These are some of the postings on the Societies for the History of Economics (SHOE) website related to my posting of “Deck the Halls with Macro Follies”.

December 7 from Steve Kates

I thought this would be of interest to historians of economics. John Papola, the animating spirit behind the Keynes-Hayek Rap, has now done a video on Say’s Law, the fundamental principle of the pre-Keynesian theory of the cycle. While most of those who come to this site have an interest in the history of economics, not everyone is a specialist in the issues he raises. To help appreciate the video, here are a few bits of background to catch the full flavour of just how beautifully done it is.

John Maynard Keynes introduced the notion of aggregate demand into economic theory. Before his General Theory of Employment, Interest and Money was published in 1936, demand deficiency as a cause of recession was literally and with no exaggeration seen as a fallacy by virtually all mainstream economists. That is what an acceptance of Say’s Law meant. Today, of course, macroeconomics is the mainstream and when recessions occur the first thought in almost everyone’s mind is to restore the level of demand.

Keynes took the idea of demand deficiency from Thomas Robert Malthus who published his Principles of Political Economy in 1820, the most important aspect of which was his argument that recessions are caused by too much saving leading to too little demand. Keynes was reading Malthus’s letters to Ricardo in October 1932 which was the specific reason that he would eventually write a book on demand deficiency as the cause of recession. Most scholars who have looked into the transition from The Treatise on Money do not accept Malthus as the inspiration for Keynes. But since there is general consensus that Keynes formed the idea of demand deficiency in late 1932 and there is no question that Keynes was reading Malthus in late 1932, there are very strong reasons to believe that it was because Keynes was reading Malthus at just that moment that he wrote The General Theory to explain demand deficiency as the cause of recession. But it is a controversial point so some may not accept the notion that Malthus was the inspiration for Keynes as suggested in the video.

Say’s Law, which does not get mentioned by name, was called the Law of Markets during classical times. The principle was not given the name Say’s Law until the 1920s but it was Jean-Baptiste Say in France and James Mill in England who together are responsible for the initial crafting of this bedrock classical proposition. And as a very good first approximation to its meaning there is this, the best short statement on the law of markets and its implications, which was given by David Ricardo in a letter to Malthus dated 9 October 1820. It is briefly referred to in the video as part of a song title as it flashes by:

“Men err in their productions, there is no deficiency of demand.”

Ricardo was trying to explain to Malthus that in his view the recessions that followed the ending of the Napoleonic Wars in 1815 were not due to there having been too much saving and therefore too little spending. It was not even spending that mattered. What had gone wrong was that the goods and services produced did not match the specific demands that people with incomes had (“men err in their productions”). There were therefore unsold goods and services, but not because there was too little spending and too much saving, but because businesses had produced one set of goods (housing in the US to take the most recent example of recession) that could not be sold at prices which covered their costs. The structure of production was wrong which would inevitably, as it always does, affect credit markets as defaults became legion.

And finally there is the question of effective demand which is different from the notion of aggregate demand. Aggregate demand is just a total. Effective demand explains what creates purchasing power. What makes individuals within an economy able to buy more than they presently do is more production of goods that can find a market. Producing saleable products – raising productivity – is the only means by which economies can grow and therefore, beneath it all as Friedrich Hayek explains, there must be more investment in capital (actual productive assets) and more innovation which improves the technology embodied in the capital. An economy is driven by supply, never demand. Only if value adding supply goes up can demand go up.

That is the message of the video. It is a piece of genius that so much can be so condensed into just over four minutes.

December 8 from Marie Duggan

Dear All,

This is really fun! However, the trouble with the logic of the argument is that, as Keynes realized in the 1920s, a lot of businessmen were not borrowing in order to invest in anything real, but in order to speculate in financial markets (as Keynes himself knew all too well!). Between 1978 and 2007, rather the same thing was happening with savings in the US. Those who saved, speculated. So much money went into speculation that asset bubbles were more profitable than real production! Keynes’ gets that complicated story. But I don’t think he advocated deficit spending, as much as he advocated redistributing income from the high-income earners to the middle income earners. He would say today raise taxes on the high-income earners, and cut taxes by the same amount on the middle class (or support public education, which would result in the middle class paying less out), and poof, aggregate demand would zoom.

Marie Duggan

December 8 from Barkley Rosser

Papola’s piece is highly amusing, if definitely skewed to a particular perspective. Two points on that perspective.

