Words and language matter. An entertaining book by Tom Wolfe, The Kingdom of Speech (2016) explores the way in which speech and culture intersect. Wolfe refers to an acrimonious dispute between Daniel L. Everett, a linguist and, at the time, Christian missionary, and Noam Chomsky, representing the received wisdom on linguistics. It turned on Everett’s experiences living with a small isolated Amazonian tribe, the Pirahã. The tribe’s language did not appear to follow the prescribed forms which evolution seemed to dictate, and which the received wisdom believed were common to all languages.
Everett found that “the Pirahã had not only the simplest language on earth but the simplest culture”. Apparently, the tribe spoke only in the present tense and had no words to describe yesterday or tomorrow. Accordingly, they made nothing of permanence: “Occasionally some would sling together crude baskets of twigs and leaves. But as soon as they delivered the contents, they’d throw the twigs and leaves away.”
This essay appeared in a recent Quadrant.
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It seems the tribe exhibited an archetypical throw-away culture. “They had no conception of making something today to use ‘other day’ meaning tomorrow in this case.” Now, whether culture begets language or the other way around—a matter for linguists—the one must tend to be consistent with the other; be mutually reinforcing. Having no word for tomorrow sits easily enough with making little of permanence and throwing away what’s made each day. Once tomorrow is envisaged, that basket of twigs and leaves might be made stronger and used longer. There is no reason to think that such consistency between language and culture applies only to simple languages.
Suppose the way we described economies is informed by a defunct economist. Suppose when the national accounts come out we don’t describe economic growth according to what additional goods have been produced but according to what’s been spent. Suppose, for example, we say that consumption expenditure accounts for this or that part of economic growth. Try it at home. It was a bountiful year, last year, we spent a lot. Next year will be even better, if we can only just increase our spending. Seems silly on the home front. It is equally silly on the national front. Yet it is exactly what happens. And it can’t be quarantined. It infects the culture and, consequently, economic policy-making. Germanely, the defunct economist in question is none other than John Maynard Keynes. More on Keynes and defunctness to follow.
Keynesian economics is entirely focused on expenditure. Everything is looked at from the demand side. This makes sense if you have (stoically) read The General Theory of Employment, Interest and Money, published in 1936. I have read it from cover to cover twice and that’s apart from many other dips into its innards. Get a life, might be an apropos reflection. Never mind, we all have our idiosyncrasies and it certainly gives me an advantage over modern-day economists who, we can be pretty sure, have never read Keynes but yet unwittingly are, as Keynes put it, “slaves of some defunct economist”. In this case, ironically, none other than Keynes himself.
Keynes believed that a shortage of demand would both delight and plague societies in the second half of the twentieth century and beyond. Gluts of products lay ahead. Keynes supposed that it would be “comparatively easy to make capital goods so abundant” that the return on investment would fall to “zero”. After all, what could businesses invest in profitably, if there were already available a superabundance of goods and services?
You see the two-edged sword. Plenty mixed with a paucity of investment opportunities. The needs of all amply met but with endemic underemployment. Look at it another way. Rather than too much production there’s insufficient demand. A superabundance of goods and services sates demand, reduces scope for new investment and increases unemployment. In a nutshell, this was his premise. And it’s there in plain sight for those sufficiently intrepid to venture into his arcane defining work. But if you want it laid out even more starkly go to his essay “Economic Possibilities for our Grandchildren”, written six years before The General Theory was published:
In our own lifetimes … we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed.
We are being afflicted with a new disease … namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.
For the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.
We shall endeavour to spread the bread thin on the butter—to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while.
We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.
There is much more of this kind of stuff in Keynes’s essay. You might think it borders on the eccentric. I have quoted at length to underscore the thinking that Keynes took into his economic analysis. To be clear, it’s perfectly reasonable to focus on an insufficiency of demand causing unemployment, if Keynes’s premise is right. To wit, that economies will soon be so productive that all the wants and desires can be met with ease while running the show in low gear. Mandeville’s Fable of the Bees, to which Keynes refers in passing, is instructive. A prosperous community becomes wretched when they all decide to live as frugally as possible. In that case, there arises a self-inflicted insufficiency of demand which puts lots of trades out of work.
