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墨尔本指导Keynesian Economics: the Beginning of the End
Steven Kates
RMIT University
Melbourne Australia
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Let me begin with the point I wish to establish. The problem with economic policy is the economic theory that lies behind it.
Economic theory is based on explaining the cause of fluctuations in activity and
employment on variations in aggregate demand which leads to the conclusion that the
means to restore strong rates of growth and full employment is through raising
aggregate demand through increases in public spending.
Both the theory and the policy conclusions are wrong. As to the theory, fluctuations in
economic activity and employment are not caused by variations in aggregate demand.
And in terms of policy, raising the level of aggregate demand through increased levels
of public spending will not restore growth and full employment. Such policies will, in
fact, reduce real growth and keep unemployment higher than it otherwise would have
been.
Everything I say about theory and policy was perfectly well known to every
economist from the early decades of the nineteenth century through until the
publication of The General Theory of Employment, Interest and Money by John
Maynard Keynes in 1936.
But with the coming of Keynes and Keynesian theory, economics has been infested
by a conceptual disease that appears almost impossible to eradicate no matter how
many failures it has had and in spite of its total absence of success.
The bitter pill that will need to be swallowed by various governments will be matched
by the need for the economics profession to renounce at long last the Keynesian
infection that is burrowed deep within macroeconomic theory.
Governments can, of course, be thrown out and replaced by new ones who are happy
to denounce the policies of those who had come before. But how an entire discipline
can finally be made to recognise that resident at its very core has been a theory of
such devastating error that any policy judgement built from it is almost certain to be
wrong, how an entire discipline can be made to recognise that this is in fact the case, I
do not know. I suspect it cannot be done.
Say’s Law
What economic theory did in 1936 was discard what had until then been one of its
bedrock principles, a principle originally known as “the law of markets” but which is
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墨尔本指导assignment now almost universally referred to as Say’s Law. It was a principle which had been
guiding theory and policy by that time for more than a hundred years.
To economists, I point out that Keynes was at pains to demonstrate that his General
Theory was a full book-length effort to refute Say’s Law. That was the expressed
intent of the book and that is what it most assuredly did. And it is an either-or
proposition. Either Say’s Law is valid or Keynesian economics is valid.
They are mutually exclusive. If one is right the other is not. If you agree with Keynes
and reject Say’s Law, then you are a Keynesian because that is all that Keynes wanted
you to do. Everything in the General Theory was stitched together in the way it was in
order to show that Say’s Law was wrong. Therefore, if you think Say’s Law is wrong
and Keynes was right, then you are a Keynesian.
But before I go on to explain what Say’s Law is, I wish to clear one matter away.
Say’s Law is not a proxy for laissez-faire. Although it was the law of markets, it did
not in any way suggest there was no role for government. It is not a restatement of
laissez-faire. It is not a statement about the role of the state in economic affairs.
I make this point because I often come across statements in which Say’s Law is used
as a metaphor for free markets. I therefore wish to guard you against this. It is in no
way a political statement of any kind. It is a more or less technical conclusion about
how market economies work and from which there is much to learn about how to
manage an economy.
Let me also make one more observation. In March I had the honour of presenting the
Ludwig von Mises Lecture at the Mises Institute in Auburn. Until that time, I would
have said that while only a minority of the profession understand the meaning of
Say’s Law, a fairly sizeable proportion do.
Having presented my paper, however, I am now led to the conclusion that it is only a
very small minority who have any idea what the concept means and why it is so
important. Economists no longer know enough about Say’s Law even to lead them to
an informed rejection of its central message.
Economists can glibly repeat Keynes’s set of words, “supply creates its own demand”
– words which every single economist virtually without exception knows – but could
not give you an intelligent explanation why every single mainstream economist before
Keynes thought Say’s Law was utterly true and crucially important.
If you would like to see the presentation I did at the Mises Institute, you can find it on
Youtube under its title, “Why Your Grandfather’s Economics was Better than Yours”.
It explains how Keynes overturned this universally accepted conclusion in economic
theory and more importantly in my view, shows through the various propositions that
underlie the actual meaning of Say’s Law how it should be understood as a related set
of concepts.