One is that Say himself admitted in several places in his main book that his “law” may not always hold and described some historical examples involving the Roman and Ottoman Empires (the latter still existing when he wrote, so “current” rather than “historical” when he wrote) of when people may have been hoarding cash that was neither purchasing goods nor being provided through financial markets lead to real capital investment. Some of these involved people seeking to avoid property taxation by hiding their assets, and indeed the Ottoman Empire experienced increasing stagnation of growth as time passed. Hoarding of cash that is not saved by being put into the financial system has long been posited as a way for a shortfall of aggregate effective demand to come about.

The second is that Ricardo’s explanation of the post-Napoleonic slowdown is a statement of faith, not of clearly proven fact. Do we have evidence that the surpluses in those sectors where men were “erring” by producing too much offset by declining inventories in the other sectors? If that was not the case (and I have never seen anybody present evidence that it was), then indeed the case can easily be made that Malthus was right that there was a shortfall of aggregate demand leading to layoffs, even if one wants to argue that this was strictly a short-term adjustment on the way to a convergence onto a long-run classical equilibrium growth path of superior efficiency and sustainability.

Barkley Rosser

December 8 from James Ahiakpor

Both the facts and logic of which I am aware are painfully in contradiction to Marie Duggan’s claims. I wonder how she came by them.

The number of people employed in the U.S. in 1978 stood at 96.048 million and rose to 146.047 million by the end of 2007. Were the additional nearly 50 million people employed just to engage in speculative activities? Even recent U.S economic history that includes the housing bubble should alert one to realize that the bubble involved lots of real production (houses).

Keynes certainly favored income redistribution from the rich to the poor or middle class. But this derived from his mistaken notion that the savings of the rich are not spent (an argument he started from the Treatise, namely, the paradox of thrift). Had Keynes tried (harder, if he encounted the statement in the Wealth of Nations) to understand Adam Smith’s explanation that “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a diffrerent set of people,” he might have spared us that folly. J.S. Mill (Works, 2:70) and Alfred Marshall (Pure Theory of Domestic Values, quoted in Keynes, GT: 19) restate Smith’s savings-are-spent explanation that Keynes could have tried to understand. Thus, when the rich are taxed more, its those things that their savings would have been spent on (by the borrowers) that would contract to match the additional consumption of the middle class. Marie’s vision that such income redistributive policies, poof, increase aggregate demand turns out to be a fallacy.

Perhaps, the video would have been additionally helpful to point out the source of Keynes’s problem with saving, namely, confusing it with cash hoarding by private individuals. There was a lot of that during the early 1930s (run on banks, leading to a $8 billion contraction in demand deposits between 1930 and 1933). We don’t have that going on now, thanks to the FDIC (Federal Deposit Insurance Corporations, 1934), although you wouldn’t know it from the reckless money creation by the Fed over the last four years or so.

I’m praying for the arrival of the day when enough economists would stop making excuses for repeating Keynes’s macroeconomic follies.

December 8 from Steve Kates

If I might, a brief reply to Barkley Rosser. On the first issue on Say’s wavering adherence to Say’s Law, in spite of his Letters to Mr Malthus published in response to Malthus’s Principles in 1821, it was not his version of the concept that became standard in the literature. Say thought that unsold goods could be sold if more of other goods were produced. But as Ricardo pointed out at the time, it was not that more of other commodities needed to be produced but there should be less production of what cannot be sold with the resources used instead to produce something else. Anyone who goes to Say to find out what Say’s Law meant is going to someone who never really seemed to understand this principle in full himself. I must say, though, that hiding cash from governments that will take it from you if they find it, the example given by Barkley, is not the kind of example that those who argued in favour of oversaving actually had in mind.

As for the nature of the recessions that overcame Britain from 1813 to 1823, I refer you to an interesting paper, “The Historical Context of the General Glut Controversy” by Tim Davis which may be found in my Two Hundred Years of Say’s Law (Elgar 2003: 133-153). There, in his conclusion, Davis wrote:

“My account of historical events is important because it shows there was no chronic depression during the postwar decade. Instead, the economy was beset by a series of shocks, mostly external, to which it adjusted quickly. Malthus did not recognise the separate crises and so criticised Ricardo’s analysis of postwar events. He believed Ricardo attributed the economic trouble of the entire period to a shift from wartime to peacetime production. This was not the case. Instead, Ricardo recognised the several shocks that occurred and the fact that in the ensuing adjustment, capital and labour were unemployed. With regard to the dispute about ‘oversaving’, Ricardo rejected Malthus’ argument, especially as stated in Chapter 7 of Malthus’ Principles of Political Economy, that excessive investment reduced the demand for labour and contributed to unemployment. Nothing in the historical record suggests that Britain suffered from too rapid an investment program; also, the logic against ‘oversaving’ is compelling.” (Davis 2003: 148-149)

