide to Say’s Law”. At the centre of this presentation there is a slide that reads as shown below. And the point I am making, and will then set out to prove, is that not only was not one of these propositions accepted by John Stuart Mill nor by any of his mainstream classical contemporaries, but demonstrating that the classical economists were right is also far easier than you might think. This is the slide:

Economics is filled with nonsense no economist before the marginal revolution [1870], never mind the Keynesian Revolution [1936], would have believed:

A national economy is driven from the demand side

Classical economists had no theory to explain involuntary unemployment

Recessions can be caused by demand deficiency

Thinking of national saving as a flow of money makes sense

Unproductive public spending can make an economy grow

Profits are maximised where Marginal Revenue equals Marginal Cost

Supply and demand explains what businesses do and how markets work

You can discuss the operation of an economy without discussing the role of the entrepreneur in detail

Nor is it that our modern ways of thinking had never occurred in classical times. Every one of these propositions had their fringe-dwelling supporters but not only were none of these accepted by the classical mainstream but each and every one was also actively opposed. Today, of course, every one of these is mainstream. So what makes you actually believe in progress when economic theory was far more sound and acute 150 years ago than it is today?

SOME FOLLOW-UP: I appreciate the comments from each of you, with the most serious omission mentioned by “danger mouse” and I am very grateful to have had it pointed out:

Steve, adding something about lowering interest rates would make it even more relevant to our times…

As for MR=MC, almost beyond comprehension how this vacuous piece of rubbish holds its place in the economic side. As Mullumhillbilly said:

I’ve read Steve’s book 2nd edition, and the case he seems to be making there is that businesses in real life can’t follow that rule because of uncertainties about demand, prices, and costs. Which is fair enough, but technically, mathematically, I think the rule is correct, and should not simply be stated as “wrong”.

MC=MR is “technically” correct in the sense that if I assume someone has wings, if they then fall off a cliff it will do no damage to their skull. It tells no one who studies economics anything at all about how a business works or how they will behave in any given situation. If you think I go on about Keynesian economics, you should see me on this. Just try to provide a product or set of real life circumstances for which the diagram and the underlying concepts make the slightest sense or explain a thing you wouldn’t already know after ten seconds. The approach by classical economists to monopoly is so different that they might as well have come from a different galaxy.

I will also add that it is not the first slide. This is the first slide and in 36-point type:

Every macroeconomic theory based on aggregate demand is wrong

Not that I couldn’t use help on my presentation skills, but the slide I did show pivots then from history into theory and that is the lead in.

Finally, I will just repeat what Rafe has posted:

The former Labor government’s $100 billion stimulus package during the GFC has been slammed in a scathing new Treasury-commissioned report, which argues the cash splash actually weakened the economy and damaged local industry by overvaluing the exchange rate. The report, authored by economist Tony Makin from Griffith University, says the Rudd government’s fiscal stimulus was “unnecessarily large” and “misconceived because it emphasised transfers, unproductive expenditure such as school halls and pink batts rather than tax relief and/or supply side reform”. The latter occurred in New Zealand, where “marginal income tax rates were reduced, infrastructure was improved and the regulatory burden on business was lowered”.

The third edition of my Free Market Economics – available this month – has a whole new chapter on explaining all of this in even greater detail than already.

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28 Responses to Each and every one of these economic propositions is WRONG

  1. RobK

    ” So what makes you actually believe in progress when economic theory was far more sound and acute 150 years ago than it is today?”

    I think 150 years ago things were less complex but harsher. Possibly the obvious was more authentic (more obvious), by which I mean less spin and correlation/causal studies.

  2. Bruce of Newcastle

    Steve – I had to read the first sentence of the slide a few times before comprehending to what you meant. I suggest you edit slightly to this:

    Economics is filled with nonsense which no economist before the marginal revolution [1870], never mind the Keynesian Revolution [1936], would have believed:

    Personally I think both Say’s and Keynesianism fall down on the time axis, although for different reasons. Although Say is much better than Keynes for certain pragmatic reasons. So for example point (3) is wrong since a panic can cause consumers to go on strike for many months at a time, due to fear. That impacts small business who live from day to day. They go bankrupt and fail to pay their suppliers. Who then also go bankrupt. Which then rolls through the economy as a supply collapse due to business collapses. Henry’s cash splash helped avoid that short time-frame fate by telegraphing confidence, but conversely Gillard’s long time-frame BER was completely wasted.

