A classic case of economic ignorance

I am in the midst of finishing off a book on classical economic theory from which, and only from which, you can discover just how fatal to economic health modern economic theory is. The Australian economy is not far from disaster, real growth is falling as are real wages. But this we find at the top of the front page of The Oz.

PUBLIC SPENDING KEEPS NATION AFLOAT

Here are the opening paras.

Surging federal and state government spending has insulated the economy from a dramatic plunge in growth, as business investment and household spending shrank, raising questions about the health of the economy.

The latest national accounts show annual economic growth fell to 1.4 per cent — the slowest since 2009 — as rapid increases in public spending and global demand for the nation’s coal, LNG and iron ore papered over weak or falling household spending and business investment.

That it is the public spending that is taking the economy to death’s door occurs to no one. Let me therefore take you to a bit from the introduction to my forthcoming book.

The chapter goes to some length in discussing the advent of Keynesian theory, which was summarised by Paul Krugman in his introduction to The General Theory which was published in 2006, seventy years after Keynes’s original publication in 1936.

“Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

1. Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment
2. The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully
3. Government policies to increase demand, by contrast, can reduce unemployment quickly
4. Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach.

“To a modern practitioner of economic policy, none of this – except, possibly, the last point – sounds startling or even especially controversial. But these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable. And the great achievement of The General Theory was precisely to make them thinkable.”

There is no question that Keynes did indeed make each of these more than just thinkable. He was able to turn these propositions into the mainstream where they have been accepted by virtually every economist ever since. It is classical economic theory that has now become unthinkable. The result of the Keynesian Revolution has left things so that the classical alternative is not just no longer contemplated by anyone within the mainstream of economic theory, but that no one within the mainstream even knows what that alternative is.

I stumbled onto classical theory by accident but it has been so accurate in allowing me to understand what’s going on that I can never understand why others don’t sicken of this Keynesian trash. It has never ever in a single instance brought an economy from recession into recovery. It’s all set out in my Free Market Economics. How we ended up in this dismal place we are now in is what my next book will go into chapter and verse.

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19 Responses to A classic case of economic ignorance

  1. Mak Siccar

    Excellent. Keep up the good work. May I suggest that you write an article, using layman’s terms, for publication in The Oz in order to reach a wider audience of thinking people?

  2. Tim Neilson

    Hi Steve,
    Slightly O/T but did you see the “Alex” cartoon in today’s Fin Rev? For a couple of panels it looked like Peattie and Taylor were actually questioning the low interest orthodoxy – but then …
    Still, I suppose any publicity is better than no publicity.

  3. a happy little debunker

    Now where on earth did the ‘Surging federal and state government spending’ come from?

    Sometimes the stupid is on full display!

  4. Another problem with Keynesian theory is that EVEN if it did work, no Government ever has the intestinal fortitude to reverse the process and claw the spending back when times get better so that level of government spending stays until the next time stimulus is ‘needed’ and it goes even higher again.

  5. Kneel

    “…I can never understand why others don’t sicken of this Keynesian trash.”

    Well, D’UH!
    Politicians don’t want solutions, they want problems – that way, they can be heroes by “solving” problems.
    Therefore competent, workable economic theory is verboten in govt.
    And govt is the biggest “consumer” of these numbers.
    They get what they want – they don’t even need to ask, everyone knows.

  6. Tim Neilson

    Politicians don’t want solutions, they want problems – that way, they can be heroes by “solving” problems.

    You’ve put “solving” in quotes very advisedly.

    I read an article about Margaret Thatcher which noted that she changed the jargon from “managing” problems to “solving” them.

    If government really could “solve” problems i’d be happy for them to do it but I think that they are much happier “managing” them, with no end point in sight at which the bureaucrats and politicians would have to find alternative employment.

  7. Percy Popinjay

    Here’s a link to a piece in the conversation pushing the same incoherent rubbish.

    Were it not for very strong growth in export income and the biggest surge in government spending in 15 years, the economy would have shrunk.

    Written of course, by one of those “economists” who are wrong about everything, all the time.

  8. Mak Siccar:

    Excellent. Keep up the good work. May I suggest that you write an article, using layman’s terms, for publication in The Oz in order to reach a wider audience of thinking people?

    Allow me to digress a bit.
    Microsoft have cornered the OS market by being easy to use (sort of)
    The closest competitor is Linux. Linux is a cow to use and understand, and the average computer user won’t have a bar of it because of this.
    Linux could be a real threat to microsoft but Linux developers refuse to use a similar simple ‘click and go’ system.
    Linux users and developers would prefer to be warm and snug in their technically superior pond than actually getting out and competing against Microsoft.
    This scenario is similar to the Classical vs Keynes battle.
    Neither of the Classical/Linux camps wants to actually fight.

