Professors Backhouse and Bateman invite us to indulge in a visionary
perspective in dealing with the Global Financial Crisis and the
subsequent recession that will not go away. They wish us to look at
alternative ways of thinking about the economy and how it works. 

As it happens, I have done just that. In August this year, Edward Elgar
published my _Free Market Economics: an Introduction for the General
Reader_ which outlines the mechanics of an entrepreneurially-driven
market economy embedded within a political structure where the rules and
regulations that businesses work within are determined by others. And
what is particularly notable about the book is that while it explains
Keynesian economics as accurately as any other introductory text on the
market, it is also at the same time the most relentlessly anti-Keynesian
book written in the past forty years. Moreover, if you would like to
have an economics text that explains the classical theory of the cycle
– the best alternative I know to Keynesian theory – my book does
that as well, and I think in this regard, it may be the first book to do
so in over three-quarters of a century. To my knowledge, there is no
other book like it, although I truly do wish the market was flooded by
hundreds of alternative titles along the same lines. 

Let me therefore highlight one of the sentences in the
Backhouse-Bateman article:

“Even Keynes himself was driven by a powerful vision of capitalism.
He believed it was the only system that could create prosperity, but it
was also inherently unstable and so in need of constant reform.” 

Well I can agree with half of this but the other half is plain wrong.
Capitalism is without question the only system that can create
prosperity. But as the existence in 1936 of the by then hundred year old
classical theory of the cycle should tell you, there has never been much
doubt that capitalist systems are subject to instability. Nor was Keynes
intention to explain to his fellow economists that our economies were in
need of constant reform, whatever that might mean. The point of _The
General Theory_ was to introduce into mainstream economic theory the
notion of aggregate demand.  (Read page 32 of the GT on Malthus and
Ricardo if you are in any doubt). There is nothing else in the book that
is novel or that has spread like a weed throughout the discipline the
way this concept has. And its adoption has been the single most
disastrous mistake economic theory has ever made. Because economists now
think in terms of aggregate demand we are no longer capable of
explaining even the basics of the cycle and cannot provide sound advice
to governments when economies fall into recessions as they inevitably
will. 

Let me finally say that I endorse everything written by James Ahiakpor
in his earlier post. But let me also add that while the tremendously
faulty structure of the bailouts can only be explained by the need to do
something straightaway, that there was a need for government action
could have been found by reading Bagehot’s _Lombard Street_  which was
published in 1873. It was the stimulus that came after, pure Keynes in
both structure and intent, that is the core problem we are dealing with
right now. The stimulus packages themselves are the most important cause
of the prolonged recession most economies are facing today. It is the
problems of debt and deficit that are the major problems we must find
answers to, not a failing financial system which was the problem in
2009. So where Backhouse and Bateman ask:

“How do we deal with the local costs of global downturns? … If
economists want to help create a better world, they first have to ask,
and try to answer, the hard questions that can shape a new vision of
capitalism’s potential. 

OK, I’m in. Let’s find a solution to all of this and more. But if
you think Keynesian theory is any part of the answer, then my friends,
you are in my view part of the problem and in no way part of the
solution. 


Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Level 12 / 239 Bourke Street
Melbourne Vic 3000

Phone: (03) 9925 5878
Mobile: 042 7297 529