Another posting on the SHOE website as a follow up to Macro Follies:

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.