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This central banker believes in the continuous progress of Economics, in which Autrian Economics was a set back.

The Austrian school of economics and Austrian economic policy
Zilk Lecture, Hebrew University of Jerusalem
May, 31, 2015
Ewald Nowotny
Oesterreichische Nationalbank

Kates is obsessed with Say's Law, how it is true basically by definition. Mill's view of macroeconomics is very sophisticated indeed, and Keynes notoriously undervalued the knowledge of his predecessors. But one very big difference is indeed over Say's Law, which Mill accepted and Keynes did not. Given Kates's strong views on this, of course he says Mill > Keynes, but, in fact, Say's Law is not true in general, and Say himself knew it, as Kates has had pointed out to him on numerous occasions, but...

BTW, now that it seems I can post here again after a long period of not being able to, let me add that I do not see anything particularly Austrian about Say's Law. I just scanned a few books by Hayek nad von Mises I have here in my office, and there was not a single mention of Say's Law in any of them. I did find a mention of Say in Mises's Socialsm, but about whether or not Ricardo was right about gros versus net product. No Day's Law.

I would suggest you all should not get yourselves too worked up about hanging your hats on Kate'ss obsession, which he shares with the even more fanatical James Ahiakpor, whom those who follow HET know of. What is in it for you guys other than another way to bash Keynes?

I'm not sure if this speaks to Barkley's concerns or not, but here's an Austrian "take" on Say's Law (and there is similar material in my Routledge book). I don't think there's anything distinctly Austrian about Say's Law, but I do think there's an important insight there that is consistent with the Austrian emphasis on microeconomic coordination.'s%20Law-Elgar.pdf

It pleases me to see that Barkley Rosser has opened a second front on the issue of Say’s Law and Mill. And let me begin by noting where we agree, which is the absence of much discussion on Say’s Law among Austrian economists. But while there is not a lot, there is some, the most important one unfortunately going all the way back to 1950, in an article by Ludwig von Mises in "The Freeman", titled “Lord Keynes and Say’s Law”. You can read the whole lot at this link [ ] but I will quote you the most relevant passage:

"The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say's Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.

“Neither did Keynes try to refute by discursive reasoning the teachings of modern economics. He chose to ignore them, that was all. He never found any word of serious criticism against the theorem that increasing the quantity of money cannot effect anything else than, on the one hand, to favor some groups at the expense of other groups, and, on the other hand, to foster capital malinvestment and capital decumulation. He was at a complete loss when it came to advancing any sound argument to demolish the monetary theory of the trade cycle. All he did was to revive the self-contradictory dogmas of the various sects of inflationism. He did not add anything to the empty presumptions of his predecessors, from the old Birmingham School of Little Shilling Men down to Silvio Gesell. He merely translated their sophisms—a hundred times refuted—into the questionable language of mathematical economics. He passed over in silence all the objections which such men as Jevons, Walras and Wicksell— to name only a few—opposed to the effusions of the inflationists. . . .

“In fact, inflationism is the oldest of all fallacies. It was very popular long before the days of Smith, Say and Ricardo, against whose teachings the Keynesians cannot advance any other objection than that they are old.”

Say’s Law is at the heart of Austrian theory without most Austrians being fully aware of it. I have spent a good deal of effort trying to get Austrians more interested in Say’s Law as a means to explain the fallacies of Keynesian economics. I will merely here provide a link to my “Ludwig von Mises Lecture” of 2010, where I tried to show just how important Say’s Law is if classical economic theory – of which Austrian economics is the only modern manifestation – is ever again to become central to our understanding of the way in which an economy works. Just let me apologise in advance for the way in which I pronounce Mises’s name; at the time I had read much of what Mises had written, but by the nature of things, had never actually heard his name said by anyone else. It’s one of the problems being a lonely scholar way off on the other side of the globe. But as you will see from the video, there is no denying my extremely high regard for both Mises and Hayek whom I discuss early on.

Actually, Hayek viewed Say's Law as an equilibrium concept. He argued it did not hold in a monetary economy because money allows there to be demand without supply. One could say the denial of Say's Law in a monetary economy undergirds Hayek's monetary theory of economic fluctuations.

It is not clear that the Law originated with Say. It already appears in the Wealth of Nations.

Then there is the question of whether Say changed his mind. In the fifth edition of the Treatise, never translated, Thomas Sowell argues that Say changed his mind about the Law.

Finally, Mill's Fourth Fundamental Proposition Respecting Capital is at the heart of Hayek's cycle theory. Hayek clarifies that in an Appendix to The Pure Theory of Capital. And I analyzed its relevance in Economics as a Coordination Problem. It is not a forgotten concept.

