Classical Economic Theory and the Modern Economy
by Steven Kates
Edward Elgar, 2020, 264 pp.
Per Bylund (per.bylund@okstate.edu) is Partner Teacher of Entrepreneurship and Records-Johnston Teacher of Free Enterprise in the School of Entrepreneurship in the Spears School of Organization at Oklahoma State University, a Fellow of the Mises Institute, and a Partner Fellow of the Ratio Institute in Stockholm.
Steven Kates, historian of economic thought, is a relentless and singing critic of Keynesian need side economics. His current book, Classical Economic Theory and the Modern Economy (Edward Elgar, 2020), connects the dots in his critique by discussing, elaborating on, and promoting for classical financial theory. Particularly, the goal is to explain economics as it was understood by John Stuart Mill in his Concepts of Political Economy (1848 ), which to Kates is when” [e] conomic theory reached its highest level of analytical power and depth” (back matter). He does this by contrasting classical economics with Keynesian such.
It may seem strange that Kates chooses to utilize Keynesian dogma as background for his defense for pre-marginalist economics. But the author keeps in mind that modern mainstream economics, specifically macroeconomics, has wandered so far from the classical understanding of the economy that economic experts of today are incapable of comprehending the earlier analysis. Hence, the reader can not merely be offered the classical analysis as is, but should be warned of their fundamentally various point of view. Kates does this by both presenting the contrast, including recommendations to the errors of the “incorrect mythology,” and elaborating on how and why economics came to adopt it. The book is therefore 3 books in one: an intro to and description of classical financial idea; a debunking of Keynesian demand-side economics; and a conversation on the history of this fundamental shift in economic thought.
The book’s eleven chapters plus afterword takes the reader through a blend of these 3 viewpoints. It is a method that works well for getting the point throughout and making sure the reader does not leap to conclusions. Some readers might find it recurring sometimes, but this too is most likely intentional as the author revisits arguments, ideas, and crucial points in order to make sure that the classical theory he presents is not misshaped by being translated utilizing a modern economics lens. In truth, as the author claims early in the book, the reader’s modern-day conception of economics stands in the method of comprehending classical economics.
Prior to the real discussion starts (in chapter 3, “The background”), the very first two chapters are the author’s introduction and a declaration about the special nature of the issue addressed. Chapter 2 is titled “The purpose of this book and why only I could write it.” It is both a short personal history of how Kates found the significance and value of Say’s Law and a summary of his considerable previous work on this subject in addition to a personal account of the power of using sound economic theory in real-world policy and practice. It likewise underscores the trouble of comprehending classical economics the method J.S. Mill and his contemporaries comprehended it.
Chapter 3 “The background” gets the reader up to speed with the classical point of view. It starts with the author specifying the problem that the book is intended to amend: “Modern economics is established on classical fallacies of such a complex nature and confounding depth that it is nearly impossible to understand how it was ever various or to see the logic of the economics of the past” (p. 45). It then briefly explains what classical economics is and who the classical economists were. The chapter sets the borders for the discussion by noting the basic fallacies of modern economics and, for that reason, what it misses out on.
Chapter 4 “The Keynesian transformation and classical theory” explains the Keynesian transformation in economics. Drawing from the author’s previous work, the chapter rapidly moves into talking about the recklessness of aggregate demand analysis and describes the true (classical) significance of State’s Law, which refutes demand-side economics and policy. Kates does more than summarize his previous work, nevertheless. He takes an essential next action by comparing 2 laws attributed to Jean-Baptiste State: the well-known loi des débouchés, discovered in Say’s A Writing on Political Economy (1803 ), and the modern-day conception of State’s Law that mentions the impossibility of general overproduction (need shortage). This conversation is then used to reconnect to Keynes’s work and straw male attack on classical economics.
Chapter 5 “Understanding classical presuppositions, terminology and ideas” is something of a classical economics dictionary that discusses core terms and concepts. The descriptions are contrasted with how the concepts are misconstrued in Keynesian theory.
Chapter 6 “The classical theory of worth and the limited transformation” attempts to dispel the commonly held view that classical economics was based on the labor theory of value. Not so, argues Kates. J.S. Mill presented a theory of worth in 17 points, recreated in this chapter, that at least in part weakens the revolution of marginalist economics: the extremely first of Mill’s elements mentions that “Value is a relative term.” The chapter even more goes over the classical economics perspective on the function of cash, credit, and business cycle.
