Economic errors and fallacies concerning the gold standard, the Great Depression, Keynesianism, post-Keynesians, MMT, free trade, Austrian economics, immigration


Come 27/7/20I shall post the first of a number of articles dealing with contentious economic issues and theories that have serious political ramifications. What follows will provide readers with a brief introduction to each subject.

Professor Bill Mitchell (University of Newcastle, NSW) is one of the world’s leading proponents of MMT (modern monetary theory). As part of an effort to popularise MMT he posted articles1 that painted a grotesque picture of what is called the classical gold standard. His most egregious error is his assertion that it had a natural tendency to cause depressions. This is utter nonsense. It was deviations from the gold standard that resulted in depressions, not the gold standard itself. It is clear that Professor Mitchell’s ill-founded attack on the gold standard is part of an attempt to justify MMT policies.

My rebuttal of Professor Mitchell’s anti-gold thesis will deal in detail with all of its errors. Unfortunately, he is far from being alone in his ignorance of how the gold standard really functioned. Professor Sinclair Davidson (RMIT) is every bit his equal in that regard. It was he who unequivocally asserted that the gold standard was a bad idea without being able to explain why.2 He also blamed Australia’s sluggish growth rate in the late 1920s on the country’s return to gold. (This stuff is on par with Professor Mitchell’s gold standard nonsense.) Elsewhere, Professor Davidson emphatically stated that Australia’s recovery from the Great Depression was caused by Australia leaving the gold standard in January 1931 which he thinks led to the devaluation of the Australian pound. This is an extraordinary assertion  when one considers that the country left the gold standard in December 1929, some 28 months or so before the recovery3. How Professor Davidson was able to confuse the abandoning of gold with the date the exchange rate was revalued is therefore something only he can explain.

This brings to us to the dangerous myth, a myth that many economists on both the right and left adhere to, that the 1931 devaluation was responsible for Australia’s recovery and the elimination of mass unemployment. The sheer magnitude of the recovery should have alerted economists to this error. In addition, the failure of these economists to take into account the effects of the worldwide deflation on the prices in tradable goods is unforgivable. Moreover, the likes of  Professor Davidson and Steve Kates go further than the Keynesians and post-Keynesians by allocating a key role to government spending cuts. The key factor was not the spending cuts but the rapid recovery and expansion of manufacturing resulting from adjustments to the real factory wage 4 combined with a steep fall in production costs. Hence spending cuts played a very minor role in the recovery. On the other hand, the alphabet soup of Keynesian-minded economists’ assertion that the spending cuts were deflationary is pure Keynesian baloney.  The  key factor was the huge drop in costs.

It cannot be sufficiently stressed that the right failed to grasp the vital fact that Australia’s recovery completely destroyed the Keynesian, post-Keynesian and Marxist explanations for depressions as well as their nostrums while simultaneously validating the currency school theory5 of booms and recessions that our right has chosen to deliberately ignore. In addition, Davidson’s baseless attack on the gold standard and his erroneous explanation for Australia’s recovery from the Great Depression severely weakened the case against Keynesianism. So we are now in a position where the Australian experience of the Great Depression is not used against Keynesianism policies because our right not only failed to understand its true significance but cannot even get its dates right. The result is that the likes of the  post-Keynesian Tim Harcourt6 feels free to make outrageously misleading statements about the Great Depression safe in the knowledge that there will be no repercussions from the right.

This returns us to Professor Mitchell who made the ridiculous and easily refuted claim that “mass unemployment arises when the budget deficit is too low.” (It is truly infuriating that our right also refuses to respond to this nonsense.) In the same post he made the equally absurd claim that the rise in real wages in the US during the Great Depression probably increased the demand for labour. Then there is his erroneous belief, shared by many others7, that the 1937 crash was caused by Roosevelt’s tight fiscal policy. This is another myth that doesn’t hold water. (The question of the 1931 devaluation, spending cuts, mass unemployment and the real wage will be dealt with in detail in the near future.)  Professor Mitchell also peddles the nonsensical Marxist concept of surplus value8 without so much as a squeak from our self-appointed defenders of the free market.

The important question is this: Why does our right persist in giving the post-Keynesians a pass? It’s question they are apparently not prepared to answer.

