Why Your Grandfather’s Economics Was Better Than Yours

0:00I'd like to take this opportunity to recognize the people in our program who have traveled very long distances from foreign countries to be here. We do have people from France, Ireland, Guatemala, Great Britain, Germany, Chile, Dominican Republic and Turkey, which allows me to segue nicely into the introduction to this lecture. Our speaker has come 8-10,000 This is the Ludwig von Mises lecture. Dr. Stephen Cates spent most of his career working as the Chief Economist for the Australian Chamber of Commerce and Industry. Until last year, he was also Commissioner on the Australian Productivity Commission, the Australian near equivalent of the U.S. Council of Economic Advisers.

0:51He co-directed a massive study on science and innovation as well as working on other areas of the Commission's work. He is now an academic at the RMIT University in Melbourne. Most of his research is in the history of economics, in which his most intensive contribution has been in the area of Keynesian economics and Say's Law. Dr. Cates was born in Canada but has spent the last 35 years in Australia. He holds an honors degree in economics from the University of Toronto, a master's of arts degree in economics from the University of Western Ontario, and a doctorate and Economics from Latrobe University in Melbourne. He has been a visiting scholar at Cambridge. His PhD thesis was published in 1998 as Say's Law and the Keynesian Revolution, How Macroeconomic Theory Lost Its Way, and I highly recommend the book. His latest book is an edited collection on the global financial crisis which includes a number of Austrian scholars. It is titled Mainstream Economics and Its Failings. Dr. Cates will speak to us on Why Your Grandfather's

1:56Economics was better than yours. Please join me in giving a warm welcome to Dr. Kates.

2:09Thank you very much. I appreciate that. And I'm very grateful to Joseph Salerno himself and to the Mises Institute for inviting me. It's a great honor for me to be able to present Why Your Grandfather's Economics Was Better Than Yours, Present Company Exempted

2:52for many years with great interest. At the turn of the century back in 1999, December 1999, I put together a, I was writing a column in the Canberra Times at the time, and I did a column on the ten most influential economists of the 20th century, and the reason I used the word influential is that there is no one but Keynes who you can put first, and I didn't want to say the best, the greatest, I just want to say influential, which Keynes was, but when I did that list, I then had numbers two and three as you can see, and my second one was Friedrich von Hayek, and the third one was Ludwig von Mises, and what I said about von Mises at the time was this, that Ludwig von Mises took the fight up to the socialist dogmas of the early 20th century and showed on paper that no economy could ever solve the problem of allocating resources without a price mechanism, free markets and private property. Who doesn't know it now? He knew

4:02it 80 years ago, which is right, except that I might revise it now. Who doesn't know it now? I would say legions don't know it now. Anyway, there is something else I've always used. I always tell people how I have in I have a common with von Mises and it's this that he was the economist for the Austrian Chamber of Commerce for 24 years. I was economist for the Australian Chamber of Commerce for 24 years. So that I think we have this common. But I think what it means it actually has a more important thing and that is when you are the economist for a business association, You see things and you're involved with things that most people are not involved with.

4:54And therefore I think it helps you shape your view of the world. And one of the things that was important for me, one of the reasons I actually think that in my own way I reinvented Say's law by accident, was that we have something, a tradition in in Australia was much worse back when I began called the national wage case and in the national wage case something like at the time 90% of the wages in Australia not the minimum wage 90% of the actual wages paid were determined by a central body called the Australian Industrial Relations Commission and I used to go in on behalf of the employers and say why they shouldn't And the unions would come in on the other side saying why they should be raising wages, and one of the arguments the unions used to put up was you should raise wages in order to stimulate demand.

5:56And it's interesting, I've seen that argument all the way back to even prior to the Great Depression, the unions have been using that argument for something like 80, 90 years. So I put together an argument and said, well that really doesn't make sense. You can't stimulate demand by taking money from business, giving it to someone to spend, and then have those people spend it in your business as if you're better off at the end of it. So that, and what, I mean it's the obvious of it is that you simply can't create demand by taking money out of somebody's pocket and giving it back to them. But strangely, and then I had an early interest in history of economics, and I was reading John Stuart Mill.

