FME 2nd ed book description

Posted on March 7, 2014 by lawofmarkets

This is from a form I have just sent to the publisher on how to advertise the second edition of my Free Market Economics.

1. Please describe the book in non-technical layman’s terms (in no more than 150 words). Include brief details of the book’s main objectives and conclusions.

Have you ever wondered why no public sector stimulus has ever worked? You are holding in your hands a book that is unique in our times. It is a text on economic principles based on the economics before Keynesian theory became dominant in macroeconomics and equilibrium analysis became standard in micro. It looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation occurs at virtually every moment, and the future is being created before it can be understood.

Of particular significance, this book assumes Keynesian theory is flawed and policies built around attempting to increase aggregate demand by increasing non-value-adding public spending can never succeed but will only make conditions worse. The theories discussed are the theories that dominated economic discourse prior to the Keynesian Revolution and are thus grounded in the economics of some of the greatest economists who have ever lived.

I might also mention this which is a notice I received this week from the publisher:

I am delighted to be writing to all of our authors, contributors, customers and business partners with the exciting news that Edward Elgar Publishing has won another important industry award.

The Frankfurt Book Fair Academic & Professional Publisher of the Year 2014 award was presented to us by the Independent Publishers Guild at a ceremony on Thursday evening.

The judges commented that Edward Elgar Publishing turned in a very impressive sales growth in 2013, achieved on the back of a prolific publishing programme and successful Elgaronline platform. Judges liked its smart customer profiling and forays into international markets. “Edward Elgar is incredibly professional, responsive and imaginative. It is a great example of how a relatively small publisher can be at least as innovative as those many times its size.”

Not quite the last and there are more every day

Posted on February 21, 2014 by lawofmarkets

This was the original post from Thomas Humphrey:

I would like to nominate Professor James Ahiakpor for the position of “Last of the Classical Economists.” This honorific title recognizes James’s stalwart and unceasing insistence that all monetary theorizing since the classical era of Hume, Smith, Thornton, Ricardo, and others has been a snare and a delusion, a retrogression not an advance. It honors James for never saying die, for never admitting defeat, for always pressing on, and for keeping alive the flame of classical monetary theory in this age of heretics, doubters, and dissenters.

I know James and think of him as one of the very few on my classical side of the fence. We have disagreed on things as friends might often do. But we are on the same side. Nonetheless, he is not the only classical economist, so I put up a follow up post to say so:

I think there are more classical economists around than Thomas Humphrey might have taken into account. I always call myself a classical economist to differentiate my views from those who have come later. And given my partiality to John Stuart Mill and Say’s Law, I don’t think there should really be any doubt where my views might be placed.

But let me also say there are more of us classical economists around than you might think. Not a lot but definitely more than just one. Can I therefore recommend to you David Simpson’s extraordinary and excellent, The Rediscovery of Classical Economics: Adaptation, Complexity and Growth (Elgar 2013). This is exactly what the title discusses, the importance of thinking about economic issues with the concepts that had existed amongst the genuinely classical economists at a time before the emergence of marginal analysis and our modern focus on equilibrium. If you read it, you will find modern economic theory not only a pallid imitation of what a true economic theory ought to be but also understand why our textbook version of economics has become near useless in either comprehending or managing our economies.

Following which James himself added this:

Delighted to see Steve’s post regarding the “Last Classical Economist.” I wonder why Tom thinks he has seen the last of the classical economists? Sure, J.M. Keynes used that term almost as a slur. That is why several upholders of the classical tradition, including Dennis Robertson and Ralph Hawtrey, shied away from it. But I embrace that label with pride, just as Steve and some others do.

In fact, after I’ve introduced my students to the evolution of modern macroeconomics that includes the seven schools of thought that I identify, they often ask to know to which I belong. Some express surprise when I tell them, “None!” The schools are (1) Neoclassical Keynesianism, (2) Post Keynesians, (3) New Keynesians, (4) Monetarism, (5) New Classicals, (6) Real Business Cycle Theorists, and (7) Austrians. (I leave out the Marxists.) I also mention that all but the post Keynesians have Nobel Prize winners among them. Several students also tend to ask me why not many economists, including our textbook authors, appear to be aware of the classical macroeconomic principles, including definitions of such terms as saving, capital, investment, and money, that I explain to them and they can clearly understand. My response tends to vary from “I don’t know” to “I’m still trying to find out myself.” You should the surprise look on their faces.

