What a Miserable Film

If you want to see why Obama is President of the United States go see Les Mis the movie. I saw it on the stage in the 1980s where to my surprise I found without any hesitation that the supposed great villain, Inspector Javert, is the hero. There he is, upholding the law against cutthroats, thieves and revolutionaries, while the forces of disorder attempt to tear down what little civilisation there is.

I wouldn’t have mentioned it since I thought it was pretty straightforward as an example of leftist propaganda except that my wife, who is pretty reliable on such things, took it all in just as she was meant to. Even then I wouldn’t have mentioned it except for a review by John Boot at PJ Media where the opinions ought to be as reliable as my wife’s but there we instead find something altogether different.

Maybe I should lighten up and just listen to the music and watch the spectacle but what was unmistakable to me is just how wrong the morality is which totally spoils the rest. Boot describes the film as an “epic, two hour and 40 minute story about freedom, love, sin, redemption, justice, poverty and revolution.” To me it is a two hour and 40 minute indulgence in the worst kind of socialist idiocies. Some nice tunes, great cinematography, lovely acting but such a repulsive moronic story.

I know it’s all in the novel. But even so, how anyone with a conservative disposition can watch this parade of inanities go past without gagging I do not know.

I do not doubt that justice was by our standards pretty harsh back then. We are so much more “enlightened” today given how light handed our system of justice has become, and the story lets us pat ourselves on the back for how much more tolerant we are of theft given how much richer we have become. But right from the start it is hard going to see Jean Valjean as a pillar of society. The only person willing to give him a hand ends up robbed of his silverware. That the Bishop then improbably to the maximum extent on which an improbable plot twist can turn tells the police that he had given him the silver and then hands on the candlesticks that Jean Valjean had supposedly forgotten is so stupid as a premise that it is plain insulting to have to endure the rest. But let that go.

Paris was filled with prostitutes with young children to support so why Fantine and Cosette are singled out by Jean Valjean is a mystery that never seems remotely probable. The landlord and his wife on the other hand are out and out thieves if not worse. But Sacha Baron Cohen and his wife Helena Bonham Carter are presented as no more than a pair of rogues. Plot devices that do not work for me but I have endured worse and enjoyed the film.

But what does get to me are the revolutionary scenes at the end. They are hard to bear for their sheer idiocy with the young revolutionaries portrayed in all their romantic stupidity. That anyone can watch and worry over the fate of such barbarous fools taking up arms against the state and not see them in the great tradition of all such revolutions is quite a wonder in itself. That audiences around the world have taken to this story and give their wholehearted support to the revolutionaries as they take to the barricades only demonstrates how lost as a culture we may be. Our value system is shot to pieces. Our instincts are completely wrong. Think Lenin. Think Mao. Think Castro. Why we should have an ounce of sympathy for these people eludes me.

The absence of a sense of history and any notion of the real world of early nineteenth century poverty turns the plot into an anachronistic tale of inverted injustice. The assumption that infuses the plot is that there was some means, some mechanism that could have lifted living standards, given everyone more to eat, a better place to live, less hunger, if only the right people had been in charge. It is the social system that is at fault and we are to sympathise with those who wished to overturn the system . . . and do what?

Thomas Sowell has a few Christmas reflections one of which is this which seems to capture my own mood in watching this film:

The more I study the history of intellectuals, the more they seem like a wrecking crew, dismantling civilization bit by bit — replacing what works with what sounds good.

Les Mis is a homage to the wrecking crews. Do see it since it will likely be the picture of the year, it is a spectacle and is important as a cultural artifact. But weepie though it’s supposed to be, if you’re like me, you’ll be able to leave your handkerchief at home.

“The greatest financial reform of modern times”

What a wonderful thing a secondhand bookshop is. This is from the preface to the English edition of Socialistic Fallacies by Yves Guyot translated from the French and published in 1910 which I picked up off the shelf on the day before Christmas. I have linked to an online edition.

Until 1906 the Liberal and Democratic party in Great Britain placed in the forefront of its programme the relief of the taxpayer by the reduction of the National Debt and the decrease of taxation. It prided itself on its sound finance. . . .

That was until 1906. But then there was this.