6:42And I came across exactly the same argument. And this was actually in his principles first, but then I came to this in his essays. This is written in 1844, and it's a culmination of something in economics called the general glut debate, which I'll come back to in a minute. But really what Mill was writing in 1844, at the very end of it, he's saying, look, you know, we've had this argument out and now we know the true answer. And he said, quote, the utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. I mean, way back then, he was saying, people used to think this, but no one would be so stupid to think this now.

7:33And he said, and it is no longer supposed, and this is the same argument I was trying to use, that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods. You see, now what I did not know, and I thought, oh this is really interesting, this is my argument, this is what I've been saying in the wage case, and here I find it in the mill. And what I didn't know, was what I had stumbled across by accident, was Say's Law. And what Say's Law actually says, and I'll go into this in a bit more detail, What it actually says is that high levels of public spending do not encourage industry. I mean, we just think it automatic. If you take your typical standard Keynesian text, you think that's just public spending, good for industry.

8:27Back in 1844, they knew it wasn't so. Spending does not of itself great growth and employment. You cannot make an economy prosper through expenditure, but only through value-adding production. production and demand does not drive an economy forward nor does demand deficiency cause recessions. Now this was the very core of what John Stuart Mill was arguing in 1844 and he was summing up what everybody by then agreed with and he was making a statement that would be accepted by economists all the way through to 1936 with no exceptions amongst the mainstream. Now what the Keynesian Revolution did, and this is what Keynes did, was that he deliberately and willfully destroyed Say's Law. That in fact, you cannot, in my view, understand the Keynesian Revolution or even modern macro relative to what came before without first understanding what Say's Law is and what Say's Law meant to economists before Keynes actually not only destroyed it as a concept, but actually almost completely made it impossible for someone to know what Say's Law really meant.

9:54The question is, what was revolutionary about Keynes? We talked about the Keynesian Revolution, but what made it revolutionary? And what is very clear, what is very clear, if you read the general theory and if you look at itself, Keynes himself is as specific as you want. You can go to any number of textbooks now and they'll tell you what the general theory was about and they'll tell you it's about risk versus uncertainty or it's about this and that. Keynes was in no doubt whatsoever that he was refuting Say's Law, which he was. Not properly, not correctly, but he was actually trying to do it. And what he was talking about was Say's Law. And interestingly, that he got the idea from reading Malthus.

10:46Now this is kind of one of those things that if you say this to almost any Keynesian economics, Keynes goes out of his way to say what a genius he was, and how he worked this all out, and then afterwards discovered that others had had the idea before him, including Malthus, when in fact the evidence is so overwhelming now that he got the idea by reading Malthus that, anyways, so general theory comes out of Malthus, what has Malthus got to do with anything? Malthus was the Keynes of his own time, he was the single most Malthus was a famous economist in the world, bar none, Keynes had written as we heard on two days ago, he had written a book that was a worldwide sensation, the economic consequences of the peace, made his name a worldwide, there was no one more famous as an economist than Keynes by the time he wrote The General Theory, Malthus was in the same position, called On Population and On Population is the book about how population will

11:57continue to rise above until either pulled back by not enough food or plague or disease so that he wrote his economics textbook in 1820 it wasn't just another textbook by another economist it was written by the single most famous The famous economist in the world. And the thing that made Malthus' text so unique and different from all the others of his time was that he went in and he specifically said, you know, the reason we've had this recession, the recession following the polionic wars, the reason we've been having this recession is because there isn't enough demand. Now you go, we're talking 1820, we're talking an era of such, if you think about it, how low the living standards were, but already by then, by 1820, the Industrial Revolution had been so successful, that relative to even in their own memories, people were looking fantastically prosperous.

12:59And he said, we are not buying the stuff, that's the problem, we're saving rather than spending. Malthus had vehemently opposed Ricardo's doctrine that it was impossible for effective demand to be deficient, but vainly. So he's saying, here was Malthus, this genius, here was Ricardo, this really overblown economist, and Ricardo had said that it was impossible for effective demand to be deficient. Malthus had opposed that. For since Malthus was unable to explain clearly, apart from an appeal to the Facts of Common Observation, how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction and Ricardo conquered England as completely as the Holy Inquisition conquered Spain.