The question of free trade is a hot topic, as it should be. Unfortunately, our right bungled this issue just as badly as it bungled the topic of Australia in the Great Depression. When Professor Steve Kates correctly observed that the difference between free trade today and free trade in the nineteenth century was the gold standard he was stating a vitally important fact.9 Professor Judith Sloan and Professor Sinclair Davidson immediately responded with sneers and in doing so revealed a shocking ignorance of classical thinking regarding international trade and the gold standard. Davidson went so far as to make the grotesque  suggestion that Kates was implying that the classical economists based the theory of comparative advantage on the gold standard. This asinine response served to reveal Davidson’s  staggering and unpardonable ignorance of the subject. If only Kates had read the classical economists on the subject he would have had no difficulty in disposing of Davidson’s twaddle.

One thing needs to be made clear: The basic argument of the likes of Sloan, Donald Boudreaux and Davidson rests on the assumption that the pattern of international trade has been determined, or largely determined, by comparative advantage. The basic argument of the classical economists is that this situation could only be satisfied with a specie standard, meaning gold or silver, which is one of the reasons they opposed a fiat currency. If both Sloan and Davidson choose to disagree with this opinion then it is incumbent upon them to explain why they are right and the classical economists are wrong.

(I hope my own articles on the gold standard will succeed in explaining why the classical economists firmly believed that the gold standard was necessary for the maintenance of free trade.)

Professor Donald Boudreaux deserves a special mention with respect to free trade in that his libertarian extremism is what gives genuine free trade policies a bad name. Boudreaux uses free trade theory to justify the insanity of mass immigration on the grounds it increases specialisation, which it does not.  When it comes to the detrimental effects of unrestricted immigration on wages rates he dismisses it as an “empirical question” without any reference to supply and demand. However, when it comes to the minimum wage it immediately becomes  a question of supply and demand.10 Whether he likes it or not, the damaging effects of mass immigration on wage rates and hence the standard of living  is no more empirical than the theory of comparative advantage or the damaging consequences of an effective minimum wage11.

None of this would matter if we didn’t have to endure this nonsense from the insufferable  Chris Berg (Institute of Public Affairs fellow) who argues that our borders should be abolished on the ridiculous grounds that it would raise global GDP!12 He also justified this destructive policy on the basis that there is no significant economic difference between importing goods and importing people. It beggar’s belief that any person with a Ph.D. in economics could make such a ridiculous statement. Professor Davidson, a colleague of Berg’s, used the same ludicrous fallacy to argue that “a restriction on immigration is a restriction on economic prosperity” and is akin to “increased taxes”.13

It beggars belief that a professor of economic could make such staggeringly stupid statement. Nevertheless, Dr. Berg did his best exceed his mentor’s silliness by stating that there is nothing special “about national borders or the nation itself”.14 It came as no surprise to find  John Humphreys15 (Centre for Independent Studies) using free trade theory to justify the folly of an open borders policy. How anyone trained in economics could be so idiotic is baffling. It has to be beyond a normal person’s comprehension as to how this sanctimonious crew of libertarians can smugly blind itself to the destructive social, political and economic consequences of abolishing Australia’s borders.

Neither Davidson, Berg nor Boudreaux would be able to find a single classical economist who supported such a policy.16 In fact, it would horrify them. The greatest fear of these economists was that population growth would exceed the rate of capital accumulation thereby producing  mass destitution. Anyone who read a classical economist would know this. What they did  support was emigration to the less populated  colonies where there was abundant land. So the likes of Boudreaux and Davidson have no business quoting David Ricardo, or any other classical economist,  on the benefits of free trade while ignoring his views on the relation between wages and the size of the  population. The same goes for Chris Berg. It’s about time these libertarians  learnt that comparative advantage is a theory, not a dogma,  and they have no right using it to deceive people into thinking the classical economists supported a policy of open borders.