From the time when the Socialists try to make the State provide for the livelihood and the happiness of all, the Liberal Government bases its existence upon the increase of expenditure. The Budget shews a deficit. So much the better! Taxation is no longer imposed solely for the purpose of meeting expenditure incurred in the general interest. It is looked upon as an instrument for the confiscation of the rents paid to landlords and of the interest paid to holders of stocks and shares, as a means of absorption by the State of unearned income and unearned increment. . . . [My emphasis]

Lloyd George is the Liberal leader but he can see the fiscal handwriting on the wall. So this is what we get.

The Budget for 1909-1910 introduced by Mr. Lloyd George is an application of this portion of the Socialist programme. No doubt he states that the scale of taxation proposed by him is a modest one, but he is placing the instrument in the hands of the Socialists. When they have once grasped it, they will know how to use it. . . .

And do they not know it. This is not just anyone but the opening speaker to the TUC Congress who has recognised how fiscal disciplines have now been loosened so that even more than a century later, we still see the same policies as one of the core elements of socialist policy.

Mr. Shackleton, M.P., in opening the Trade Union Congress on September 6th, 1909, referred to it as ‘a Budget which will rank as the greatest financial reform of modern times.’ [My emphasis again]

The interest to me was to find that deficit finance has been in the socialist playbook going well back before Keynes. And it is interesting to see that it was identified as a socialist idea as far back as 1910. I had somehow always assumed that it was an innovation of the depression that had followed the use of deficit financing during World War I. Not so. It is instead the very essence of socialist policy making and goes back to Lloyd George’s Liberal budget of 1909-10. Keynes was himself a Liberal. What Keynes did was provide an economic rationale, as flimsy as it might be, for the policies that were anyways one of the cornerstones of socialist policy. He thus introduced into economic theory one of the essential elements of the left.

It has always been something of a puzzle how impossible it is to debate deficit financing and the value of public spending amongst economists. Public sector spending and the related deficits are sacrosanct. Economic theory is permeated with a left agenda (see Free Market Economics, Chapter 15) which is why such debates take on a religious character rather than being a straightforward discussion of what works and what does not. The Keynesian faith-based community will virtually forbid any of this to be discussed and so such thoughts persist and continue even though the evidence is now overwhelming that public spending and deficit finance cannot and do not achieve what they are supposedly intended to achieve.

But if such policies are “looked upon as an instrument for the confiscation of the rents paid to landlords and of the interest paid to holders of stocks and shares, as a means of absorption by the State of unearned income and unearned increment”, then it is clear that such policies work very well indeed.

An interesting sidelight on Mr Shackleton, M.P. whose name must have been familiar to all when the book was written. This is from Wikipedia:

Shackleton became chairman of the Trades Union Congress in 1906, maintaining his powerful position in the trade union movement. In 1910, Winston Churchill invited him to join the civil service and Shackleton left Parliament. He quickly rose to the rank of Permanent Secretary in the new Ministry of Labour and is considered the first man from a working class background to rise to such a senior position.

“Pure fallacy from beginning to end”

Here is Milton Friedman stating Say’s Law. He is asked this question (35 seconds in):

Isn’t there some benefit to having the government steal our money . . . . They take this money and they give it mostly to government employees. Well the government employees spend it . . . . And so the people who were robbed have to do something creative to get the money back? And isn’t this creative activity the real wealth?

In his answer, Friedman first makes the obvious point that is, unfortunately, almost impenetrable to the modern economic mind. He says that the premise behind the question is:

Pure fallacy from beginning to end.

Friedman explains why but this is his summary in his own words:

Spending isn’t good; what’s good is producing.

Play the tape for yourself and listen to the full answer. And it is interesting that Friedman states this so clearly since what he is stating is the obvious logic of a market economy, a logic now all but lost.

I wrote to Friedman in 1994 at the latter stages in the writing of my thesis to ask him if he had ever discussed Say’s Law. The problem, unfortunately, is that he intuitively understood Say’s Law as a practical explanation of how economies worked, as the above quotation unmistakeably shows, but did not know that this is Say’s Law. So in his reply – excerpted from a letter more than a page in length and personally typed – he wrote this:

I do not recall ever having written anything specifically about Say’s Law. The closest I have come would be in the various discussions of Keynes’s theory, such as my article on the quantity theory of money in the New Palgrave. The issue of whether there can be a long-run underemployment equilibrium is essentially the Say’s Law issue and my discussion of that indirectly is a discussion of Say’s Law, though not directly.