    Winston will now retire to his wine bunker…

  9. Mak Siccar

    Winston. Sage words indeed that the good Profs hopefully might heed. Their country needs them to step up!
    I will join you in the wine bunker and tonight will share with our hosts a bottle of 2009 Warrabilla Parola’s Durif with their good Osso Bucco! Can hardly wait.

  10. Iampeter

    I stumbled onto classical theory by accident but it has been so accurate in allowing me to understand what’s going on that I can never understand why others don’t sicken of this Keynesian trash.

    Like supporting tariffs?
    Sorry Steve, I know I do this to all your posts, but you yourself are a classic case of economic ignorance, so it’s a bit rich for you to complain about other classic cases of economic ignorance.

  11. Bad Samaritan

    Ah, interest rates. And their effects….

    So I studied Economics at High School and Uni and then went to live in Europe for more than a decade. The Deutsche Mark and Dutch Florint and Swiss Franc and a few others were always on the rise over time, while various other currencies crumbled. and some completely collapsed: Drachmes, Lira (Turkish and Italian), Dinara and so forth. In Greece it was very easy in the 80s and into the 90s to get 20-25% on a bank deposit.

    And bear in mind that when Andreas Papandreou returned to become the socialist Prime Minister he’d got his Economics PhD from Harvard, and had run the Economics department at Berkeley, so who better to completely f*ck up Greece’s finances eh?

    Anyhow…it all made me understand that most economists do not have a clue since every one of them says that high interest rates support a currency and low interest rates weaken it.. which must have been why the strong, perpetually-rising currencies had low interest rates and the crashing ones (like the Drachma) super-high ones, right?

    Hmm. So I have ignored them completely for a long time now. Buy gold and stash it somewhere safe, Cats. That is all you need to know about economics.

    BTW: Forget Cryptos. They’ll be the first or second thing to disappear completely if the shyte really hits the fan. They do not exist!

  12. Bad Samaritan

    Iampeter. I missed your post at 2.54pm.

    Even Adam Smith made it clear that tariffs are the way to go at times.….

    “The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods, is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours.

    Or isn’t Smith classical enough for you?

  13. Sunni Bakchat

    It’s taking an awfully long time for Aussies to wake up to the deliberate destruction of their economy by Keynesian Baby Boomer central bankers?

    As for the lack of alternate perspectives. Ambrose Evans-Pritchard from today’s London Telegraph wrote a brilliant article referencing Wicksell. For those who don’t know of or understand Wicksell here’s an excerpt from the article;

    “Wicksellians accuse central banks of pulling the natural rate of interest ever lower with each cycle until it cannot go any lower.
    Under this “intertemporal” hypothesis – advanced in different ways by the Bank of International Settlements (BIS) and by Bernard Connolly, the high priest of eurosceptic theory – the central banks have been stealing prosperity from the future for the last quarter century. Eventually the future catches up with them.
    The asymmetric reflex of letting asset bubbles run but always intervening to cushion the bust itself promotes the slide deeper into this swamp. It has blocked the Schumpeterian cleansing of creative destruction. This has kept “zombie companies” alive and suppressed productivity; and it has led to a debt trap. Global liabilities have reached 332pc of GDP.
    New Keynesians point the finger at the global savings glut. The model of Leninist capitalism in China keeps savings artificially high. This has combined with the contractionary fiscal bias of the eurozone. The two together starve the world of adequate demand. Businesses refuse to invest. Excess savings have nowhere to go – hence the monetary death spiral.”

    Seems bloody obvious to me which theory is balderdash.

  14. Tator

    Percy, seeing who wrote that article in the Conversation site. It surprises me that any University would have him as a Visiting Fellow with his record of being incorrect.

  15. John A

    Winston Smith #3148119, posted on September 5, 2019 at 1:11 pm

    Mak Siccar:

    Excellent. Keep up the good work. May I suggest that you write an article, using layman’s terms, for publication in The Oz in order to reach a wider audience of thinking people?

    Allow me to digress a bit.
    Microsoft have cornered the OS market by being easy to use (sort of)
    The closest competitor is Linux. Linux is a cow to use and understand, and the average computer user won’t have a bar of it because of this.
    Linux could be a real threat to microsoft but Linux developers refuse to use a similar simple ‘click and go’ system.
    Linux users and developers would prefer to be warm and snug in their technically superior pond than actually getting out and competing against Microsoft.
    This scenario is similar to the Classical vs Keynes battle.
    Neither of the Classical/Linux camps wants to actually fight.

    Winston will now retire to his wine bunker…

    Time to emerge from said bunker and take a new look at Linux, with lots of point and click.

    I learned from the OS/2 days that the OS war is not the one to win. I still think the OS/2 Desktop app (the Workplace Shell) was the killer app but it remained under-exploited.