So, I believe there are more classical economists yet to emerge on the debating scene, Tommy!

And now Thomas Humphrey has re-entered, who is himself in many ways one of us:

Steve,

My sincerest apologies for the oversight. I agree that there exist today more than one, and perhaps a sizable number of, classical economists, you being prominent among them.

And it was not the classical theory of distribution and growth, which, as you say, still has much going for it, that I was referring to. On the contrary, I’m a fan of Smithian and Ricardian distribution and growth theory. Rather I was referring to classical monetary theory, some of whose doctrines (but certainly not all, quantity theory and price-specie-flow ideas especially) have, it seems to me, been rendered obsolete, marginalized, and superseded by Chester Phillips-James Mead demand-deposit expansion analysis as well as by Keynesian, New Keynesian, and Post Keynesian doctrines.

I realize that you, as a major critic of Keynes and Keynesianism, will dispute all this. And you may be right in doing so. I’m just enunciating one view, namely my own and others like mine. In the spirit of letting a thousand flowers bloom, I hope you will indulge us even as you disapprove. That’s the beauty of doctrinal-historical conversations. They are willing to tolerate different views.

I might well dispute what Thomas wrote but it is a major advance even to see “Smithian and Ricardian distribution and growth theory” mentioned in a positive light. And to find Wicksell discussed, whichever side one might be on, is a return to some of the important debates of the past that have major implications today. And I do think James is right that it has taken three generations for economists to become brave enough to identify with pre-Keynesian economics which up until recently has been a no-go area for anyone interested in a career in economics, specially an academic career. But things are changing and it is very pleasing to see these shoots beginning to come up.

Watermill made of clay

Posted on February 18, 2014 by lawofmarkets

From Shapes of Clay

http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=360858765531#shpCntId

The art and science of debate

Posted on February 14, 2014 by lawofmarkets

Let me start by taking up a couple of issue as examples of the lack of reasoned debate in our society.

The first of these is global warming. There has been an across-the-world debate on whether the planet is in the midst of unsustainable warming due to increased greenhouse gases. Even though I have had my doubts from the start, what you do is examine the arguments others bring up to see what truth content there is and you look at the evidence that’s presented along with the theoretical explanations. And OK, for a while, the temperatures were going up, which was a correlation but not proof. I, like others, therefore kept an open mind and watching brief. But then, around fifteen years ago, temperatures stopped rising even while atmospheric carbon continued to increase. As a result, my scepticism has been maintained and I think of such scepticism as fully justified. Yet I do not know of a single person of the green persuasion who has come to the conclusion that perhaps they might have been wrong?

Or take another of my areas of interest, Keynesian economics. I have, for theoretical reasons, strong doubts about modern macroeconomics and its focus on aggregate demand. In my view, Say’s Law is valid while the whole of modern macro is built on a well known classical fallacy. And what is the the fallacy: that increases in public spending will increase aggregate demand and therefore return an economy to low unemployment and faster growth. OK, comes the stimulus, I set down in print my expectation that it would fail on a grand scale, that it would make economic conditions far worse than they were, and would not return our economies to strong growth and full employment. And had our economies, contrary to my expectation, recovered I would have had to give up my opinions, not least because everyone would have reminded me of what I had written. But instead, the world’s economies have unfolded almost exactly as I expected they would. But has any Keynesian actually said that, well, you know, perhaps modern macroeconomics is wrong after all. If there is, I have not heard of a single instance.

This brings me to a very high level and interesting discussion on why arguing with people on the left is not the same as debating, more like talking to a wall. Beyond that, as Captain Capitalism, the name he calls himself, points out, a proper debate is about advancing the truth, whereas dealing with the left merely ends up with abuse but little advance of knowledge. A long post on the art and science of debate but here is one part of which the whole is well worth the effort:

Aurini . . . delves into detail explaining the “debate” structure of grammar, logic, and rhetoric. Grammar basically meaning you all have to agree on the definitions and meanings of words. Logic meaning you have to be intellectually honest and adhere to associative rules and other logical concepts that ensure integrity. And rhetoric meaning you apply it in the real world or test one another’s arguments with anecdotes from reality. If both parties in a debate or even a discussion have these three things, then the conversation/debate is much more productive and progresses towards an inevitable “conclusion,” “reality” or agreement.

