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November 24th 2015 print

Steven Kates

Drawing the Wrong Conclusions

Global warming and Keynesian theory are natural bedmates, each built on the notion that only harm can come of trusting market forces. As both aim to suppress individual freedom, those who fancy themselves best equipped to regulate the world's affairs tolerate neither naysayers nor contradictory evidence

myth IILet me state at the start where this is heading, since it may not be apparent from the way it begins. Two of the great intellectual disasters of our age are Keynesian economics and anthropogenic global warming (AGW). For both there is a theory which most of the specialists in each area take to be an unshakeable truth. For Keynesians, it is the belief that aggregate demand is the single most important factor determining the level of output and employment. For those who accept AGW, there is the so-called “settled science” that greenhouse gases will over the next half-century lead to an upwards movement in global temperatures with a series of ecological calamities to follow.

Both theories have had a single diagram that has provided the conceptual framework on which millions have built their understanding of what’s involved. In economics, it has been what is known as the Keynesian-cross diagram that relates aggregate demand to the level of current production. For AGW it has been what has become known as “the hockey stick”, which shows temperatures more or less flat for the past thousand years until the beginning of the twentieth century, after which they rise dramatically with no peak in sight.

If these diagrams presented a genuine understanding of the facts they supposedly portray, there would be value in their wide acceptance. But neither does. Both are so deeply flawed that it remains a scandal that neither has been finally put to rest and the theories they support discredited for all time.

The catastrophic role of diagrams in economics

One of the great catastrophes to overtake economics was the utilisation of the diagram in place of words. Even more than mathematics, which still requires an economist to think about things, a diagram produces restful disengagement. The picture replaces thought. If you are trying to convince others about your theory, and you can draw a diagram to explain it, you are more than halfway there. This is what I wrote about this modern trend in my book Defending the History of Economic Thought:

The argument in earlier texts was carried in the words and not in the manipulation of lines on a graph. In a modern text, there is almost invariably some graphical apparatus presented that one learns to manipulate. The diagram provides a way of looking at things that gives a kind of precision to the underlying reality that just may not be there. A modern text will tend to present a kind of stability in equilibrium different from the kind of message earlier economists were trying to convey …

Using diagrams in the place of argument and reason changes the nature of economic instruction and tends to make such instruction more superficial. By teaching price determination as if it is merely about a meeting point between two lines when such lines have no existence and no one setting a price ever knows where they are or even thinks such concepts are of any direct relevance, we may be leaving students less capable of truly understanding the logic of economic action.

Both micro and macro are saturated with diagrams that are seen as essential for an understanding of the conceptual framework being taught. Students who are instead compelled to explain such matters without diagrams but using the logic of the situation are very different kinds of students and become better economists as well.

A diagram tends to lull someone into a false sense of comprehension. It becomes the reality, and the world the diagram is supposed to describe falls backwards into the shadows.

The two diagrams here discussed—Michael Mann’s “hockey stick”, used to demonstrate the devastation caused by global warming, and Paul Samuelson’s depiction of aggregate demand in a diagram he devised back in the 1940s—have already cost us an unbelievable amount of communal wealth and have warranted an immense transfer of purchasing power from the community to governments, which continues without much likelihood of cessation. I start with the hockey stick, since it is now the subject of a wonderful and hilarious book by Mark Steyn called A Disgrace to the Profession.

The hockey stick

The hockey stick was put together by Dr Michael Mann of the University of Pennsylvania. Based on data culled from analysis of tree rings across the past thousand years, the diagram shows virtually no increase in planetary temperatures until around 1900, from which time temperatures rise sharply. It showed what many dearly wished to believe, that something happened after 1900, and that the something that happened was the rise in carbon dioxide and other greenhouse gases in the atmosphere that then led to a rise in global temperatures. The hockey-stick metaphor is thus based on the notion of a long steady period followed by a sharp upwards trend, in the way that the blade at the end of an ice-hockey stick rises at the end of the shaft. Let Scientific American take up the story, from an article in 2005 when climate scientists were still attempting to defend Mann’s work:

The work of Mann and his colleagues achieved special prominence in 2001. That is when the Intergovernmental Panel on Climate Change (IPCC), an international body of climate experts, placed the hockey-stick chart in the Summary for Policymakers section of the panels Third Assessment Report. (Mann also co-authored one of the chapters in the report.) It thereby elevated the hockey stick to iconic status—as well as making it a bulls-eye. A community skeptical of human-induced warming argued that Manns data points were too sparse to constitute a true picture, or that his raw data were numerically suspicious, or that they could not reproduce his results with the data he had used. Take down Mann, it seemed, and the rest of the IPCCs conclusions about anthropogenic climate change would follow.

