Keynes and his discontented critics

Steven Marglin of Harvard has joined the discussion but has changed the name of the thread to “Keynes and his discontented critics”. He doesn’t mention me by name, but I shall enter into this for sure [and here is the reply I eventually wrote] but I am curious whether any one else has anything to add. This is very high level.

Marglin, Stephen [email:]


I share most of David Colander’s sentiments, particularly the recasting (or the casting) of Keynes as one in search of a way to replace static equilibrium and comparative statics by dynamic adjustment, equilibrium price by price (and other) mechanisms. I believe this is what Keynes meant by the passage in the preface to the GT in which he says

My so-called ‘fundamental equations’ [in the Treatise] were an instantaneous picture taken on the assumption of a given output. They attempted to show how, assuming the given output, forces could develop which involved a profit-disequilibrium, and thus required a change in the level of output. But the dynamic development, as distinct from the instantaneous picture, was left incomplete and extremely confused. This book, on the other hand has evolved into what is primarily a study of the forces which determine changes in the scale of output and employment as a whole. (The General Theory of Employment, Interest, and Money, p vii)

Alas he didn’t have the tools, and perhaps he was not even clear enough on the concepts to do what he set out to do. I am currently channeling Keynes in order to see what 75 years of reflection and criticism have added to our knowledge.

There is one point on which I can’t agree with David, namely, his anodyne view of Say’s Law. J S Mill had a clear statement of what Keynes and others took to be Say’s Law:

[If we could] suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as a supply: everybody would be able to buy twice as much, because everyone would have twice as much to offer in exchange. (Principles of Political Economy, 1961 [1848], Book III, Ch. XIV, ¶ 2)

With all the qualifications Mill adds to this bald statement, there is a lot more here than that supply and demand are interdependent. And this, I believe, was the principle that underlay the contemptuous rejection of underconsumptionist theories, for example, the following, from a QJE survey of the literature of the depression in 1933:

The whole joint product of industry in any period is the same as the aggregate income of the community during that period; it cannot be more and it cannot be less. The aggregate income of the community represents the total available purchasing power of the community, nothing more and nothing less;… an addition to the community’s stock of capital assets, through savings from whatever type of current income derived and in whatever volume effected, constitutes a demand for a corresponding part of current production. It follows that the total available purchasing power of the capitalistic community must be exactly equal to the joint product of industry, however swiftly the latter may be increased and however inequitably it may be distributed…

[T]he erroneous assumption that production and consumption must somehow be kept “in balance,”… rests, in turn, upon the naïve belief that income which is not “consumed,” but “saved,” does not constitute a demand for the current output of industry. More puerile nonsense than this would be hard to imagine, and were it not for the frequency and volubility with which such ideas are put forward, even occasionally—alas!—by economists with a respectable reputation,… the space of a professional journal would not need to be encumbered with their refutation. (Myron Watkins, Quarterly Journal of Economics,1933, pp 523-524)

To suggest that all that is at issue in Say’s Law is that there is a relationship between supply and demand is to blur the distinction between Keynes and his classical forebears. Keynes’s consumption function posits a relationship between supply and demand (“men are disposed, on the average, to spend a fraction of their incomes…”) but this is hardly the same as the idea that, one way or another, all output/income gets spent.

On the novelty or lack thereof of Keynes’s views on deficit spending and fiscal policy: as many have argued (Colander, Backhouse and Bateman,…), Keynes was no Lerner, at least not until he read and digested The Economics of Control. And others shared his view that countercyclical fiscal policy is a good thing even if the government can’t find productive employment for people. It was Jacob Viner, not Keynes, who wrote in 1933

If the government were to employ men to dig ditches and fill them up again, there would be nothing to show afterwards. But, nevertheless, even these expenditures would be an indirect contribution to business recovery. Their major importance would not be in the public works or the unemployment relief which immediately resulted, but in the possibility of hope that a substantial expenditure would act as a priming of the business pump, would encourage business men by increased sales, make them more optimistic, lead them to increase the number of their employees, and so on. They would be using funds that are now lying idle in the banks, or which the bankers are now afraid to create. In the past three years the test of a successful banker has been the rate of speed with which he could go out of the banking business and into the safety-deposit business. Those bankers have survived who have succeeded in the largest degree and at the most rapid rate in converting loans into cash. That has been good banking from the point of view of the individual banker, or of his individual depositors; but from the social point of view it has been disastrous. Which is preferable during a depression-a bank that continues to finance business and thus endangers its solvency, or a bank that acts on the principle that during an acute depression good banking means no banking? The latter have survived the crisis and now have the confidence of the public. (“Inflation As A Possible Remedy For The Depression,” Proceedings of the Institute of Public Affairs, University of Georgia, Athens, GA, May, 1933, May, 1933, p 130)

So why do we celebrate (or at least some of us do) Keynes and merely remember Viner? In my view, because Keynes, however ambiguous and unclear he was about fiscal policy, provided a framework in which Viner’s prescription (and his own more famous parallel one in the GT) make sense. He provided a theoretical home for aggregate demand where Viner and the rest had only their intuitions.

Steve Marglin

1 thought on “Keynes and his discontented critics

  1. Pingback: A reply from one of Stephen Marglin’s discontented critics « Law of Markets

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