Keynes’s 1933 letter to Harlan McCracken


The letter you see I uncovered in 2008 in the Harlan Linneus McCracken Archive at Louisiana State University, which has now been published in the March 2019 issue of the Journal of the History of Economic Thought. It has already been published by me, but only in black and white. Here we see the letter as it actually is. If you would like to read more fully of the letter’s significance, you can go to:

Kates, Steven. 2008. “A Letter from Keynes to Harlan McCracken Dated 31st August 1933: Why the Standard Story on the Origins of the General Theory Needs to Be Rewritten.” History of Economics Review 47: 20–38.

The letter would be momentous were it not for the fact that it reveals that Keynes with certainty was reading other sources than those he had previously owned up to in writing The General Theory which he commenced writing in 1932 and which was finally published in 1936. The letter substantiates virtually beyond argument – there is always an argument – that Keynes took up the notion of demand deficiency because he had been reading Malthus at the time. Malthus had been the single most important economist to have argued for the importance of demand deficiency as a cause of recession and unemployment during the nineteenth century. Virtually every other economist at the time and through to 1936 thought Malthus was completely wrong. It was unanimously agreed among mainstream economists that the notion of demand deficiency was totally false.

Going further, it was from McCracken that Keynes took his definition of Say’s Law: “supply creates its own demand”. These words are found for the first time ever as a definition of Say’s Law in the very book Keynes is thanking McCracken for having sent to him and which he had “now read”.

The article the letter is attached to, and now published in the Journal of the History of Economic Thought, was written to demonstrates that “Say’s” Law not was invented by J.B. Say. No understanding of the classical meaning of Say’s Law can be found other than by going through the literature that followed the publication of Malthus’s Principles in 1820, not by reading Say’s Treatise, whose first edition was published in 1803. Moreover, “Say’s Law” was the name applied to this concept for the first time by Fred Taylor in the twentieth century. It was not a classical term. Keynes took the phrase “Say’s Law” from Taylor or from one of Taylor’s contemporaries. I am near enough the only person from whom this can be found out. Virtually no one else will even repeat it, and certainly no one is capable of refuting it since the term never shows up anywhere until it was coined by Taylor. Beyond that, no one ever said “supply creates its own demand” in relation to Say’s Law until it was said by McCracken.

You would not think there would be such a cover-up in something as esoteric as the History of Economic Thought, but the implications are explosive, the more so to the extent that others might begin to appreciate there is more in pre-Keynesian economic theory than anyone since 1936 has given it credit for.

McCracken, Malthus and Say’s Law

It was all the way back in October that I received an email from Thomas Colignatus, a blogger in The Netherlands. He had read my article on the origins of the General Theory and had written a post on it titled, Thomas Robert Malthus visiting Maastricht. This is how he begins his post in relation to what I had written:

Malthus set John Maynard Keynes on the path of the theory of effective demand. Keynes in his Essays in Biography:

“If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!” (Keynes 1961 [1933], p. 120)

Relevant is also this archive of the History of Economics Review, and in particular Steven Kates on JMK and TRM and then also on JMK and McCracken, or see the longer discussion by Kates in HER 48, 2008.

“Thus, at the very time that he has commenced writing the book that will become the General Theory, the single most influential book on the business cycle written during the past century, Keynes states in no uncertain terms that the most fruitful approach to dealing with the economic issues raised by the cycle ought to be set within an analytical framework that descends from Malthus.” (Kates HER 48, 2008)

Note that David Ricardo isn’t kicked out of the window. His method of mathematical modeling is retained, of course. His arguments are duly weighted too. The only thing is that Malthus’s argument on the lack of demand finds proper recognition. What was counter-intuitive to Ricardo is rephrased so that it becomes the proper intuition that we enjoy today. Merely putting money in the bank doesn’t help: it are the real investments that determine income.

“The Keynesian Revolution, which swept the economics world in a matter of less than a decade, had its origins in Keynes’s reading of Malthus’s letters to Ricardo in late 1932. It was from these letters that Keynes discovered the issue of demand deficiency. Reading Malthus’s letters in the midst of the Great Depression infused within him the be­lief that demand deficiency was the cause of recession and mass unem­ployment. The essay on Malthus, found in Keynes’s Essays in Biography and published in February 1933, makes plain the extent to which he had absorbed Malthus’s economic views while reading Malthus’s writings. Malthus had been the leading advocate of demand deficiency in the nineteenth century. It was this message that Keynes’s carried into the twentieth.” (Kates 2010, History of Economic Ideas, xviii/2010/3)

I can only say that it has been a long semester, and while I ought to write to people immediately, there was a lot to write about. Even with this reply which I attach below, there is much more I could have written and should have written. But this gets to the issues at hand, or at least some of them.