He unfortunately understood “Say’s Law” in the way it has been bequeathed to the modern world by Keynes and recognised that his explanation is indirect rather than specific. But as far as understanding how an economy worked, he most definitely understood Say’s Law in exactly the way it needs to be understood. You cannot drive an economy from the demand side.

[My thanks to JP for sending the video of MF.]

From a discontented critic – a note to Stephen Marglin

I also wrote offline on to Stephen Marglin on 15 December after I posted my public reply on the thread he began. He has replied to the post by James Ahiakpor but has not replied to mine. This is what I wrote:

Dear Professor Marglin

I am writing to you off line which I hope you will not mind. I was completely serious when I wrote that I was not at first sure whether or not you were agreeing with me because you are possibly the first person outside of those whom I have dealt with personally, to write something on this topic that was fresh and interesting and which I could largely agree with. I can honestly ask why it is you would not line up against this Keynesian nonsense. You could not possibly believe that earthquakes are good for economic growth or that building pyramids – the epitome of a non-productive public works program – could enrich a community. I know that money obscures the operation of an economy and is part of the reason that things do from time to time go wrong but that is merely a re-statement of page one of any classical work on the business cycle. The problem for any economy is that it is the sum total of billions of decisions made across vast geographical regions in which everyone is trying to adjust to what they believe the future will be like, a future about which there are no facts of any kind to base any decision upon. There are facts about the past and the present. just none at all about the future, and the more distant that future, the more hazy everyone’s conjectures must be.

And to me, not only is Keynesian economics wrong, it is wrong because Say’s Law is right. I won’t waste your time if this doesn’t interest you so I will close with a few additional bits I would like to bring to your attention and then leave any further contact to you.

· From Wikipedia I see you teach the ‘anti-Mankiw’ course at Harvard. Think of my doing the same down here. I have even written my own book to go with the course: Free Market Economics: an Introduction for the General Reader. Since no one else will say it, I will say it for myself: it is the best introductory book on economic theory in the world, an easy claim for me to make since it is the only book in the world that actively warns students against Keynesian macro while teaching them what it is in as traditional a way as you could hope. That book will therefore give someone a better grounding in economics than any other book I know. If you can suggest another I would be very interested to read it. It is all about dynamic adjustment in a politically driven economic environment where entrepreneurial decisions are what gives an economy its direction while rabidly having absolutely nothing to do with laissez-faire.

· In July, I gave a presentation at a conference in Istanbul on the empirical work being undertaken by your colleague, Alberto Alesina. His empirical work demonstrates there is something to classical economic theory. You cannot get his results if reductions in public spending really do reduce the rate of growth. You can get his results if classical economists were right about Say’s Law. I will attach a copy of the paper I gave which has now been published in The Atlantic Economic Journal.

· I will also attach the article on the intellectual origins of The General Theory which I mentioned in my post to SHOE. Following the threads that understanding Say’s Law reveals to me brings some things to light that are invisible to other economists who have been brought up on the traditional white bread form of economic theory.

I really thought your post was great and I am grateful that you took the time to write it. If we keep acting as if more directionless and valueless government spending makes economies stronger we economists will be responsible for the greatest economic catastrophe since the Mississippi Bubble. And it really will be our fault.

With kindest best wishes

Steve Kates

The war on boys

A letter read on air by Rush Limbaugh after the shootings in Connecticut:

I have not watched a second of news on the school shooting over the weekend, mainly because seeing the reporting makes me cry and unable to do much else. But I’m tuned in enough to know that once again the American leftist culture is forcing us to collectively look at the wrong reasons for the problem, and as such, we will never be able to come to grips with it, much less find a solution. What do all of the public shootings in the last years have in common? They were all done by young white males who were from upper middle-class families. The problem is not guns. That’s the easy shiny thing that the liberals flash in front of us so that we don’t look at their failed political agenda.