14:13So what you had here was Keynes saying that the big mistake we made in economics was that we followed Ricardo and not Malthus, if only we followed Malthus. And so what he says, again this is Keynes, a continuation of that passage, a great puzzle of effective demand with which Malthus had wrestled vanished from the economic literature. Now that is the truest statement Keynes ever made. There is nothing else in general theory like it. It is the only one. No economist ever thought about what I call R&D, recession and Depression, in terms of demand efficiency for the following almost a hundred years.

14:59No one did that. It was just simply verboten amongst economists. And so, as Cain said, the celebrated optimism, this is a general theory again, of economic theory, is to be traced, I think, to their having neglected to take account of the drag on prosperity, which can be exercised by insufficiency of effective demand. And then he says, Say's law, you see, this is demand efficiency, Say's law, is equivalent to the proposition that there is no obstacle to full employment. Now anybody who's done economics just knows this is in fact we're all taught. If you are taught economics and you're taught this at all, you're told, look at all those crazy classical economists, they always assume that you're going to have a fully employed economy.

15:50What idiots. Thank goodness Keynes came along. Now, there have been 150 years of recessions and downturns and depressions and yet Keynes was somehow able, his authority, his name, to get away with actually convincing, and everybody to this day even thinks it, that up until then there was no acceptance of the possibility even of long-term mass unemployment and recession. Therefore, if you want to understand what Say's law is, you have to see it in relation to the response of classical economists to Malthus.

16:36Malthus writes his book in 1820. It is not enough to say that, you know, as Keynes wrote, Supply creates its own demand or any other short form version of what Say's Law is. You have to see it in the longer term in a series of propositions. It is not, I shall also say this, it was not called Say's Law during classical times. It's very important to know this, that when Cain said Say's Law, he was saying something was something that was actually a new term that had been introduced into economic discourse and the interesting thing about the fact that it had just been introduced was that it was an American term and the fact that it was in America was discussed here on the American side of the Atlantic but was unfamiliar amongst those who would be reading general theory in England and the other thing I find just so remarkable, one of those pieces of research The phrase supply creates its own demand, which is Keynes' phrase for what Say's law meant, was actually first written by an American economist.

17:56He was the professor of economics over at LSU, a guy named Harlan McCracken, and he's the one who invented this term. and there is no question whatsoever that Keynes directly took this phrase from McCracken because McCracken sent him a copy of his book in 1933 and Keynes wrote back and said thank you very much for your book, I have now read it in full so that there is no doubt that Keynes was getting these ideas from American economists and he has told nobody, he said I got all these ideas myself

19:03in French, which because Say being French himself was a theory to deboucher and we brought it into English law of markets. And really it's, there's a lot of history on this, did he get it from Turgo, where did it come from, but happy enough to see that Say gets the kind of credit for it. But it's a series of propositions and bearing in mind that the The propositions are all in response to Malthus. Malthus saying that these recessions are being caused by demand deficiency. There is then a series of propositions to grow out of it.

19:48And what needs to be actually said, when I put these propositions together, you also have to take into account what Keynes said. In Keynes said, there's no obstacle to full and Social Employment. So, the first of these propositions is this one. And this is it. And this is, this is, as I, when I, if I have a short-form definition of Say's Law, it's this. Recessions are never due to demand efficiency. An economy can never produce more than its members would be willing or able to buy.

20:34High levels of savings do not cause recessions. In the paper I have with this, I have four different sets of quotes going back through time. I think the first one is Adam Smith. I have one from Marshall, another one from Mr. and Mrs. Marshall, but there's this fourth one, and it's from, it's from Friedrich Hayek and it's from 1931. It's interesting here again, there's this question, why didn't Hayek go after General Theory when he could? Part of the reason was, as we've heard, and I think he had said it himself, that, that, no, Keynes keeps changing his mind, why should I keep spending life, my life trying to refute what he He will then realize it was wrong to begin with, but there's another reason, and that is in 1931, he wrote this massive paper, 30-40 pages long, dealing with two American under-consumptionists, and in that paper he writes this, and he says, I'll just read it again, The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production is almost as old as the science of political economy itself.