What’s funny though is for the longest time I never viewed debate as a cooperative effort, but rather an adversarial one. One of competition. One where you had an enemy that needed to be defeated. Of course, this was the sad consequence of growing up with the mentally deficient people that populated my generation. Parties I attended in my 20’s I was regularly attacked and berated for being a conservative. Debates in college (or even post college) were filled with emotion and vitriol. And in nearly 100% of the cases my opponents degraded into name calling, ad hominem attacks, accusations of “ism,” or being a nazi, etc.

And then a little later in his article there is this:

The majority of people are weak-minded. They are also lazy. However, they are also egotistical . . . and so their mind reaches for something that will not only allow them to claim some kind of intellectual “superiority” or “achievement,” but also allow them to do so with no work.

Going green
Protesting
Claiming they’re a caring liberal
Joining a religion
Going vegan
Becoming a professor
etc.

This not only results in them living in a delusional, non-real world, but also makes them emotionally and egotistically invested in keeping up their ideological facade. Thus, when you make impassionate, logical, stoic arguments of fact, math, and statistics you (consciously or not) pierce their ego, expose their charade, and therefore trigger a visceral, emotional, and often hate-laden response from them.

The left tend to deal in feelings rather than facts and proof. It actually seems that facts and proof are no part of anything they propose. They believe what they wish to believe because it makes them feel better, not because it is actually valid or demonstrable to reason and common sense.

If the SHOE fits

Posted on February 12, 2014 by lawofmarkets

There has been a kind of hammer and tongs discussion at the Societies for the History of Economics (SHOE) website that began when I posted that the President of France had stated in support of a more “austerity”-oriented economic policy that, L’offre crée même la demande. Or in English, that supply really does create demand, a principle known in English as Say’s Law. Every economist is taught from the first day of macro that Say’s Law is wrong and that a Keynesian stimulus is the answer to recession. Sounded better five years ago but today, who would suggest more public spending even though our economies remain as dismally placed as they are. But part of what I found so charming is that the suggestion is made that I am near enough the only economist in the world who thinks “the strong version” of Say’s Law is true. How weird is that! But of course, that doesn’t mean that I think that I’m wrong, specially since all the evidence is so one way.

The SHOE website is filled with interesting discussion over a vast range of economic issues. You definitely do not have to be an economist either to join or to listen in on the discussion. You can register here. Meantime, this is my latest post on how I see the role of the history of economic thought.

I am rather charmed by Barkley Rosser’s last post, to wit:

So, my final comment will be directed very directly at Steve Kates and James Ahiakpor. Can you guys not figure out that you have totally and utterly lost this debate? Nobody here agrees with you, nobody. You have lost, period. Sure, you can get the occasional Per Berglund to sort of attempt to help you out by questioning details of the critiques of your arguments, but even those folks in the end do not come down on agreeing with your defense of a strong version of Say’s Law. Deal with it, please. We have all had more than enough.

I am more than aware that so far as numbers go, we are on the wrong side of the ledger. When I began to argue in public against the stimulus back in 2009, there were attempts made by that solid mainstream to have me sacked from my university appointment. There are risks in taking such positions. What protects me now from such attacks is the unbelievably dismal outcomes from the stimulus. You may not understand what I’m saying. But there is no doubt that, so far as the way our economies have performed, I have little reason to think anything other than that Mill was right, that the “strong version of Say’s Law” is valid, and classical economists knew what they were talking about. The modern Keynesian fashion, on the other hand, has little to show for it. Does evidence count for nothing?

But I come onto this thread firstly to thank our moderator for his willingness to let the previous thread on L’offre crée même la demande continue to its end. But there is more to it than that. I wrote my book on Defending the History of Economic Thought, not just to explain why making the effort to understand the economic theory of the past is an extremely good way to deepen an economist’s understanding of economic theory, but also to argue that HET is the place where economic theory goes to regenerate itself. This is the one and only place that economists from every one of the traditions in economic theory come to look in on what is being said by others.

There are mainstream journals, but also Austrian, Neo-Keynesian, Post-Keynesian, Institutionalist, Marxist and others, and if you are not part of whatever tradition that journal represents, it is unbelievably difficult to get published. HET has broken this tradition down, at least to some extent. It may well be that no one can follow what I or James or Per are trying to say, although we can follow each other with near perfect clarity. But where else are you going to even hear it at all?