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Defining Say’s Law
Let me therefore come to explaining the meaning of Say’s Law. And to do this, I will
invoke the classical pre-Keynesian words that were typically used to explain its
meaning. And there are two such forms of words:
• there is no such thing as a general glut
• demand is constituted by supply.
But even before I explain these, I have to point out one of the profound differences
between modern macroeconomics which is utterly Keynesian in its orientation and
classical economic theory as it was understood prior to the publication of the General
Theory.
Macroeconomics, like its Keynesian parent stem, is understood from above. There are
great lumps of abstractions that have dealings with other lumps of abstractions. There
are consumers, investors, governments who buy, invest and spend. This is the world
as seen from high above on Mt Olympus say, or amongst economists working on
economic questions inside a nation’s capital.
These are abstractions upon which data can be collected and such numbers can be fed
into a computer program. There are no actual people, no human motivations, no actual
effort or failures. There are just major groupings of abstract actions against a
colourless background of nondescript undifferentiated individuals none of whom do
anything more remarkable than anyone else.
Nothing in this approach will explain innovation, change or growth.
Classical theory was as different as different could be. Classical theory was
understood as a relationship amongst people. The focus was brought down to ground
level. The focus was brought down to a human scale, where actual individuals lived,
worked and strove to get what satisfactions they could from life. Economics was
based on individuals finding themselves within a set of circumstances with the
challenge at hand being to make the best of whatever hand they were dealt.
The crucially important difference was perspective. It was about real live people
trying to find ways in which to better themselves which, as the theory showed, also
tended to better their communities as well. This is Adam Smith:
“It is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner, but from their regard to their own interest.”
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This is the essence of an exchange economy amongst producers. It makes no
difference if one is the butcher or the butcher’s assistant, the master brewer or the
brewer’s apprentice, each is helping produce something for someone else to buy so
that they can earn incomes to allow them to buy what others have produced and put
up for sale.
Now where are we? We talk about consumption is a function of income, while we
manipulate broad aggregates. The butchers, brewers and bakers have evaporated into
thin air. Even in micro we talk about supply and demand without ever mentioning that
behind every point on every curve there is an assumed human being with an assumed
set of motivations who are doing particular things for particular reasons.
All that is gone, and we are left with a desiccated dried out set of theories in which
there is not the slightest evidence that someone has thought past the mathematical
relationships to the actual human beings beneath.
No Such Thing as a General Glut
Say’s Law is part of the economics of the world of actual people behaving as real
people might be expected to behave. The first of the overall definitions of Say’s Law
was: there was no such thing as a general glut. In today’s jargon, this would be
translated as: demand deficiency is never the cause of recession.
What this meant was that an economy would never enter recession because people
did not want to buy more. It went further. It stated that it was inconceivable that an
economy would ever be able to produce so much that the population would have so
much already that to satisfy their remaining wants did not require everyone who#p#分页标题#e#
wanted to work to have a job.
This was inconceivable in 1803 when Say first wrote what would eventually be called
Say’s Law. It was inconceivable in 1936 when Keynes published his General Theory.
And it is inconceivable today in the midst of the multitude of products we now take
utterly for granted.
Now if one said to a classical economist, what would people do if there were some
unexpected economic crisis, they would have said that they would likely have hung
onto their money while danger passed. This is not conjecture; that is exactly what they
did say. If business confidence were low or economic conditions became highly
uncertain, there would be a reluctance to part with money and so spending would
diminish.
Does this prove that demand deficiency causes recession. Of course not. It proves that
in recession everyone becomes more cautious until the danger is seen to have passed.
It may take one month, maybe three, perhaps in really bad times six months, but
eventually optimism returns and the upturn begins. It may take years to return to prerecession
conditions but unless things are made worse by inept government programs,
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the healing processes of a market economy begin to gather force much sooner than
modern theory typically gives it credit for.
But to think that a refusal to spend during a crisis was evidence of demand deficiency
– a general glut – was recognised as nonsensical. It was nothing other than a passing
storm, and to know the difference was then a simple part of the general understanding
of an economist. Today, it is only one economist in a hundred, if even that, who
understands such things and keeps them firmly in mind.
Demand is Constituted by Supply
Let me now turn to the other way in which Say’s Law was expressed. That was to
point out that demand is constituted by supply. Keynes’s mangled version was
“supply creates its own demand”.