  3. Snoopy

    Henry’s cash splash helped avoid that short time-frame fate by telegraphing confidence

    To me it signalled panic.

  4. iampeter

    I think it’s a symptom of a bigger problem and its not just confined to economics.

    We have professional journalists who spend their careers writing about politics but don’t know the basics like what “rights” are or what the difference between “left” and “right” is.
    We have professional scientists who think our atmosphere works like a greenhouse and can heat our surface contrary to basic physics.
    We have professional politicians who couldn’t tell you what the proper function of a government is and why, even if you had had a gun to their head.
    We have professional businessmen who think producing solar panels and wind mills that cost more to make then they make back are good business decisions and that government subsidy is no different than investment.

    There’s been a lot of talk of the death of expertise but I think there are plenty of experts, it’s the fundamentals that people seem to be forgetting or have never known in the first place. That and an ability to think properly about any given subject. Thinking is just not something that’s taught at all these days.

    So without a grasp of fundamentals and without the ability to critically think about anything, you’ll find even the smartest, hardest working and professionally experienced people you meet are profoundly clueless about critical issues.

  5. Bruce of Newcastle

    To me it signalled panic.

    Snoopy – Look at it from the perspective of someone from Mt Druitt. They’re apprehensive about Lehman Bros etc from the nightly news. So they decide this week isn’t good for buying the new 200″ plasma TV. Let’s wait and see. So there’s an incipient buyers’ strike. Consumption suddenly becomes savings overnight.

    Then Henry’s $900 sploshes into their bank account. Thanks!

    That says to them the Govmint Has It In Hand and ooh I have $900 that I can spend!
    A lot of small businesses may have survived as a result. And their creditors.

    I agree the BER stuff was completely wasted. The local panic was over by then and that whole $17 billion went down the toilet, effectively.

  6. danger mouse

    Steve, adding something about lowering interest rates would make it even more relevant to our times…

  7. Snoopy

    John Key reduced marginal income tax rates, brought forward infrastructure projects and eased the regulatory burden on business.

  8. Snoopy

    A lot of small businesses may have survived as a result

    Bruce, late life career in climate science awaits you!

    🙂

  9. Bruce of Newcastle

    Snoopy – I vividly recall that time. Consumer demand cratered amazingly. As I recall the US car industry barely sold a single car for two whole months.

    A large business can survive that but a small business, with a bank overdraft, a business loan and extremely antsy bankers, cannot.

    Multiply across the economy and thousands of small businesses and their creditors. It makes Azimov’s Hari Seldon sound plausible.

  10. Leo G

    Economics is filled with nonsense which no economist before the marginal revolution [1870], never mind the Keynesian Revolution [1936], would have believed:

    The problem now is that the relative pronoun “which” introduces a relative clause with a past subjunctive. You are effectively saying: “No economist before the marginal revolution would have believed economics is now filled with nonsense.”
    Better to keep it simple and avoid absurdities”: No economist before the Marginal Revolution would have believed the nonsense which now fills economics.

  11. Steve

    A large business can survive that but a small business, with a bank overdraft, a business loan and extremely antsy bankers, cannot.

    You mean Kogan?

  12. Token

    Remember when Malcolm suggested the government should limit bank deposit guarantees as a blanket would damage the market (i.e. squeeze small lenders).

    Those were the days, when Malcolm actually showed knowledge of ways to avoid government destroying the economy.

  13. Snoopy

    Profits are maximised where Marginal Revenue equals Marginal Cost

    Why isn’t this the case?

  14. Fat Tony

    What is the purpose of economists?
    Barrel loads of them all round the world.

    Most economies are stuffed or nearly stuffed.

