I have been in quite some correspondence since the Macro Follies video arrived and from these conversations I can see that there are four bits I may be leaving out in my explanations, the first being the necessity of seeing these issues in aggregate terms, the second the role of consumption, the third that the delay between receiving one’s income and spending does not provide a theory of recession and the fourth the effect of living in a money economy. Nothing I say in adding these in is in any way contrary to the classical understanding of the law of markets or different from anything I have tried to explain before.

Aggregate Concept

Say’s Law is about the economic aggregates of an economy. There may not have been a set of national accounting figures published during the nineteenth century but they still had a grasp of the economy as a whole. Say’s Law never applies to any individual. No individual’s demand is necessarily comprised of that individual’s supply. We borrow each other’s savings, we pay taxes to the government, we give money gifts for others to spend. Say’s Law is a concept that applies to the economy at the aggregate level only. The total demand found in an economy in real terms consists of the total output of the economy in real terms.

Consumption

Say’s Law does, of course, presuppose that as much output as can be produced will be bought but this will only happen if what is produced coincides with what buyers want to buy.

Production is valueless without consumption. If no one wished to buy then no one would produce. But since desires are insatiable there is no reason to worry that if producers can work out what buyers want to buy that that buyers will stop short of purchasing everything produced. Keynes however argued that people in aggregate would earn incomes for producing 100,000 units of output and then only decide to buy 90,000 units of what they had produced. This is the underlying dynamic in an economy that is experiencing a recession due to deficient demand.

And so far as policy is concerned, he seems to have then assumed that businesses would increase employment and production if what they had already produced could find a market. The reality is that businesses will only employ and produce if they believe they will earn a profit from what they produce next. Past sales have only a minor effect on employment going forward. Current sales are only one indicator amongst many in the production matrix of a typical firm. It is why Keynesians were so astonished by the Great Inflation of the 1970s since the combination of high unemployment and rapidly rising prices should have been theoretically impossible.

When looked at from above, if the amount being spent in aggregate is greater than the amount that was earned from producing output – let us suppose the government is running a deficit – then somewhere within the economy there are income earners being short changed since they do not receive in value the amount of value they produced. The spending may have taken place in Washington or Pennsylvania, the shortfalls may show up in Montana or Tennessee. But as invisible as the process is, the effect is quite clear. Some businesses will not earn the returns they expected. They will therefore scale down their level of production or even close down entirely. Ultimately the level of employment will be lower than it otherwise would have been as will the level of national output. A Keynesian will attribute this to too much saving and not enough demand.

The Time Gap between Receiving an Income and Spending

The existence of money adds some complication to the Say’s Law story but not much. There is always the intrinsic time delay between (A) outlaying money in some productive venture; (B) selling products one has produced or earning wages as someone’s employee; (C) receiving the money for what one has produced or earned as an employee which may be delayed through sales on credit or by being paid wages in arrears; and (D) spending the money one has received.

An increased time delay between C and D is not a theory of recession and unemployment.

This is what Mill in his essay “Of the Influence of Consumption on Production” is trying to get across. He was desperate to try to explain to the boneheads of his own time what the conclusions from the Law of Markets are. And it is extraordinary the number of people I have come across who read this essay and then argue that Mill is contradicting himself because he denies demand deficiency at the start of the essay and then talks about people hanging onto their money and delaying expenditure at the end. This is John Stuart Mill we are talking about, the man with the nineteenth century’s highest IQ and whose previous book was his Logic (1843) which was used throughout the nineteenth century and well into the twentieth. He is not likely to have contradicted himself in a way that any bumbling idiot could pick it up. Perhaps they should try to work out more closely what he meant.

And what Mill is trying to get people to understand is that a prior theory of recession is needed to explain why the delay between C and D has occurred. That is the explanation for recession not some blue sky decision not to spend. The increased delay has been caused by something. What is it? That is what needs to be known. And whatever it is has caused the rate of increase in A to diminish as well. But if you believe that the cause has been too much saving, then says Mill, you will never understand the first thing about how an economy works.

The Role of Money

To understand the money side of these things, it helps to go to Wicksell who followed Mill by about half a century (see Chapters 16 and 17 of the second edition of my Free Market Economics). What Wicksell discusses firstly is the natural rate of interest which is the supply and demand for productive resources (machines, bricks, tools, labour hours, everything that can be used in production). Of these, there is only a finite amount (it is a stock) and the potential rate of increase is very slow. Then there is the nominal rate of interest which regulates money and credit, the number of units of purchasing power in an economy. These can be increased at quite a rapid rate, much more rapidly than can the quantum of real resources.

Start with 100,000 units of productive resources and money and credit equal to 100,000 units of currency. Each unit of production thus costs one unit of currency. If the amount of money and credit goes up to 200,000 units of currency, eventually the price of productive resources will rise to two units of currency. But that is eventually. In the meantime, the people who first get their hands on the extra units of currency can buy more since the price level has not as yet risen to the full extent that it will.