To any classical economist, the word supply in this context meant “value adding
production”. Even this, to modern ears, is barely enough so it is important to specify
that value adding meant that the value of output must be greater than the value of the
inputs that were used in its production.
In a market economy, where production is for profit and producers who cannot cover
costs disappear, it was good enough to just say supply because what else was there.
Now, of course, there are no end of buyers who contribute nothing at all to the sum
total of goods and services others would willingly pay the full cost of production to
possess.
But in the days before macro and massive increases in public spending, the ability to
buy was dependent on one’s ability to sell. This is again a ground level view of the
operation of an economy. Butchers would buy from brewers, brewers would buy from
bakers, and bakers would buy from butchers.
And where did they get the incomes to do all this buying. Brewers would sell to
butchers, butchers would sell to bakers and bakers would sell to brewers.
There was then embedded at the very core of understanding of an economy the
necessary mutual accommodation in which each producer tailored their own
production to the demands of others while they trimmed their own expenditures
depending on how much they earned.
If you build in on top of all of this an appreciation that wants are near enough infinite,
the notion that a market economy will be run into the ground by demand deficiency is
just about as nonsensical an idea as one can find.
Causes of Recession
This little apparatus gives you an idea of how the whole process might break down
into the occasional recession. The Keynesian falsehood – absolute falsehood – that
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classical economists assumed away the possibility of involuntary unemployment is
still taught to this day. But quite obviously it was untrue as even the mildest
recognition of the existence of the theory of the cycle would clearly show.
The causes of recession were never demand deficiency – there is no such thing as a
general glut. They said that and I say that. If you wish to know why economies enter
recession, look elsewhere.
And where to look was in the structure of demand relative to the structure of supply.
We have our butchers, brewers and bakers selling to each other. I could be political
and point out how a new tax on alcohol might affect production and sales or how new
regulations in the meat industry could affect relative prices.
But really, anything at all can happen to upset the relationship between purchase and
sale. Mad cow disease, the return of prohibition, or wheat fields given over to ethanol
production; each can have a major effect on production costs, relative prices and
product demand.
So too can positive new features in each market. Innovation and new products can
upset established markets. Exchange rates can move and export demand can increase.
And of course, there are the effects of monetary policy and the credit creation system
that can have major distorting influences on every market.
This is the classical theory of recession, structural maladjustments of one sort or
another. It also makes it evident that recessions will be with us always. This is a
theory that makes sense. You can see how the GFC started and built using this theory.
Try explaining the downturn in 2008-09 using Keynesian economics. Keynesian
theory, so far as explaining the onset of recessions is concerned, is shallow, utterly
without penetration or insight. It is only because we have known nothing else for
seventy years that we put up with it. But it cannot explain a thing.
Say’s Law and Classical Policy
But not only is Keynesian economics useless in explaining why the recession
occurred, it is even less useful in trying to think through what ought to be done next.
A Keynesian sees the problem as demand deficiency. There is no other scenario,
nothing else is included in the reference frame. The policy solution is therefore some
variant of instructions on how to raise aggregate demand, whether by lowering
interest rates or raising public spending. Deficit finance is an intrinsic part of the
Keynesian program.
Starting from classical theory and Say’s Law, however, two matters are clear. The
problem is not demand deficiency. And to get the economy moving again, the answer
can only be found on the supply side of the economy.
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The major aim of classical policy was to allow the market re-adjust. To raise
employment it was first necessary to raise the level of value adding production. All of
the emphasis would have been on the supply side.
Moreover, because of Say’s Law, no economist before Keynes would have been
unaware of the impossibility of spending-on-anything road to recovery. They would
have understood it because they understood in their bones what Say’s Law meant.
They would have understood that to produce goods and services whose production
costs are greater than their value will slow the recovery process, not hasten it.
It is now as clear as day that the massive expenditure programs carried out around the
world as an attempt at an economic stimulus have not worked. They have not even
remotely worked. The private sector in the United States has been virtually moribund.
Meanwhile, the rate of unemployment rose beyond the highest level projected had
there been no stimulus at all and has remained high and is expected to remain high
well into the foreseeable future.
Below is a chart dealing with the American economy which is pretty well self
explanatory. The green line is the stimulus expenditure, the yellow bars are the
unemployment rate and the dotted line shows the maximum rate of unemployment
that President Obama said would have been reached had there been no stimulus.
