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 , never mind the Keynesian Revolution , 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.