Who’s Afraid of Free Market Economics? By Steven Kates

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San Paulo Stock Exchange, by Rafael Matsunaga (CC BY 2.0).

As the Second Edition of Free Market Economics: an Introduction for the General Reader has just been published, author Dr Steven Kates tells us why his textbook is still unique.

When I wrote the first edition of my Free Market Economics in 2009, I thought of it even then as the best introduction to economic theory anywhere. It combined five features that are unique to this book each one of which is necessary to understand the way an economy works, and none of which are found in any other text that I know of:

  • an uncompromising anti-Keynesian core
  • a microeconomics that rejects the notion of an equilibrium
  • a focus on the role of the entrepreneur
  • a full and detailed chapter on the classical theory of the cycle
  • an emphasis on uncertainty as the crucial element in any serious discussion on why only market economies can create growth and prosperity.

I also had no idea how much more I wanted to say until I came to write the second edition which to my eyes has far transcended the first. The second edition has been fashioned out of what I learned by teaching the first for five years while also watching how economic events unfolded following the stimulus.

You may only have the author’s word for it here, but there is no book like it. If you want to understand how an economy works based on the English tradition in economic theorising that goes from Adam Smith to John Stuart Mill, there is literally no other place you can go.

The book steps back two “revolutions” in economics, not just the Keynesian of the 1930s, but the marginalist revolution of the 1870s as well. It is a companion volume to David Simpson’s wonderful The Rediscovery of Classical Economics, also published by Elgar and done in association with the Institute of Economic Affairs. Reading the two will provide you with an understanding of just what is wrong with economic theory today from the perspective of the great classical economists but reading mine will also explain the operation of an economy in ways that will allow you to understand why, for example, our current economic policies have left out economies in such a dreadful state.

That the policies that have been adopted over the past five years – which have been based on standard economic theory – are ruining our economies is beyond doubt. But the reason why that is so will nevertheless remain incomprehensible to anyone who continues to believe that aggregate demand is a valid concept in trying to make sense of economic events, or that a focus on microeconomic equilibrium conditions has much if anything to do with explaining how an economy works.

My Free Market text was written in a kind of white heat over twelve weeks as the text for the course I was giving during the first months of the worldwide introduction of stimulus packages. The absolute dead certainty I had was that public sector spending whose only aim was to create jobs and not also create value would end in disaster, as it most assuredly has. Our economies are sinking under the weight of massive levels of unproductive public spending and debt levels that continuously subvert every attempt to wind them back.

Yet you cannot go to any standard economics text even for an inkling of why that is. They cannot explain to you what has gone wrong or why.

free market

Free Market Economics: An introduction to the General Reader

To understand any of this you must first understand Say’s Law. Say’s Law was the bedrock principle of economic theory from the earliest years of the nineteenth century until swept away in a fit of distraction by the publication of Keynes’s General Theory in 1936.

It is founded on recognising that only value adding production can create economic growth and add to the number of jobs. The most central chapter in my book is Chapter 3, the chapter on Value Added, a discussion found in no other text that I know of.

Yet without understanding value added, understanding that every form of production not just creates more goods and services but also at the same time uses up existing goods and services during the production process, it is impossible to think about public spending and economic policy correctly.

Only if what is produced has greater value than the resources used up can an economy grow. Government spending seldom creates value. The stimulus was therefore doomed to fail as is so much of the policy matrix found today.

The strangest part about the book, however, was for me to discover my own beliefs on the nature of economic theory in so many other areas. There is not a chapter in it that would fit into a standard economics text. All of it takes you back to an earlier time and a different theoretical matrix.

Space is too short to tell you much more but let me draw you to the cover which shows a water mill on a plaque made of clay. This is because the two most important influences on my own way of thinking have been two of the greatest economists England has ever produced, John Stuart Mill and Henry Clay.

Their ideas are returning. There are a number of strands in economic theory at the moment which go under different names: Austrian, Behavioural, Complexity, Evolutionary. There is an effort being made to restore the economics of the classical economists since it was their theories that made economics the engine of ideas that it became. What Free Market Economics does is provide an introductory understanding of the ideas that have now been largely scattered to the winds which are now being put back into place.

I can do no more than encourage you to read this book. It is a defence of the market economy published at a time when there may never have been a greater need for such a defence.

steve_katesDr Steven Kates is Associate Professor of economics at the RMIT University in Melbourne, but spent most of his working career as the Chief Economist for Australia’s national employer association, the Australian Chamber of Commerce and Industry. If he has a mission in life, it is to see Keynesian economic theory disappear from our textbooks and the return of the classical theory of the cycle as the guide to economic policy.

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