The quote that Kates provides from Mises is peculiar. It is clearly a criticism of Keynes, but aside from declaring that Keynes failed to disprove Say's Law, he really provides no defense of it or how it fits into Austrian economics.

I am interested to see that Steve Horwitz basically that the main Austrians said very little about it, and one has to go such figures as Hutt to find much, with followups by Steve himself and some others.

I think Jerry is right that Hayek probably did not accept it in a monetary economy.

Mill took it very seriously and spent much time talking about it and relying on it in his arguments.

Regarding Say himself, he may have changed his mind on it, but from the very beginning he always recognized that it did not universally hold and gave various examples of how and when it might not hold, most of these involving people hoarding money for some reason or other, such as in the Ottoman Empire not to have to spend more on taxes if one engaged in conspicuous consumption, although one can find numerous quotes from him in various places where he certainly states some version of it. As it is, I think it was James Mill who coined the term and promoted it in the English literature, thus making it not too surprising that his son would also be an advocate of it, although I may be mistaken on this last point (and I accept that versions of it may well have been around earlier).

The fact that this fundamental principle of pre-Keynesian economic theory is named “Say’s” Law has been one of the more damaging aspects of both the history of economics and of economic theory itself. Here is something to contemplate about the true origins of the Keynesian Revolution. The term “Say’s Law” was invented by Fred Manville Taylor and entered into common usage on the American side of the Atlantic in the 1920’s with the publication of Taylor’s Principles of Economics. How, it may be asked, did the term get into The General Theory? Say himself never understood Say’s Law properly. If you do want to understand it properly you need to go to John Stuart Mill and those among the classical school who followed after. J.E. Cairnes is the most accessible source.

Say’s Law states that you can never make an economy grow from the demand side. Mill’s version is a direct refutation of Keynesian economics: “demand for commodities is not demand for labour”. Mill and the classics said you could not make an economy grow by increased expenditure; Keynes said you could. All modern macro continues to argue that it can be done and is to that extent entirely Keynesian. That there is no real world evidence that increases in aggregate demand lead to increases in output and employment confirms in every instance a stimulus has been applied that Say’s Law is valid. If you would like to see my explanation in short form, you have my articles at the Liberty Fund to go to. If you would like to see the longer and more extended version, you could try the second edition of my Free Market Economics. I will just leave you with Ricardo’s reply to Malthus in the midst of the general glut debate (the first attempt to introduce “Keynesian” economics during the 1820s): “men err in their productions, there is no deficiency of demand”. This is the classical and Austrian theory of recession. There has been a disorganisation of markets that has led to recession and unemployment (that is, men have erred in their productions). The problem is not over-saving and a lack of aggregate demand.

Hayek detailed the influence of classical political economists on his theory of the business cycle. See the 1st chapter of Prices and Production. Many predecessors are mentioned, just not Say.

In Economics as a Coordination Problem, I suggest that Say is relevant. But it is Say's theory of the entrepreneur that is relevant.

James Mill did not use the term "Say's Law," preferring the "Law of Markets," but he and Say corresponded and they each cited the other in their works.

In the WN, Adam Smith argued that "parsimony" was the immediate cause of "the increase of capital." That is an ex ante version of what came to be known as Say's Law.

"What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too." In other words, the supply of savings constitutes the demand for investment.

Even earlier, there are statements by the Physiocrat, Mercier de la Rivière, that anticipate Say's Law. And so on.

It is not a little odd to be instructed by Barkley Rosser that James Mill and J.B. Say corresponded and cited each other’s works. I have written one book, many articles, and brought together two collections of writings on Say’s Law, including a five volume set on everything written on Say’s Law through until the year 2000. Of course James Mill didn’t use the term “Say’s Law”. The phrase wasn’t even invented until the twentieth century. That he discussed “le loi des débouchés” (the law of markets) is different since that is the name he applied himself. That still doesn’t answer where Keynes came up with the term Say’s Law since that is from F.M.Taylor (1921). Those who think they know the story of how Keynes went from the Treatise (1930) to The General Theory (1936) typically ignore this very inconvenient fact.

Say’s Law does not mean “goods buy goods”. What Say’s Law means is that demand deficiency (overproduction) does not cause recessions and therefore a demand stimulus is never the remedy. Everyone once knew that goods bought goods – see the second paragraph of the introduction to Book II of The Wealth of Nations where it is spelt out with perfect clarity.

For an indubitably Austrian perspective on Say’s Law, let me then direct you to Murray Rothbard in an article specifically titled “Say’s Law of Markets” []. It is mostly right but Rothbard is unfortunately caught up in the trap of thinking that Say’s Law was originated by Say, or worse, that Say explains it properly. But here he is absolutely on the money as he is on most of the rest of what he wrote:

“Essentially Say’s law is a stern and proper response to the various economic ignoramuses as well as self-seekers who, in every economic recession or crisis, begin to complain loudly about the terrible problem of general ‘overproduction’ or, in the common language of Say's day, a ‘general glut’ of goods on the market.”