Chapter 7 “Keynesian theory overruns the classics” describes how Keynes’s The Theory General Theory of Work, Interest and Cash (1936) in merely a years and a half might change economics to the core. The chapter offers a historic introduction of the core players and their functions in producing the transformation. It thus explains the mechanics by which the Keynesian revolution was brought about.
Chapter 8 “The basis for Keynes’s success: why was Keynes able to be successful” continues where chapter 7 ended by taking the conversation of “who” to “how.” Kates here talks about Keynes’s position and impact in the economics discipline, the temper of the times, the connection with Kuznets’s advancement of the GDP procedure and how it was executed as “generally a reflection of Keynesian theory” (p. 179), and the role of statistics and mathematics.
Chapter 9 “Classical theory and the role of federal government” handle another typical mistaken belief of classical economics: that the classical financial experts were highly doubtful of government and public spending. Kates here argues that classical economics was not laissez faire economics but, on the other hand, that the classical economists saw a significant function for federal government and public spending.
Chapter 10 “Austrian economic theory and the classical economic custom” addresses the unique role of Austrian economics, which, by putting entrepreneurship at the center of a market procedure of production, is probably the most classical of modern schools of believed in economics. Nonetheless, although Kates notes that “Austrian economists to a large extent presume the entire of the classical supply-side understanding of the operation of a market economy” (p. 11) which” [t] he Austrian theory of the cycle sits completely within the classical framework” (p. 213), he likewise keeps that” [t] he Austrian custom, especially given how it has actually evolved given that the nineteenth century, is entirely various from the classical tradition in the English-speaking world” and, Kates states,” [t] his can not be stressed enough” (p. 208). This difference mostly rests on the Austrians’ focus on limited energy, which Kates argues always shifts economic thinking away from the supply side.
Chapter 11 “An overview of classical economic theory” is a correct conclusion to the book’s argument. The three main viewpoints in the book come together in an enlightening discussion on how classical economics comprehends the operations of an economy, the process of economic growth, and, notably, the classical theory of business cycle. This is also where the classical understanding gets to stand on its own, individually and without supports. Contrasted with the minimal and Keynesian transformations, the classical framework is presented as a valid and pertinent alternative in spite of its 150 years of obscurity.
This book is the natural conclusion and apex of Kates’s decades-long provocative research study program intent on reanimating State’s Law and reviving the classical understanding of the economy. The work ties together and extends numerous of the arguments from the author’s previous books and posts and does so in a readable and interesting format. A number of the arguments are well received and both intriguing and thought-provoking. Kates goes well beyond his previous writings and takes several of the arguments to their sensible conclusion.
Although the book is exceptional, it is not totally without flaws. Numerous of the points might have benefited from elaboration whereas others might have been mentioned more effectively. Some readers may discover the indirect and sophisticated “European” style of composing discouraging, particularly if they are utilized to the “American” style.
In this reviewer’s simple opinion, the only major weakness of the book is the chapter on Austrian economics. Kates utilizes excessive area to go over the politics of Austrian economists, which, because the chapter directly follows chapter 9’s conversation on the function of federal government for classical financial experts, provides the impression that the review is primarily political. But this is not the case. Kates’s review is based in the school’s founding contribution to the marginal transformation. Because minimal analysis is based on marginal energy, the financial analysis always moves from supply-side in the direction of demand-side reasoning. Therefore, Kates reasons, the Austrian school is complicit in the shift away from proper classical economics. The argument is interesting but would require more elaboration to be persuasive. It is not helped by the author’s seeming urgency to side with Hayek versus Mises while the real discussion, at least in this customer’s reading, appears to line up more carefully with Mises. But this is primarily a somewhat confusing information, which does not remove from the main argument.
Classical Financial Theory and the Modern Economy must be a welcome addition to the reading lists of both amateurs and expert economic experts, whether one’s interest remains in macroeconomics or the history of financial thought. Although the book is a beneficial read on its own without familiarity with Kates’s work, this customer believes it actually shines when read as a follow up and conclusion to the author’s previous contributions.