The History of Economic Thought is by all accounts dying yet it is the most intellectually alive area in the whole of economic theory. It teems with ideas and there are economists from every tradition who are willing to fight it out before an audience of upwards of a thousand of their peers who can follow these discussions as they like. There is seldom a thread I don’t learn from and I typically read them through.

And there is no doubt that HET is under threat of extinction. There are people at the top of our hierarchies, and I am talking about our hierarchies within HET, who would willingly take this study into the History and Philosophy of Science and leave economics behind. There are also mainstream theorists who would be glad to see the end of us and our constant criticisms of established textbook economics.

But there are also people, like myself and others who come to this site, who just find it fascinating to listen in on alternative ways of thinking about economic issues. That is what HET is for. Rather than restrict this area to burrowing into particular issues related to economists who are no longer mentioned in our textbooks, it should also be a place where ancient economists are resurrected and their ideas discussed. And I don’t just mean on this site but across the entire expanse of the history of economic thought.

The journal, History of Economics and Policy, is a paradigm of just what is needed. Perhaps not for all of us, but certainly for some of us. This is not the end of HET but in my view is its salvation. Here is a link to its archive.

It is what every HET journal should become more like. Some traditional material but also some which see the relevance of past theory to our present problems.

And in furtherance of this post, I might just mention this news item, Canada charts comfortable course to 2015 budget surplus. If you are a Keynesian, your reaction would be, how terrible! If, however, you have been following the news for the past five years, you can see what a triumph it is. The strong version of Say’s Law remains an absolute necessity if you are to understand how an economy works and why public spending and deficits are the disasters they have so obviously proven to be.

Say’s Law on the HES website continues

Posted on February 4, 2014 by lawofmarkets

This is a continuation of my posting on the Societies for the History of Economics (SHOE) website. It follows from this and this. And note very carefully that Keynes might have read Ricardo’s letter to Malthus.

I certainly appreciate the replies to my previous postings by Daniele Besomi and Barkley Rosser.

Let me begin with a news item reporting on my testimony to the Australian Senate Economic References Committee. They were reviewing the effects of the stimulus and had invited me because of my views on Keynesian theory and policy. This is from the Sydney Morning Herald of 21 September 2009.

“Labor senator Doug Cameron said Prof Kates’ comments had certainly embedded in his mind that you should never let an ‘academic economist run the economy’.

“‘Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?’”

I can now more clearly see Senator Cameron’s point about academic economists, but I draw you attention to the second of his statements.

Since J.-B. Say had put together what is in English called the law of markets, it does not surprise me that the phrase “Say’s Law” may have turned up on various stray occasions. But as someone who had been curious about the origins of this term, which is used by none of the major classical economists, it did finally dawn on me that it had come from Fred Taylor, not least because he specifically states that he is inventing the term. He used the phrase in his 1909 article on teaching economics; it is in his 1911 and six subsequent student editions of his for-students-only principles text distributed at the University of Michigan and buried in a chapter he titles, “Certain Fundamental Principles of Trade”. But by the time his text is released commercially in 1921, Say’s Law is a chapter on its own, titled “Say’s Law” in big letters, and in that chapter Taylor specifically says he is giving a name to what he describes as a yet unnamed principle. That someone used the term in 1920 is not a surprise but the phrase Say’s Law does not enter into economic discourse in a big way until after that. If it pleases you to think that Keynes took the name because of one of these stray mentions picked up by Daniele, be my guest as long as you accept that he took it from somewhere else. It just seems reasonable to me that Keynes used the term because it expressed exactly the point he was trying to make. Whether he was reading Taylor directly, or someone else who had read Taylor who had used the term, we cannot know. But that he was reading the mostly American literature on Say’s Law is as near certain as any such thing can be. And the only reason anyone resists this common sense, indeed obvious point, is that it is damaging to Keynes’s reputation since it suggests that his letter to Harrod, about how he had on his own by himself thought up one idea and then another, is not what actually happened at all.