And please take note of the technical term he uses, “economic ignoramuses”. I understand the exasperation, especially in the face of yet another massive failure of policy in the various Keynesian stimulus packages that followed the GFC.

Several quick thoughts:

1. The best understanding of "Say's Law" is that "production is the source of demand." That aligns with Steve K's point, and Rothbard's, that "spending" cannot get you out of a recession. Say's Law is the rejection of "demand-side" economics.

2. Say recognized that money mattered. The later versions of "Say's Law" that ignored money and suggested that, esp. in Keynes's caricature, that macroeconomic equilibrium always held in a "free market," simply did not understand the basic idea. I am not even sure those folks really knew Say.

3. I like thinking of the Law of Markets as simply an extension of Smith's insight that the division of labor is limited by the extent of the market. Production is what creats the wealth that defines the extent of the market, which is itself a result of the increased division of labor. The Law of Markets is looking at Smith's insight from a "macro" perspective in some sense.

4. And, as usual, Jerry has it right. Mill's proposition is at the heart of Austrian macro, which is why microfoundations matter so much (hence, my book on that topic). It is money that makes this whole Smith/Say process (and note that word) possible, but it also opens up the possibility of coordination failure if money isn't right. This is at the heart of Hayek (and Mises) and captured by Roger Garrison's "loose joint" terminology.

5. Finally, if we are in a general glut caused by an insufficient money supply, increasing the money supply is the appropriate remedy. That is required to restore the monetary framework necessary for production to be translated into demand. That point is consistent with a money-enhanced version of the Law. It also implies that increasing the money supply beyond the point of monetary equilibrium will NOT generate additional growth/recovery, at least over time.

Again, I deal with all of these issues in my Routledge book, both in the MET chapter and chapter 6 which is on Hutt and Say's Law.

Here is the link to the Rothbard piece:

Steve Horwitz has clarified the issues. I agree that the "loose joint" metaphor captures an essential part of the Austrian narrative on cycles. There is a monetary story, a capital story, and a coordination story. That analytical combination goes beyond any version of Say's Law I have seen.

Two more links:

1. A Freeman piece of mine on Say's Law:

2. Chapter 3 of the late Larry Sechrest's book is also excellent on these issues:

Hmmmm. So, it looks like there is now an Austrian-style macro that has elements linked to a sophisticated version of Say's Law. OK. Fine.

On Kates, I shall comment on his underlying piece, which is awful as is most of his work. As usual, his version of Say's Law is universally true no matter what under any and all circumstances. He simply asserts and repeats that we have never ever seen a recovery that was demand driven, without providing a shred of evidence other than a cite of one of his other works (and after he praises his own uniqueness as a scholar of all this, gag).

Let me go back to Mill, J.S., that is, not his dad. I initially noted that he had a very sophisticated macro model. It is funny that his discussion of downturns looks very much like Keynes's, with neither of them focusing that much on people "oversaving" and consuming too little, thus leading to a glut of goods, although Keynes did talk about this.

No, both of them were very modern and relevant to recent experiences. Their models were much more tied to financial failure with following collapses of real capital investment. Both of them even wrote about speculative bubbles and the collapses thereof, with these leading to the failure of financial institutions and a following period of general economic downturn, very much what we experienced particularly after 2008.

Now, of course, Kates is right that Mill advocated basically hanging around (maybe with some social safety net help on the side that led Hayek and others to call him a socialist) for awhile until things naturally arighted themselves as the financial institutions sorted themselves out and got going again, whereas Keynes said that "in the long run we are all dead" and advocated active fiscal policies involving spending or tax cuts to get the economy going again from demand side stimulus, the Great Depression lasting a lot longer than any of the downturns J.S. Mill observed.

How Kates can spin the similarities between the Millian and Keynesian analyses of such situations (not discussed in the underlying paper) is to argue that all of this is supply-side. The bank failures following the collapses of the speculative bubbles led to producers of capital goods simply deciding not to produce, not because they were facing any lack of demand for their products. Their inability to obtain financing was a supply side issue, not a matter of them having fallen down animnal spirits, or maybe those fallen down animal spirits themselves are alao a supply side problem.

In short, and I have seen Kates argue these points elsewhere at length, any sort of case where one might think that one might be seeing a short term change either up or down that is driven by the demand side, he will come up with an explanation that makes it into a supply side problem, somehow or other. I am not going to review all these cases, but I shall simply note that this includes some cases that are pretty hard to do that with and which the vast majority of economists would say were demand side driven.

