A conversation with Steve Kates, for Man and the Economy


  steve_katesSteven Kates is Associate Professor of Economics at RMIT. He was chief economist for the Australian Chamber of Commerce for 24 years and a commissioner on the Productivity Commission. If he has a mission in life, it is to see Keynesian economic theory disappear from our textbooks and the return of the classical theory of the cycle as the guide to economic policy.

  He has written Free Market Economics: an Introduction for the General Reader (Edward Elgar 2011), which explains what economic theory looks like if the entrepreneur is placed at the centre of microeconomic analysis and in which Say’s Law is brought back as the core of macro.

  Grégoire Canlorbe: According to you, Say’s Law was the statement that demand would never fall short of properly proportioned supply. In other words, demand deficiency could never occur—except in the case of miscalculations on the side of supply.

  At first sight, this proposition is a tautology. By definition, so long as decisions by producers on what to produce coincide with decisions by buyers on what to buy, there prevails an equilibrium of supply and demand. In my opinion, the law of markets presupposes in fact something crucial, namely that the desire to buy goods is only limited by the nature of goods supplied. Although there may happen a global mismatch between the wishes of buyers and the composition of supply, the willingness to acquire (consumption or equipment) goods is otherwise infinite.

  Overproducing means here to produce something in excess with the demand of people or to sell it at a price that does not cover the costs of production. The classical proponents of the law of markets believed overproduction of everything could never occur—unless an outbreak of entrepreneurial mistakes concerning the public’s preferences or purchasing power. In this regard, what they fundamentally did was to castigate any theoretical explanation of crises holding the fluctuations in demand for a phenomenon totally independent of the structure of supply. The classics generally put it in these somewhat sybillin terms: while men err in their production, demand is infinite as such. While recessions happen, they are never caused by demand deficiency.

  In his posthumous Notes on Malthus, David Ricardo provided an eloquent summary of this precocious intuition of classical economics.

  “If the commodities produced be suited to the wants of the purchasers, they can not exist in such abundance as not to find a market. Mistakes may be made, and commodities not suited to the demand may be produced—of these they may be a glut; they may not sell at their usual price; but then this is owing to the mistake, and not to the want of demand for productions [per se].” [i]

Could you start by reminding us of the lines of force of the reasoning underlying this cumulative proposition on the part of Jean-Baptiste Say, James Mill and Robert Torrens?

  Steve Kates: There are a number of false assumptions on the nature and scope of Say’s Law that must be eliminated before we can have this conversation.

  The first and most important of these assumptions is that Say’s Law is a conception best understood by looking at economists from the early nineteenth century. And the reason this conception remains embedded in so much of the modern approach is that it is called “Say’s” Law, Jean-Baptiste Say, of course, having written the first edition of his Treatise in 1803. So let me begin by putting this discussion on Say’s Law into its proper context.

  The term “Say’s Law” was invented in the twentieth century. It was invented by the economist Fred Taylor, as he describes in his introductory text, Principles of Economics. The text was self-published in 1911 and distributed only to his own students at the University of Michigan, but was then published in 1921 by the Ronald Press in normal textbook form as the eighth edition for use beyond his own classrooms. And how do we know that Taylor invented this term? Because he says so. Chapter XV is titled “Say’s Law” and in it he discusses why he chose this name. Having explained how demand is constituted by supply, he wrote:

  “The points just brought out with respect to the relation between demand and the output of goods are so evident that some will consider it scarcely legitimate to give them the dignity derived from formal statement… I shall therefore put the proposition we have discussed in the form of a principle. The principle I have taken the liberty to designate Say’s Law; because though recognized by many earlier writer, it was particularly well brought out in the presentation of Say (1803)”. [ii] (My bolding)

  I particularly like the fact that for Taylor and his contemporaries the principles behind Say’s Law seemed so obvious that he hardly thought it even needed to be said. If you don’t believe it, look it up. Taylor had been using the phrase “Say’s Law” since 1909, always mentioning that he had invented the term. It is a phrase never used before it was coined by Taylor and came into common use on the American side of the Atlantic only after his text was formally published in 1921. The very embarrassing question that comes from this is, if this is a twentieth century term invented by Taylor, how did the words “Say’s Law” show up in The General Theory? Because once you realise that Keynes had to have been reading a literature that no one knows he had been reading, the provenance of The General Theory becomes very different from what we have up until now been taught.