And perhaps it is Daniel who has not understood my point. His point, he writes, is that “Say’s law was not ACCEPTED throughout the 19th century by writers trying to explain crises” (his emphasis). I don’t think that’s right. If you go the Haberler’s 1937 Prosperity and Depression, which is a compendium of all of the theories of recession that were then in existence, virtually all of the theories presented are about structural dislocations. In what was probably the most common theory of recession of the time, people had used their savings all right – hoarding was not the problem – but had produced non-saleable output leading to recession, with the reason for such dislocation often but by no means always related to financial mayhem of one sort or another. To the extent that classical economists had a view about saving as a cause of recession, it was that recessions might occur because the level of saving had been insufficient to complete all of the projects that had been commenced following the previous trough. There wasn’t too much saving, there was too little. Read Haberler discussing Hobson and under-consumption if you are looking for a dismissive view of oversaving as a theory of recession.

What Say’s Law said to economists was this: when trying to explain the causes of recession, “there is no deficiency of demand” (and that is a quote from Ricardo), so you should therefore look somewhere else. I will, for a change, let Keynes be my authority.

“Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. . . . The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature.” (GT: 32)

It may seem a negative conclusion but it is a crucial one. There is no such thing as a general glut. Overproduction never occurs. Demand deficiency does not cause recessions. And so far as policy is concerned, increases in non-value-adding public spending cannot lead to a recovery but will, instead, make them worse. That is what I was trying to say to our Senate. Five years later, who has the runs on the board? Is it the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, or is it our classical predecessors? Is it Keynes or Mill?

So to come back to my original post. There may well be something to what classical economists had been saying, which is the point Francois Hollande has very bravely made. And it is brave since he will be opposed by his political enemies, by his political friends and by economists who refuse to think that just maybe perhaps Keynes was wrong.

Let me finish with a quote from another politician, the former Labour Prime Minister of the UK, James Callahagn, speaking to the Labour Party Conference in 1976 during the Great Inflation, which was also a period of persistently high unemployment:

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

It’s not as if our economies, as a result of these high levels of public spending in the period after the GFC, returned to rapid rates of economic growth and low rates of unemployment. We have seen the effects of the stimulus and they are dismal. Hollande, who is a first rate economist, went into government as a Keynesian but a Keynesian he no longer is. Why anyone else still is remains the central question in economic theory today.

Say’s Law – some basic distinctions

Posted on February 3, 2014 by lawofmarkets

A few days ago I put a post onto the SHOE website on Say’s Law for which there was one reply from Daniel Besomi. My reply should make clear what he had written:

I appreciate Daniel Besomi’s comments, which I hope will help us clarify these issues. I might also mention that most of what I summarise here, as in the previous post, was discussed in my Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Elgar 1998).

The first point I am trying to make begins here. There are two fundamental economic questions:

1) what is the basis for demand?

2) what causes recessions, or perhaps more accurately in this case, what does not cause recessions?

What Say, and Robinet, were explaining was the origins of demand, which they argue is based on previous sales. Demand is constituted by supply. What they wrote is an answer to the first question, but it is not an answer to the second.

The second question may be rephrased in this way: can there be such a thing as a general glut? This is a completely different question from the first, and the answer, as a consequence of the general glut debate, was that no, there is no such thing as a general glut, demand deficiency does not cause recessions. James Mill’s answer to this question was, in part, premised on Say’s answer to the first but were not an answer to the first. They are separate but related issues. Mill used Say’s discussion on the basis for demand to explain why a general glut was impossible.

It is because James Mill was the first, so far as I know, to answer the second question that I see him to have been the first to frame the classical statement on what is now called Say’s Law. The General Theory is about whether demand deficiency, a general glut, is possible. And when one finally accepts the classical answer to question 2, as FH may have done, then, but only then, the economic issues revolve around 1, which is what kind of supply will actually create demand.

And then, in answering that question, we can ask ourselves whether the Keynesian notion that spending on anything at all will do the trick is a correct answer. To a classical economist, it need hardly be said, the idea that anyone would think non-value-adding production could create growth and employment is too ridiculous even to contemplate. Only a modern economist might think so, but to anyone from the classical tradition, the idea is still ridiculous.

Daniel also points out that Fred Taylor had used the phrase “Say’s Law” earlier than 1921. This is true, but 1921 nevertheless remains the significant date, which is why I chose my words very carefully. What I wrote was this:

The first thing that might be noted is that the term ‘Say’s Law’ is not classical in origin but was consciously invented by Fred Manville Taylor and introduced into general economic discourse with the publication of his Principles of Economics text in 1921.