To reiterate, if the premise is right—too many goods chasing too little demand for them—Keynes is right. However, the premise is wrong. It is not wrong as a matter of logic. It is wrong as a matter of experience. Do you know of anyone (outside of a few billionaires perhaps) whose demand for goods and services is sated? Do you think that either genteel or grinding poverty is now, or will be soon, absent from the Australian landscape? I’ll be self-reflective. Would I prefer to own a holiday chalet in St Moritz, travel in the front of the plane, own a swankier car, and so forth? In fact, yes. Even the Stoics preferred more to less while being admirably stoical with less.
It might seem unlikely, bizarre even, but almost the whole of the economics profession adopted Keynesian economics without at all understanding that abundance and endemic unemployment were at its core. On a false premise, it supplanted the economics of John Stuart Mill, whose textbook (Principles of Political Economy) held sway during the second half of the nineteenth century and whose classical economic precepts prevailed until they were discredited by the intellectual mob in the aftermath of the publication of The General Theory. What happened is analogous to Ptolemy overthrowing Copernicus and Galileo. But unlike celestial science (at least before moon landings and satellites and the like) economic science has real-world consequences.
The application of Keynesian economics leads to bad economic policy. I’ve covered this topic in Quadrant in a number of articles—for example, in “Time to Topple Keynes” (September 2010) and “Shadow Boxing with Keynesianism” (July 2015). As also, in masterly fashion, has Steven Kates—for example, in “The Dangerous Return of Keynesian Economics” (March 2009) and “The Dangerous Persistence of Keynesian Economics” (March 2019). I won’t go over old ground, as much as it’s still evidently and unfortunately relevant. Instead, my focus is on language; on the lexical heritage of Keynes. In particular, on the way the word demand has entered the economic language with an import which before Keynes was dismissed as a concoction of slovenly minds.
Whether in primitive or modern societies, “the slovenliness of our language makes it easier to have foolish thoughts” as George Orwell perceptibly put it in his essay “Politics and the English Language”. Such foolish thoughts about demand were expertly swatted away by John Stuart Mill in the first edition of Principles of Political Economy (1848); as being, among other things, “fatal misconceptions”. Their resurrection, since 1936, has insidiously subverted economic thinking, especially in times of economic distress. Most particularly in times of inflation, as now, and in times of recession.
In a recent piece in the Australian, the writer, for whom I have regard, correctly identified the responsibility of the federal government to do its bit in containing inflation by controlling its expenditure and by taking action to free up the supply side of the economy. Good points. Yet demand was thrown into the mix. To wit, the government should be dampening demand, not stimulating demand. To again use Keynes’s dictum, and this time in full: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”
This is from the Reserve Bank’s February 2023 “Statement on Monetary Policy”:
In nominal terms, domestic final demand continued to grow strongly in the September quarter, underpinned by solid growth in real demand and strong growth in domestic prices. Total nominal demand in the economy remained elevated, having grown well above its pre-pandemic trend rate over the year.
There’s demand again. Front and centre, as you will find in just about all economic statements from the Reserve Bank and from federal Treasury and, in fact, from almost all of those who call themselves economists. It must be understood that this way of analysing economic affairs did not pre-date Keynes. It all comes from him. He brought demand as an aggregate concept into the lexicon.
Inflation can be defined as a persistent and appreciable rise in the general level of prices. It’s a definition with specialised meaning among central bankers. Central bankers find 2 per cent inflation non-inflationary but anything over 3 per cent alarming. And then there’s the duration. For a time, central bankers believed that the current episode of increasing prices was due to global supply-chain disruptions and therefore temporary. Clearly, temporary morphed into persistent.