That led to unjustified attack after unjustified attack, complains climatologist Gavin A. Schmidt of the NASA Goddard Institute for Space Studies. Although questions in the field abound about how, for example, tree-ring data are compiled, many of those attacking Manns work, Schmidt claims, have had a priori opinions that the work must be wrong. Most scientists would have left the field long ago, but Mike is fighting back with a tenacity I find admirable, Schmidt says. One of Manns more public punch backs took place in July 2003, when he defended his views before a congressional committee led by Senator James M. Inhofe of Oklahoma, who has called global warming a hoax. I left that meeting having demonstrated what the mainstream views on climate science are, Mann asserts.

And mainstream these views certainly are, most importantly through their promotion by the IPCC and Al Gore. After the IPCC’s 2001 report the hockey stick became (along with stranded polar bears on an ice floe) the most important so-called demonstration of the supposed reality of climate change. The diagram has wormed its way into the consciousness of millions who know nothing about climate science, but believe the planet is heating and its temperature rises must be controlled.

But as the article shows, even by 2005 there were sceptics aplenty. The most important moment came when Michael Mann crossed swords with Mark Steyn. Steyn is one of the great climate change sceptics. In an obscure post at National Review Online he wrote a comment that will make no sense without some knowledge of the background. This is what Steyn said:

If an institution is prepared to cover up systemic statutory rape of minors, what won’t it cover up? Whether or not he’s “the Jerry Sandusky of climate change”, he remains the Michael Mann of climate change, in part because his “investigation” by a deeply corrupt administration was a joke.

This vague association with Jerry Sandusky led Michael Mann to sue National Review and Mark Steyn for defamation. Sandusky, like Mann, was at the University of Pennsylvania. Sandusky was convicted of statutory rape while employed at UPenn but the university’s initial investigation let him off the hook. And it was in this vague association between himself and Sandusky that Mann believed he had been defamed. It is a case that has now dragged on since 2011. You can catch up on the legal side of it if you don’t know the details by visiting the SteynOnline website, but the insanity of the American justice system may remain the most bizarre aspect of this entire process.

And so we come to A Disgrace to the Profession. In order to make use of the immense amount of material he has collected on Mann, which he intends to take up with Mann as part of the legal discovery process, Steyn decided to put together a volume filled with all of the criticisms of Mann’s hockey stick that have been made, not just by amateurs and observers such as Steyn and most of us, but also by actual climate scientists. And what a rich field this turned out to be, full of evidence that leaves the hockey stick utterly without credibility. No scientists who wish to keep their credibility intact will go anywhere near it.

Steyn originally went along with his other defendants at National Review in playing the legal system with a straight bat. But after one example of legal insanity after another, in which the process is the punishment, he broke away and is now running his defence on his own, and running it in the court of public opinion at the same time as the case makes its way through the glacial and costly American judicial system. And bearing in mind that Steyn is being sued for defamation, there is something very unusual in that he describes Mann in print as “Mr Fraudpants” and runs articles with titles such as this on his website: “Michael E. Mann: Liar, Cheat, Falsifier and Fraud”. In such posts we find the kind of quote that Steyn’s book is filled with. The following was written by Dr John Christy, the scientist who created the satellite temperature record, someone one might take as an authority:

Regarding the Hockey Stick of IPCC 2001 evidence now indicates, in my view, that an IPCC Lead Author, working with a small cohort of scientists, misrepresented the temperature record of the past 1000 years by (a) promoting his own result as the best estimate, (b) neglecting studies that contradicted his, and (c) amputating another’s result so as to eliminate conflicting data and limit any serious attempt to expose the real uncertainties of these data.

It takes someone like Dr Christy to see through it all and explain the problem with authority. Most people, however, will only know what they are shown by the IPCC and Al Gore and in the media, which seldom discusses the views of sceptics. Thus millions have been convinced by this diagram and think it is the gospel truth beyond challenge. If and when the discovery over Mark Steyn’s defamation case ever takes place, the cross-examination during “the trial of the century” may end up being more closely watched round the world than the trial of O.J. Simpson, with a great deal riding on the outcome. Although they are no friends of Steyn’s on climate science, the entire media establishment in the United States is lining up with Steyn, since an adverse judgment will leave every journalist in the world vulnerable to defamation in doing no more than just reporting the news.

 

The Keynesian-cross diagram

Yet for all that, the single most damaging diagram in the entire history of the sciences is, without any doubt, the Keynesian-cross diagram. It has been depriving economists of the ability to make sense of economic events since it was first published in the first edition of Paul Samuelson’s Economics text in 1948.