I am not nall that much of a fan of conventional economic analysis, but the standard stuff out there basically says: long run is supply side, short run is demand side, which does not mean one should necessarily carry out active government policies of any sort in the short run to deal with those demand side fluctuations. But it looks pretty accurate, and I suspect that Hayek of the Austrians at least would go along with it.

BTW, although he may not think so, and it may not look so, I do respect Kates's history of thought scholarship on the various roots of Say's Law.

I cannot leave this by noting that I was the one some decades ago who pointed out to him that Say did not believe in his own law. Back then Steve ignored me, or at least did not respond to this. It now looks like he has come up with a response, which is that Say was a dummy who never even understood his own law.

Oh, I cannot avoid noting another irony here. We have a lot of Austrians coming on strongly defending supply-side classical arguments, when at the origin and foundation of the Austrian School starting with Menger and running through Bohm-Bawerk;s critique of Marx, we have a strong emphasis on the supremacy of the demand side, of marginal utility, and of subjectivism.

I simply note that and leave it to you all to provide an explanation. Maybe it is something along the lines of that there really is no such thing as macro anyway, so, well.....

I don't get your point Barkley. Producers respond to what they perceive as consumers' evaluations of course. But consumers can only demand with the proceeds of their prior production, itself dependent on successful anticipation of consumer demands. That economic value ultimately comes from the subjective judgments of individuals in their capacity as consumers doesn't mean that spending is the source of wealth. Wealth creation comes from producers who *correctly anticipate* the valuations of consumers, not from the act of spending itself.

The point of my articles on the Liberty Fund website was to draw the attention of others both to Say’s Law and John Stuart Mill. There was no name for the principle when Mill wrote, which is why Fred Taylor chose to give it a name in 1921, just in time for Keynes to take it up and ruin its understanding within economic theory. But while it remained in place, Say’s Law was the fundamental principle of economic theory, with the whole of economics structured around value adding as the core element in understanding how economies grow. Say’s Law states that “demand is constituted by value adding supply”. The “value adding” bit was left out by the classics because this was already perfectly well understood by every economist of the time. Would that we could say the same today.

The division was between productive and unproductive labour, which is a notion we economists now deride. This is the distinction between value adding and non-value adding. It is the distinction that is essential in Mill and the classics generally, perfectly explained in Adam Smith. Let me take you to the opening of Book II, Chapter III of The Wealth of Nations:

“There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit. The labour of a menial servant, on the contrary, adds to the value of nothing.”

This is a distinction no one now makes. The “menial servant” may provide utility but does not add value. Future productivity is not increased by whatever he might do. If you return to my original article on the Liberty Fund website [] , and in particular look at the discussion that centres on the diagram you will find there, you will see this distinction more carefully explained.

Moreover, Say’s Law emerged out of the general glut debate, over whether a stimulus might increase production and add to employment. The debate clarified innumerable issues for the time, the most important one for us now is that a demand-side stimulus made up of non-value adding expenditures could not possibly raise output and employment, but would, in fact, make things worse. This is why I find Steve Horwitz’s statement that “if we are in a general glut caused by an insufficient money supply?”, although he perfectly well understands the issues, selling the pass to the Keynesians. There is no such thing as a general glut, not for any reason, not ever.

Mill himself worried about the term “general glut” which many even in his own time used as a synonym for recession. A general glut is not merely a recession, but is a recession specifically caused by demand deficiency. To write instead, “if we are in a recession caused by an insufficient money supply”, we are in the world of classical theory where that and every other form of economic derangement was closely examined as potential causes of recession. Say’s Law ruled out only one potential cause, demand deficiency. But in ruling demand deficiency out, the result was that Keynesian-type solutions were never proposed by economists until the publication of The General Theory in 1936.

The culmination of the classical theory of the cycle can be found in Gottfried Haberler’s Prosperity and Depression, which was published the year after The General Theory (and is summarised in Chapter 14 of my Free Market Economics). If you are looking for “a monetary story, a capital story and a coordination story” that is the place to go. Say’s Law merely tells you where you should not go. But without Say’s Law as a fundamental principle of economic theory, the result is Keynesian economics and aggregate demand with policies built around endless stimuli, deficits and debt which never work, as any classical economist could have told you. Murray Rothbard was pretty clear about the nature of the “economic ignoramuses” that have to be dealt with once Keynesian theory is accepted. The extraordinary part is that what he wrote is not a fundamental part of Austrian economics, which is why even today I have to bring these issues to the table using the economics of John Stuart Mill.

Oh, my. Where to begin?

Kates says that Say's Law emerged out of the general glut debate. A debate requires two sides. So there were economists who advocated "Keynesian-type solutions." Sismondi, to name just one.

