Would the real anti-Keynesian economist please stand up

Classical Economic Theory and the Modern Economy

Here there are two anti-Keynesians in Australia and we both disagree with each other. The headline in the paper was kind of all right – It’s Keynes’s fault – again we go into debt to ‘stimulate’ the economy – but so incoherent was this as an anti-Keynesian rant that it has left me completely nonplussed (defined as: “so surprised and confused that one is unsure how to react”).

A Keynesian believes that economies are driven from the demand side and that recessions are due to a deficiency of demand. The cure for recessions are therefore increased public spending to increase the level of demand, raise the level of activity and return an economy to full employment. You know, from the equation Y=C+I+G etc, where more G leads to more Y and therefore more jobs. Introduced into economic theory in 1936, there has never been a single occasion when a Keynesian “stimulus” has led to a recovery. Not one, not ever.

I should also add that Keynes, in writing his General Theory, made a point about his rejecting this concept called “Say’s Law”. Mere detail to others who enter these discussions. And while I sort of agree with the conclusion of the article, I am completely foxed by how it was arrived at:

Cutting government spending should take precedence over raising taxes. Reduced public spending, particularly on industry assistance and overlap in spending at federal-state levels, should be central to the recovery program.

This should be accompanied by tax reform (including to internationally uncompetitive company tax rates), business deregulation and industrial relations reform. Without this, our economy will remain in limp convalescence for decades.

That raising taxes is even an option is beyond me, but as for cutting public spending I am all in. But unless you understand the reasoning behind the pre-Keynesian position and Say’s Law, you won’t understand what needs to be done, and especially why it needs to be done. Everyone seems to be in for “infrastructure spending” but if we haven’t learned from the NBN, there is no hope for any of us.

Which reminds me that my latest book – Classical Economic Theory and the Modern Economy – is being released just this month.

Economic theory reached its zenith of analytical power and depth of understanding in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains what took place in the ensuing Marginal Revolution and Keynesian Revolution that left economists less able to understand how economies operate. It explores the false mythology that has obscured the arguments of classical economists, providing a pathway into the theory they developed.

I read other economists today and laugh since what else is there to do? Real wages have been falling across the world – other than in the US and then only until recently – since the stimulus programs that followed the GFC. If you want to know why, you could always buy the book, or at least get your library to order it in.

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11 Responses to Would the real anti-Keynesian economist please stand up

  1. 2dogs

    from the equation Y=C+I+G etc, where more G leads to more Y and therefore more jobs.

    The problem with this is that it is a logic fallacy known as “reifying a classification”.

    Y=C+I+G is merely a classification system, not some empirical result. One can create classifications to divide up the total transactions any number of different ways. The totals resulting are completely arbitrary; none of the classifications so created have a real existence in and of themselves. Suggesting that increasing the size of one classification will increase the overall total is mindless paper shuffling. I could just as easily create a different classification system that demonstrated the need to increase in the amount of money paid to me.

  2. John Bayley

    Many of the comments under that article in The Australian make one realise we, as a country, are truly and utterly f*cked.

    Never fear though; our glorious, ‘small government’ (ROFL) Coalition overlords will save us by not allowing international travel ‘at least until next year’.

    If the BS that is ConVid-1984 can still be peddled so shamelessly and yet so successfully to the sheeple, then why not Keynes and his ‘theories’?

  3. a happy little debunker

    Since it is more than arguable that the government suppressed demand (by proclamation & regulation), as long as those restrictions are entrenched in the populace then demand will remain supressed.

    Their plan is to quarantine the healthy until a vaccine can be found for a virus – when the most common viruses still does not yet have a vaccine. (not a great plan)

    But the government thinks it has a solution – abandon those one the front line of the demand curve and support 2nd or 3rd tier industries (especially those with skills shortages) to avoid economic collapse.
    In this instance I would cite the absolute collapse of the tourism & hospitality industry vs the largess afforded to construction that will build all the new hotels, nobody will stay in.