The idea of honouring this diagram occurred to me when Mark Steyn described A Disgrace to the Profession as “the story of the 21st century’s most famous graph and the damage it has done both to science and public policy”. Ah, I thought, but the present century is still young and although the harm the hockey stick has undoubtedly caused may already be calculated in the billions, the harm Samuelson’s diagram has done may be calculated in the trillions.

For those unfamiliar with the Keynesian cross, it shows an upward sloping aggregate demand curve which reaches equilibrium where it crosses the forty-five-degree line at a level of national income well below the level of production that would employ everyone who wants a job. The answer, therefore, is an increase in public spending which pushes the line upwards and therefore pushes the equilibrium level of production along the horizontal axis to the right which then allows everyone to find a job.

So in the diagram we have all of the elements of spending, by consumers, investors, governments and those overseas net of imports—that is, C+I+G+NX. The total level of spending is the total level of national output, GDP, represented by the letter Y. So when the economy goes flat, and aggregate demand is down, the government can restore GDP and raise employment by increasing its own spending. All this is shown by the diagram which has been used in classrooms around the world for three generations and where the increase in public spending is shown by the increase from G1 to G2. Equilibrium then rises from Yu to Yf, with Yf being the full employment level of output while at Yu unemployment was unacceptably high.

Other diagrams of the same sort are now more popular—what are termed in the trade IS-LM and AS-AD—but the core message is the same. You can cause a line on a curve to shift by raising public spending and the result is a higher level of Y. The higher level of Y, the higher the level of employment. Everyone learns it if they have done even a single economics course, and in spite of what some economists like to pretend, this remains the theory near-universally accepted in dealing with recession. As a result of this belief, when the Global Financial Crisis struck, the automatic and near-universal response across the world was to increase public spending or find some other means, such as lowering interest rates, to raise the level of aggregate demand.

The policy has, of course, never worked, but the trillions of dollars of public sector waste have drained our economies of astonishing levels of wealth, keeping our living standards well below their potential since Keynesian theory finally took its grip of the economics profession. The thing is, the diagram seems so reasonable since everyone translates it into what would happen in a single business. If there is an increase in demand for some product, efforts will be made to produce and sell more of whatever it is.

The problem is that you cannot translate this across to the entire economy. Sales in an economy occur because buyers have produced other products somewhere else and received an income for their efforts. The purchase has therefore already come with a contribution to the total amount of goods available for sale. Although the aggregate contributions to production and the subsequent purchases are so massive that it is impossible to keep track, in a market economy demand in total is made up of supply in total (unless what was produced did not match what others wished to buy). Everyone once knew that. Now almost the whole of the economics profession denies it absolutely.

Thus, with Keynesian deficit spending, there are more units of output that buyers are trying to buy than there are units of output that have been produced. And the result is that across the economy there are individuals who find themselves unable to buy as much as they expected. Ultimately, rather than increasing demand and employment, the result is a fall in real demand and employment.

Or to put it another way, it is one thing to argue that as total output grows across the economy the level of demand will grow. More output leads to more sales. That is just economics and ought to be obvious. It is quite another thing to argue that as demand grows, the level of output will grow to match the demand, that spending by itself will magically create the goods and services to buy. This is a cargo-cult mentality and fundamentally wrong. Yet that is what virtually every modern economics textbook now says.

And whether others can see the logic or not, the reality, time and again when these Keynesian experiments have been tried, is high rates of unemployment and a slowdown in growth. We have seen experiments in public spending and deficit finance across the world since the GFC, and in not a single instance has an increase in public spending led to an upturn in the economy and a return to full employment. The British Labour Prime Minister James Callaghan said in 1976 at the height of the Keynesian-induced Great Inflation:

We used to think you could spend your way out of recession and increase employment by boosting government spending. I tell you, in all candour, that that option no longer exists. And in so far as it ever did exist, it only worked on each occasion … by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

And why did he and millions of others think it was even possible? Because they could draw a line on a diagram, increase the level of G, see that the new equilibrium was at a higher level of GDP and then assume that the economy would behave in exactly the same way.

I have written my own book on the disgrace to the economics profession, now in its second edition. It takes apart Samuelson’s piece of beguiling illogic. Keynesian theory is itself the height of junk science, which has never on a single occasion allowed an economy to raise its level of production and return an economy to full employment. It has, instead, led governments to pour their trillions into one wasteful project after another, of which green energy is only the latest, but far from the most expensive, example.

Economists who use any of these Keynesian diagrams starting with Samuelson’s are throwing sand in their own eyes. It is almost impossible to explain to someone who has been taken in by these graphs why they have been so badly misled. No stimulus has ever worked but we still teach the diagrams that say public spending will bring our economies out of recession and give us strong and balanced growth. Who could believe that after what has gone on since 2009? Yet they do. A disgrace the diagram may be, but what is even more disgraceful is that the entire profession continues to accept a theory that has never worked. This diagram has corrupted the understanding of more individuals than any other diagram in human history.