If you go to my Say’s Law text (pp 148-149 and especially the footnote), you will find that I discuss Taylor’s invention of the term, including his first use in 1909 in an obscure article on how to teach economics. He then brings Say’s Law into his introductory text, but the first seven editions were student editions distributed only within the University of Michigan. It is only following the publication of the eighth edition as a general text with commercial distribution that the term enters general economic discourse. It is the publication of the book for sale outside the U of M campus that brings the term to a wider public, and it is only after 1921 that it enters into more general discourse.

But it is really neither here nor there whether Taylor invented the term in 1909 or 1921. What is important to understand is that the term was invented in the twentieth century and it was invented by Taylor. What is not in any way affected by the dating is the need recognise that Keynes must, as an absolute certainty, have been reading other things about the various issues that end up in The General Theory that he never mentioned to anyone else. The locked-himself-in-a-room-and-came-up-with-these-ideas-one-by-one version, as he tells the tale himself and is now repeated as gospel, is obviously untrue since Keynes had to have picked up the phrase from somewhere else. If not from Taylor than from someone who had read Taylor.

Then, on the third point raised, if it can be said, as Daniel says, that my stating that everyone accepted Say’s Law through until 1936 was only “approximately true in the English, French and Italian literature”, that’s more than good enough for me. I perfectly well understand that there were some very few and generally obscure dissenters, particularly in English. I even discuss this very weak opposition in my book, with the two (three, I guess) most important dissenters in English having been John Hobson on the one hand and Foster and Catchings on the other. Keynes can himself name only five in his “Brave Army of Heretics” (GT 371), and if you look at the list and choose only his contemporaries, aside from Hobson who is iffy, you are looking at a very dubious list of authorities, namely, Silvio Geselle and Major Douglas. During the period up until 1936, there may hardly have been a theory more universally accepted than Say’s Law.

Say’s Law and the law of markets are not the same

Posted on February 1, 2014 by lawofmarkets

I have belatedly come to realise that Say’s Law is not the law of markets. How weird is that, after all these years. I have put the following up on the SHOE website as a continuation of my previous post L’offre crée même la demande. Hollande, as a result of the bitter experiences in trying to manage the French economy, now has a better grip on our fundamental economic principles than pretty well the whole of the economics profession.

There are a number of facts that are relevant in any discussion of Say’s Law which I thought I might set out. What I find something of a problem is the common assumption that Say’s Law refers to something that was believed during the early parts of the nineteenth century and was of little significance thereafter. No discussion ever seems to get past Malthus, Say and Mill in looking at what was an embedded principle right up until 1936.

The first thing that might be noted is that the term “Say’s Law” is not classical in origin but was consciously invented by Fred Manville Taylor and introduced into general economic discourse with the publication of his Principles of Economics text in 1921. Before Taylor no one called this association of demand with previous supply “Say’s Law”. Taylor introduced the term because he thought economic theory needed to identify one of its most important underlying principles. The ironies of what followed next are too obvious for comment.

This continuous fixation on the early classical economists has had a number of unfortunate consequences. The first is that economists are always returning to Say as if he provided the definitive statement on Say’s Law. He did not. If you want the point of origin, it is in James Mill in his Commerce Defended published in 1807. Here is the passage that matters, although the whole of his discussion is well worth the effort:

“No proposition however in political economy seems to be more certain than this which I am going to announce, how paradoxical soever it may at first sight appear; and if it be true, none undoubtedly can be deemed of more importance. The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced.”

The final sentence should be familiar but is not the actual origins of the specific words used by Keynes.

It is also important to appreciate James Mill’s role since I see his statement not only as exactly right, but he wrote his book in response to an argument in which too much saving and too little demand were seen as the causes of recession. This was the first instance in which an argument that economies are driven by demand was rejected. Mill was saying an economy could not be stimulated from the demand side. That was the point of Say’s Law, and still is.

This nameless principle was universally accepted by the mainstream. But if you would like to find Say’s Law as clearly stated as it is possible to find it in the classical literature, this is David Ricardo writing to Malthus just after the commencement of the General Glut debate in 1820. Malthus said the post-Napoleonic recessions had been caused by too much saving and too little demand. To this, Ricardo replied:

“Men err in their productions, there is no deficiency of demand.”

