A reply from one of Stephen Marglin’s discontented critics

My reply to Stephen Marglin’s post. My hope is that more of those who read these things will get it but for some reason, as badly as the stimulus has been and as economically illiterate as demand creates supply actually is, there is a resistance that can never be overcome. But John Papola has even brought Harvard professors into this debate so it has been a fantastic outcome.

I was delighted to read Stephen Marglin’s posting on ‘Keynes and his discontented critics’. Being possibly the single most discontented amongst all of Keynes’s critics I was nevertheless unsure at first whether Professor Marglin was agreeing with me or disagreeing. I have reluctantly come to the conclusion that he was disagreeing but please first let me note that the overlap between our points of view is quite extensive. I would also suggest to anyone reading this post that they read his first.

What I particularly took note of was where Professor Marglin wrote, ‘I am currently channeling Keynes in order to see what 75 years of reflection and criticism have added to our knowledge.’ We here in the antipodes are often not as up-to-date with the latest research techniques but I wish him well in his endeavours. But let me discuss a number of points he raised that I think are relevant for his work.

Firstly, the quote he cites from Mill occurs on page 18 of The General Theory as I’m sure he knows. The passage is not, however, exactly as written by Mill but came to Keynes in the form in which it had first been cropped by Marshall in an article published in 1876 and which was then used by Hobson in 1889 although not in quite the identical form. Keynes may or may not have read Mill but the form in which Mill’s words appear in The General Theory provide no evidence that he had.

But this is the important part. The quote from Mill does not substantiate Keynes’s point even though it was written in support of Say’s Law. The quotation is from Book III Chapter XIV of Mill’s Principles which is the chapter in which Mill is trying to explain the validity of Say’s Law. Anyone who wishes to understand classical theory needs to come to terms with what Mill wrote there. And in that chapter, Mill begins by saying that the idea of demand deficiency is so nonsensical that he can barely make it coherent even to himself but will do his best. He then says demand deficiency could occur for two possible reasons, the first being that incomes are not distributed so that the community is not capable of buying everything it would like because they do not have the purchasing power. It is from this part of the discussion that the quote in Keynes shows up. But this was not Keynes’s own point which was that the money would not be spent although it had been received. They would save it instead. This was the issue covered in the second part of Mill’s discussion. So while Keynes does try to show a bit of scholarly erudition, he clearly had not understood what Mill had been writing, assuming he had actually even read Mill’s words in Mill.

But the conclusion that Professor Marglin comes to is reasonable but still not quite right. He writes: ‘With all the qualifications Mill adds to this bald statement, there is a lot more here than that supply and demand are interdependent.’ It’s not that they are interdependent, of course, but that they are identical that matters. I will therefore extract from another of the quotations provided by Professor Marglin, this from someone who was probably a man of the left given that he uses the word ‘capitalistic’ in the quoted passage. But this is classical economic theory as it was understood in 1933 at the very bottom of the Great Depression when no one could possibly have been accused of assuming full employed was assured:

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)

Three years later the rug will be pulled out from under Professor Watkins and his fellow classical economists by the publication of The General Theory which contained nothing other than the ‘hard to imagine’ ‘puerile nonsense’ referred to which we are pleased today to call macroeconomics. And while in the midst of the Great Depression, in the very same year Myron Watkins was writing, Jacob Viner could conceive that an economic stimulus in valueless activity might do some good, this should not be taken as evidence that Viner agreed with Keynes on the underlying theory. His November 1936 review of The General Theory would eventually show up in Henry Hazlitt’s Critics of Keynesian Economics because deeply critical he most certainly was.

Lastly, I will repeat Professor Marglin’s opening comment leaving out the quote from Keynes. There he wrote:

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. . . . 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.

My turn now to say alas. That was not what Keynes set out to do although it would have been far preferable if he had. What he set out to do was to overturn Say’s Law and bring Malthus’s notion of demand deficiency into the mainstream. How do I know? Because Keynes said so. This is from a letter dated August 31, 1933 written by Keynes to Professor Harlan McCracken, the man who coined the phrase ‘supply creates its own demand’.

In the matter of Malthus, you will perhaps have seen from my account of him in my lately published ‘Essays in Biography’, which appeared before your book was out, but after I think you had written it, that I wholly agree with you in regarding him as a much under-estimated pioneer in the line of thought which to-day seems to me by far the most likely to lead to progress in the analysis of the business cycle. Your contrast between Ricardo and Malthus contains, I am convinced, the essence of the matter.

This quote is contained in an article of mine you can find on the net titled, ‘Influencing Keynes: The Intellectual Origins of The General Theory’ which was published in History of Economic Ideas (2010/XVIII/3). Projecting one’s own research agenda onto Keynes writing in 1933-34 is not appropriate.

When all is said and done, we may still end up thinking that Keynes was right even if we actually come to understand what pre-Keynesian economists believed and how The General Theory made the difference it did. On the other hand, if we did understand all of this, perhaps we wouldn’t.

Economists think of Say’s Law as quaint and antique, something old, musty and past its time. They are very wrong to do so. Instead it is one of the most fundamental laws in all of economics, an economic principle which we ignore and have ignored at our very great peril.

2 thoughts on “A reply from one of Stephen Marglin’s discontented critics

  1. Pingback: From a discontented critic – a note to Stephen Marglin « Law of Markets

  2. Pingback: Keynes and his discontented critics | Law of Markets

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