Then there is the other extreme with Professor Bill Mitchell stating that free trade is nothing but  “a stacked deck of cards” and that the pattern of international trade is set not by comparative advantage but is “dominated by a combination of concentrations of economic power and the old imperial forces”. Steve Keen, a disciple of Piero Sraffa.  also rejects free trade theory, calling it “a fallacy based on a fantasy, and it has been ever since David Ricardo dreamed up the idea of Comparative Advantage and the Gains from Trade two centuries ago.”17

When Steve Kates refers to the nineteenth century link between free trade and the gold standard he is met with sneers but when the left-wing likes of Bill Mitchell and Steve Keen savage free trade theory the response is total silence, suggesting once again that our right lacks the fortitude to confront these left-wing economic theorists. But Kates is right and his critics are wrong. This brings me to Matthew Smith18, another anti-market economics lecturer, whose post-Keynesian nonsense, along with Mitchell’s, is allowed to go unchallenged. So why isn’t our right training its intellectual firepower on these leftists? Why does the IPA (Institute of Public Affairs), the professed defender of capitalism, refuse to even question the thinking of these anti-market economists?

The left argue that recurring booms and busts are inherent in capitalism. Instead of challenging this assertion our right have gone along with it19 with Steve Kates going even further, arguing, indirectly, that the so-called classical theory of the trade cycle confirms the left’s anti-capitalist stance. But there is no such theory20. There was the currency school theory of the trade cycle (which showed there is no cycle) which came from Henry Thornton21 (1802) and then there was the banking school theory21 formed in the 1840s by Tooke and Mill, which is the one Kates refers to. It is also the one Marx adopted as his own.

The utter failure of our right to grasp the true nature of the ‘boom-bust cycle’ was made patently clearly by its feeble response to the “global financial crisis”. Not one of them seemed to realise that there was nothing exceptional about it and that it followed the usual trade cycle pattern,  meaning that it was signalled by real factors and not financial factors. Failure to understand the nature of the problem caused members of the right to make appalling mistakes that strengthened the left’s attack on capitalism. This is  not surprising when one considers the right’s  ignorance of the so-called nineteenth century trade cycle theory and classical economic thinking on the subject.

This ignorance was revealed by Professor Sinclair Davidson when he made the absurd comment  that the gold standard slowed Australian growth after 1925 and that the 1931devaluation triggered Australia’s recovery. Both these assertions are wrong. He is equally wrong, as are many others, in stating that the 1937-38 crash was due to a monetary contraction. Steve Kates was just as bad when he blamed Roosevelt’s spending22 for prolonging the Great Depression. Dr  Alan Moran (formerly of the Institute of Public Affairs) thinks debt was the problem, stating  that “once debt creation was slowed in 1937, the economy again tanked”. (Quadrant, October 2013).  Dr Moran overlooked the fact that from 1932 to 1937 Commonwealth debt actually fell by about 3 per cent. Instead of tanking the Australian economy continued to expand and create more and more jobs. This is proof positive that correlation is not causation. On the other hand, if Dr Moran means by “debt creation” credit expansion then this is dealt with below.

Unfortunately, now that Davidson and Kates’ errors regarding the Great Depression have been presented as indisputable facts the subject is considered closed, ensuring that both these gentlemen will not be called on to defend their arguments. (So much for the idea of open debates.) The result has been the right’s failure to utterly destroy the left’s so-called solutions for overcoming recessions and unemployment, despite the fact that Australia’s experience in the Great Depression discredited Keynesian nostrums.

No myth or fallacy pertaining to economics should ever be allowed to go unchallenged. One myth that has currency among left-wing economists is that the 1932 debate between Piero  Sraffa and Hayek resulted in a total defeat for the Austrian theory of the trade cycle. In a future article I shall explain why this is nonsense along with a refutation of the fallacious concept of “own rates of interest” that Sraffa used to attack Hayek. In 1960 Sraffa also published a book23 in which he introduced the concept of reswitching. This is where a technique can be profitable at both a high rate of interest and also at a much lower rate of interest, leading to the conclusion that “capital reversing” is a possibility. The result is that a great many economists now appear to think that Sraffa had hammered a nail into Austrian capital theory, thereby thoroughly refuting Böhm-Bawerk24. The general acceptance of this myth strongly suggests that Böhm-Bawerk’s critics did not pay his work sufficient attention.

I hope the forthcoming articles on these subject will produce some constructive exchanges.


1Return to a gold standard – don’t even think about it

Gold standard and fixed exchange rates – myths that still prevail

2Return to the gold standard: … bad ideas just never die.

