Say’s Law and the business cycle at SHOE

My likely final posting on this fascinating thread that began with my bring up Francois Hollande’s pointed comment on Say’s Law. The interesting thing for me to have seen in this instance is that others study the business cycle and find Say’s Law invisible. I began from examining Say’s Law and found its concepts an intrinsic part of the theory of the cycle.

Between Daniele Besomi and Barkley Rosser, I am beginning to get some idea why it is so hard for me to get my papers published.

But they are not the only ones who have published books on the classical theory of the cycle. I have my own as well, Free Market Economics: an Introduction for the General Reader (Elgar 2011). It’s an unusual title, perhaps, but I adopted it from Henry Clay’s Economics: an Introduction for the General Reader published in 1916, and after many reprints, with a second edition in 1942. My book is a cross between Clay, John Stuart Mill and a number of more modern features economic theory has picked up over the past century or so. I also teach Keynes, but those sections come with a skull and cross bones just so my students are warned about the dangers this kind of stuff can cause.

In this book I have a chapter on the classical theory of the cycle which is largely adopted from Haberler (1937) and then three more chapters explaining in more detail the nature of economic management using classical theory. But because I think of Say’s Law as the very core in understanding the cycle, what you see is the result of an enormous amount of additional reading on everything I could get my hands on about the pre-Keynesian theory of the cycle. In the days when I was starting my work on Say’s Law, I would tell people that I was working on classical business cycle theory because, as you know and can see from this thread, putting in a good word for Say’s Law is not apt to get you published or promoted. But I can do no other.

So let us suppose you were interested in the classical theory of the cycle, who do you think would get you closer? Someone who accepts Say’s Law, agrees with Mill on his fourth proposition on capital, thinks Keynes was right when he stated that he had introduced aggregate demand into mainstream economics where it had never been before, and uses classical reasoning to argue, at the very moment the stimulus packages were introduced, that they would lead to exactly the kind of economic stagnation we find today.

Would you trust that person, or would you trust someone who thinks you can boil most of what the classical economists had said down to deficient aggregate demand, even when Ricardo has explicitly stated that demand deficiency is not a valid explanation for recession, while Keynes had argued that what he was doing was overturning Ricardian economics and bringing demand deficiency into economic theory.

You can disagree with the classical theory of the cycle and why not, millions already do even though they have no idea what it is. But to argue that you have understood classical theory when you don’t agree with a word of it makes me have to ask why you are so sure you have it right? Some of the smartest people who ever lived were classical economists. Are you really going to set John Stuart Mill straight, or W.S. Jevons, or David Ricardo or Alfred Marshall? What will you add to their sum total of insight? That following a downturn business people become more tentative and hang onto their funds for a longer time before committing them to some project? That demand deficiency actually does cause recession? That wasteful public spending will increase employment and generate faster growth?

Does it really make any sense to believe that the Global Financial Crisis was caused by an almost overnight decision of people around the world to stop spending and start saving. What possible insight do you get by saying there was a shift to the left of an aggregate demand curve? Or that what we must now do is shift the AD curve to the right?

The GFC was a classical recession which is described almost down to its last gory details by Walter Bagehot in Lombard Street who had seen many just like it. Money and resources had been poured into the housing construction industry in the US and houses bought by people who could not make their payments. Events flowed on from there, including a financial crisis. Since demand is constituted by value adding supply, the fact that people could not afford what had been supplied, meant that resources had been misdirected. The recession was just a necessary correction with the prior lending practices the eventual disaster in waiting.

I will merely state that if you cannot incorporate the classical understanding of Say’s Law into what you write, you will have a problem understanding how classical economists analysed recessions. If you are going to reproduce the classical theory of recession, then you must begin with these words: “Recessions are, of course, never ever caused by too little demand and excessive levels of saving, but in spite of that recessions are a frequent occurrence because . . . .”

Let’s go to the policy level as well. Your explanation of recession must also help you to complete a sentence that begins with these words: “Even though the most evident signs of recession are warehouses filled with unsold goods and extremely high levels of unemployment, we cannot get out of recession by increasing public spending because . . . .”

Although we are mostly academics on this thread, this is not some academic exercise. There is an awful lot riding on this. The Japanese had their lost decade (times two) following their stimulus in the early 1990s. We are ourselves already half way into our own lost decade and there is nothing to suggest it might not go another half decade, or even stop then.

If you want to understand how I think about recessions and what needs to be done, you can read my text, or you can read Henry Clay. The one advantage you get from reading mine is that I have actually experienced Keynesian economic theory and have been taught this classical fallacy as the best economic theory we have today. I have seen the enemy, and it is us.

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