22:00Because the idea recurs in the writings of Malthus, which gave rise to the celebrated theory de de Boucher, of J.B. Say, you see, here was Malthus saying it, and J.B. Say responded to it. In spite of many attempts to refute it, it being the assertion that saving renders purchasing power and consumption insufficient, in spite of many attempts to refute it, it permeates the main doctrines of socialist economics. Even back then, that's what they all depend on, a socialist economist, would always say, ah, there's not enough demand, it's a very essence, it always had been a very essence of what's socialist economics. And then he says something that's kind of ironic in the end of it, fortunately it has not succeeded as yet in depriving savings of its general respectability.

22:54so that five years later when Keynes writes a general theory that that just simply goes out the window it is what Keynes does but that first proposition that first proposition the man deficiency does not cause recessions was the essential point in understanding what all pre Keynesian economists believe now the second one is what is demand where does it come from where where is it and And it was an essential concept within all classical economists understood this, it was intrinsic, it was in their bones and it was that demand is constituted by supply, that be able to supply, it's a sequence, to be able to demand you must first supply, that it is embedded, your ability to demand is embedded in your ability to first produce something for somebody else.

23:51Well the example I give here is from a chap named Henry Clay. Henry Clay wrote what I think is the best economics textbook written in the 20th century. Wrote it in 1916. You can still buy it on the net for about $8, but it's one of those books which is quite extraordinary. If you look at his public history, it goes 1916, 1918, 1919, twice, 1921, 1920, continues right up to 1942, I think, at which point he puts in a second edition, and it's 1943, and then 1944, and then gone. Why gone? Because Keynesian economics will come in. Suddenly we're going to have the Samuelsons replacing the Henry Clay's.

24:40And what Henry Clay says is this, it is only because our exchanges are made through money that we have any difficulty in perceiving that an increase in supply is, well those are not my brackets, that's his brackets, it's is, not causes, is an increase in demand. An increase in supply is an increase in demand. What is divided among the members of the society is the goods and services produced to satisfy its wants. and the same goods and services are both supply and demand. Now this was, like I say, the most used textbook of its time. I mean, this was just obvious to everybody. If you grew up in an economic environment, this pre-Keynesian economic environment, of course you knew that was true.

25:29The third proposition. Purchase and sale is a conversion of one's own goods into money. and then the reconversion of the money one has received back into other goods, money is intrinsic to the process involved. Now again, to tell you something more about the Keynesian Revolution and what Keynes writes in general theory, he writes very early on that the trouble with you, we classical economists, is that you never think about money, Well, who can I get to refute that statement?

26:14Well, J.B. Say, in 1821, and I note the 1821, and you'll see it again with Torrance, 1820 is the year that Malthus writes his book. You will see a slew, I mean, an unbelievable slew of economics books written between 1820 and 1825. All of them, you know, focus around the need to finally say something about Malthus and what an idiot he is. But here J.B. say, and it's not that he wrote, his book was written in 1803. He reprinted in 1812. He said, I'm going to wait until Napoleon disappears, 1814, sorry. This is the fourth edition in 1821. Why is that one the one that's translated? It's translated twice, once in Britain, once in America, so you can get two different translations, but both in 1821, and they both occur in that same year because Malthus has written his book, and you want the refutation.

27:19So what is it, so we're talking about money, you know, like, like, did classical economists leave out money? Well here's Say talking about it, should a tradesman say, I do not want other products for my woolens, I want money, there could be little difficulty in convincing him that his customers could not pay him in money without having first produced it, procured it by the sale of some other commodities of their own. Almost all produce is in the first in its exchange for money before it is ultimately converted into other produce. But that's Say writing in his treatise. This is the true Say's law. And not only is money not peripheral, it is central. It is the very core of the argument. You cannot even conceive of how Say thinks about economies unless you see that he's thinking about in terms of money.

28:11Now, here is a statement. This is the fourth proposition. Recessions are common and result in high levels of involuntary unemployment. Now, really, to have said this to an audience in 1930, well, you know, like how ridiculous. Course there are recessions all the time. You can say in 1928, people knew recessions. There had always been recessions. It is only because Keynes said that, hey, those stupid classical economists didn't, you know, they I assume that full employment was always just automatic and there were no obstacles to it. That we now have to go back and in fact, you see these periodically in the literature, people saying, oh look, you know, turns out that the classical economist actually did think he could have a recession.