  Nor does the embarrassment end there. Keynes’s definition of Say’s Law is “supply creates its own demand”, the only phrase within economics other than “the invisible hand” known to every economist. And that, too, comes from a twentieth century American text, Value Theory and Business Cycles, a work published in 1933 by an obscure and unknown American economist, Harlan Linneus McCracken. In a chapter on “Involuntary Failure of Demand” McCracken wrote:

  “The Automatic Production-Consumption Economists who insisted that supply created its own demand, that goods exchanged against goods and that a money economy was only refined and convenient indirect barter missed the significance of money economy entirely.” [iii] (My bolding)

  You won’t believe that either, since you rightly find it ridiculous that you should be hearing such significant facts about the origins of the most thoroughly investigated economics text in history only now, some eighty years after The General Theory was published and brought to your attention by someone as unknown to you as Harlan McCracken. But there you are, and there is no possibility of anyone refuting either of these two facts since neither the term “Say’s Law” nor its definition “supply creates its own demand” have ever been found anywhere within the economics literature of the nineteenth century. Neither the term “Say’s Law”, nor its definition “supply creates its own demand”, were ever part of the discourse among economists prior to the twentieth century. The question you need to ask is how did they get into The General Theory?

  Therefore, if you wish to understand the actual meaning of Say’s Law, it is worse than pointless to return to the economists of the early nineteenth century. It is to Taylor you must go since he specifically tells you what it means.

  “Principle – Say’s Law. The Ultimate Identity of Demand and Product

  “In the last analysis, the demand for goods produced for the market consists of goods produced for the market, i.e., the same goods are at once the demand for goods and the supply of goods; so that, if we can assume that producers have directed production in true accord with another’s wants, total demand must in the long run coincide with the total product or output of goods produced for the market.” [iv]

  But we must go a bit farther to understand why Taylor had gone to the trouble or writing his chapter, identifying this principle and giving it the name Say’s Law. All this is explained at the very start of the chapter.

  “General Demand Fallacies. – Among the fallacious notions in popular thinking that have gained very wide currency are to be found a number which grow out of misconceptions as to the real source of the general or total demand for goods, and as to the methods by which that demand is increased or diminished. Several types of these fallacious notions may be cited. Thus, government improvements of all kinds, including even those of questionable value, are often supported by businessmen and others on the ground that such improvements increase the total demand for goods… A true understanding of the nature of the total demand for goods will show that these notions are fundamentally unsound.” [v]

  Of course, that entire line of reasoning has utterly disappeared since the Keynesian Revolution. Everyone now believes what economics teaches, that government spending, even expenditure of questionable value, increases the total demand for goods and services, and therefore increases the total demand for labour. And while it may come as a shock to some to find that Keynes deceived his followers by hiding from them the research he had undertaken in writing his book, they will comfort themselves by arguing that at least he was right about these issues. But there is no denying the deception. Keynes lied about what he was reading and it is only these very faint traces that allow us to understand what he was actually doing. Of course, Taylor was also right about the economics and Keynes was wrong, as the consequences of the various stimulus packages should, by now, have made evident.

  And as an aside, if you interested in a more extended discussion on all of this, you should look at my article, “Influencing Keynes: The Intellectual Origins of the General Theory” which was published in 2010. It’s all there and in fine detail.

  So let me give you the proper definition of the principle that lies behind Taylor’s and this is from John Stuart Mill and from his Principles of Political Economy published in 1848. This is known as Mill’s Fourth Proposition on Capital, and it states:

  “Demand for commodities is not demand for labour.” [vi]

  The level of employment cannot be increased by increasing the demand for goods and services. It is Mill trying to tell us that a public sector stimulus will never reduce the level of unemployment. And while you might wish to deny that Mill is right about the theory, you cannot deny that, given his words, he would have foretold that the stimulus packages we have seen across the world since 2009 would with certainty fail. Just as each and every stimulus has done in each and every one of the countries in which it has been tried. The meaning of Say’s Law is thus found in the fact that the increased demand for goods and services by governments since the Global Financial Crisis has not led to an increase in employment in any country of the world. Instead, employment growth has been woeful, much worse than in any previous recovery since the Great Depression. It is thus unnecessary to go back to the nineteenth century to understand Say’s Law. All you need to do is look at the abysmal recoveries we have had and recognise that this is exactly what every classical economist would have told you would occur.

  And it is not as if the policy direction from Mill had been ignored. This was highlighted by Winston Churchill’s in his 1929 budget speech.

  “Churchill pointed to recent government expenditure on public works such as housing, roads, telephones, electricity supply, and agricultural development, and concluded that, although expenditure for these purposes had been justified: ‘for the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.’” [vii]

  These were, moreover, genuine value adding forms of spending and in no sense of the make-work variety. Yet even then, little if any additional employment had been seen to have occurred as a result. The same may be said of the various stimulus packages that have been adopted across the world after the Global Financial Crisis.

  Indeed, as a general rule, which has had no peace-time exceptions, increases in public expenditure do not and cannot lead to a permanent increase in employment. If anything, such expenditures will slow the recovery process and will inevitably keep unemployment higher than it would otherwise have been.

  This is the conclusion that comes from a proper understanding of Say’s Law. There has, moreover, never been a single exception to this rule during the entire eighty year period since the General Theory was published.