    MS won the Application War so that the MS-Office suite is nearly ubiquitous, and a de facto standard (horrid as it is) as a result.

    The open-world is slowly unravelling the applications with Open Office and a number of email clients to beat Lookout, as well as vertical market applications (eg. GNUCash is a full double-entry accounting system).

    You may be surprised at how Linux has progressed.

  16. John A:
    At the start of the year, this conversation had a run. I tried using several of the OS available. No good – it required a knowledge base I just do not possess.
    I use Open Office and have done so for years. In fact, I think I downloaded it in the middle 90’s. Still impressed.
    I also use DOSBOX to play older games on.

  17. Chris M

    the public spending that is taking the economy to death’s door

    Steve what is your opinion of the cash / so-called dark economy? Sadly I’m not part of it but I feel it is not only beneficial but actually essential to the Australian economy and without it the whole place would likely go belly-up fast. Cash exchanged for goods and services in this way does not suffer the dead weight loss of government. If they attempt to ban cash I believe things would deteriorate fast and the negative effect would be way beyond what they anticipate.

  18. max

    It turns out that American history does record an instance in which US ports were closed for both exports and imports, with the desire to harm Britain. The year was 1807 and the president was Thomas Jefferson, of all people.

    The US was trying to stay neutral in a conflict between France and Britain (the latter days of the Napoleonic wars) but British ships started pilfering American goods and sailors for the war effort (still considering Americans to be subjects). Jefferson wanted to avoid a shooting war, but still wanted the US government involved to defend human rights against what seemed to many to be a form of terrorism. Jefferson was talked into using trade power (a supposedly more peaceful solution) in an effort to get Britain to stop.

    The result was a near-total embargo, and probably the closest modern example we have of how national autarky would actually work in practice. Jefferson wrote in a letter that Congress has never been “more solidly united in what they believed to be the best for the public good.” It’s not possible to ramp up a trade war beyond a complete shutdown. In other words, this is a case wherein the president threatened trade intervention of a form far more extreme than has thus been proposed even by Trump.

    The Results of 1807

    The decision turned into the worst disaster of the Jefferson presidency. The trade war of 1807 led to the loss of lucrative trading routes, the breakdown of mutually beneficial trading relationships, a revolt among Jefferson’s electoral base, a victory for the Federalist Party, the rise of black market trading activity, a huge rise in the price of imported goods and a fall in the price of exports, and huge popularity blow against the Jefferson presidency, which was supposed to be about reducing government’s role, not cutting off business opportunities for the American people.

    The entire trade-war effort failed and ended up undermining both American prosperity and the Jefferson presidency.

    Irwin writes (“The Welfare Cost of Autarky: Evidence from the Jeffersonian Trade Embargo, 1807–09”):

    The highly controversial embargo was in effect for just 14 months. Growing domestic opposition to the trade restrictions, particularly in New England, forced Congress to repeal the measure in March 1809. The consensus among historians is that the embargo failed to achieve its objective because Britain and France refused to change their policies regarding American shipping. This was not due to the failure to eliminate trade, but the failure of the trade measures to weaken the political resolve in Britain to suppress neutral shipping in its effort to strangle the French economy.

    So much for the politics of trade embargoes: it undid a presidency and bolstered the enemies of liberty. The tensions of this period continued into the next presidency and resulted in the War of 1812 in which the president had to flee the White House, which ended up being burned by British troops. The trade war became real war. The long-simmering dispute in American history between the nationalists and the decentralists ended up being lost by the good guys precisely because of a trade war.

    The Economic Results

    As for the economics, writes Irwin, “The embargo had a dramatic impact on prices in the United States, driving down the domestic prices of exported goods and driving up the domestic prices of imported goods.” Further: “The best-guess calculation of the static welfare cost of the embargo is about 5 percent of GNP. The cost does not represent the total gains from trade, however, because the initial trading equilibrium was one of restricted trade. Still, the embargo inflicted substantial costs on the economy while it was in effect.”

    It’s stunning to think of: fully 5% of national output. That’s depression levels. These calculations are interesting but don’t come near including the unseen costs of the embargo, the loss of trade routes, the ruined relationships, the diverted resources, the ruined businesses, and so on. All this wealth that was wrecked could have been invested or saved and formed new capital for business expansion during what was otherwise a time of great economic growth.

    https://www.aier.org/article/two-trade-wars-1807-and-2018

  19. Neil

    resulted in the War of 1812 in which the president had to flee the White House, which ended up being burned by British troops.

    And why was the White House burnt by the British? Well the USA had declared war on Britain and did so by invading Canada. While trying to annexe Canada, US troops burnt down Canadian govt buildings. As punishment when they had spare troops, Britain drove US troops out of Canada and burnt the White House as punishment for burning down Canadian govt buildings in Toronto

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