December 8 from Gary Mongiovi

Smith’s assertion that all savings get channeled into spending (as clear a statement of Say’s Law avant la lettre as one can find), is just that–an ungrounded assertion. He offers no persuasive rationale for it. Somehow the savings magically get channeled into spending. If memory serves, John Stuart Mill hints at interest rate adjustments as a mechanism that might bring investment spending into line with saving, but he recognized that in a money economy, where decisions to sell can be separated from decisions to spend, the mechanism could falter in ways that could produce considerable economic distress for a while at least (see Mill’s On Some Unsettled Questions of Political Economy, 1844).

So I doubt if Keynes could have learned anything useful about the problems with which he was concerned by reading what Smith had to say about saving & investment. And in so far as Mill recognized that demand could fall short of aggregate output, at least temporarily, there’s a bit of common ground between him & Keynes. Keynes obviously had read Marshall quite carefully, and outlined a critique of the Marshallian position; we can debate whether that critique is persuasive, but that’s a different issue from the one on the table here.

I always find it curious that anyone takes Say’s Law seriously. It contends that any level of aggregate output will be sustainable, since aggregate spending will always adjust to precisely the level of output the economy has produced–whatever that level may be. In most of the classical literature there’s no robust rationale for it: it’s supported by pretty lame statements along the lines of: well, no one would take the trouble to produce x dollars worth of output unless he wanted to buy x dollars worth of other stuff.

I know that Say’s Law is often claimed to be an element of neoclassical economics, but I’m skeptical about that too. Say’s Law contends that ANY level of aggregate output can be sustained. In neoclassical economics, the only equilibrium level of aggregate output–the only level that can be sustained–is the full employment level. If the system produces a level of output that falls short of the full employment level, then wages, the interest rate and other relative prices are presumed to adjust to move the system towards full employment. I don’t find that argument persuasive myself, but it’s not really Say’s Law.

And as far as the empirical evidence goes, well, I’m no econometrician, but isn’t the US economy going through a patch now where private sector investment spending is falling short of household and business saving? And wouldn’t the high-saving German economy have some real aggregate demand problems if the demand for its exports evaporated? Saying that crowding out is total doesn’t make it so.

No one denies that production is the source of income, or that income is a significan source of demand. The question is whether there is a mechanism which ensures that every dollar of income translates into a dollar of demand: this is not self-evident; if anything, it strikes me as a highly dubious claim.

Gary

Gary Mongiovi, Co-Editor
Review of Political Economy
Economics & Finance Department
St John’s University
Jamaica, NEW YORK 11439 (USA)

December 8 from Sumitrah Shah

Since Paul Krugman as Macro Santa gets to “create things out of thin air” at the end of the video (at least I think it is supposed to be him), maybe we should give him a chance to explain the General Theory as he understands it, with its strengths and weaknesses. It is as lucid an introduction as one could hope for, even though it is sure to enrage some people! But isn’t that the point of the video too?

http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html

Gary’s excellent statement about J. S. Mill: “in a money economy, where decisions to sell can be separated from decisions to spend, the mechanism could falter in ways that could produce considerable economic distress for a while at least” seems elementary and yet needs to be repeated.

And speaking of creating things out of thin air, where would be Schumpeter’s investors and innovators be without the facility to use credit to develop whole industries “out of nothing” as it were? His theory of entrepreneurship would be implausible without the banker whom he called the “ephor” of capitalism. The fractional reserve system guarantees that savings out of current income are not necessarily the source of all investment at all times. Savings will, of course, increase out of higher incomes to attain a new equilibrium. And similarly, bankers could balk at lending because there aren’t good investment opportunities around, as they have done in the recent recession by sitting on piles of cash. The relationship between savings and investment spending is complicated, at the very least.