35½ big things Kevin Rudd doesn’t understand about the Australian economy, was published by the IPA and authored by Professor Davidson and July Novak. John Roskam, who heads the IPA, has expressed deep concern about what passes for history in some of our universities. If he is sincere he will either withdraw Davidson and Novak’s greatly misleading article or publish a correction. However, doing the right thing in this case is not what I expect from the IPA.

Davidson’s nonsense about Australia and the Great Depression seems to be held by every member of the media. Ross Gittins’ article Learning from the Great Depression contained every one of Davidson’s unforgivable errors.

Andrew Bolt, a conservative commentator with the Murdoch press, used the Held Sun’s web site to mindlessly promote Davidson’s error-ridden article on the Great Depression. Needless to say, Mr Bolt knows as much about economics history and economics as I do about astrophysics.

4The real factory wage is the ratio of the money wage rate to the total money value of factory output. While lecturing on economics at the University of Sydney in the 1920s Frederic C. Benham, a British economist, did a study which revealed  the relationship between wages, production and unemployment in Queensland for the period 1916 to 1924. This showed an inverse relationship between the demand for labour and value of output. In his own words: “It would be hard to find a clearer proof of our thesis [that excessive wage rates cause unemployment]”. He made it plain that by excessive he meant labour costs that exceeded the value of labour’s product. I used the same method for American and Australian manufacturing with respect to wage rates and the value of manufacturers’ output.

The Prosperity of Australia, P. S. King & Son, LTD, Orchard House, Westminster,1928, ch. vi.

Steve Kates argues that Australia was  “the first economy to come out of the Great Depression” because the  government cut spending in 1931. This is a thoroughly mistaken view that completely ignores the role of production costs, particularly with respect to wages. In fact, there is no way the 1931 cuts can be considered responsible for the recovery.

5The currency school sprang from the bullionist debate that was triggered by Walter Boyd’s A Letter to The Honourable William Pitt (1801) in which Boyd argued that the Bank of England’s inflationary policy was responsible for the state of the exchanges and rising prices.

The currency school had adopted Henry Thornton’s theory of booms and busts which placed the blame squarely at the feet of the banking system, meaning fractional reserve banking. By forcing down the rate of interest the banks encouraged excessive lending that created booms that could only be reversed by a monetary contraction. The currency school’s solution was to restrict the note to the amount of gold held by the banks, which meant ignoring demand deposits.

Samuel Jones Loyd was the leader of the currency school with Colonel Robert Torrens being  its most formidable theoretician. Unfortunately, Loyd (later Lord Overstone) and his supporters adamantly rejected the idea that demand deposits were money while Colonel Robert Torrens, William Clay, George Arbuthnot and James Pennington strongly disagreed. Nevertheless, Loyd prevailed and the result was Peel’s Bank Charter Act 1844 was seriously flawed because it assumed only notes were money.

6In 2013 Tim Harcourt (son of Geoff Harcourt, one of Australia’s leading post-Keynesians and an ardent supporter of Piero Sraffa) wrote an outrageous article on the Great Depression that was so historically inaccurate as to be grotesque and yet not one member of our right would step forward to correct him. No wonder Australian leftists think they can erase  history with impunity.

Blinded to one of Australia’s finest moments

7What causes mass unemployment?

Bruce Bartlett, an American historian, stridently argued that it was Roosevelt’s “very big cut in federal spending in early 1937” of 17 per cent crashed the economy. What he overlooked is that the “very big cut” amounted to  a very  meagre 1.6 per cent of GNP. It’s utterly ridiculous to assert that such modest cut could crash the US economy. Take Australia as an example, which every economist should do.  The Australian government cut spending in the midst of the depression: For the year ending on 30 June 1931 Commonwealth spending peaked at £68,585,546 while the 1932 period saw spending fall to £61,004,576, an 11 per cent drop that came to about 1.7 of GNP. Instead of sinking further into depression, as the likes of Bartlett and Mitchell would argue, the economy started to recover. (Was this a case of “expansionary austerity”?)

Are We About to Repeat the Mistakes of 1937?

