Still more on Say’s Law and Austrian economics

The debate on the Coordination Problem website continues but see here, here and here for the prior discussion. Personally, but what do I know, those on the attack have ground to a halt, with these the latest posts:

Oh, my. Where to begin?

Kates says that Say’s Law emerged out of the general glut debate. A debate requires two sides. So there were economists who advocated “Keynesian-type solutions.” Sismondi, to name just one.

Kates fails to distinguish between long-run (equilibrium) and short-run (dynamic) propositions in classical political economy. JS Mill and many other classicals had a dynamic theory of economic crises. Barkley’s characterization is on the mark.

Then there is the problem of fifty years of missing economic history. Economists on the eve of the Keynesian Revolution were not classical economists, but neoclassicals. They were Austrians, Walrasians, Marsahllians, etc. so, Haberler was an Austrian, not a classical economist.

By the time of the GT, Keynes had an embarrassingly large number of precursors for Stimulative fiscal policy. Indeed, Keynes was a latecomer. The Chicago School was a hotbed of such policies. Friedman explains that Chicago was inoculated to Keynesian economics because of that.

In The New Economics and the Old Economists, J. Ronnie Davis details the pre-Keynesian origins of what we call Keynesian policy. Rothbard details how many economists supported pump-priming under Hoover and later under FDR. All before the General Theory. Ditto Steve Horwitz’s work on Hoover.

Fisher represented another strand of thought. His debt deflation theory of the cycle is one in which a fall in nominal values has real effects. The obvious solution is reflation. The issue is not whether Fisher was correct, but that there were many, many demand-driven policies to cure recessions before Keynes.

Kates seems to just leave out any ideas that do not fit his thesis. Other ideas are simply fitted onto his Procustean bed.

Posted by: Jerry O’Driscoll | July 19, 2015 at 09:51 PM

First let me thank Jerry O’Driscoll for dealing with some matters I would have otherwise. I agree in full with his remarks.

On Steve’s post before that, two things. One is that he is like Keynes in way overstating the importance of Say’s Law. It was never the “foundation of economic theory,” although maybe J.S. Mill thought it was.

The second is that Steve embarrassingly botches his discussion of Smith’s view. I think one can indeed find a variation of Say’s Law in WoN, but this is a joke. Productive versus unproductive labor has nothing to do with the idea of value added, beyong the trivial point that if something does not add value it does not add value, duh. In fact, Smith’s focus on material production was later carried over by Marx, and one could find this distinction between productive and unproductive labor in Soviet income and product accounts, although it might be useful in regard to rent seeking. As it is, one can easily imagine a “menial servant” providing valuable input even into a material production process. This whole thing is silly and has Kates making Smith look silly. Yikes!

On the later post, sorry, Steve, you do not remember your history. We debated this matter on the internet before your first book was out, and I told you then about Say’s views. But, this is just trivial and boring.

You continue to avoid the main arguments by both Mill and Keynes about the sources of macro fluctuations, which focused on financial crises and collapses of capital investment, not shortfalls of consumption. While Keynes ridiculed what he called Say’s Law and defended the possibility of general gluts, that was not really the focus of his theory, which had more to do with the collapse of animal spirits of business people.

Your efforts to dismiss Say simply look ridiculous. In fact, his examples against the law were already in his first edition. You have trouble reading, don’t you, for such a great scholar of Say. But we already know how worthless Say was and can ignore him, especially given that he actually supported government spending on public works projects during the downturn after the end of the Napoleonic wars.

Again, I am not going to bother arguing with you about the many cases where most economists would say that there was an increase in aggregate demand that pulled the economy out of a slump as we have already seen what you will say, which is simply to declare everything that happened that had any effect to be supply side.

I am glad, I guess, to see that you thought maybe something might be done by government to help get out of the Great Recession, although it would appear that you wish to get all worked up again about public spending that involves “value added” versus that which is not. Yeah, sure, pretty much everybody would prefer to see productive public spending on useful infrastructure or whatever rather than the old joke Keynes digging holes in the ground and filling them up again, although I suspect you have either forgotten or did not know what that famously repeated-out-of-context quote was really about.

And as for your big final question, why should anybody care and of what importance is it? Sorry, none, although I am not going to argue with your claim that it was Fred Taylor who first coined it, woo woo woo.