Drawing to a close

We live in an age of science, so if you are going to be deceived, you will be deceived in a scientific way. No one has the remotest possibility of checking on any of the scientific facts all of us accept. The universe began with a big bang. Humans have descended from apes. The sun is mostly hydrogen. The list goes on. We believe, as has probably always been the case, because everyone else believes as well, but also for most of us, what we believe hardly matters in the slightest in the way we lead our lives. But we do know that this thing called “science” works since we are surrounded at every turn by the wonders it has created.

Thus, if scientists come along and tell us that greenhouse gases will cause the polar ice caps to melt, raise sea levels and disrupt our civilisation, we are apt to listen. And then, when they provide us with a diagram that shows, using scientific methodologies, that these problems exist and need to be dealt with as a matter of urgency, we pay attention. Just as we did back in 1999 when computer scientists told us about how the new millennium was going to cause massive global disruption in our computer networks.

The cost to us personally is immense in believing such things if they are untrue. AGW may turn out to be the greatest scam in history. “Hide the decline” is a phrase known to all who are dubious about the science, but either unknown or ignored by those who accept the conclusions and the need for action.

With Keynesian economics, the power of diagrams is immense, coming as they do with equations, computer models and extensive extrapolations. They are, moreover, found in virtually every macroeconomics text in the world. Government outlays in the trillions of dollars have been based on these theories and models, yet the evidence that there is actually a fiscal lever attached to any part of the economic apparatus remains scant indeed. If the theory is not right, we are costing ourselves immense amounts of wealth and are blighting billions of lives by denying a large proportion of the world’s population the kinds of living standards entrepreneurially-driven businesses can bring. Because of Keynesian analytics, productive businesses continually find themselves competing with governments for these funds, or worse, finding governments passing on billions to their crony capitalist associates who deplete our wealth in dismally unproductive ways.

And this is where AGW overlaps with Keynesian theory. Both are built on explaining the harm that must follow by leaving things to the market. Both are aimed at suppressing individual freedom in order to overcome the problems a market economy supposedly creates. It is the powerful wish that these theories are true that drives their adoption in the face of massive evidence that they are wrong. Actual scientific truth cannot withstand such beliefs. Governments are now spending immense amounts on green energy and other such programs to combat a problem that may not even exist. AGW has now met Keynes in another way, since Keynesian economics provides a warrant for governments to spend at prodigious rates. Unless both sets of theories are recognised as utterly without foundation in every important respect, they will be our certain economic ruin.

Dr Steven Kates is Associate Professor in the School of Economics, Finance and Marketing at RMIT University.

 

Comments [1]

  1. en passant says:

    Steven,
    An enjoyable read about the stupidity of the educated. I studied Economics at university, but did not believe that I actually ever understood it. I quickly became convinced that neither did the professors nor tutors who could only regurgitate what I had just heard (but not explain it), nor could they answer my specific questions. Their alternative comment was to look at me knowingly and say “Hold that question as it will be answered later in the course”. No question was ever answered satisfactorily, so what they were really saying was “Go away and with luck you will be out of my class soon and I will never have to explain what I don’t understand myself”.
    Fortunately, I am having better luck with the Climate Con as I can use the BoM and NOAA data to make predictions that do in fact come true. Although the beginning of November was below average cold in Melbourne and I do not know the more recent weather (I am out of town) I can already write the BoM, CSIRO Press Releases and the FewFacts Newspaper headline for 1st December 2015: “November the Warmest Month Evaaaa!!”
    As nobody reads further they can then publish total tosh along the following lines and get away with it: “Despite no detectable warming for 19 years the upward trend continues after the data was corrected to fit the computer models. “It’s worse than we thought!” said the “Fry & Die” Greens Candidate for the ‘Seat of Heart of Adelaide’ (which may be delisted and redistributed by the Electoral Commission as it has too few people to be a separate seat. Ms2U Emily List said that the decommissioning of SOHA was a racist, islamophobic plot to take down Green Seats just because nobody lived in them.
    Ms2U List went on to state that CO2 had doubled this year alone, temperatures had risen by 2 degrees centigrade, the seas were more than a metre higher and polar bears were now extinct in Antarctica. When questioned about these facts she snapped back angrily: “What does Benghazi matter? Who needs facts when we already know November was the hottest November Evaaa and that December was even hotter.”
    Cannot argue with that logic, but I have learned never to vote for anyone or any Party that could believe in Keynes or CAGW.