But the producers of those 100,000 units of real output will eventually find that they have not been able to exchange what they produced for enough money to allow them to buy products equal in value to the value of the products they sold. If they are running a business, they find they are unable to replace their stock with the revenues they have earned. They have been cheated blind and yet the one place they don’t look for that theft is in the increased demand created by the government since that is what they have been taught to believe is what has been done to save them from the problem that very solution has caused.

And if you have made it this far and would like to see a further continuation of this discussion, see Misunderstanding Say’s Law of Markets which provides a different perspective but on the same issues.

If you would like to see what passes for a discussion of Say’s Law in the modern world, see below. My comments are in bold and found in square brackets. An utterly and thoroughly Keynesian description of the Law of Markets with almost no understanding of the classical theory that sits beneath it. And I even think this is supposed to be a defence. Why is it impossible for someone writing on Say’s Law to read my book. He even sources Horwitz in the book I edited but hasn’t even bothered to read my intro. Useless junk! No wonder no one understands Say’s Law. The question I always ask anyone who tries to defend Say’s Law is why classical economists thought it was so important. What major principle was involved? What instructions did it give to makers of policy or what did it tell them not to do? From what you see below, the writer could not possibly give a coherent answer to any of these questions. But at least he did give it the perfect title.

Misunderstanding Say’s Law of Markets

– By Garrett Watson, St. Lawrence University

Few ideas in the history of economic thought have achieved a level of perplexity and criticism than Say’s Law. Perhaps one of the most misunderstood and elusive concepts of the Classical economics, Say’s Law of Markets, first postulated by John Baptiste Say in 1803 [They only think this because it was given the name Say’s Law in the 1920s], underwent considerable support and eventual decline after its assault by John Maynard Keynes in The General Theory. Many of the fundamental disagreements we observe in historical debates surrounding macroeconomics can be traced to different conceptions of how Say’s Law operates in the market economy and the scope used in the analysis. By grasping a thicker idea of Say’s Law, one is able to pinpoint where disagreements in both macroeconomic theory lie and judge whether they necessarily must be dichotomized.

Say’s Law is best known in the form Keynes postulated it in The General Theory: “supply creates its own demand” (Horwitz 83) [He needs to footnote Horwitz! Why hasn’t he read The General Theory if he’s going to talk about Say’s Law?]. Despite the apparent eloquence and simplicity [!] contained in this definition, it obscures the genuine meaning of the concept. For example, one may interpret this maxim as meaning that whenever one supplies a good or service, it must be demanded – this is clearly untrue (83). Instead, Say’s Law can be interpreted as saying that the ability to produce generates their ability to purchase other products (84). One can only fully grasp Say’s Law when analyzing the nature of the division of labor in a market economy. Individuals specialize in producing a limited range of goods or services, and in return receive income that they use to buy goods and services from others. The income one receives from production is their source of demand. In other words, “all purchasers must first be producers, as only production can generate the power to purchase” (84) [Not right. The notion is being reduced to individual buyers when it is an aggregate concept where demand in aggregate is constituted by supply in aggregate. Purchasers are often borrowers who have produced nothing but intend to buy more than their incomes will allow. Lots of other possibilities right down to giving my children their allowance.]. This idea is intimately linked to the Smithian idea that the division of labor is limited by the extent of the market (89).

The result of this fascinating principle in the market economy is that (aggregate) supply will equal (aggregate) demand ex ante as demand is equally sourced by previous production (Sowell 40) [And having repeated exactly and with no modification the very conclusion reached by Keynes, we can dispense with any thought that our author has any idea whatsoever about the meaning of Say’s Law in pre-Keynesian times. ]. Another important point made by Say’s Law is that there exists a trade-off between investment and consumption (40). In contrast to the later Keynesian idea of falling investment leading to a fall in consumption and therefore aggregate demand, an increase in investment means falling consumption, and vice versa. This idea can be analogized to Robinson Crusoe [RC is a terrible example since in a discussion of Say’s Law we are of necessity talking about an exchange economy. This is a discussion explaining that saving is the feedstock for investment.] abstaining from consumption to build a fishing net, increasing his investment and his long-term consumption of fish (42). Therefore, a higher savings rate pushes up investment and capital accumulation, increasing growth and output (as Smith eloquently argues) (40). In another stark contrast to Keynesian analysis, there is only a transactions demand for money, not a speculative nor a precautionary demand (40). The implications of this are that money cannot affect real variables; it is a veil that facilitates transactions only – money is neutral (Blaug 148).[This is just Keynes repeated. Does he really think classical economists believed that no one ever held money as an asset and that the amount of money held was a constant. Thinking in terms of the quantity theory of money – MV=PQ – meant that V would fall during recession.] Finally, Say’s Law also shows that there cannot exist a “general glut”; an economy cannot generally overproduce [Why? Needs explanation. I don’t think he understands the reasoning so can’t provide one.](Sowell 41). While relative over and under-production can occur, there is no limit to economic growth [He seems to think Say’s Law is an argument against secular stagnation!](41).