Posted by: Barkley Rosser | July 20, 2015 at 02:14 AM

BTW, I shall agree with Steve Kates that Ricardo’s discussion in the general glut debate does look somewhat Austrian in his emphasis on misdirected production that needs to be reallocated, and I have said that in a forthcoming paper on “History of Economic Dyhamics” to appear in the Handbook of the History of Economic Analysis and currently available on my website.

I should also say that while Jerry identifies Haberler as an Austrian, he is sort of as Schumpeter was. His great book is very eclectic and even handed in its accounting of many views, many of which have been forgotten even though quite interesting and worthy of reconsideration.
Posted by: Barkley Rosser | July 20, 2015 at 02:20 AM

It is hard to gauge where I stand since no neutral has bought in to indicate what they think themselves. Anyway, here is my reply to Barkely. I will reply to Jerry after.

Essentially, Barkley, what you have done is call the classical theory of the cycle “Keynesian” and declared victory. If I really do have to demonstrate that Keynes was trying to show that demand deficiency was the cause of recession, we are at such a primitive level of debate that it is almost impossible for me to work out where we can find some kind of solid ground on which we can agree so that we can work out between us where our differences lie.

This making it up as you go along version of Keynes is quite astonishing. Do you really believe that “while Keynes ridiculed what he called Say’s Law and defended the possibility of general gluts, that was not really the focus of his theory, which had more to do with the collapse of animal spirits of business people”? Here is what Keynes actually argued and right at the start of the book as he is trying to give an overview of what is to come:

“The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.” (GT: 32)

I think Keynes in this instance is absolutely right about the nature of economic theory right up to his own time. The General Theory is about deficient aggregate demand and designed to refute Say’s Law. For you not to know this you must somehow have avoided the Keynesian-cross diagram, leakages and injections, IS-LM, AS-AD along with Y=C+I+G, versions of which may be found in every single Samuelson clone and which are still taught to just about everyone. If what you call “Keynesian” is some package of inferences from the later chapters of The General Theory that ignore what you can find at the front, well feel free to go on with your private understanding of what Keynes really meant, but it is not the Keynesian theory that now disfigures virtually every first-year macro text in the world, nor the one that informs policy.

And as for ignoring what Keynes thought was the cause of the recession of his own time, he is perfectly clear about it in the GT:

“The post-war experiences of Great Britain and the United States are, indeed, actual examples of how an accumulation of wealth, so large that its marginal efficiency has fallen more rapidly than the rate of interest can fall in the face of the prevailing institutional and psychological factors, can interfere, in conditions mainly of laissez-faire, with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing.

“It follows that of two equal communities, having the same technique but different stocks of capital, the community with the smaller stock of capital may be able for the time being to enjoy a higher standard of life than the community with the larger stock; though when the poorer community has caught up the rich — as, presumably, it eventually will — then both alike will suffer the fate of Midas.” (GT: 219)

I know this is dead set stupid, and not at all like the sophisticated arguments of Mill, but if you are going to defend Keynes, this is what you must defend. “The fate of Midas” is, of course, a situation where everyone is so wealthy that they stop buying and save instead. This is why Keynes thought the world had gone into depression, because he sure wasn’t discussing the 1920s, or at least not the “roaring ‘20s” of the United States.

That you disdain the need for spending to be value adding is quite clarifying so far as this exchange of views is concerned. You do represent a modern view of what Keynesian policy makers believe. You do not think that such expenditure has to be value adding to lead to faster growth and employment. Economists have, indeed, been taught that spending on anything at all will add to growth and employment. And you say this even with the labour market in the US as moribund as it is, where the only reason for the fall in the unemployment rate is the even faster fall in the participation rate.

The economics of John Stuart Mill is so superior to this unbelievable nonsense that you make every effort you can to associate your views with Mill’s while disassociating yourself from what Keynes really wrote. And it is no wonder why, because what Keynes wrote is such nonsense. But it is this Keynesian theory that has informed the Keynesian policies that were tried 2009-2011, which are now being abandoned. There is a need for policy guidance that will explain to policy makers what needs to be done, since they certainly cannot find any such thing in our modern Keynesian-saturated texts. But they could find it in Mill, if they only knew enough to look.

At this stage, all I can hope is that some of those who pay attention can see the point, or at least that there is a point. It is beyond me how anyone can continue to defend modern textbook theory when it never delivers what it promises. But in this instance, the notion that Keynes was really arguing some dynamic theory of adjustment, that is, arguing what Mill had been arguing, and not trying to overturn Say’s Law is just ludicrous. But since no one knows any history any more, what someone might end up believing is anyone’s guess.

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