  4. Pyrmonter

    Was tempted to draft a post on this, but, really, it’s beating a dead horse. How is this man still employed? Would someone _please_ send him an intermediate macroeconomics text:

    https://www.smh.com.au/business/the-economy/with-economic-recovery-far-from-assured-the-pm-s-nerve-may-be-fraying-20200616-p5530s.html

  5. Watch Your Back

    Let’s take this at its face value, however modest that may be.

    Assume government decides to borrow and spend very large amounts of money on roads, railways and tunnels. How quickly will these projects get built, how long before workers are on the job? Are we looking 30 months until completion? In which case the recession will not respond to these measures.

    Another way is to cut taxes, slash regulations, make it easier to take on staff, remove wage controls and reduce electricity prices. This could all kick in from 1 July. The response in businesses reopening, investing and taking on staff should be more immediate. Isn’t this worth trying?

  6. Nicholas (Unlicensed Joker) Gray

    A great t-shirt slogan, “To Hayek with Keynesians!” I give up all copyright. Have fun!

  7. Alastair McLachlan

    Would love to buy your book, when will the Kindle version be released ? I have neither the cash nor the space in my life for a hardback, as wonderful as I am sure it will be. Cheers

  8. Rex Anger

    @ Happy-

    In this instance I would cite the absolute collapse of the tourism & hospitality industry vs the largess afforded to construction that will build all the new hotels, nobody will stay in.

    Nah, you’ve just pointed out which industry group has the deeper pockets, the stronger unions and the more obnoxious lobbyists.

    If one was to be hyper-uncharitable and assume that the worse you are to deal with, the more money Da Gummint will throw at you to keep you away from them, then the deals struck to ‘preserve’ jobs make perfect sense.

    To the Union bosses and their lobbyists, their fellow-travelling bureaucrats and the Canberra swamp-monsters that comprise Parliament, anyway…

  9. There’s an island in the middle of the Pacific Ocean that nobody knows about.
    On this island called Say, people are busy fishing, collected coconuts, gathering nuts berries and roots and a small scale crop raising.
    People are specialised in various areas of activity and they barter. Fisherman exchange fish for coconuts, roots etc etc. They don’t have a government as such hence no taxation.
    Their economy can be described thus:-
    Y = C +I

    One day, 4 long boats of foreign natives come to the island and beat up people, kill a few and take away their provisions and some women and girls as slaves and go away.
    The islanders are devastated. The elders gather to discuss what they can do to defend themselves should this happen again.

    A strong young man stands up and says “I can defend us, but I need 20 strong men. We need to develop and make weapons and I need to train them.
    That means I can no longer climb coconut trees to feed myself and nor can my men have time to go out fishing. So all the rest of you will need to supply our daily needs.”

    The elders agree and these 21 strong young men are given an agreed upon amounts of fish, coconuts, roots etc etc.
    Now the island economy can be described thus :-

    Y = I + C + G

    G being the defensive unit of 21 men. They gotta eat too you know.

    Does G increase Y? No, because in order to have G, we must deduct an equivalent amount from I and C.
    The only way G can increase Y is if outside borrowings are made. But even then, those borrowings will have to be repaid at some stage and that repayment MUST come from I and C, i.e short term boost to Y, but a longer term reduction of Y during the life-time of the borrowing.

  10. Interesting that in the 2008 financial crisis, Keynesian fixes created chaos and in the end an accounting detail fixed it.

    https://tambonthongchai.com/2020/02/21/brianwesbury/

  11. John A

    Alastair McLachlan #3488256, posted on June 17, 2020, at 6:11 pm

    Would love to buy your book, when will the Kindle version be released? I have neither the cash nor space in my life for a hardback, as wonderful as I am sure it will be. Cheers

    Same question from me.

    Steve’s last tome was only available through Kobo. I struggled with the software even though I learned a lot from the book.

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