Economics is quite simple and straightforward.

Unless it’s taught by a Keynesian or Marxist, that is:

By this stage, if you still accept Keynesian economics as a legitimate approach to understanding how an economy works, or how to find our way out of recession, you are basing everything on authority and simple faith. It’s in all the texts, but you would think that by now there would be a growing level of dissatisfaction about the irrelevance of textbook theory for making sense of the actual events of an economy.

Well, the problem is that those who are dissatisfied are drummed out of academia.

Keynesian economics will disappear around the same time that the left gives up on socialism and we all know how long that will take. These people will just have to be ignored, in the way they are in the UK.

Economics does provide useful models, ones that really do work and you can use to frame policy. But all such models start on the supply side and revolve around the specific efforts of entrepreneurs living in a world of innovation and uncertainty. In that sense, economics is quite simple and straightforward. The trick is to get 50%-plus-one to vote for policies that make everyone prosperous by making some people quite well off.

Of course, Classical economic theory (that was supposedly debunked forever by Lord Keynes) IS simple and straightforward.  Take Say’s Law, for example:

Dollars have value because of the things for which we can trade them: Picasso paintings (or, ideally, paintings by some superior artist), coffee, cotton, cheeseburgers, sofa beds . . . checks, chickens, or pesos. This is an aspect of what in economics is known as Say’s Law, which holds that goods are paid for in goods — i.e., that we manufacture widgets or grow tomatoes or write novels because we wish to consume shoes and poached salmon and Buicks. The dollar or the euro is just a way to avoid the difficulties of trading a truckload of chickens (or a convoy of them) for Les Femmes d’Alger.

Say’s Law really wouldn’t be adding much of a point at all if the only thing it said was that spending is based on selling. What makes it important in a world of Keynesian economics is that it points out that demand which is not based on having produced and sold, ultimately leads to a fall in output and employment. Where spending is greater than available supply, the economy finds there are more than 100 units of output being bought for ever 100 units of output having been produced. It takes a while for the problems to show up, but eventually they must. When those down the expenditure track try to spend the dollars they receive, they find they cannot buy as much as they thought they would. Some firms therefore cannot pay all their bills and the economy slips a bit further back.

***

Modern economics is based on the fallacy that demand can be manufactured before there is production to match the spending. You can see that such policies do not work by the dismal state of those economies which tried deficit spending to generate growth. You just cannot find these policy failures explained in any of our economics texts, other than, of course, my own.

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Categories: Economics, Keynesian Economics, Thinking like an economist

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