While it was uncontroversial among the Classical economists that there wasn’t a limit on economic growth [Say’s Law is not a theorem about secular stagnation.], several economists took issue with the fundamental insights of Say’s Law (44). One of the most well-known criticisms was that of Thomas Malthus. Malthus was an early proponent of the “Paradox of Thrift” [What an anachronism!] – an excessive amount of savings could generate an economy with less than full employment (43). One could describe the view of Malthus as fundamentally “under-consumptionist” (Anderson 7). Unlike his contemporaries [Wrong, wrong, wrong!!!!! This is drenched in Keynesian idiocies.], Malthus did not view money as inherently neutral (Sowell 41). Other classical economists, such as Smith, argue that money “will not be allowed to lie idle”, effectively dismissing a precautionary motive for holding money and therefore monetary disturbances [He should at least read Becker and Baumol to cure him of at least some of his ignorance.] (38). This is where we see the inherent difference in perspective in the analyses of Smith and Malthus. Smith is focused on long-run conditions of money (its neutrality and importance of real fundamentals) versus the short-run disturbances money can generate in output (39).

Money is half of every exchange; a change in money can therefore spill over into the other half of every exchange, real goods and services [This is not a defence of Say’s Law, it is a criticism from someone who has no idea what the proposition means.] (Horwitz 92). In effect, “The Say’s Law transformation of production into demand is mediated by money” (92). This means that Say’s Law may not hold in conditions in which monetary disturbances occur.[Then Keynes is right!] John Stuart Mill recognized this possibility and affirmed Walras’ Law: an excess of money demand translates to an excess supply of goods [How wrong can you get.] (Sowell 49). An excess money demand manifests itself by individuals attempting to increase their money balances by abstaining from consumption. This therefore generates an excess supply of goods, which some would argue can be self-correcting, given downward adjustment of prices [More Keynes.] (Blaug 149). Malthus (and later on, Keynes [He is explicitly siding with Malthus and Keynes!!!!!!!!!!!]) argues that downward price and wage rigidities (which can be the result of game theoretic problems in firm competition, efficiency-wages, or fixed wage contracts [This is Malthus? Would have been news to him.]) can short circuit this process, yielding a systematic disequilibrium below full employment (Sowell 65). In terms of the equation of exchange, instead of a fall in V (and therefore a rise in money demand) being matched by a fall in P, the fall in V generates a fall in Y. This point was taken into further consideration by later monetary equilibrium theorists, including Friedman, Yeager, and Hutt. The same analysis can be used to understand the effects of drastic changes in the money supply on short term output, as Milton Friedman and Anna Schwartz would demonstrate in the contraction of the money supply during the formative years of the Great Depression [As if classical economists would be unaware that a fall in money supply would constrict economic growth. What does he think the quantity equation shows?].

When analyzing the large disagreements over Say’s Law, it becomes clear that they stem from a difference in scope: supporters of Say’s Law analyzed the macro economy in terms of long-run stability, while Malthus and others after him focused on short-run disequilibrium generated by monetary disturbances (Sowell 72)[Neither he nor Sowell understand Say’s Law. I never liked Sowell’s explanations as can be seen from my book.]. Smith and other classical economists, pushing back against mercantilist thought, emphasized that money was merely a ‘veil’ that does not affect economic fundamentals, and that quantities of money ultimately didn’t matter [Every sentence gives me pain.](72). The Malthusian grain of truth regarding disequilibrium caused by monetary disturbances in the short-run does not refute Say’s Law; it reveals the necessity of getting monetary fundamentals correct in order for Say’s Law to cohesively operate. [This is an Austrian version that is deeply mixed with Keynes. If you accept this, arguments against the stimulus are much weakened since there really is a shortfall of demand.] It becomes increasingly clear that once we look at the disagreements through the lens of scope, the two conceptions of the role of money in a market economy need not necessarily be incompatible.

And now that you’ve read this, you should read Understanding Say’s Law of Markets.

References

Anderson, William. “Say’s Law: Were (Are) the Critics Right?” Mises Institute1 (2001): 1-27. Mises Institute. Web. 19 Oct. 2012.

Blaug, Mark. “Say’s Law and Classical Monetary Theory.” Economic Theory in Retrospect. 4th ed. Cambridge: Cambridge University Press, 1985. 143-160. Print.

Horwitz, Steven. “Say’s Law of Markets: An Austrian Appreciation,” In Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Steven Kates, ed. Northampton, MA: Edward Elgar, 2003. 82-98. Print.

Sowell, Thomas. On Classical Economics. New Haven [Conn.]: Yale University Press, 2006. Print.

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.]

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

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.

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

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