My major presentation at FreedomFest was on Keynesian economics, using the same title as this post. There was lots more than this quote below from Hutchison written when Keynesian theory was unchallengeable at the risk of one’s entire career as an economist, but he did repent – mostly – later on. Here he is quoting John Stuart Mill to show how absurd classical beliefs were. But this is also what every economist in the nineteenth century believed, and then right up until 1936. No one, except a handful of others today, now believe what was absolutely mainstream. Not only that, they cannot understand the reasoning, and it definitely was not because they thought recessions never occurred or they ended almost as soon as they began.
Say’s law is the proposition that recessions are never caused by a deficiency of demand and that recessions can neither be brought to an end or employment levels improved by an increase in aggregate demand. The typical way in which this conclusion was expressed was to state that overproduction is impossible, that demand deficiency is never a valid explanation for recession and mass unemployment. Although completely siding with Keynes, these issues are thoroughly discussed by Hutchison (1953), where the proposition is examined through the writings of John Stuart Mill who was writing in 1848.
“The idea [wrote Mill] ‘that produce in general may, by increasing faster than the demand for it, reduce all producers to distress,… strange to say, was almost a received doctrine as lately as thirty years ago; and the merit of those who have exploded it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity’….
“Mill again agrees that in fact in commercial crises ‘there really is an excess of all commodities,’ which is a regular though transient phenomenon; but on the other hand, ‘it is a great error to suppose with Sismondi that a commercial crisis is the effect of a general excess of production’.” He goes on to denounce the latter notion (but not of course the former) as being (all in one paragraph) ‘ a chimerical supposition’, ‘ a confused idea’, ‘essentially self-contradictory’, ‘a fatal misconception’, ‘a fatal error’, and ‘a veil not suffering any one ray of light to penetrate’. Finally, he makes a pronouncement (later faithfully quoted by Fawcett) affecting the whole shape and task of political economy:
“The point is fundamental; any difference of opinion on it involves radically different conceptions of political economy, especially in is 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 hand there is a third thing to be considered – how a market can be created for produce, or how production can be limited to the capabilities of the market.”[Principles, Bk. III, Ch. XIV, para 4.]” (Hutchison 1953: 349-352)
This “chimerical proposition” is now mainstream and has been since 1936, with a major role for economic policy to determine “how a market can be created for produce”. I consider this as absurd as Mill had thought of it, but there is virtually not an economist alive today who agrees with Mill or myself.
Mill was right, and modern Keynesians are wrong, which really means that the whole of modern macro is wrong. It’s like believing that the earth is at the centre of the universe, but that is how it looks. Nevertheless utterly wrong, but you with certainty do not even know what a classical economist believed or how they thought the business cycle began and ended.