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A conversation with Roy Barzilai, for Agefi Magazine

 8056037 Roy Barzilai is an independent scholar, who studied both Ayn Rand’s philosophy of Objectivism and Rivka Schechter’s philosophy of language, rooted in the Hebrew Bible. The synthesis of Rand’s Aristotelian philosophy, and the biblical creed of ethical monotheism provides profound insights into the ideas that shaped the Western mind. By exploring the intellectual history of Western civilization, Roy seeks to reach a greater understanding of the human mind.

  As a financial analyst for more than a decade, Roy became aware of the herd mentality in financial markets. He studied the Wave Principle of Human Social Behavior and the new science of socionomics, focusing on how change in social mood affects society, its ideas, philosophy, culture, and economy. This dynamism is the engine of history.

  Roy holds undergraduate degrees from Tel Aviv University in Law, accounting, and computer science. He is the author of two books: The Objective Bible, published in 2014, and The Testosterone Hypothesis, published in 2015.

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A conversation with George Gilder, for Agefi Magazine

george-gilder201209271600  George Gilder is a venture capitalist and Senior Fellow at the Discovery Institute and American Principles Project, Editor-in-Chief of the Gilder Technology Forum (from Forbes).

Grégoire Canlorbe: It is not uncommon to hear that the global weakness of the contemporary USA lies in the worsening of income inequalities. The best predictor of social and economic class is nowadays the social and economic class of parents. People like the Rockefellers or the family of Mitt Romney are born into the 1% and pass that position along to their children. In other words, the USA have a plutocracy, like it or not; and that plutocracy should at least pay a higher tax rate and a higher death tax—a higher tax for passing along its wealth to its kids. America works best when it can open the path for dirt-poor kids with drive and intelligence to rise—as Abraham Lincoln rose from the poverty and mud of his father’s farm in Illinois.

  What is your opinion on this popular view?

  George Gilder: The popular view is nonsense. Inequality is irrelevant. Under free markets, capital flows not to those who most quickly spend it but to those who can best expand it. It goes to suppliers rather than demanders. What matters is mobility and creativity. Forbes magazine shows ever more rapid arrivals and departures from their lists of rich people. However, the “hypertrophy of finance” in the world economy that I describe in The Scandal of Money is fostering more inequality based not on merit but on government privileges.

The world’s central banks have become a fourth branch of government that centralizes economic activity and renders the system fragile and unfair. This is a serious threat to the future of capitalism. Futile and meaningless currency trading is now 73 times larger than all world trade in goods and services. Yet it fails to establish money more stable than the economic activity it supposedly measures. The perversion of money under socialism is the leading cause of immutable inequalities based on power and privilege rather than on knowledge and on contributions to the economy.

  I believe that new forms of money based on the Bitcoin blockchain and gold will evolve in coming decades and emancipate the world economy from its central bank socializers. I also believe that this popular hostility towards income inequalities as such—and the inability to recognize that only inequalities based on privilege are illegitimate—is the symptom of an even more general misunderstanding of the nature of material progress.

  As I have demonstrated in Wealth and Poverty, material progress is ineluctably elitist: it makes the rich richer and increases their numbers, exalting the few extraordinary men who can produce wealth over the democratic masses who consume it. Material progress depends on the expansion of opportunity: geniuses identify themselves chiefly through their works rather than by their inheritance or test scores. Material progress is difficult: it requires from its protagonists long years of diligence and sacrifice, devotions and risk that can be elicited and financed only with high rewards, not the “average return on capital”. Material progress, although democratically demanded, is procedurally undemocratic: it means the expensive support of activities thoroughly beyond the ken of the people, and often even their leaders.

  Grégoire Canlorbe: “One of the problems with organized religion,” affirmed Hugh Hefner, “is that it has always kept women in a second-class position. They have been viewed as the daughters of Eve.” How would you assess these statements by the founder and chief creative officer of Playboy Enterprises?

  George Gilder: Feminism condemns women to inferiority by subjecting them to the standards of male achievement. Feminists want to present women as victims, which means inferiors. Hefner celebrated the superiority of women’s bodies, which feminists decry. But Hefner, for all his philosophastering, did not have ideas any more interesting than the vanities of feminism. Generally speaking, he did not articulate nor materialize the true spirit of capitalism.

  To the extent that both conservatives and socialists believe the engine of economic growth is driven by consumer demand, they agree to see permissiveness as favourable to growth under capitalism. In reality, demand, whether avaricious or just, is impotent to impel growth without disciplined, creative, and essentially moral producers of new value. All effective demand ultimately derives from supply; a society’s income cannot exceed its output. The output of valuable goods depends not on lechery, prurience, lust, and license but on thrift, sacrifice, altruism, creativity, discipline, trust, and faith. To the extent that pornography and promiscuity debauch the moral capital of the society—to the extent that they distract workers and entrepreneurs from the long-term effort to create new value—these sources of “demand” actually undermine economic growth.