28:57So, now I'm going to, now here's Robert Torrance writing in 1821, he's again, this is 1821, in the year 1821, and where you see the word proportion there, think structural production. That's how that phrase evolves into the mainstream economics of the pre-Keynesian era, and what Torrance says in 1821 is this, and he says, look, so long as proportion is preserved, every article which the industrious classes of the will and power to produce will find a ready and profitable vend, market vend. No conceivable increase of production can lead to an overstocking of the market. It's not even conceivable that you could ever produce so much that you couldn't sell it. It's just not conceivable. And then he says, if you know the phrase, the phrase in economics that Keynes brought into what supply creates its own demand as the meaning of Say's Law, Robert Torrens then says in 1821, and the point about, the reason to point this out is that you'll see how this understanding of economics, this Say's Law

30:21The fundamental understanding of economics was the very essence of the theory of recession. And so what Torrance says is, increased production will create a proportionally increased demand. Increased production will create a proportionally increased demand. Supply creates its own demand, okay? So this is what he is explaining. So what caused the recession as well? This is the fifth proposition, the key. So you see, we're going to where demand comes from, and we're talking about, and I'm using torrents as kind of like that going over the divide, recessions are due to structural problems. Recessions occur where the structure of supply, not the level, the structure of supply does not match the structure of demand, where things somehow go out of whack, they don't fit together.

31:13So that's the whole point. And so I, here, where they've got the three dots, so here is Torrance saying, okay, introduction will create a proportionate increase in demand, you can never have a problem, always going to have demand, as long as you produce the right things, people buy it, but, he says, but, this happy and prosperous state of things is immediately interrupted when the proportions in which commodities are produced are such as to disturb the quality between effectual When the structure of supply goes out of whack with a structured demand, then gluts and regurgents are experienced. So what he is saying is that everything is great, you can produce as much as you like, as long as you keep producing things that people want to buy.

32:01But if, for example, the housing market is producing the wrong things for the wrong people and you can't sell it, then you'll end up with recessions. So that the idea that classical economists thought that full employment was a certainty or that recessions were impossible is bizarre and wrong, but not only that, the understanding of why recessions and unemployment were possible was built upon an understanding of Say's Law. I find that the most astonishing irony in all the discussions I know of Keynesian economics that Say's law is not rather than being an obstacle to understanding how recessions occur, it is the very essence of what you need to understand.

32:47And I have torrents here to tell me this in 1821, but I also have Habler. I think Habler is up here somewhere. I mean, he's one of the names. He's one of the great names of economics. And in 1930, the League of Nations organized that for a book to be written on, just the beginning, it was just the very beginning of the Great Depression, and the League of Nations said, look, what we have to do is we have to put together a book on what caused the recessions, so that we'll have a kind of world understanding. So, Habler puts together this book, he is the one who finally contracted to do it, and he publishes in 1937, and it's a book called Prosperity and Depression, and what he says is, and it's the same thing as you'll see in Torrens, he's trying to explain what has been the collective wisdom, the collective wisdom of all the economists of the world Looking at the business cycle and what causes it and why it goes up and why it goes down,

33:55what he says is, an expansion or contraction may be interrupted on the one hand by an accident and then, or it may be on the other hand itself give rise to maladjustments in the economic system. Most cycle theorists have tried to prove that the second type of restraining

34:45In 1937, a year after Keynes published The General Theory in 1936, the general theory will sweep the world.

35:15was sure you could have too much of particular goods, but could you have too much of everything? Could you produce too much of everything? And the question was then, yes, no, and the answer was no, you could not. You could have recessions, you could have depressions, but you just could not have them because you'd produced too much. People would not save and you wouldn't have to worry about that. What is meant by Say's Law? Overproduction of individual goods can lead to a general downturn in an economy.

36:03You always have overproduction of particular goods, like housing, like housing. And that individual markets, once you oversupply some market, you can, that oversupply, some market being in excess supply, that can lead to a downturn in economy general. The transmission mechanism is from a reduction in earnings in some sectors to a fall in demand and in other sectors, and therefore to a wholesale downturn in activity. Now this is from about Walter Badgett and he's writing a book on the monetary, on the money, the money market in England in 1873. So that it's not as if he's unaware of monetary factors. He's perfectly aware that the book, Lombard's Three, is about the money market.