8The Marxist concept of surplus value is a ridiculous fallacy. Chapter 17 also a defence of the fallacious concept of over-production. Twaddle doesn’t begin to subscribe this stuff. Marx’s distortion of the classical economists’ reasoning on industrial crises is a bloody disgrace and his “metamorphosis of commodities” is pure mumbo-jump. Yet our right finds itself totally incapable of effectively refuting this crap. No wonder the left appear to be winning.
We need to read Karl Marx

9Kates correctly observed that the gold standard meant that there is indeed a fundamental  difference between free trade today and free trade in the nineteenth century. Unfortunately, he was unable to explain what it is. Forthcoming gold standard articles will do just that.

10Free-Market Case Against Open Immigration?

A letter to Nancy Pelosi on the minimum wage.

Unfortunately, when it comes to this issue Chris Berg and Sinclair Davidson are every bit as bad as Boudreaux.

11An effective minimum wage is one set above the market clearing wage rate, which is the one that creates unemployment.

12In a truly globalised world, immigration must be free

13Immigrants Boost The Economy And Should Be Welcomed

14Open the Borders. If Chris Berg were honest he would have called his piece of garbage Abolishing Australia. No wonder the left treat this self-satisfied clique as a libertarian joke.

15John Humphreys, The case for  Free Immigration Agreements, IPA Review, March 2008

16The classical economists feared that the labour supply might one day exceed the rate of capital accumulation, the material means of production. As John Stuart Mill put it:

One of the effects of this change of circumstances is sufficiently obvious: wages will fall; the labouring class will be reduced to an inferior condition.”

He further stressed that “high wages imply restraints on population”.

Principles of Political Economy Vol. II, p. 721
Ibid. Vol. I, p. 343

Then there was the political aspect of open borders:

Among a people without fellow-feeling, especially if they read and speak different languages, the united public opinion, necessary to the working of representative government, cannot exist.

On Liberty and Other Essays, Oxford University Press, 1991, p. 428.

It is abundantly clear that no classical economist would have been such a fool as to tolerate let alone peddle the pseudo economic  arguments and phony ethics these libertarians use in an effort to pass off their libertarian dogma as sound economics that also serves to promote a human right.

17Professor Steve Keen, an apparent  disciple of Piero Sraffa, is an Australian left-wing economist who knows he can freely attack the idea of free trade in the full knowledge that there will be no response from our right. So the likes of Keen and Mitchell get a pass while Kates is hammered for stating a simple fact with respect to  gold and free trade in the nineteenth century. This doesn’t say much for Davidson or Sloan.

Trump’s Truthful Heresy On Globalization And Free Trade


The case against free trade – Part 2

The case against free trade – Part 3

Incidentally, none of the economists mentioned appear to know that it was Colonel Robert Torrens who first laid down the fundamental principle of comparative advantage in his book An Essay on the External Corn Trade 1815. Instead of using wine and cloth he sensibly applied the principle to Polish wheat versus British wheat production. This was done without the use of figures.

18Matthew Smith teaches at the University of Sydney. In an article for the Conversation in he attacked so-called austerity policies while also using Sraffa’s reswitching concept to support his argument. Reswitching is supposed to have refuted  Böhm-Bawerk: it did not.

‘Crowding out’ and the fallacy of fiscal austerity

Anyone with some knowledge of classical economics and a passing interest in MMT (Modern Monetary Theory) will have noticed its link with the monetary thinking of Thomas Tooke (1774–1858). Smith made this abundantly clear in his paper On the Transformation in Tooke’s Monetary Thought. He appears unaware of the fact that in probably one of the most brutal slap downs in the history of economic thought Col. Robert Torrens thoroughly eviscerated Tooke’s monetary theory. The following gives  the reader some idea of the tenor of Torrens’ assault on Tooke’s contradictory line of reasoning. Using a quote from Mill*, one of Tooke’s votaries, Torrens wrote:

When Mr. Tooke maintains that the Bank does not possess the power of increasing its issue, he “plays such fantastic tricks with dates and figures as would have been incredible had he not himself taken the trouble of proving their existence on the ground of mere history by an elaborate exposure” of his own inconsistency. (Col. Robert Torrens, Principles and of Peel’s Act 1844, Longman, Brown, Green, Longmans, and Roberts, 1857,  pp.105-106)

*J. S. Mill, Principles of Political , Vol. II,  p. 661.