Dear Thomas

I apologise for this long time in writing. And the delay was not because I was in any way hostile to what you had written. I actually found myself very pleased to see how accurately pretty well all of what you wrote was. If I were to say anything at all about the text, it is that while I do not think of Keynes as a plagiarist in the normal sense, I am certain he knew the sources of what he wrote but preferred to be thought original than have to share the glory with anyone else. There is no doubt in my mind that Keynes found knocking over Say’s Law the perfect vehicle for him to get governments to spend money in the midst of recession. He came upon Malthus in later 1932 because he was updating his Essay on Malthus, he borrowed Malthus’s letters to Ricardo from his closest friend, Piero Sraffa, and discovered the entire literature on demand deficiency. He is then swept along by his discovery and by one of the stranger flukes of history, is sent a copy of McCracken’s book that does two things. It completes every thought he had had about demand deficiency and Say’s Law, even giving him the phrase “supply creates its own demand”. And it disturbs him to find that someone else had seen exactly the same thing, either simultaneously, or more likely, even before he had, given how long it takes to get a book into publication. My memory on this is a bit suss by now, but I somehow recall that this was a book that was sent out to a few people McCracken thought would be interested, which is why Keynes takes the trouble to write to McCracken personally. It doesn’t matter much, but if it is not a personally sent copy, there is no reason for Keynes to have written to McCracken at all.

As for the phrase itself, I am not even sure that Keynes recognised that he had taken it from McCracken. In my view, he would never have used the phrase in the way he did if it had McCracken’s DNA all over it. Either he read it and noted the phrase since it so perfectly fit into the point he was trying to make and then forgot the source, or he merely thought that McCracken had himself taken it from the classical literature. But it is the one absolutely certain dye marker that connects Keynes to McCracken. I had always been convinced that McCracken had been a major influence on Keynes. He appears as an “undocumented” influence, in my Say’s Law and the Keynesian Revolution (Elgar 1998). It was only when Richard Kent picked this up years later – my thesis was written before internet searches were possible – that I was finally able to nail the connection. It is now absolutely undeniable, except that everyone in the Keynes industry continues to deny it.

And I do have to disagree with you where you write that “McCracken’s book did not contain other elements that Keynes was concerned about”. I read every pre-Keynesian book on the cycle as part of the research, which is why I read McCracken. But the moment I picked McCracken up, I knew that I was reading a preliminary version of The General Theory. It is wall-to-wall Keynesian pre-history. And the other interesting part about the General Theory is that all of the parts on Mill and Say’s Law and supply creates its own demand are not found in the three sets of galley proofs. This was inserted at the absolute last moment, either because he didn’t want anyone else to know what he was doing, or he felt he needed to strengthen the attack on established theory, or because it only occurred to him at the last minute. But he must have put this in almost at the very last minute either during Christmas 1935 or just after the New Year in 1936. I don’t think it was a last minute decision, myself, since it is so neatly done. But it was an issue he kept from every single person he had been dealing with, other than Sraffa, who knew exactly what Keynes was up to. And if you cross over to Cambridge, you can see Sraffa’s “Notes on the General Theory” which are sitting in the archive but have never been published. I have tried to publish them myself, but they will never be allowed out, you may be sure of that, or at least not for some time yet.

Anyway, I was very grateful that HEI published my article, so it remains in the literature, studiously ignored by everyone. To me, the combination of Fred Taylor’s general publication of the phrase “Say’s Law” in 1921, and McCracken’s first use of the phrase “supply creates its own demand” in 1933, is a devastating revelation, that if it became the issue it ought to be, would absolutely require a wholesale revision of the mythological version of the trek from the Treatise to the General Theory. I hear these nonsensical stories about the major role of the Cambridge Circus and the rest of it, but it is all horsefeathers to me. But you either have to take the evidence as it is, and recognise that Keynes out and out misled everyone about how he came to write the book, or you have to shrug your shoulders and say that he wrote his book, without telling everyone what he was actually doing at the time.

However, if you actually understand that he was reading McCracken and probably Taylor, there is a very different story to tell about the genealogy, and about the actual effect of the General Theory on the nature of economics, since he was absolutely wrong about the economics of his classical forebears. This is an instance, in my view, where understanding the history makes a very large difference to understanding the present.

UPDATE: Mantaray asks:

“Supply creates its own demand”. OK, so we all know this is a strawman. Is there a correct one-line definition?

I know this is already a long post, but who else is around at the moment, so I have taken this opportunity to slip all this in. Here is the best one-line definition in the whole of the economics literature. It is from a private letter written by David Ricardo to Malthus on 9 October 1820 (source: Ricardo 1951-73: VIII. 277), just after Malthus had touched off the General Glut debate with the publication of his Principles of Political Economy earlier that year.

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

There are three parts I like about it, all devastating for Keynesians. First, although Keynes specifically states that Ricardo and those who followed did not recognise the very fact of recessions, it is absolutely clear that Ricardo and Malthus are discussing the nature of economic recession and their cause. Second, Ricardo provides in short form, a summary of the classical theory of recession. The economy becomes misdirected for some reason. Recessions are structural, due to errors on the production side. Third, we have the true meaning of Say’s Law, stated as clearly as one could wish: whatever may be the cause of the downturn, “there is no deficiency of demand”. Every economist from Ricardo’s time till the publication of The General Theory in 1936 believed exactly that. Today, it’s down to me and about a couple of dozen others. Modern macroeconomic theory is a well recognised classical economic fallacy.