Source: Veronique de Rugy from National Review Online (24/vi/10)
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The Demand for Goods and Services is Not the Demand for Labour
The fact of the matter is that there is not a single stimulus program implemented after
the commencement of the Global Financial Crisis that has actually worked. Not a
single one has created employment. Not a single one has brought the rate of
unemployment down.
The two most prominent examples of such stimulus programs were the American and
the British. The American, as the chart above has shown, has turned out to be useless.
The British led to an equally abysmal result with the new government of the UK now
in the process of bringing the British economy back into fiscal balance.
Demand is constituted by value adding supply. Demand that is created through
producing goods and services whose production costs are greater than the value of the
output at the other end of the process create neither an increase in demand or an
increase in employment.
Once upon a time, to understand this was not quite second nature to an economist but
was seen as one of the unintuitive conclusions that came with a proper understanding
of economic theory.
In the passage below, I am quoting Hayek directly, who is quoting a nineteenth
century economist Leslie Stephen (now best remembered as the father of Virginia
Wolf) who was himself repeating one of John Stuart Mill’s most celebrated economic
conclusions first published in 1848, that the demand for commodities is not the
demand for labour. And this is what Hayek wrote:#p#分页标题#e#
“John Stuart Mill’s profound insight that demand for commodities is not demand
for labour, which Leslie Stephen could in 1878 still describe as the doctrine whose
‘complete apprehension is, perhaps, the best test of a sound economist’, remained
for Keynes an incomprehensible absurdity.” (Collected Works, Vol. 9. p. 249)
What to Hayek was a “profound insight”, what to Leslie Stephen was “the best test of
a sound economist” was to Keynes “an incomprehensible absurdity”. And so it
remains today, not just to Keynesians but to virtually the entire profession most of
whom could not be made to understand this under almost any imaginable conditions.
In the straightforward words of today, what Mill wrote was this:
“Buying things does not create jobs”.
He wrote this before there had been a single stimulus package anywhere in the world.
He wrote it because of the pure logic of how economies work. And the logic it was
based upon was the logic of Say’s Law.
But now we have seen stimulus programs. We have seen the New Deal, the
stagflation of the 1970s, the failure of the stimulus in Japan in the 1990s and now all
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of the many similar failures around the world. We have actually seen that buying
things does not create jobs, but unlike during classical times, we no longer have an
economic theory to explain the outcomes that are occurring right before our eyes.
For a discussion of this proposition of Mill’s (as well as many other matters relating
to Say’s Law), see my Say’s Law and the Keynesian Revolution (1998: 71-73). Let me
therefore quote myself from this work on these very issues, also written well before
our present failing public spending programs:
“Stimulating demand will do the unemployed no good. Raising consumption may,
in fact, lower the ability to employ rather than increase it, if it consumes capital
that might otherwise have been diverted into payments to labour. The cure for
unemployment does not occur through actions taken on the demand side, but
through actions which raise production.” (Kates 1998: 73)
Is there one economist in a thousand who any longer understands this? The Keynesian
Revolution has been astonishingly destructive of the ability for economists to
understand how an economy works. Mill did not, of course, know Keynes but he
knew many “Keynesians”. Mill wrote that amongst the economists of his own time
most at times spoke as if buying goods was identical to hiring labour.
“[They] occasionally express themselves as if a person who buys commodities,
the produce of labour, was an employer of labour, and created a demand for it as
really, and in the same sense as if he bought the labour itself directly, by the
payment of wages.” (Mill [1848] 1924: 80)
And of such economists Mill was in despair:
“It is no wonder that political economy advances slowly, when such a question as
this still remains open at its very threshold.”
Not only did economics fail to advance slowly or otherwise, with the arrival of
Keynesian economics it retreated back into its Stone Age. Think of this. Because of
Keynes, it is probable that economists today understand the operation of our
economies less well than did the economics profession of a hundred and fifty years
ago. If that does not cause you to despair, I cannot imagine what would.
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墨尔本指导Bibliography
Kates, Steven. 1998. Say’s Law and the Keynesian Revolution: how macroeconomic
theory lost its way. Edward Elgar: Cheltenham.
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