That’s it. Say’s Law. Recessions are caused by mis-directed production, not deficient demand. This was the foundation for the entire theory of the cycle that would develop over the following century. It is the disappearance of the theory of the cycle that may be the greatest loss economists have experienced because of the General Theory.

There is then this. At the end of the General Glut debate in 1848, John Stuart Mill published his Principles of Political Economy, which included his fourth proposition on capital. This may be the most enigmatic statement ever made by a great economist, but if you want to see the principle behind Say’s Law, whether you agree with it or not, this is what Mill wrote:

“Demand for commodities is not demand for labour.”

Or as we might put it today, an economic stimulus will not create jobs. This is a statement whose reasoning is perfectly clear to me. I teach it to my students and it is in my text and few ever have any trouble with it. Described in 1876 as “the best test of a sound economist”, in my view it still is. It was a conclusion that policy makers accepted right through until the 1930s and perhaps even for a while after. But it was an enduring concept.

So I take you back to Francois Hollande. What he said in French was this:

“Le temps est venu de régler le principal problème de la France : sa production. Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux. C’est donc sur l’offre qu’il faut agir. Sur l’offre ! Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.”

This is the whole thing in my free translation:

“The time has come to work through the number one problem in France: which is production. Yes, that’s what I said, production. We must produce more, we must produce better. Hence, it is upon supply that we must concentrate. On supply! This is not in opposition to demand. Supply actually creates demand.”

It is true the point Hollande makes takes you back to J.-B. Say, David Ricardo and James and John Stuart Mill, all of whom are, of course, classical. But he also takes you back to Fred Taylor whose book was published only a few years before the General Theory, where he was trying to state what every economist of his own generation knew and accepted. Today, so far as aggregate demand goes, we are all Keynesians now, with some very few exceptions.

And while we’re at it, you might also ask yourself how Taylor’s very much twentieth century phrase ended up in The General Theory. The standard story of the trek from the Treatise to the General Theory has a lot of gaps, even after the hundred million words that have been devoted to explaining what the General Theory means and how it came to be written.

Krugman and his continuing ignorance of Say’s Law

Posted on January 26, 2014 by lawofmarkets

Following my post on Hollande and Say’s Law, there has so far been just one response, which merely carried an article by Paul Krugman, Scandal in France. The scandal, as seen by Krugman, has nothing to do with

I haven’t paid much attention to François Hollande, the president of France, since it became clear that he wasn’t going to break with Europe’s destructive, austerity-minded policy orthodoxy. But now he has done something truly scandalous.

I am not, of course, talking about his alleged affair with an actress, which, even if true, is neither surprising (hey, it’s France) nor disturbing. No, what’s shocking is his embrace of discredited right-wing economic doctrines.

You would think that the way he writes that the recovery that followed the American stimulus has been a light unto the nations and that the US and Keynes have much to teach us about economic management.

Mr. Hollande, in announcing his intention to reduce taxes on businesses while cutting (unspecified) spending to offset the cost, declared, “It is upon supply that we need to act,” and he further declared that “supply actually creates demand.”

Oh, boy. That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true, and it’s very much not true as a practical matter at the beginning of 2014. All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. For proof, one need only look at inflation, which is sliding fast. Indeed, both France and Europe as a whole are getting dangerously close to Japan-style deflation.

That Krugman is as innocent as the day is long of the actual meaning of Say’s Law is merely evidence that he is like 99% of the profession who have been mis-educated on a principle that was at the centre of the classical theory of the cycle. He wouldn’t know that either. It is actually shocking to see someone so ignorant of the things about which he so confidently speaks. Well the fact of the matter is that Krugman is an ignoramus who is continually pushing economic advice that is keeping the American economy low and is impoverishing millions of his fellow citizens.

The European economies, and Australia as well, emerged from the Great Depression faster than we have today because they used classical theory and policy to work things out. The UK famously balanced its budget in 1933 at the very trough of the Great Depression. We cut spending here in 1931 and was the first economy to come out of the Great Depression with the Australian trough being reached in 1931 from which time things continually improved.

Only the American economy, with its Keynesian-Roosevelt road to recovery remained in the Great Depression right up until the US entered the war at the end of 1941.

There’s more to the world economy than the US, and even if that is all Krugman knows, even that should make him just a bit more cautious, perhaps a whole lot more cautious in speaking about things he knows nothing about.

Say’s Law and Hollande posted at SHOE