Domestic final demand, as referenced in the Reserve Bank’s statement above, simply means the sum total of expenditure by governments (excluding transfer payments, such as social security payments), and by businesses and households during a specified period. We can say with some assurance that the private-sector component of this expenditure fell during the Covid lockdowns. This is Philip Lowe addressing the Anika Foundation on September 14, 2021:
The result [of Covid-related lockdowns] is that the economy will now contract significantly in the September quarter. Domestic demand will contract sharply in the quarter … Our rough rule of thumb is that household consumption is around 15 per cent lower during a lockdown than would otherwise be the case.
A deflationary environment, do you think? Well, the Reserve Bank Board clearly thought so, hence its view that interest rates would be unlikely to rise before 2024. Sure, domestic demand was only one of a number of variables the Reserve Bank was looking at. Nevertheless, once domestic demand is in the frame as an important driver of economic activity, it really becomes impossible to envision subdued demand and inflation co-existing.
When Lowe made his comment about contracting demand, governments were spending wildly on transfer payments. At the same time, the Reserve Bank was buying up government bonds and thus monetising the government spending. In the two years prior to his address, from August 2019 to August 2021, public cash holdings plus current account bank deposits (the M1 money supply) increased by a whopping 49 per cent. Lowe and other Reserve Bank board members must have known this, I assume. But it seems to have been akin to an unseen elephant in the room. The siren call of subdued demand, among other distractions, took their attention and robbed them of their presence of mind. The introduction of demand as an aggregate into the language of economics has so warped the culture of the economics profession that primary economic drivers like the money supply are treated as being of secondary importance.
In times gone by an untoward expansion in the money supply was the very definition of inflation. It was inflationary; yes, even in the presence of subdued economic activity and in the absence of rising prices. Its latency was understood. Eventually it would show itself in price rises, as it must. Economic policy-making is hard enough. Economic forces are complex and ever changing. It is simply impossible to get policy-making even half right if demand in aggregate form is anywhere on the stage, never mind being centre stage.
Demand for individual products is one of the foundational building blocks of economics. As an aggregate across all products, it is meaningless. Its mere mention among public and private-sector economists should result in a donation to an economics swear-jar. Let me illustrate. Illiterate Keynesians like, say, Nobel Prize-winner Paul Krugman, always call for governments to increase their spending in order to increase demand when a recession hits. In the immediate aftermath of the 2009 financial crisis, Krugman called for the US government to double its so-called “stimulatory” spending. On what, he explicitly didn’t think important. Then how about on measures to produce more cars and houses which were already glutting the market? It’s self-evidently crazy.
A recession, as John Stuart Mill and other classical economists knew, is due to a mismatch between the goods and services produced and those demanded. Think of entrepreneurs mistaking the future or their competitive strengths and overproducing commercial buildings, or apartment buildings, or electric vehicles—which seems very likely. The resulting localised economic distress, if of sufficient magnitude, can spread nationwide and turn into a recession. It will self-correct from the production side. But, if it is tackled at all, it should be tackled from the production side—the supply side—by reducing business taxes and regulations. Not from the demand side; that is, unless you want to force people to buy specific goods and services they don’t want. To reiterate, it’s crazy.
Demand as an aggregate simply falls out of primary economic forces. It is a derivative and an uninteresting one. It has no life of its own. It can’t, for example, decide to fall of its own will and cause a recession. Keynes thought it could because of his false premise that we’d soon be wallowing in abundance. Classical economists knew that our demand is insatiable, as should we by a simple process of introspection. There is and never will be a shortage of demand taken as a whole; only for individual products which have been oversupplied. Take a big box of food. Do you want to buy it? Maybe, but not if it’s all baked beans, anchovies and brussel sprouts. You want to know what’s in the box. What’s in the box will determine your appetite to buy it.
Our economic language needs either to go back to before Keynes or to grow beyond him. A simple three-part mnemonic taught in schools and in university Economics 101 might help. (1) Making makes us wealthy. (2) Making comes before spending. (3) Spending is a derivative of making. A fourth might possibly be added: Total spending, so-called aggregate demand, is an expletive. Delete it.
Peter Smith is a frequent contributor to Quadrant and Quadrant Online.