On the Transformation in Tooke’s Monetary Thought

19The left argue that recurring booms and busts are inherent in capitalism. Instead of challenging this assertion the great majority of economists endorse it, including Steve Kates. Also see:

Jonson, P. D. Great Crises of Capitalism, Connor Court Publishing, Pty, LTD, 2011, p. 282.
Smith, Peter, Bad Economics, Connor Court Publishing, Pty, LTD, 2012, p. 82.

20Steve Kates so-called classical theory is simply the old banking school theory better

described as a psychological theory of the phenomenon and the same theory that Marx took as his own. The theory made its mark in the 1840s though Mill did lay it out in his 1826 Essay Paper Currency and Commercial Distress. Nevertheless, the currency theory, which is a monetary theory, dominated economic thinking until the financial crisis of 1847 brought on by railway mania severely embarrassed it. Kates also bizarrely believes that the Austrian school theory of booms and busts “had been designed to refute Marxists and socialists of all varieties”. This is sheer tommyrot.

21Henry Thornton’s An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, (1802) provided a monetary explanation of booms in which the rate of interest played a key role. Hence, “revulsions”, as they called them, were not natural to capitalism but a monetary driven phenomenon caused by the banking system driving down the rate of interest below its market rate thereby creating an excess demand for loans.

22Roosevelt prolonged the depression in the US by seven years. If Steve Kates were right then the Nazi’s huge spending programme would not have eliminated unemployment.

23Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, 1960. Chapter xii deals with reswitching. Even people that dislike Sraffa’s work think I’m being unfair when I say his book reminds me of Harold Shea, a Strague de Camp character who finds himself in alternative universes where the laws of physics cease to apply and where magic prevails. In brief, Sraffa’s book is in no way connected with economic reality and in is even far worse than the concept of perfect competition. At least I enjoyed the Harold Shea stories.

24Böhm-Bawerk’s monumental three volumes: History and Critique of Interest Theories, Positive Theory of Capital, Further Essays on Capital Interest, Libertarian Press 1959.

7 thoughts on “Economic errors and fallacies concerning the gold standard, the Great Depression, Keynesianism, post-Keynesians, MMT, free trade, Austrian economics, immigration”

  1. I looked for Davidson article on the great depression. What I found was a power point post with a diagram of an “Austrian explanation” of the depression. He also said that the “turning point” for Australia was 1931 when she went of the gold standard and that started the recovery. How is this different from what you think? BTW, he also mentioned spending cuts on catallaxy.

  2. Davidson doesn’t know what he’s talking about when it comes to the great depression. Australia left the gold standard in December 1929 and not January 1931.The real turning point was the fall in the real factory wage (the ratio of the factory money wage to the money value of factory output) and not the ‘devaluation’.

    His use of Garrison’s diagram to explain the cause of Great Depression was an egregious error because it is a forced savings argument, usually called an over-investment theory but as Mises stressed:

    “The essence of the credit-expansion boom is not over-investment, but investment in wrong lines, i.e., malinvestmcnt.” Human Action, Henry Regnery Company, p. 559

    Mises did not deny the possibility of forced saving only that it was unusual. Had Davidson done his homework he would have known that the 1920s was not marked by a reduction in real incomes. Another problem with Davidson’s approach is that readers could reasonably conclude that the Austrian theory of the trade cycle applies to Australia’s depression. It does not.

  3. The classical and correct definition of forced savings occurs when inflation increases the quantity of capital at the expense of consumption to the extent that it causes an absolute fall in real wages.

    Jeremy Bentham was the first to raise the problem of forced saving or, as he put it, “forced frugality”, which he rightly condemned as unjust. (A Manual of Political Economy, 1794.) In 1802 Henry Thornton inflationary policies and warned they could result in forced saving whereby the labourer is forced to “consume fewer articles, though he may exercise the same industry.” Thornton also understood that such policies would have to be reversed. (Enquiry into the Nature and Effects of the Paper Credit of Great Britain, pp. 263-64)

    Ricardo made the same point when he stated that inflation could bring about “a violent and an unjust transfer of property, but no benefit whatever will be gained by the community.” (The High Price of Bullion, 1810, p. 49.)

    The classical economists had a great deal to say that is highly relevant to current economic conditions.

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