  By that measure, the sexual revolution embodied by Hugh Hefner and his magazine clearly retards economic progress and prosperity. It distracts, demoralizes, obsesses, and depraves the men and women who must forgo immediate returns, sacrifice immediate pleasures, master difficult disciplines, and respond to the needs and desires of others if they are to create successful businesses. Capitalism has been incomparably the most productive economic system in the history of the world because it best evokes the effort and creativity—the moral quality and productive energy—of workers and businessmen who put the interests of others before their own gratifications.

  Grégoire Canlorbe: Your analysis and your appraisal of capitalism are based on a profound theory of information, which was recently synthetized in Knowledge and Power. Could you remind us and develop the main outlines of this highly integrated view of information, technology and entrepreneurship?

  George Gilder: Based on the mathematical ideas of Claude Shannon and Alan Turing, information theory is an evolving discipline that depicts human creations and communications as transmissions across a channel, whether a wire or the world, in the face of the power of noise, with the outcome measured by its “news” or surprise, defined as “entropy” and consummated as knowledge.

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A conversation with Waleed Al-Husseini, for Gatestone Institute

716889-waleed-al-husseini01recadre2jpg  Waleed Al-Husseini is a Palestinan blogger and essayist as well as the founder of the Ex-Muslim Counsel of France. He garnered international fame in 2010 when he was arrested, imprisoned and tortured for articles he posted in which he criticized Islam. He has received threats and death threats. He is one of the most celebrated cyber-activists from the Arab world and now lives in France where he sought refuge. He continues to be a fierce defender of its secular, republican values.

  He is the author of an autobiography, Blasphemer! Allah’s prisons! edited by Graset in 2014 (re-issued in 2015), as well as articles in Le Monde, La Règle du jeu and Libération. His blogs are “la voie de la raison” and “I’m proud to be atheist.” Contact: hassayen@gmail.com

  Grégoire Canlorbe: Could you start by reminding us of the circumstances and motives of your dissent?

  Waleed Al-Husseini: My atheism is the result of a long quest for the truth about what I saw happening in front of me. Obviously, nobody holds all of the Truth, but during my research, I realized that religion in general, and Islam in particular, was highly incompatible with the values of human life. That was the beginning of my rejection of Islam. As time goes by, the horrors and crimes committed against mankind in the name of Islam seem to have proven me right. They have strengthened my conviction that it was the right choice to make.

  Grégoire Canlorbe: Despite being jailed, tortured, threatened, persecuted and socially pressured, you have never given up your opinions or curbed your determination to defend them. How come?

  Waleed Al-Husseini: Once I had made up my mind, I had to defend my new convictions against all sorts of pressures, whether in prison or in the street. To do so, I gathered my strength out of the weakness and archaism of the religious speech. I simply used intelligence against faith. The former opens the mind, the latter puts human beings in prison. It feels as if religious leaders practice some sort of psychological torture on their followers in order to dominate them. In Muslim societies, all the citizens live in a huge prison called Islam. I wish to remind the readers that, if I am deeply hostile to Islam as a religion, I respect Muslims as human beings and deplore the situation in which they have to survive.

  Grégoire Canlorbe: “Mahometism, writes Tocqueville in his Writings on the Koran, is the religion that has mixed both political and religious powers, and in a way that the high priest is necessarily a prince, and the prince is the high priest, and all the acts of civil and political life are ruled more or less according to religious law… This concentration and confusion established by Mahomet between both powers… was the primary cause of despotism and social immobility… which has always been a characteristic of Muslim nations.”

  Do you think that things can change? Or that Islam—and the Islamic world—cannot be reformed?

  Waleed Al-Husseini: During the genesis of Islam—which looks in many aspects like a sect—the political power relied on religion in order to control and dominate society. Subject to certain exceptions, the situation has not changed in 1,400 years.

  In his time, the prophet Mahomet had already made use and abuse of many fatwas, attributed to the angel Jibril, in order to justify what can never be justified. He awarded himself the right to rape young girls, in the name of poligamy, and used religious discourse to wage his wars, which he called “Islamic conquests”. He also committed the first war crimes in the name of Allah—upon, he claimed, divine command!

  The same methods are still common practice today, in the main Islamic countries. Iran is ruled by the Wali e-Faguih, the Supreme Leader, who claims he is “God’s vicar on Earth”. Saudi Arabia is under the rule of the “Keeper of the holy Places”. The king of Marocco is the self-proclaimed “Commander of the believers”. In the other muslim countries, the rulers call themselves Wali alAmr, “the tutor”, a title that works as a deterrent, allowing imams to use religion in order to ban any possible objection to the tutor’s authority.

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