36:52And in this book he's talking about sometimes things get quiet and he's explaining why. He says, no single large industry can be depressed without injury to other industries, think housing market. Still, as can any great group of industries, if industry A fail and its difficulty, industries B, C and D would use to sell to it, will not be able to sell and in future they will stand idle till industry A recovers. Now if you want to understand what caused the recession we are in, you don't say, People start to save or people start wanting to buy. You say there was some kind of dislocation, something went out of phase. It's like this. It is. And in America particularly, you had the housing market, you had the car industry, and then the banking sector. All of them were in serious, serious bother. And all of that collectively brought the economy down.

37:49that's what Badger is talking about in 1837. We didn't have suddenly a desire for everybody to save more and to spend less. Proposition 7. Then again, Keynes, you've got to come back to the general theory and the kind of dorky notions that are put in amongst economists, and this is that, that, no, classical economists did not, did not actually have a view about money, like he thinks the general theory of employment interest and money, he said, I'm going to tell you about money, where all these people before me had never talked about money. Well, monetary factors, most notably a contraction of credit, can also be and often are an important cause of recession. Even where monetary instability has not been the originating cause of recession, monetary factors will often deepen recession brought on for other reasons. So monetary factors can cause it or something else has caused it, say as in the United States in the last year, something else has caused and other causes such as the housing downturn that an infection in the money market itself can cause it to be expanded.

39:01Now this is just old hat in classical economists. Now this is the only quote I have that is not pre-1936. This is from two young economists at the time, two chaps named Becker and Beaumont, who each got very successfully in their own right. They wrote a paper in 1952 to look at this, to actually examine, was it true that classical economists had a poor idea of money and money markets and whatever? And they particularly focused on John Stuart Mill and what they wrote was indeed in reading Mill on the problems caused by monetary problems. One is led to wonder why so much of the subsequent literature, this paper included, had to be written at all.

39:49Basically, they absolve them totally, totally, of any mistaken notions as far as money is concerned. And then there's finally this, and this was intrinsic, intrinsic to the classical theory. You know, I always find it really, the fact is, one of the great oddities that you say, oh, Keynes saved us from the Great Depression. Well, Keynes didn't save us from the Great Depression. The Great Depression, if you think South United States where you had Roosevelt, but if you go to England or you go to Australia, what we used to get ourselves out of the Great Depression was absolutely classical. In the Chancellor of the Czech Republic in Britain in 1933, he made a point of saying, at last we balanced our budget.

40:37In Australia, the government in 1931, it was a labor government, which is really quite amazing. It was a labor government. What they did was they cut spending, they cut wages, and they aimed to bounce the budget. And Australia was the first country in the world to come out of the Great Depression. We were coming out of it in 1932. So that the actual policies used to get out of the Great Depression, during the Great Depression, were non-Keynesian. And the ones that worked were the non-Keynesians, get back the fundamentals, cut back excess spending, get wages down, get to a solid foundation, and we can grow. That's what they did. The only country, famously, that did not do that was the United States.

41:23And the US stayed in double-digit unemployment rates, stayed in the Great Depression until 1941, when you entered the war. Anyway, so here you have this proposition, and I come back to my original quote from Mill that I gave you originally. The utility of a large government expenditure for the purposes of encouraging industry is no longer maintained. Back in 1844, a way could say, how stupid, how stupid to actually think public spending would be good for growth. We have lost that. This is what the Keynesian revolution has brought us. We have lost what we once knew. This is an example of lost knowledge amongst economists, in fact, the general public.

42:15Now, here is what I think is the perfect statement of Say's Law. It's perfect. And it's not, I didn't make it up, this is part of the personal correspondence between Ricardo, David Ricardo, great economist of the time, and Malthus. And what he said, just in a letter, you know, you read page after page after page, and then there's this and it says men air in their productions there is no deficiency of demand now this has come out just after Malthus has published his book and they're having this correspondence over the contents of the book and this is over the general glut debate and what what Ricardo is saying is look sure we have a recession sure we have people unemployed sure there's this mass downturn here here in here in Britain Probably everywhere else, but sure we're having this mass downturn, but look, there is no deficiency of demand, that's not the problem.