The problem in America today is how we have treated white boys for the last decades, and it all has at its root the unrelenting liberal political agenda. Boys have been pushed out of two of the most important activities: school and sports. In an all-out effort to convince girls they can do anything a boy can, schools have ignored the natural needs and learning traits of boys and forced them to learn like girls. Fewer boys are going to college, in part because they’re being pushed out by a feminist agenda in education. We have rushed to dilute the energetic aggressive aspects of the male species by drugging them as children and chickifying them at every turn.

We allowed our young boys to play violent murdering video games. These types of games are the same ones the military uses to train soldiers. But they are being played by very, very young kids in dark rooms all over the country. You want to ban something, ban those. We have overlooked the devastating effects on all children of not having a father in the house. And we have ignored and not helped boys with their mental illness. We’ve hyperventilated endlessly over girls and their eating disorders, image issues, self-esteem, sex, blah, blah, blah, but we have most totally ignored the mental challenges that boys face.

Interesting, don’t you think? It’s an e-mail from a female listener to the EIB Network.

Their outrage is phoney, their promises are worthless

I read this in Christopher Pearson’s column and even then it took me half a day to appreciate what it said. I had probably heard the same before but hadn’t really tweaked to its significance. This is what he wrote:

McTernan is credited with writing Gillard’s misogyny speech and with her gender wars campaign.

Gillard’s misogyny speech was written by a man! Come on, it was written by a man!

I had actually thought at the time that as much as I thought her speech was dishonest, vile and disgusting, that it had been her own true self finally exposed to the light of day. Not a bit of it. She was merely mouthing the words put there by some male, a male who saw political advantage in her saying what she said. If he did not think there was political advantage, she would not have said what she said. What she really thinks no one will ever know.

Pointing out the phoney outrage of the Labor Party has to be at the top of Coalition policy in the election to come along with an emphasis on how worthless their promises are. Their specialty is outrage and discontent. They do not have a platform so much as a plan of revenge on behalf of the bitter and envious.

They are the most incompetent government in Australian history. On not a single issue has this government been a success. Nothing they promise to do ever comes out.

They cannot stop the boats. They cannot balance the budget. They cannot maintain economic growth. They cannot build an NBN. They cannot improve our education system. They cannot maintain national defence. They cannot reduce carbon emissions. They cannot keep living costs down.

All of their outrage is a con and none of their promises will be kept. This must be the theme for the Opposition and it must start now so that when the election finally arrives this will be the thought in every voter’s mind whichever party they choose to vote for. No matter what Labor promises, the reality, the true reality in everyone’s mind must be that they NEVER deliver on their promises.

It is more than that they lie, which they do as a matter of course. It is that they are incompetent. They are incapable of achieving anything they set out to do. They do not have the grit nor do they have the understanding.

You can vote for them because you are a rusted on brain dead lefty. But no one should ever vote for them because they believe the ALP will bring good government or deliver on what they have said they will do. This is the worst government in Austrlian history. They are counting on the stupidity of voters to get them back. And if they do get back, they will have been right to count on it.

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.

Making the world a better place

You know, there are some ideas so beyond my wildest thoughts that when I hear them I can only marvel that others think the way they do. It was not me, of course, who brought up pyramid building as a wasteful form of expenditure but Keynes. He’s the one who brought it up, mentioning pyramid building in the company of earthquakes and war as a means of generating wealth and prosperity in what he assumed everyone would agree would be the most unlikely places. Here, however, is the letter from someone who apparently thinks the Pharaohs were thinking ahead to the days when the tombs they built would become major tourist attractions and wished to make the world a better place:

Steve Kates,

Can you explain why you think that the pyramids are examples of ‘useless public works’? Strictly speaking they were useful, as best I understand, because they were tombs for kings. Perhaps there are better expenditures of labor power, but I suppose that many people think that they enriched the world of antiquity and continue to enrich our world even today. Of course there are issues about forced labor, but it seems to me that you prove some point Keynes made when he criticized those committed to a simplistic profit-loss formula. Have you seen them? (I have not, yet, much to my regret.) Are you saying that you think that the earth would be a better place in their absence?

David Andrews

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: smarglin@harvard.edu]

to SHOE

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