Best,

Sumitra Shah

December 9 from Steve Kates

I am very grateful to Sumitra Shah for posting Paul Krugman’s introduction to The General Theory which gets to the very heart of the issues at stake. This is what Krugman wrote:

Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

• Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

• The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully

• Government policies to increase demand, by contrast, can reduce unemployment quickly

• Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

To a modern practitioner of economic policy, none of this – except, possibly, the last point – sounds startling or even especially controversial. But these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable. And the great achievement of The General Theory was precisely to make them thinkable.

The first of these dot points is the refutation of Say’s Law. Let me therefore put the meaning of Say’s Law into the same form used by Krugman: whatever might be the cause of those frequently occurring recessions which do, of course, lead to high levels of involuntary unemployment, such recessions are never caused by a lack of demand.

If anything sounds startling and controversial to a modern economist, it is this. And because of Keynes, the very idea that demand deficiency does not cause recessions is utterly unthinkable today. Aside from a very small handful of those who read this site, such a possibility has not only never crossed their minds, but will be rejected out of hand. Yet the denial of demand deficiency as a cause of recession was accepted by Ricardo, Mill, Marshall, Jevons, Pigou along with virtually the whole of the mainstream prior to 1936 and they did so having thought through the “Keynesian” alternative.

No classical economists would ever have subscribed to the stimulus programs whose deficits and debts are ruining one country after another. The Great Depression ended after four years. The present recession has no end in sight. Why, then, does anyone think Keynes was right and the classics were wrong? That is the point the Macro Follies video is trying to get across.

December 9 from Sumitrah Shah

I thank Steve Kates for his response. My bullet points are directed to his comments at the end of his message.

“No classical economists would ever have subscribed to the stimulus programs whose deficits and debts are ruining one country after another.”
The deficits and debts of at least the U.S. can easily be traced to the enormous redistribution of incomes and wealth towards the top, which led to reduced revenues. Add to that major expenditures of unfunded wars and you have a recipe for deficits and debts. It was not long ago when in the late 1990’s we were running budget surpluses.

“The Great Depression ended after four years.”

Surely the New Deal policies had something to do with that. It is fashionable to be New Deal deniers in some circles, but I don’t think the folks who read this site. In 1937, when Roosevelt was pressured into austerity measures, the economy did slide into another downturn.

“The present recession has no end in sight.”

Could the political gridlock in America have something to do with it? And in other countries, austerity measures are the official policy and they are doing worse than the U.S. If one country after another are being ruined as you claim, it is certainly not due to commitment to meaningful stimulus programs.

“Why, then, does anyone think Keynes was right and the classics were wrong? That is the point the Macro Follies video is trying to get across.”

The “Keynes and the classics” dilemma remains still. But as to the point of the video, the makers are far too clever to settle just for educating the public to their viewpoint. It would be a wasted effort if they didn’t want to ruffle many feathers too!
Cheers,

Sumitra Shah

December 10 from Barkley Rosser

My heavens, Steve. Your latest post is simply crawling with absolute statements, most of which are demonstrably false. Let me simply note your claim that none of the “mainstream” or “classical” economists prior to 1936 thought that fiscal policy stimuli should be used to combat unemployment. Right there on your list is Pigou, who thought so. Much of the Chicago economics department thought so prior to Keynes as well, including Henry Simons and Aaron Director. Going further back, well, I cannot resist; Jean-Baptiste Say himself thought so as well.

December 10 from Steve Kates

You would really have to wonder what the Keynesian Revolution actually was if you follow Barkley Rosser. All those “demonstrably false” statements I make, and yet it is he who thinks that classical economists thought the answer to recessions was a fiscal stimulus. So just what is it that he thinks Keynes did that was so special?

Classical economists did indeed argue that there was a role for public spending to play during recessions, but such spending was seen as a palliative and not the actual solution, such spending had to be value adding and no deficits were involved. It is everywhere across the classical literature, even in the very chapter John Stuart Mill wrote to explain and defend Say’s Law. I will even quote him:

“There is another way in which government can create additional industry. They can create capital. They may lay on taxes, and employ the amount productively.” (Mill [1871] 1921, Ashley edition, p 86)

But the key here is that the money had to be spent productively. None of this digging holes and filling them again kind of stuff, and as you can see, there is no hint of deficit spending since there needed to be taxation to pay for the spending by government. So burying banknotes in disused mine shafts or building pyramids would not have been what any classical had in mind. The mindless waste during the so called stimulus would have been anathema.