43:19It is not a deficiency of demand. But we do have a problem, and what is the problem? Men air in their productions. This is the structural production, the maladjustment, this is what he's saying, there is no deficiency of demand. What there is is that people are making mistakes in what they produce, and once you get that fixed up, once people stop producing the losing things and start producing the right ones, it'll fix itself, but it is not being caused. Now, if this were, if this were, if Ricardo's version of things, men are in the production, there's no deficiency to man, if that were today, the general understanding amongst the community, business, bureaucracy, public servants, then we would not have the kind of reflation policies, all the stimulus programs and all the rest.

44:13There is no one's ambiguity, no one's certainty about what that means. We don't have the supply creates its own demand version, the cane is bequeathed to us as if that's what it means. When you see recession in the real world, it cannot be understood, that's from the very beginning, it cannot be understood ever as a consequence of too little demand. It has to be seen as some kind of derangement, some kind of things going out of whack with each other within the market process. And then, if it were understood, if we understood things in that way, there would never be any doubt about what you should do or what you shouldn't do. There'd be no excuse for the levels of spending. I mean, we've seen Japan in the 1990s.

45:00The worry now is that America and Europe and Britain will follow along that Japanese example, where the spending will itself be the cause of the downturn and the continuation of poor performance and low growth and high unemployment. and like with Japan, I mean I've had this argument with no end of people, look I said it's all those public spending programs that the Japanese have, that's what's kept this famous 20 year lost decade, you know, it just goes on and on, it just goes on, and why does it go on, because they still have the same economic textbooks, they still think that demand efficiency is the issue, now I wrote this book back in 1998 and This year it got, well last year now, but it got reissued in paperback because it's timely and even I know, I harangue people on this, I harangue people about Japan.

45:55My subtitle was How Macroeconomic Theory Lost Its Way. The problem with economics and maybe there's too much, but it's that it's become, it's become Keynesian. so infused with Keynesian, you cannot buy a textbook that does not, whether it's Mankiw or anybody, you cannot buy a textbook that does not have at least one of the three aggregate demand versions in it. It'll either say, have the Samuelson C plus I plus G, or it'll have aggregate supply against aggregate demand, or it'll have, non-economists will just have to take my word for it, something called the ISLM curve. But all of them have that Keynesian Aggregate Demand Curve right in it. It is the embedding of aggregate demand, something that no classical theory ever had. The introduction of aggregate demand is the poison that sits within economic theory to this minute. Keynesian economics has not had a single peacetime success.

46:59Now, I don't think it's even had a wartime success, but I just put that in. But it has has not had a single peacetime success, but has recorded many, many failures. In fact, it's gone almost a hundred percent ration. It has not had a success. And I think we're about to see another one. A return to an economic theory based around Say's law and the classical theory of the cycle, which removes aggregate demand from all concepts of how we think about macroeconomic issues, is the way in which economic theory should now move. Thank you. Any questions?

47:54Well it's now weakened and what we now have is it deals with only the minimum wage. So, yeah, the national wage case is still on. Is the whole of the game still on that? Oh, well, I believe we consider it a fantastic success. You know, they used to have the award, what we called the award system, and every single person, whatever you did, if you were a, you know, teacher while you were on, you know, you started your award level one and third, second year you go to, and every wage in Australia had an award level to it. I mean it's inconceivable. Now we've more or less got rid of the awards but with the labor government coming back in they're trying to revert back to that yeah it's insane but we is gone now

49:09and from China, with one additional fact that the sections of the new cultural block, cultural supplier, won't match structural to that, and I need you to talk to me about China, some of the, you know, some of the, you know, some of the, you know, some of the, you know, some of the, you know, No, no, I worry a lot about China. They are moving and trying to move away from centralized, Beijing-based central government five-year plans, but it's still not I think perfectly well understood that an economy works in the bottom up, that entrepreneurial activity anybody should be able to start a business and just go to some financial institution, borrow some money and just try their luck.