Kates fails to distinguish between long-run (equilibrium) and short-run (dynamic) propositions in classical political economy. JS Mill and many other classicals had a dynamic theory of economic crises. Barkley's characterization is on the mark.

Then there is the problem of fifty years of missing economic history. Economists on the eve of the Keynesian Revolution were not classical economists, but neoclassicals. They were Austrians, Walrasians, Marsahllians, etc. so, Haberler was an Austrian, not a classical economist.

By the time of the GT, Keynes had an embarrassingly large number of precursors for Stimulative fiscal policy. Indeed, Keynes was a latecomer. The Chicago School was a hotbed of such policies. Friedman explains that Chicago was inoculated to Keynesian economics because of that.

In The New Economics and the Old Economists, J. Ronnie Davis details the pre-Keynesian origins of what we call Keynesian policy. Rothbard details how many economists supported pump-priming under Hoover and later under FDR. All before the General Theory. Ditto Steve Horwitz's work on Hoover.

Fisher represented another strand of thought. His debt deflation theory of the cycle is one in which a fall in nominal values has real effects. The obvious solution is reflation. The issue is not whether Fisher was correct, but that there were many, many demand-driven policies to cure recessions before Keynes.

Kates seems to just leave out any ideas that do not fit his thesis. Other ideas are simply fitted onto his Procustean bed.

Let me now look at Barkley Rosser’s latest posts and deal with the easiest part first. If you go to my Say’s Law and the Keynesian Revolution (published 1998 – well before I had apparently been written to by Barkley), there you will find a discussion of Say’s inadequacies in his discussion of Say’s Law: “ultimately, the discussion in the fourth edition [1821 in English] provides a poor understanding of Say’s Law, and in itself would have been unlikely to commence a revolution in economic thought” (p. 34). Hutt also points out that Say’s version of Say’s Law is very badly done. And in fact, there is an exchange of letters between Malthus and Ricardo where both of them agree that Say’s conception is off base.

But really, what was Say’s Law if it is not that there is no such thing as a general glut, that is, that demand deficiency does not cause recessions? And from that the policy conclusion is clear: “demand for commodities is not demand for labour”. You cannot end recession and reduce unemployment from the demand side. Roosevelt didn’t do it. It was not done during the Great Stagflation of the 1970’s and 80s. The Japanese didn’t do it in the 1990s. And the Obama stimulus didn’t do it following the Global Financial Crisis. No one has done it on any occasion. I know why they didn’t work because I have read Mill. But do you?

And it is not as if I think we should sit idly by as economies go up in smoke. I was very clear in my support for the TARP, and even discuss it in my Free Market Economics. There you will also find a list of measures governments might successfully take during recession, which even includes small doses of public spending that are purposefully value adding. There was a classical macro. The question that really might be asked is whether there was a classical micro before the 1870s.

Barkley says what I wrote is “awful” but then never give a single reason why. I’m used to that sort of thing, but seriously, look at the diagram and the discussion that goes with it in my original post, and tell me just what is so wrong with what you see. I may well be wrong, but you do not say why I am wrong, just that I am. If Mill and Keynes are so close, as you say, in their descriptions of recession – I don’t think they are, by the way – but if they are, what precisely was so revolutionary about the Keynesian Revolution? Recall that if one believes that Say’s Law is true, according to Keynes there is no obstacle to full employment. Was Keynes wrong about this? Did classical economists see such obstacles?

More to the point, Keynes specifically said that recessions were due to over-saving which caused demand to be deficient. That is the whole point of I=S. There is too much saving, which causes the economy to go into recession. The Global Financial Crisis was not, however, caused by over-saving. To think any such thing would be idiocy. You cannot use a Keynesian model to explain the crash in the American housing market, the meltdown among Wall Street banks, the transmission of a credit freeze across the world and the downturns in every economy across the planet. This was not a fall in demand but a massive derangement of markets. This is the classical theory of the cycle – perfectly explained by Mill – and is not in any way Keynesian. And the conclusion you would reach based on a classical model is that if we are to have a recovery, it will be driven by supply-side entrepreneurial activities, and not by a government stimulus. We have tried the stimulus and it didn’t work. Now it will be “austerity” as Keynesians like to call the kinds of policies that are focused on value adding production.

And finally, I come back to my favourite question for Keynesians: where did Keynes get the term “Say’s Law” from?

First let me thank Jerry O'Driscoll for dealing with some matters I would have otherwise. I agree in full with his remarks.

On Steve's post before that, two things. One is that he is like Keynes in way overstating the importance of Say's Law. It was never the "foundation of economic theory," although maybe J.S. Mill thought it was.

