Classical theory explained

I’ll be in Canberra for the first three days of next week for the meeting of the History of Economic Thought Society of Australia where I will be giving a presentation on the actual meaning and significance of “classical” economic theory. I am therefore putting up a post from way back in history that I did in 2011, so ancient that Maurice Newman was the Chairman of the ABC and I was still being published at The Drum. The rest of this post is what I said then. But before I get to that, I will put up this quote from a brief article on me [my name even comes first in the article’s title!] which you may find in the June issue of the Journal of the History of Economic Thought:

“Steven Kates is probably the best-known present-day proponent of the old ‘classical’ macroeconomics of Jean-Baptiste Say, James Mill, David Ricardo, and John Stuart Mill.”

But as I say in the heading to the slide, I am probably the “best-known” because I am probably the only one in existence. It was also, let me assure you, not intended as a compliment. Anyway, here is what I wrote back then.

__________

I have an article up at The ABC’s Drum website where I again look at the statement by the ABC’s Chairman, Maurice Newman, on the value of classical economic theory in comparison with the modern. Here was the full quote from his speech:

We may think we are all Keynesians now, but perhaps contemporary teachings of Keynes are not faithful to the original doctrine, or, maybe, Keynes is now a defunct economist. Perhaps post modernist economics has so captivated our journalists that they have suspended the spirit of enquiry, open-mindedness and scrutiny that an informed democracy so desperately needs.

Under relentless pressure, classical economics has become all but a relic of a bygone era. Yet the work of classical economists most likely holds the solution to today’s economic ills.

The point that Maurice Newman was making was that journalist really ought to take a look at the economic ideas of the classical economists, which using the modern Keynesian definition incorporate every economist before Keynes himself, with the exception of Malthus, Hobson, Major Douglas and Gesell (who these last three are you might very well ask, but this is Keynes’s very own and very short list). As for the rest, they were consigned by Keynes to the dustbin of history, whose theories are only kept alive by a very small band of economists scattered across the world.

In the article, I quote Alfred Marshall, arguably the greatest economist to emerge from the nineteenth century. As I wrote on The Drum, Marshall “was very specific about not mistaking an economic recession for a failure to spend and he very much thought of himself as following in the tradition of the classical economists. This is what he wrote in his Principles of Economics:

[This is] the attitude which most of those, who follow in the traditions of the classical economists, hold as to the relations between consumption and production. It is true that in times of depression the disorganization of consumption is a contributory cause to the continuance of the disorganization of credit and of production. But a remedy is not to be got by a study of consumption, as has been alleged by some hasty writers … The main study needed is that of the organization of production and of credit.

Demand deficiency was not an idea discovered by Keynes. It was an idea about as old as economics itself and had been thoroughly debated and rejected for a hundred years before Keynes came along. And the fact of the matter is, there is not an economist in a hundred who could tell you in a convincing way why demand deficiency had been seen by classical economists as the province of cranks. They would also be unable to tell you what the classical theory of recession actually was. All they have is what they were told by Keynes, the very last man in the world from whom anyone should try to learn what classical economists had said.

Newman’s point is exactly right. Why don’t our journalists (and economists) show enough curiousity to find out what those classical economists said and wrote. We might still reject classical theory when we have examined their theories and ideas. But then again there is the possibility, a possibility that grows stronger by the day as we move towards another downturn, that classical economists actually did know more about the causes of recessions and their cures than we are currently led to believe.

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9 Responses to Classical theory explained

  1. Empire GTHO Phase III

    In the article, I quote Alfred Marshall, arguably the greatest economist to emerge from the nineteenth century. As I wrote on The Drum, Marshall “was very specific about not mistaking an economic recession for a failure to spend and he very much thought of himself as following in the tradition of the classical economists.

    As a non-economist primarily interested in micro, I’ve always wondered why Marshall isn’t afforded the consideration he so richly deserves. Though he didn’t consider it the fourth factor, his explanations of organisation and entrepreneurship is critical to understanding the modern economy.

