Steven Kates presents the Ludwig von Mises Memorial Lecture at the 2010 Austrian Scholars Conference. Includes an introduction by Joseph T. Salerno. The ASC is the international, interdisciplinary meeting of the Austrian School, and is for scholars interested or working in this intellectual tradition. Held at the Mises Institute, Auburn, Alabama, March 11-13, 2010.

Understanding the nature and importance of Say’s Law is the single most important issue in economics today. If you don’t understand it, you cannot understand what is wrong with modern macroeconomic theory and policy. Here is Keynes in 1936 explaining why Say’s Law is false and has to be replaced. Just because he doesn’t use the words “Say’s Law” should not distract you from what was his central point. Here he calls it “Ricardo’s doctrine” but it is to reject exactly this that is at the centre of The General Theory.

“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.” (Keynes 1936: 32)

That is exactly right. No classical economist ever used the notion of deficient effective demand because every one of them thought of it as utterly fallacious. This is John Stuart Mill in his Principles of Political Economy trying to explain – in 1848 – how inane Keynesian economics is. The Keynesian fallacy was a very old story by the time it became mainstream economic theory, which it remains to this day.

The point is fundamental; any difference of opinion on it involves radically different conceptions of Political Economy, especially in its practical aspect. On the one view, we have only to consider how a sufficient production may be combined with the best possible distribution; but, on the other, there is a third thing to be considered—how a market can be created for produce. . . . A theory so essentially self-contradictory cannot intrude itself without carrying confusion into the very heart of the subject, and making it impossible even to conceive with any distinctness many of the more complicated economical workings of society. [Mill 1848: Book III – Chapter XIV – final para]

That is Keynesian theory, “how a market can be created for produce” which we now describe as raising aggregate demand. Every mainstream economist from the 1820s right through to the publication of The General Theory agreed with Mill, and with no exception. You have lived through the disaster of the stimulus packages that followed the GFC which have been a failure in every single instance. Isn’t it time you perhaps began to consider that Say’s Law is maybe after all a valid principle of economic theory and Keynesian economics is just as fallacious as Mill and every other classical economist thought it was?

I have a book coming out in August, What’s Wrong with Keynesian Economic Theory?, which includes six of the world’s greatest Austrian economists. They all know perfectly well that Keynesian economics is pure nonsense that will with certainty rot out your economy from the inside. But it required me to put together such a collection when such articles should have been flying off the presses from the very start of the stimulus in 2009. Why this has been left up to me remains a puzzle even for myself, but that is how things happen to be.

I am finishing off a paper on supply-side economics, which I argue is only represented by classical economic theory, and is not fully embodied in Austrian theory since its focus is on marginal utility as the central driver of activity. It is also a problem – to me, anyway – that Austrian theory does not incorporate Say’s Law, again because it is demand-side driven. Your thoughts would be welcome on this, as well as on this passage from the paper:

In the modern versions of Austrian economics, the approach often taken is to reject all interventions in the market and to leave the market to fulfil its role in allocating resources without government involvement. This is not a necessity within the theory itself, but as noted by Holcombe, is to a large extent the political preferences of those who focus on Austrian economic theory.

“Economic purists might argue that Austrian economics and libertarian politics are completely separate, but casual observation confirms that self-proclaimed members of the Austrian school tend to have more libertarian political views than the general population. This connection follows from the idea that the economy and society more generally, is a self-regulating complex system that is the result of human action but not of human design, and that attempts to intervene in that system are likely to result in negative unintended consequences.” (Holcombe 2014: 108)

Yet this is not entirely consistent with the views of Mises himself, who was more “classical” in his approach, or at least was in some of his earlier writings.

“If government buys milk in the market in order to sell it inexpensively to destitute mothers or even to distribute it without charge, or if government subsidizes educational institutions, there is no intervention. However, the imposition of price ceilings for milk signifies intervention.” (Mises [1929] 1977: 20)

I completely agree with Mises [1929] on this, but I wonder if that would still be part of the approach of an Austrian economist today.