The example of Hubert Henderson is quite instructive. Henderson along with Keynes were the co-authors of “Can Lloyd George Do It? which was the Liberal Party election manifesto of 1929. And in it they both supported a public works program to deal with the unemployment of the time which existed before the Great Depression took hold. But after The General Theory was published, there was a famous meeting in 1936 in which Henderson tore into Keynes’s arguments as a form of economic insanity.

Since classical economists all understood that demand is constituted by supply, the notion of a separate aggregate demand function was seen as utterly fallacious. That’s exactly why, just as Krugman wrote, “these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable”. And if you look around in every direction today and take in the mess that the stimulus has made of one country after another you will understand why they thought such ideas were as pernicious as they really did think they were.

December 10 from James Ahiakpor

Gary Mongiovi wrote:

Smith’s assertion that all savings get channeled into spending (as clear a statement of Say’s Law ////avant/// la lettre/ as one can find), is just that–an ungrounded assertion. He offers no persuasive rationale for it. Somehow the savings magically get channeled into spending. If memory serves, John Stuart Mill hints at interest rate adjustments as a mechanism that might bring investment spending into line with saving, but he recognized that in a money economy, where decisions to sell can be separated from decisions to spend, the mechanism could falter in ways that could produce considerable economic distress for a while at least (see Mill’s On Some Unsettled Questions of Political Economy, 1844).

It would have been helpful to Gary Mongiovi to have read Smith’s statement he called “an ungrounded assertion” in full in the /Wealth of Nations/ (Chicago, 1976, 1: 359) to appreciate its validity. Define or recognize saving as the purchase of a financial asset for the reward of interest or dividend (share of profits) (Smith, /WN/, 1: 358), and also recognize that issuers of financial assets intend to spend the proceeds. Smith’s explanation becomes very clear. I referred to J.S. Mill’s repetition of Smith’s explanation (/Works/, 2:70), but once again, Gary would rather shoot from the hip–“if memory serves” he says– rather than to read the reference. Mill writes:

The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and while hoarded, is not consumed at all. But if employed as capital, it all consumed; though not by the capitalist.

Now, if one defined “investment” as Keynes (/GT/, 62) does as only “the current addition to the value of the capital equipment which has resulted from the productive activity of the period,” it may become difficult to see how savings necessarily become “investment spending.” But if one recognizes investment spending as the employment of savings or loanable funds in the sphere of production that includes the purchase of capital goods, using funds to pay workers before revenues flow in (the wages fund), and funds-on-hand to run an enterprise, that is, both fixed and circulating “capital,” then the classical explanation is easy to understand. One of Keynes’s major problems with understanding the classical literature was the meaning of “capital” as loanable funds that derive from savings. Apparently, his modern-day followers are still having the same problem with the classical language.

So I doubt if Keynes could have learned anything useful about the problems with which he was concerned by reading what Smith had to say about saving & investment. And in so far as Mill recognized that demand could fall short of aggregate output, at least temporarily, there’s a bit of common ground between him & Keynes. Keynes obviously had read Marshall quite carefully, and outlined a critique of the Marshallian position; we can debate whether that critique is persuasive, but that’s a different issue from the one on the table here.

I don’t know how Gary judges Keynes to have read Marshall “quite carefully” when Keynes (/GT/, 19) couldn’t make clear meaning of the Marshall quote:

The whole of a man’s income is expended in the purchase of services and of commodities. It is indeed commonly said that a man spends some portion of his income and saves another. But it is a familiar economic axiom that a man purchases labour and commodities with that portion of his income he saves just as much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.

Keynes couldn’t even understand Marshall’s explanation that interest is the reward for saving. Instead his retort is that interest is the reward for “parting with liquidity” or not hoarding cash (e.g., /GT/, 166-67). Why, because he thought, incorrectly, that saving is the same thing as cash hoarding!

I know that Say’s Law is often claimed to be an element of neoclassical economics, but I’m skeptical about that too. Say’s Law contends that ANY level of aggregate output can be sustained. In neoclassical economics, the only equilibrium level of aggregate output–the only level that can be sustained–is the full employment level. If the system produces a level of output that falls short of the full employment level, then wages, the interest rate and other relative prices are presumed to adjust to move the system towards full employment. I don’t find that argument persuasive myself, but it’s not really Say’s Law.