The second is that Steve embarrassingly botches his discussion of Smith's view. I think one can indeed find a variation of Say's Law in WoN, but this is a joke. Productive versus unproductive labor has nothing to do with the idea of value added, beyong the trivial point that if something does not add value it does not add value, duh. In fact, Smith's focus on material production was later carried over by Marx, and one could find this distinction between productive and unproductive labor in Soviet income and product accounts, although it might be useful in regard to rent seeking. As it is, one can easily imagine a "menial servant" providing valuable input even into a material production process. This whole thing is silly and has Kates making Smith look silly. Yikes!

On the later post, sorry, Steve, you do not remember your history. We debated this matter on the internet before your first book was out, and I told you then about Say's views. But, this is just trivial and boring.

You continue to avoid the main arguments by both Mill and Keynes about the sources of macro fluctuations, which focused on financial crises and collapses of capital investment, not shortfalls of consumption. While Keynes ridiculed what he called Say's Law and defended the possibility of general gluts, that was not really the focus of his theory, which had more to do with the collapse of animal spirits of business people.

Your efforts to dismiss Say simply look ridiculous. In fact, his examples against the law were already in his first edition. You have trouble reading, don't you, for such a great scholar of Say. But we already know how worthless Say was and can ignore him, especially given that he actually supported government spending on public works projects during the downturn after the end of the Napoleonic wars.

Again, I am not going to bother arguing with you about the many cases where most economists would say that there was an increase in aggregate demand that pulled the economy out of a slump as we have already seen what you will say, which is simply to declare everything that happened that had any effect to be supply side.

I am glad, I guess, to see that you thought maybe something might be done by government to help get out of the Great Recession, although it would appear that you wish to get all worked up again about public spending that involves "value added" versus that which is not. Yeah, sure, pretty much everybody would prefer to see productive public spending on useful infrastructure or whatever rather than the old joke Keynes digging holes in the ground and filling them up again, although I suspect you have either forgotten or did not know what that famously repeated-out-of-context quote was really about.

And as for your big final question, why should anybody care and of what importance is it? Sorry, none, although I am not going to argue with your claim that it was Fred Taylor who first coined it, woo woo woo.

BTW, I shall agree with Steve Kates that Ricardo's discussion in the general glut debate does look somewhat Austrian in his emphasis on misdirected production that needs to be reallocated, and I have said that in a forthcoming paper on "History of Economic Dyhamics" to appear in the Handbook of the History of Economic Analysis and currently available on my website.

I should also say that while Jerry identifies Haberler as an Austrian, he is sort of as Schumpeter was. His great book is very eclectic and even handed in its accounting of many views, many of which have been forgotten even though quite interesting and worthy of reconsideration.

Essentially, Barkley, what you have done is call the classical theory of the cycle “Keynesian” and declared victory. If I really do have to demonstrate that Keynes was trying to show that demand deficiency was the cause of recession, we are at such a primitive level of debate that it is almost impossible for me to work out where we can find some kind of solid ground on which we can agree so that we can work out between us where our differences lie.

This making it up as you go along version of Keynes is quite astonishing. Do you really believe that “while Keynes ridiculed what he called Say's Law and defended the possibility of general gluts, that was not really the focus of his theory, which had more to do with the collapse of animal spirits of business people”? Here is what Keynes actually argued and right at the start of the book as he is trying to give an overview of what is to come:

“The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.” (GT: 32)

I think Keynes in this instance is absolutely right about the nature of economic theory right up to his own time. The General Theory is about deficient aggregate demand and designed to refute Say’s Law. For you not to know this you must somehow have avoided the Keynesian-cross diagram, leakages and injections, IS-LM, AS-AD along with Y=C+I+G, versions of which may be found in every single Samuelson clone and which are still taught to just about everyone. If what you call “Keynesian” is some package of inferences from the later chapters of The General Theory that ignore what you can find at the front, well feel free to go on with your private understanding of what Keynes really meant, but it is not the Keynesian theory that now disfigures virtually every first-year macro text in the world, nor the one that informs policy.

And as for ignoring what Keynes thought was the cause of the recession of his own time, he is perfectly clear about it in the GT:

“The post-war experiences of Great Britain and the United States are, indeed, actual examples of how an accumulation of wealth, so large that its marginal efficiency has fallen more rapidly than the rate of interest can fall in the face of the prevailing institutional and psychological factors, can interfere, in conditions mainly of laissez-faire, with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing.

“It follows that of two equal communities, having the same technique but different stocks of capital, the community with the smaller stock of capital may be able for the time being to enjoy a higher standard of life than the community with the larger stock; though when the poorer community has caught up the rich — as, presumably, it eventually will — then both alike will suffer the fate of Midas.” (GT: 219)

I know this is dead set stupid, and not at all like the sophisticated arguments of Mill, but if you are going to defend Keynes, this is what you must defend. “The fate of Midas” is, of course, a situation where everyone is so wealthy that they stop buying and save instead. This is why Keynes thought the world had gone into depression, because he sure wasn’t discussing the 1920s, or at least not the “roaring ‘20s” of the United States.

