This is a submission to the SHOE website dealing with Sumitra Shah’s posting re Krugman.

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.