Catallaxy gets it wrong again on the classical economists on the trade cycle

I wrote this in response to Sarah’s comments about Austrian economics and Catallaxy. It was my original intention to post it as a comment but I then decided to rewrite it as a post. Sarah wrote that the Catallaxy people are “trying to give the impression that they are the only ones in Australia who have read the Austrians”.

Well, she is spot on. The Catallaxy crowd have been trying for years to pass themselves off as experts on Austrian economics. Yet any genuine Austrian who read them would know they are faking it. When it comes to Austrian capital theory, for instance, Sinclair Davidson doesn’t know what he is talking about. He just regurgitates Roger Garrison. He also knows nothing about Austrian trade cycle theory or Austrian monetary theory. In addition, he is also ignorant of economic history and the classical economists. For heaven’s sake, the man is still preaching the gross historical error that Australia left the gold standard in 1931! His casual approach to the crash of 1937-38 is just as bad. He even thinks ‘Ricardo’s theory’ of economic rent “has its origin in the labour theory of value”. No one who had read the classical economists could make such an egregious error.

Now Steve Kates was over the moon because the US Bureau of Economic Analysis is going to start producing a gross output figure for the American economy, what the Austrian economist Mark Skousen calls gross domestic expenditure. This is just total spending, including spending on intermediate goods. It’s a funny thing but I don’t recall Kates ever writing about this concept until now. With him, it has always been value added. Now he is treating the aggregate spending approach as a new discovery.

If Kates had really read the Austrians he would have known that Hayek, for example, was writing in the thirties about how dangerous it was to ignore total spending. This to me is further proof that they haven’t read the Austrians, let alone the classical economists. Moreover, Kates is clueless about what this means for his own fallacious trade cycle theory, which Davidson also supports. (This pair actually believes that economic “bubbles” are a bit like spontaneous combustion: once the right economic elements mysteriously combine you get a boom).

It is sheer dishonesty to convey the impression that no one in Australia had ever written about gross spending. I for one started writing about it nearly 20 years ago. In doing so I emphasised the vital role it plays in Austrian trade cycle theory. Sinclair Davidson’s response to my attempts to draw attention to Austrian economics was to warn Catallaxy readers not put any “store in Jackson”. In other words, don’t debate the man, just insinuate he is not trustworthy.

They are not the only ones conveying a false impression. Reading Rafe Champion leaves one with the distinct and misleading impression that there is nothing resembling Austrian thought in Australia outside of Catallaxy’s little bubble and that Catallaxy is the only place where one can find real Austrian economics. The facts are otherwise. If you want to know about genuine Austrian thinking, then stay away from Catallaxy. To make matters worse, Champion is peddling the laughable tale that Catallaxy has given birth to a new school of economics founded by Sinclair Davidson and Steve Kates, which they modestly christened the Australian School.

This fiction is, so we are told, based on the thinking of the classical school. This is remarkable considering that neither Davidson nor Kates seem to have read the classical economists. Kates’ theory of the trade cycle, which he falsely claims is based on the classical theory, is more evidence of that. It is, in fact, nothing but the old Tooke-Mill error that still infects a great deal of so-called economic thinking.

Note: Strictly speaking one should speak not of the classical theory of the trade cycle but of the dominant theory, which was a monetary one, and which was also called the currency school theory. (The reason why this theory fell out of favour is a very interesting story in itself).

That this theory was generally considered as being correct was confirmed by George Warde Norman, a director of the Bank of England. In a letter he wrote in 1841 to Charles Wood MP, who chaired the Parliamentary Committee on the Note Issue, Norman bemoaned the fact that public opinion had accepted the monetary theory of the trade cycle. The same point was made by Karl Marx (Das Kapital, Vol. I). On the other hand, R. J. McCulloch appears to have stood astride the monetary camp and the Took-Mill camp, which Marx followed. This may have been due to his adherence to the Ricardian view of the money supply. Unfortunately, this very important subject will never be honestly debated by Catallaxy or the Institute of Public Affairs.

Sinclair Davidson is Professor of Institutional Economics in the School of Economics, Finance and Marketing at RMIT. Steve Kates is an Associate Professor of Economics in the same institution. Both Davidson and Kates are Fellows at the Institute of Public Affairs.

11 thoughts on “Catallaxy gets it wrong again on the classical economists on the trade cycle”

  1. I visit Catallaxy and Quadrant fairly often now and I noticed that they never seem to debate economic ideas. They just just dismiss or sneer at anyone they disagree with. I do not believe they will ever discuss the issues Gerry raised.

  2. I wouldn’t bother with them, Sarah, not if you’re looking for economics. Its always the same thing. And I think youre right about them not discussing anything. I think Professor Quiggin said the same thing about them.

  3. I think Gerry is spot on with that crowd. The fact that both Davidson and Kates refuse to respond proves that. Gerry has basically called them liars and incompetents. No one in their position would let this go if they could prove otherwise.

  4. Gerry’s post made me realise how important this boom bust theory business is. Its obvious from his posts that Keynesianism cant be defeated unless the real classical theory is fully understood.

  5. Just found a hilarious post on Catallaxy by Steve Kates. He calls modern economics next to useless and then says the only alternative is his book. What an ego. And this is was only two months after Gerry exposed him! The man is shameless. Kates also said that post-keynesian theory “is almost identical to the classical theory of the cycle”. I do not know what post-keynesian theory is but having read Gerry I bet it’s the opposite of anything the classical economists said.

  6. Saraha’s comments convinced me that Gerry is right about the classical theory of the business cycle and Kates is wrong. What I don’t get is why Kates wont do the decent thing and face the facts.

  7. Ref: Sarah.

    Steve Kates is wrong. The post-keynesian theory of booms is definitely not related to what should be called the classical theory. It’s the offspring of the Tooke-Mill theory. It’s not saying much for Kates and his followers that they know nothing of the currency school and therefore the real history of the theory of the trade cycle. It’s now my opinion that Catallaxy and the Institute of Public Affairs are knowingly trying to mislead the public on this issue.

  8. What astonishing arrogance. These Catallaxy people completely bungled the history of the trade cycle. Not content with that, they then drew false conclusions from their bungling upon which they had the conceit to dedicate a flimsy intellectual monument to themselves that they then sanctified as the Australian School of economics. Not even Moriarty would have been so audacious.

  9. Did some more googling. It looks like the Mises Institute is backing Steve Kates line on the classical economists and the business cycle. Why would they do that?

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