That you disdain the need for spending to be value adding is quite clarifying so far as this exchange of views is concerned. You do represent a modern view of what Keynesian policy makers believe. You do not think that such expenditure has to be value adding to lead to faster growth and employment. Economists have, indeed, been taught that spending on anything at all will add to growth and employment. And you say this even with the labour market in the US as moribund as it is, where the only reason for the fall in the unemployment rate is the even faster fall in the participation rate.

The economics of John Stuart Mill is so superior to this unbelievable Keynesian nonsense that you make every effort you can to associate your views with Mill's while disassociating yourself from what Keynes really wrote. And it is no wonder why, because what Keynes wrote is such nonsense. But it is this Keynesian theory that has informed the Keynesian policies that were tried 2009-2011, which are now being abandoned. There is a need for policy guidance that will explain to policy makers what needs to be done, since they certainly cannot find any such thing in our modern Keynesian-saturated texts. But they could find it in Mill, if they only knew enough to look.

I just wrote a long reply to Steve Kates that I could not post because I spent too much time on it. It is gone, and that was time wasted. Steve always insists on having the last word, so this will be my last post on this, and I shall not reply to a lot of what he has said here.

I shall sort of play Jerry Driscoll on Haberler, and will provide quotations from Gottfried Haberler's Prosperity and Depression, which Kates puts forward as the culmination of his arguments. I also note that Steve should replay to Jerry, who has him nailed.

G.H. P&D (p. 378):

"There will always be a reate of interest high enough to discourage even the most eager borrower; but, when prices and demand are falling and are expected to fall further, th edemand for investible funds may be at so low an ebb that there is no rate (short of a negative figure) which will lead to a revival of investment and entail an increase in the effective circulation of monay - that is, in the total demand for goods in terms of money per unit of time."

(p. 384):

"Notwithstanding Professor Spiethoff's opinion to the contrary, ceteris paribus, a net increase in consumers' demand will not only lead to a revival in consmers' good industries, but will also stimulate investment-always on the assumption that there is an elastic money supply.


"A net increase in consumers' spending might conceivably be brought about by acts of dishoarding by private indivisduals."


"A much more important influence - not so much for the past as for the present and future - is the increase in consumers' spending deliberately induced by Government action in the shape of public works programmes, increases in ordinary expenditure and relief measures, all financed in such a way as to create a net increase in total demand."

Guess Haberler needs to be sent to the same naughty corner as that troublesome J.B. Say.

Oh, and, briefly, whY I find Kate's arguments "awful" is that he takes brilliant classical economists and makes them look like fools. With Adam Smith it was conflating his value added arguments with his distinction between productive and unproductive labor, a distinction mostly taken seriously now by Marxist economists. Really.

As for Mill, while refusing to discuss Mill's brilliant analysis of the role of speculative bubbles and financial collapses in business cycles (which does not fit his story very well), Kates focuses on one of the stupidest things Mill came up with, this Fourth Law of Capital, that demand for commodities is supposedly not demand for labor. Oh dear. All this does is remaind us that Mill indeed did not know demand theory very well, still took the paradox of value seriously, and thus saw value as all supply side created, just like Karl Marx did.

Barkley Rosser

Let me now turn to Jerry O’Driscoll’s comments. I have refrained from criticising what he wrote since early on he made the point that, so far as I can see, made my own point for me. Although he seems to disagree with me in tone, I could not have put this any better than he did:

“Mill's Fourth Fundamental Proposition Respecting Capital is at the heart of Hayek's cycle theory. Hayek clarifies that in an Appendix to The Pure Theory of Capital. And I analyzed its relevance in Economics as a Coordination Problem. It is not a forgotten concept.”

Once he noted this, the only issue was the form in which its relevance took. I have my own view on it and he has another. But do let me discuss his last post on what I had written.

a) Is it news that Say’s Law was formed in the heat of debate? There was James Mill’s reply to William Spence in 1808 that was the first time Say’s Law shows up, since it was the first time the question of demand deficiency as a cause of recession was debated. If there was some other moment that Jerry wishes to specify instead, he’s welcome to choose it. But since it is acknowledged by one and all that the issue comes to a head with the publication of Malthus’s Principles in 1820, leading to a controversy that involved every major economist of the time, I don’t really know what he is getting at. That there were two sides cannot even be doubted. Sowell does, indeed, argue that the issue rises first in France with Sismondi but for us in the English speaking world, it is Malthus’s role that is significant.

