ECONOMICS FOR REAL PEOPLE: The clash that defined modern economics

Students have now finished exams, and our friends at the Auckland University Economics Group have seized the opportunity of a visit from two stellar international speakers to offer a very special public event this Thursday, an evening with two world authorities on Say’s Law and Hayek:

On Thursday at the University of Auckland Business School, two world authorities are talking on the most important economic debate of the last century, and asking this question:

    How do you restore health to an economy in difficulty?

It is a question that countries around the world have been failing to answer since the Global Financial Crisis began.

The response of many governments has been to implement programmes intended to boost aggregate demand which, they argue, will restore their economies to health. It was John Maynard Keynes who most famously advocated this approach. The lyrics of the popular Keynes v Hayek music video reflect it:

    You see it’s all about spending, hear the register cha-ching
    Circular flow, the dough is everything
    So if that flow is getting low, doesn’t matter the reason
    We need more government spending, now it’s stimulus season.

The argument goes that what matters is spending – aggregate demand – and lots of it! – no matter whether by consumers or by government.

The logical implication of this view was seen in 2002 when Princeton's Paul Krugman argued "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble," or in 2011 when he suggested that America needed a fake threat from space aliens to kickstart consumption.

This focus on aggregate demand stands in sharp contrast to the views of earlier economists, when the likes of French economist Jean-Baptiste Say argued “the encouragement of mere consumption is no benefit to commerce” and thus “it is the aim of good government to stimulate production; of bad government to encourage consumption.”

Say’s Law, as it is now known – i.e., that consumption is made possible by production –  provided classical policymakers with a very different prescription to the approaches of today.

When writing The General Theory, Keynes recognised however that for aggregate demand to become embedded in macroeconomics, he first had to invalidate Say’s Law. But did he? If not, Say’s Law is valid. If so, Keynesianism survives.

    That is the question that is really at issue on Thursday night.

The economist Ludwig von Mises offered his own critique in 1950, arguing “Keynes did not refute Say's Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.”

It is clearly an area of great controversy. But this debate is not just of mere academic interest, for it continues to influence the policies of governments around the world – for good or bad.

On Thursday 10 July from 5pm to 7.30pm, the Group will host Dr Steven Kates and Dr Jeremy Shearmur, two internationally respected researchers, who will speak about Say’s Law and the debate between Keynes and Hayek.

    WHERE:  Case Room 2, Level 0, Business School, Grafton Rd, University of Auckland
                          (NOTE: plenty of parking in the Business School basement, entrance off Grafton Rd)
    WHEN:  Thursday, 10 July 2014 from 5:00 PM to 7:30 PM
                        (NOTE different time to our usual sessions)

For more details of this special event, and to register, please visit the event website.

Speaker Bios:

Associate Professor Steven Kates (left) is senior lecturer in economics in the School of Economics, Finance and Marketing at RMIT University in Melbourne. Before that he was for 24 years Chief Economist for the Australian Chamber of Commerce and Industry and subsequently a Commissioner on the Productivity Commission.
    He has authored a number of books including Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way and Defending the History of Economic Thought.

Dr Jeremy Shearmur (right) is an Emeritus Fellow in the School of Philosophy at the Australian National University (ANU).
    He was educated at the London School of Economics, where he also worked for eight years as assistant to Professor Sir Karl Popper. Dr Shearmur’s Ph.D. thesis on F. A. Hayek was a joint winner of the British Political Studies Association’s Sir Ernest Barker prize in political theory. He taught philosophy and political theory at Edinburgh, Manchester and the ANU, was Director of studies of the Centre for Policy Studies in London, and a Research Associate Professor at the Institute for Humane Studies, George Mason University.
    Dr Shearmur has published a number of books including The Political Thought of Karl Popper (1966) and Hayek and After (1996). He has worked extensively on Hayek, and is currently editing his Law, Legislation and Liberty for his Collected Works.