50:18It still is an economy based on connections, who know, what you know, so that I think they're getting closer. And I think the Chinese, being pragmatic in the way they are, are moving in that direction. But I think we had a very interesting presentation at the Productivity Commission last year from, I wouldn't call him dissident, but he's at an equivalent organization to us in China. And he was saying all the things I would say, and he was saying it to us and he's apparently saying it to them, that all this public spending going on and indulging in is going to come back to haunt you. And in fact, already you can see it in China where they're beginning to pull back on things and recognizing that the stimulus program has created even for them an amazing amount of debt, but not particularly very much value added.

51:13In the Polionic Wars, how did they get out of that?

51:43The recession is all for individual particular reasons, but by the 1820s and 1830s, the economy of Great Britain was just rolling along, as it was for pretty well everybody, but with periodic recessions, and in fact the thing about recessions was they were new in the world, that up until the industrial revolution, even what you might conceive of as a recession, couldn't happen, but now with this huge growth of Capital Structures and the way that the industry was now being organized, it became possible for a recession to happen. So they happened. But the thing that made the period from about 1820 to 1936 so sensible was everybody just knew the recessions would come along, that you were never surprised that it happened, you were often disappointed and you were often and Harm. But no one was surprised. We now act, and we actually seem to be like, well, what's happened? We've had a recession. Like, that's a zone. I mean, every classical economist would tell you, one day into your life, we're going to come a red light. And that's all.

53:12I'm really glad you asked that but not for the reason of thing. Keynes got the idea by reading Malfus. He got the idea. Really, I mean it's, I can talk to you about that later. But then he had to say, I get this idea from and he said I had my own but you know people like me would go along say but this is what Malthus had said so he had to disguise it I mean the kind of dishonesty here is just incredible but he had to disguise it so he has that chapter in which he describes these these this brave army of heretics I don't know if you know but he says see other people have had this idea before me and he names and he names you know Mandeville he names his guy the guy who began and social credit. He names Malthus and he names Hobson. And Giselle, that's right, how could I forget another Whacker?

54:16And he names them and he says, look, you know, here are all these folks who had these ideas before me. The two he doesn't mention are the two Americans that, if you read the drafts of the general theory, who were the single most prominent of the Mandeficiency people in the 1930s, before Keynes, he never quotes them as part of his brave army of heretics, but he has them in a draft as part of his brave army of heretics, so it's interesting he takes them out, he didn't want anybody to think that he had got this idea from anybody else, so that's why he goes to Mandeville, but it was after the fact.

55:02Question asked off mic. Well, I mean, I couldn't tell you an awful lot about hard money. I was assuming it was very hard. was certainly gold standard money I don't know well they did sell that yeah yeah yeah I mean they ended up indebted for it but that oh I don't know

55:56Okay, well, thank you. The reviews in Australia were not so good. That's life. But everywhere else, they were fantastic. I mean, the economic journal, I remember this in May 2000, has just every single review of the book, and there were a few, and it was unusual because something like the economic journal was not a history of economic journal. In fact, if I remember this right, it was reviewed by Thomas Humphrey of one of the Federal Reserves. And he thought it was really excellent. And there are a number of reviews just like that in the literature. I find that having good reviews doesn't necessarily make you famous or you're fortunate. But nevertheless, it really pleased me. It was people understood He understood the book and he understood the point of it.

57:17So, one more? Yeah? Well, at the very back. Do you know if Malthus Hayek is the name on the party? Ah, well, did Malthus? Well, it wasn't exactly 100% original with him, but there was this, the first of the people who put this idea together This idea together was a chap named Lord Lauderdale, and he was talking about demand efficiency, the Sismandi in France, simultaneously and possibly a bit earlier, was talking about it. But if you read the correspondence between Ricardo and Malthus, you find that right from in the beginning that they took that separate line and at Malthus very early on had just simply taken the view that the problem was too much saving and that there was not enough money in the hands of, and this is interesting because he did represent the landed aristocracy, there wasn't enough money in the hands of the landed aristocracy. If only the aristocrats had more money, they would spend it and therefore we could pull the whole economy up from their

58:36and literally unproductive. He made the point that if it was productive, it compounded the problem. It had to be just wasteful spending, so it would draw down productivity, but not build it up. So, anyway.