Responding to Steve Kates: more zombie shuffles

RMIT economics lecturer and weird Australian defender of the Romney 47%-thesis Steve Kates has a new blog up called Law of Markets, which is unsurprisingly devoted to Kates’ laissez faire economics and far-right political opinions.

You might recall that I wrote a post a few years back entitled “Don’t study economics at RMIT”, a rather tongue-in-cheek critique of Kates’ baroque views about economics, and the apparent concentration of libertarian economists at that institution.

The original post was in reaction to an op-ed by Kates in the Australian Financial Review, in which he argued that Labor government’s 2009 stimulus package was crowding out private business activity, and therefore causing inflation:

The RBA is continuing to raise rates because the government is taking up domestic savings more rapidly than we are able to generate those savings through productive activity.

In this economy at this time it is the government that is the single most important cause of rising rates. The RBA is only doing what it can to ensure the resources available for investment are properly priced.

As I argued in my original post, Kates’ ideas are highly neoclassical. Dr Kates is a well-known proponent arguing for the resurrection of Say’s Law, a largely discredited economic theory that suggests that demand and supply, by definition, are essentially always in equilibrium.

I criticised it at the time by pointing out that:

One of the implications of Say’s Law is the crowding-out theory of investment, namely, that government investment necessarily diverts the investment in productive capacity of an economy away from private firms. This is why Kates argues that “it is the government that is absorbing our national savings and raising the cost of capital.”

I further argued that there didn’t seem to be much evidence that the government was raising the cost of capital. I pointed out that the government was largely borrowing foreign money through sovereign bond issues, and that Australian firms were having no problems getting access to foreign capital via their own bond issues. So we should expect inflation and therefore interest rates to stay low.

So let’s just fast-forward and ask ourselves: has government stimulus in Australia crowded out private savings and raised the cost of capital?

No. Since Kates’ article, and since my response, Australian inflation has stayed remarkably contained, and interest rates have been lowered, not raised.

But how does Kates react to this reality? By denying it.

Here is his argument:

For me, schooled in the classics as I am, it was as obvious as a cloudless day that the stimulus could never achieve its ends. For virtually the rest of the profession it was not. Why the difference? I base my understanding on the classical theory of the cycle; they base their understanding on Keynes. That’s it. Nothing else.

Kates is so reflexively anti-Keynes that he simply can’t admit that a) stimulus can stimulate, and b) austerity can contract. This means he keeps getting things wrong. In 2010, for instance, he thought stimulus must lead to higher inflation and interest rates. Of course, it didn’t. Now, he believes that austerity is not really contractionary. Of course, it is.

It would be pretty funny, really, if it wasn’t so serious. Basic textbook IS-LM has been remarkably predictive in the current crisis. Pre-Keynesian neoclassical theory has been remarkably useless.

I tried to respond to Kates’ blog post, by the way. He binned my comment in moderation. Classy.

One thought on “Responding to Steve Kates: more zombie shuffles

  1. Hi, thanks for this blog post. I have been exposed recently to the horrors that is Steve Kates’ brand of economics. I am a Business Student at RMIT and I am shocked to find out that someone like him is teaching Economics at any university. Is there some type of ombudsman or organisation which does a kind of “disbarring” of people like him so he cannot propagate wrong and damaging ideas such as his Law of Markets??? *Fingers crossed*

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