Corrections to the blogosphere, the consensus, and the world

Monday, February 23, 2009

Say what?

In the age a few days ago

"Government spending spree has no real-world benefit
Steven Kates
February 20, 2009

....
A few days ago, I found the following in the latest issue of the Claremont Review of Books. This is a quote from George Gilder as part of a symposium on government and economic crisis. In it he wrote something that should be kept in mind as governments go about spending on their favourite projects. He, of course, was speaking of the United States. His point is just as valid here.

"Meanwhile, the profession upholds the phantasmagorical models of demand-side economics. Because these models find no confirmation in reality — as Jean-Baptiste Say proved centuries ago, demand is always and only a side effect of real supply — established economic theories are extremely difficult to learn and remember. You get Nobel prizes for minor and obvious insights in economic geography. Thus the exponents of the standard model are deeply threatened by any reality-based economics."

What Gilder is discussing is something called Say's Law, the very cornerstone of pre-Keynesian economics. A properly educated economist before Keynes published his General Theory in 1936 would have understood that only goods buy goods, with money as a mere intermediary. When all was finally said and done, each person could only buy with the value added they had created, which had then been converted into money.

I work and help in the production of some good or service. I am paid money for what I have produced. Others do the same and we each buy from each other using the money we have received for actually having created some value. Money makes the exchange more efficient, but beneath it all, the actual purchase is made with each person's own productions.

So the fictitious invention of demand through handing out deficit-financed tax cuts cannot stimulate demand unless it stimulates supply first, which it won't.

The great disaster of Keynesian economics was the introduction of the aggregate demand curve that had not existed prior to 1936 and was specifically rejected by economists before Keynes. That was what Say's Law meant.

And I am not talking about economists in 1803, when Say wrote his first book, but economists throughout the entire period from the mid-18th century right through to the publication of the General Theory.

Any policy dependent on shifting the aggregate demand curve will fail precisely because there is nothing in reality that corresponds to what the aggregate demand curve is supposed to represent.

.....

Dr Steven Kates teaches economics at RMIT University in Melbourne."


Without knowing anything about either Say's law or Kates it does seem extremely odd in twenty-first century western secular culture, to the point of being difficult to comprehend, that it should be put forward as an argument for a position that everybody believed it from 1803 up to about 1934.

And one does, of course, know a little about George Gilder. Here, I'll generously google him for you. George Gilder.

Being scrupulously honest, I have to say that what I thought I knew about Gilder wasn't correct - from memory, I thought he was one of the Dow 36,000 boys, disproved on checking Amazon (and I see that there's still a market for this stuff - Dow 100,000; and Dow 30,000 by 2008 - Why It's Different This Time - Second Printing; and Why the Real Estate Boom Will Not Bust - And How You Can Profit from It - keepers, all). No, Gilder was a different bubble. Point still stands, though: not really a cite carrying heavy credibility.

1 comment:

John Hannoush said...

Actually there is some reasonable criticism of the vulgar Keynesianism that underlies the "spend out of recession". For example estimates of jobs "created or saved" often seem to ignore the possibility that workers employed on government funded projects could have been employed elsewhere anyway. That's why the mantra includes "targeted". At a different level, one criticism is that Keynes' basic inisght was a social psychological insight about individuals' behaviour when economic activity is turning down. The empirical evidence is not conclusive for this approach - most assume that the New Deal is conclusive evidence but it isn't really - unemployment stayed very high through the thirties. Japan's experience of massive public works and pretty much zero growth seems a counter-example (espcially as it ended up with a national debt of 180 per cent of GDP). And when you see (as I have) people respond to this by saying "Ah well they didn't do it comprehensively enough" I get worried.
So in all I don't thnk you can just pack Keynesian economics in with all the other things that a decent secular society has to believe in.
PS When are you going to put a photo on your Facebook?

J

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