    With so many current entrepreneurs hoodwinked by crankology, I reckon a full frontal fourth factor assault would win hearts and minds.

  2. Given that most hold to the notion of scarcity — except for those who argue that it is a capitalist conspiracy — where the availability of goods and services do not satisfy all needs and wants, and therefore we must economise and put prices on those scarce resources, it is a contradiction to also hold to the notion of demand deficiency.

  3. Chris

    With so many current entrepreneurs hoodwinked by crankology,

    Crankologies of entrepreneurship are a broad and deep field of study.
    But the study of entrepreneurship includes some absolutely great criticisms of the ideas of modern economics such as the great loop of C+G+I meaning anything in comparison with the ‘having a crack’ of people.
    Our looter class have just about extinguished the viability of ‘having a crack’.

  4. Ray

    Mainstream economists do not regard Marshall as a classical economist. Keynes may have wanted to believe that and Kates may well agree, demonstrating once again how much these two really have in common.

    To describe Marshall as a classical economist completely ignores the marginal revolution. The classical theory of value concerned the cost of production whereas the marginal revolution attributes value to the utility perceived by consumers acting rationally within an efficient market. Utility, rational preferences and efficient markets were unknown to the classical economists such that the marginal revolution completely changed the study of economics.

    Kates known all of this of course. He regularly ignores the past hundred years of teaching in economics and proudly boasts of his heterodox credentials. Well he cannot have it both ways, claim that he shares the same economic heritage as Alfred Marshall whilst, at the same time, denouncing everything that Marshall gave to the world.

  5. struth

    More economists haven’t meant an improved economy.
    It was better without them.

    Get a real job.

    Sick of paying for this dribble.

  6. max

    Australia Cracks Down On Foreign Real Estate Buyers As “Ghost Towers” Increasingly Outrage Locals
    http://www.zerohedge.com/news/2017-09-22/australia-cracks-down-foreign-real-estate-buyers-ghost-towers-increasingly-outrage-l

    Anyone who has taken Economics 101 knows that preventing the supply from rising to meet the demand means that prices are going to rise. Housing is no exception.
    Increase the supply of housing, and prices will fall. Simple.

    there is no free market in housing
    who is responsible ?
    government policies and regulations.
    The housing market has been distorted for decades by one government after another
    Hidden subsidies are added to distortions, and rules and regulations are piled on top of each other until their purpose gets lost.

    The Government comes up with one kind of subsidy, doesn’t like the side-effects, then comes up with another to try to correct it.

    In fact, the simplest thing would be to strip away all the distortions, and try creating a free market in housing.

    every control on what you could build and where should be stripped away

    strip away all tax subsidies

    And tell the RBA that near-zero interest rates are stoking a housing bubble – and they need to be raised sooner rather than later.

    a major factor behind growth in home prices is asset price inflation fueled by inflationary monetary policy.

    Advocating for a planned, micro-controlled economy is the wet dream of socialist megalomaniacs.

  7. Empire GTHO Phase III

    Advocating for a planned, micro-controlled economy is the wet dream of socialist megalomaniacs.

    It sure is.

  8. Tel

    Anyone who has taken Economics 101 knows that preventing the supply from rising to meet the demand means that prices are going to rise. Housing is no exception.
    Increase the supply of housing, and prices will fall. Simple.

    And the same Economics 101 explains to you that blocking demand will also cause prices to fall… which happens to be easier to do in this case.

    Lots of strongly vested local interests in the real estate and building industry, while foreigners can’t vote.

  9. Lem

    And tell the RBA that near-zero interest rates are stoking a housing bubble – and they need to be raised sooner rather than later.

    The business of government is to ensure their continued survival as an entity, which means their cash flow. Tax them when they’re making money from wages, and when the jobs dry up “stimulate the economy” (code words for keep the tax dollars coming for government) by blowing bubbles with ultra low interest rates and leveraged speculation…because the government gets stamp duty, and capital gains, and no matter which way it blows government will be their taking their cut. Thieves.

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