A disgrace to the economics profession – the single most damaging graph in human history

Which has been the most damaging single diagram in the entire history of the sciences? There is not even a contest? The graph is, without any doubt, the Keynesian-cross diagram invented by Paul Samuelson which has been depriving economists of the ability to make sense of economic events since first published in the first edition of his Economics text in 1948.

keynesian cross

The idea for honouring this diagram has occurred to me with the publication by Mark Steyn of his just published book, “A Disgrace to the Profession” which he describes as “the story of the 21st century’s most famous graph and the damage it has done both to science and public policy”. Ah, but the present century is still young and although the harm the hockey stick has undoubtedly caused may well already be calculated in the billions, the harm Samuelson’s 45-degree diagram has done may be calculated in the trillions, and the damage it is doing is far far from over.

For those unfamiliar with the Keynesian-cross, it shows an upward sloping aggregate demand curve which reaches equilibrium where it crosses the 45-degree line at a level of national income well below the level of production that would employ everyone who wants a job. The answer, therefore, is an increase in public spending which pushes the line upwards and therefore pushes the equilibrium level of production along the horizontal axis to the right which then allows everyone to find a job.

The policy has, of course, never ever worked, but the trillions of dollars of public sector waste have drained our economies of astonishing levels of wealth that have kept our living standards well below their potential now for seventy years.

I have written my own book on the disgrace to the economics profession which is now in its second edition. It takes apart Samuelson’s piece of beguiling illogic which has mesmerised the profession since it was first published. It is itself the very height of junk science, which has never on a single occasion given advice that has allowed an economy to raise its level of production and return an economy to full employment. It has, instead, led governments to pour their trillions into one wasteful project after another, of which green energy is only the latest, and while wildly expensive is for all that far from the most expensive example.

Economists who use any of these Keynesian diagrams starting with Samuelson’s are throwing sand in their own eyes. Profoundly shallow it is almost impossible to explain to someone who has been taken in by these graphs why they have been so badly misled. But there you are. No stimulus has ever worked but we still teach the diagrams that say public spending will bring our economies out of recession and give us strong and balanced growth. Do you believe that after what has gone on since 2009? Does anyone? A disgrace, but what is even more disgraceful is that the entire profession continues to accept a theory that has never worked. And there is the diagram that has corrupted the understanding of more individuals than any other diagram in human history.

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16 Responses to A disgrace to the economics profession – the single most damaging graph in human history

  1. rich

    I just finished reading waffle Street. I wish I had a mechanism for pointing out the obvious to true believers en masse.

  2. Steve Kates

    Dear Rich – That is fantastic. And I agree with you and have the same frustrations, but there is no known mechanism to point out the obvious, or if there is, no one has found it yet. But Waffle Street is a great instructional manual as well as a great read.

  3. The ONLY reason that Keynes model is still going is because of its political utility. It allows our ignorant politicians to throw money at projects that a wombat would laugh at, and also allows the spivs, shady characters, and Socialist Wreckers a living they could not dream of otherwise.
    A truly just society would have these parasites digging their own graves, then filling them.

  4. Sydney Boy

    I am currently reading Waffle Street after it was recommended by many cats. Loving it.

  5. Jessie

    I would have thought the bastardisation by Warren Weaver of Claude Shannon’s 1948 Amathematical theory in communication to The mathematical theory in communication (1949) was the most damaging paper+diagram in recent human history.

    Converting an engineering theorem to the social sciences …………………………

  6. Andrew

    Hopefully the new book will highlight the U.S. sequester coinciding with the starting point of their employment recovery. 9% down to 5% while the Keynesians squealed about a 1930s mistake and bringing back depression.

    Then there’s Latvia vs Greece – one took their lumps and emerged from depression with a new high watermark in per capita GDP. The other kept spending and will never recover unless Europe is talked into a 150% of GDP gift.

  7. rich

    But Waffle Street is a great instructional manual as well as a great read.

    Steve, thanks for your kind words. Have you read Nassim Taleb’s Anti-Fragile yet? It provides a little more context as to why, in the context of science/academia/government, sheep tend to bleat “four legs good, two legs better.”

  8. rich

    The ONLY reason that Keynes model is still going is because of its political utility.

    Exactly. The +G in the formula allows the tapeworm of government to convince the body at large that its contribution is an ‘investment’

  9. Hydra

    Thanks Steve for bringing this blog back to economics temporarily…

  10. rich

    When I read Waffle Street, I read another book called “Release It!: Design and Deploy Production Ready Software” – Michael T Nygard
    Software development in this book talks about “bulkheads” to avoid catastrophic failure because failure WILL happen, but the links between different systems and debt vehicles allowed one crash to cause the entire financial system to crash. It became very clear to me after reading Waffle Street that the central banks in Western countries provide a common link or fault line

    Perhaps debt could be packaged up and sold in the market any way we like. What needs to be articulated to customers, however, is that “buyer beware.” Not only that, there should be a “red line”, a string through the debt layers allowing any layman to trace to the capital that is leveraging the debt, through all of the layers. That is the piece of regulation needed: it’s unacceptable that someone’s life-insurance policy can be compromised by someone else foreclosing on a house. Too much impenetrable butterfly effect action there.

    Ultimately producers should be making money through production and productivity, not just cleverly rearranging financial matters. Rearranging finance is a legitimate business, but it should not allow that industry to arbitrage against the rest of society like an old carny confidence man.

  11. Rabz

    To its credit, the great thing about the Samuelson graph is that like so much so called “economic theory” it is both evidence free and utterly unencumbered by the constraints of reality.

    A perfect metaphor for all unrelenting governmental idiocy.

  12. Lem

    To its credit, the great thing about the Samuelson graph is that like so much so called “economic theory” it is both evidence free and utterly unencumbered by the constraints of reality.

    On viewing that graph, it is the most perfect bit of opaque gobbldigook. What the hell does it mean, a first year economics student might ask, followed quickly by the realisation it is only necessary to reproduce it to pass whatever the subject is, and much later by the realisation that it is the most perfect way to ensure those with the power to appropriate* taxpayer funds hand them over double quick for their mutually assured political benefit.

    (* steal)

  13. Lem

    p.s. I jut downloaded Waffle Street, looking forward to a great weekends reading.

    I noted this review on Amazon.com.au:

    “Someone can get a better grip on how an economy works by reading about adventures as a server in a waffle house than they can get by reading the ten most respected economic journals in the world. Few books have made me laugh the way yours did, and it taught me a good deal about other things as well.” —Steven Kates, Former Chief Economist for Australian Chamber of Commerce and Industry, Royal Melboune Institute of Technology (RMIT) University

  14. 2dogs

    The bizarre Keynesian logic involves:

    1. Creating a somewhat artificial taxonomy to classify events within a particular domain (i.e. dividing Y into C, I, and G);
    2. Totalling the events within each class of that taxonomy; then
    3. Somehow imagining that those totals themselves describe real physical quantities with features like akin to inertia and responses to stimuli and forcings.

  15. Rabz

    What the hell does it mean, a first year economics student might ask

    Been there, done that, Lem. As a 17 year old undergraduate.

    It made me the economist I is today.

    Eternally skeptical.

  16. Mique

    Just finished “Waffle Street”. Loved it. Now for Steve’s book on Say’s Law.

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