    If engineers performed at a similar level, aeroplanes would be falling out of the sky quite regularly (of the ones that actually got up there), bridges would collapse, machinery would fail……
    And there’d be engineers hanging from lamp posts, as a warning to other engineers.

    Why don’t we have economists hanging from lamp posts?

  15. Leo G

    What is the purpose of economists?

    Economists make engineers possible.

  16. Fat Tony

    Leo G
    #2410826, posted on June 12, 2017 at 11:26 pm

    What is the purpose of economists?

    Economists make engineers possible.

    Please explain……
    I’ve never been paid by an economist, nor has any job I’ve worked on been funded by an economist.

  17. Leo G

    Please explain……

    The monetary system is a fiat system. If not for money and credit we’d be bartering. And it’s directed by economists.
    You might not be directly funded by the economist, but surely he’s a part of the system that makes the transaction possible.

  18. Mullumhillbilly

    Profits are maximised where Marginal Revenue equals Marginal Cost

    I’ve read Steve’s book 2nd edition, and the case he seems to be making there is that businesses in real
    life can’t follow that rule because of uncertainties about demand, prices, and costs. Which is fair enough, but technically, mathematically, I think the rule is correct, and should not simply be stated as “wrong”.

  19. Snoopy

    Thank you Mullumhillbilly.

  20. There is so much demand in the Venezuelan economy in the last few years. In fact the demand is vicious and violent.
    So I’d guess the Venezuelan GDP must be growing at 273.5% or thereabouts.

  21. Fat Tony

    Leo G
    #2410850, posted on June 13, 2017 at 12:22 am

    Please explain……

    The monetary system is a fiat system. If not for money and credit we’d be bartering. And it’s directed by economists.
    You might not be directly funded by the economist, but surely he’s a part of the system that makes the transaction possible.

    Which brings me back to my original point:
    What is the purpose of economists?
    Barrel loads of them all round the world.
    Most economies are stuffed or nearly stuffed.

  22. Kel

    Hi Steve,

    I am a fan of your work and wish you all the best with your efforts in LA at the end of the week.

    But – you urgently need some pointers from “Presentation skills 101″:

    That first slide is far too busy – far too much text, far too many points covered – especially for the introductory slide.

    Strongly suggest that you start with a simple slide outlining ” None of these economic “truisms” was accepted by Mill or his contemporaries:” (Then have individual slides for discussing each of the points)

    Hope that this is of assistance. Best of luck with every aspect of your trip.

  23. EvilElvis

    iampeter
    #2410431, posted on June 12, 2017 at 7:29 pm

    Agreed. I reckon the same affliction of opinion, based on a shallow pool of knowledge that is pushed out as ‘news’ from journalists can be related back to the majority of professions including economics. Fat Tony’s point about engineers is valid although there is a massive pool of shite engineers below the class that makes tin birds stay in the sky. Same goes for all professians. The ones pulling the levers in policy, economic or otherwise, are certainly not the flying high types that are required.

    Bruce of Newcastle
    #2410445, posted on June 12, 2017 at 7:49 pm

    And who paid for this $900 a pop ‘confidence’ booster? The same poor clowns who never would have received it, a portion of who would have been small business people. More tax out to go to JB HiFi, Harvey Norman…

  24. Winston

    Think Lionel Hutz explaining it: ‘There’s “Progress” (stern face and shaking of head), and there’s “Progress!” (happy face and nodding profusely).’

    The noddy one that’s the easy, everyone else is to blame, no sacrifice option is the ‘progress’ prevalent today.

  25. Fat Tony

    EvilElvis
    …although there is a massive pool of shite engineers below the class that makes tin birds stay in the sky.

    These ones don’t get to wreck national economies though.

  26. Rabz

    What is the purpose of economists?

    To make “climate scientists” seem less ridiculous.

  27. Leo G

    Most economies are stuffed or nearly stuffed.

    Economists also make Keynesian accountants possible.

  28. .

    Cut out the MC = MR is wrong one. The basis of that being wrong means there are no such thing as average costs either. There would also be no such thing as intertemporal prices.

    There is more than enough real world evidence of this being true. Surprised you didn’t see this as an industry economist.

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