Keynes’s false attribution of the full-employment assumption to classical economic analysis has been a hindrance to many of his followers to understand classical analysis. Indeed, Say’s law or the “Law of Markets” holds at any state of the economy, including periods of involuntary unemployment that may be generated by a commercial crisis or “shaken confidence” (well explained by Mill, /Works/, 3: 574) and Marshall, 1920, 591-92). As Ricardo also explains, during a process of adjustment in the condition of business due to changes in “the taste and caprice” of consumers, “much fixed capital is unemployed, perhaps wholly lost, and labourers are without full employment. The duration of this distress will be longer or shorter according to the strength of that disinclination, which most men feel to abandon that employment of their capital to which they have long been accustomed” (1: 265). Had Gary bothered to re-read Mill on the subject, he also might have recognized Keynes’s mischief in truncating Mill’s otherwise careful statement regarding the necessity of producers to match their supplies with consumer’s taste or demand in order to avoid excess supplies or demands:

Nothing is more true than that it is produce which constitutes the market for produce, and that every increase of production, /if distributed without miscalculation/ among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand (1874, 73; emphasis added).

But this is what Keynes distorted as “Supply creates its demand,” a phrasing of the law that leaves many people puzzled.

No one denies that production is the source of income, or that income is a significan source of demand. The question is whether there is a mechanism which ensures that every dollar of income translates into a dollar of demand: this is not self-evident; if anything, it strikes me as a highly dubious claim.

All markets are linked through the adjustment of relative prices and interest rates. That is the mechanism. No classical economist ever claimed that the adjustment process was instantaneous. That view is another of Keynes’s distortions of classical economics.

We can hardly make progress in our understanding of the classics and how badly Keynes misrepresented their arguments unless we take the trouble to read them carefully ourselves, especially with the meaning of words as they meant them rather than the definitions Keynes improperly assigned to them. And in the debate over the efficacy of government spending as an aid to aggregate demand, all we need do is ask ourselves this simple question: “From where does the government get the money to spend?” Unless, it is from a central bank’s printing press or borrowing from abroad, why should that increase total spending?

In a letter to T.R. Malthus, J-.B. Say writes:

Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own. To the proprietor of the mines whence this money is obtained, it is a production with which he purchases such commodities as he may have occasion for: to all those into whose hands this money afterwards passes, it is only the price of the productions which they have themselves created by means of their lands, capital, or industry. In selling these, they exchange first their productions for money; and they afterwards exchange this money for objects of consumption. It is then in strict reality with their productions that they make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands (Say 1821, 2).

The letter clarifies the meaning of the law of markets. The law does not relate to a barter economy. And should there develop an excess demand for money (through the demand to increase hoarding), prices would fall (excess supply of goods and services) unless the supply of money is immediately increased to satisfy that demand. Why the law’s logic is still lost on some people remains a puzzle to me. But I suppose no amount of quoting from the original sources will help those who choose not to understand.

James Ahiakpor

December 11 from Steve Kates

In relation to James Ahiakpor’s post, I do think Say’s Law was embodied in the classical theory of the cycle right up to 1936 but that’s a separate issue from what he wrote in trying to explain the meaning of this principle and how it was mangled by Keynes. If we are historians of economics, part of whose mission is to make sense of the great economists of the past, then it should be our mission to make sense of Smith, Ricardo, Mill and Marshall. James can follow what they wrote and can make coherent sense of their arguments. He can explain their logic and understands their economics. Whether he is right about the superiority of their arguments relative to Keynes, the question I have is whether those who have been critical of what he (and I) have written can themselves follow and make plausible sense of Smith, Ricardo, Mill and Marshall.

Unless you assume that they were complete idiots, that they believed everything produced would immediately find a buyer and that recessions were a theoretical impossibility, then it ought to be part of our own mission as historians of economics to be able to explain what they and the classical school understood about the nature of saving, investment, recessions and economic adjustment. We should also be able to understand and explain why they would have thought Keynesian economics was fallacious from end to end (and please do read Hubert Henderson’s “Mr Keynes’s Theories” which was his Marshall Society Lecture on 2 May 1936 if you are interested in a classical reply to Keynes written by an actual classical economist).

You don’t have to believe what they wrote, just be able to explain why they thought what they thought and why their arguments were persuasive enough to hold the allegiance of their fellow economists for more than a hundred years through booms and busts, good times and bad. I can easily understand and explain Keynes. Piece of cake, end to end nonsense though I think it is. But those who have been critical of James and myself, can they really explain Marshall and Mill in a convincing matter? Reading some of these posts makes me wonder not whether they can because I see that they can’t, but whether they even think they should be able to since they already seem convinced there is nothing there worth knowing.