b) J.S.Mill did indeed have a dynamic theory of economic crises, but since I side with Mill, I cannot see that as a criticism of anything I wrote. Keynesian theory is notoriously an equilibrium theory. The entire point of The General Theory was to demonstrate that there could be an under-employment equilibrium. I can only think we agree on this, so I don’t know why it is mentioned at all.

c) Those fifty years of supposedly missing history of economics are covered in my Say’s Law and the Keynesian Revolution (Elgar 1998). From page 81 to page 101, I discuss the explicit acceptance of Say’s Law over the period from 1871 to 1936. The most interesting example was Jevons, who could not abide Mill’s economics but nevertheless fully accepted Mill’s view on overproduction. As to whether these economists were “classical” or “neo-classical”, for ease of exposition I took up Keynes’s approach which you can find discussed in The General Theory on page 1:

“I have become accustomed, perhaps perpetrating a solecism, to include in ‘the classical school’ the followers of Ricardo, those, that is to say, who adopted and perfected the theory of the Ricardian economics, including (for example) J. S. Mill, Marshall, Edgeworth and Prof. Pigou.”

If you don’t like the terminology, take it up with Keynes.

d) Everyone, including J.S. Mill himself, accepted a role for public spending. Keynes did not, however, think of such spending as a palliative but as a cure. In 1929, Keynes co-authored a pamphlet on behalf of the Liberal Party called “Can Lloyd George Do It?”, in which he sought an increased level of public spending to deal with the mild slump of the time. His co-author was Hubert Henderson who, in 1936, wrote one of the most savage criticisms you will find anywhere of The General Theory since he recognised the difference between increased spending to take the edge off a downturn, and increased spending to lift an economy back into full employment from the midst of a depression.

e) I am at a loss to find Hoover, and even more so Roosevelt, used as an exemplar of good policy on an Austrian website. I would, moreover, find their example more reassuring if their policies had actually worked. The counter example is Harding’s bringing a much worse recession to an almost instant end in 1921 by tight fiscal policy and tax increases.

f) Whatever theory Fisher may have had, it was never put into effect so far as I know by any policy maker. You would have to tell me what Fisher thought the mechanism was to achieve recovery. But after that, you would have to tell me why you would think it would work in practice. There were no end of theories of the cycle prior to the publication of The General Theory.

g) The only idea that I would entertain as a proper contradiction of my thesis – which is not really mine but John Stuart Mill’s – is one in which an increase in public spending led to an economic recovery. I’ve yet to see one and, along with Mill, do not think it is possible. In the meantime, it will be interesting to see the reaction of markets when the Fed does finally begin to raise rates again.

Barkley, would you care to enlighten us as to the idiocy of Mill's Fourth Proposition? I think it demonstrates that Mill knew a fundamental truth about micro rather than revealing his ignorance.

Hayek gets it right in the appendix in TPTOC, as do Moss and Vaughn in HOPE in 1986 and Jerry in his 1977 book.

This discussion has been amusing, since Barkley and I do not usually end up on the same side of these debates.

Let me step away and make one general point. Kate is given to making strong universal statements like "every economist believed" or "no economist before Keynes" believed. It is pure sport to reply to such statements because there is always dissent in the history of economics.

I find Kates' response confused and non responsive. I made a very simple point about the general glut debate. There was disagreement, so some economists took the opposite side to the orthodox position. So every economist didn't accept Say's Law.

I'll repeat another dissent from Say's Law predating Keynes: Hayek. He accepted Say's Law only for a "natural economy" (non monetary). Check out Chapter III of Monetary Theory and the Trade Cycle. Hayek's theory of the trade cycle depends on Say's Law NOT holding.

Again, Kates missed the point on Hoover and FDR. The point was not about how good or bad were their policies. The point was that many economists supported them -- before the GT.

Steve K might also consider this:


Itn't Hayek's point that Say's Law appears to be violated in the short run, but reveals itself in the correction process --- the necessity of recalculation of investment projects.

So the introduction of Money in Hayek doesn't result in a complete violation of the workings of the "natural economy" it just introduces a "loose joint" -- just like Mises's discussion of the Quantity Theory. You can have a mechanical interpretation of the Quantity Theory, and that might be useful to defeat monetary cranks (very important intellectual move) but it is not accurate for understanding the inflation/deflation adjustment process through relative price movements. For that you need a different sort of interpretation of the Quantity Theory.

I would say the samething about Say's Law --- Say's Law is NOT Walras's Law, but that is how most people want to view Say. But that is like viewing the Quantity Theory in its most mechanical sense. Instead, we need the process interpretation. If you read the letters between Say and Malthus, it is clear I would argue what Say had in mind.

This topic gets folks very worked up -- I am not sure why but it does. To me I am more straightforwardly orthodox -- there is good economics (relative price economics) and there is bad economics (non-micro foundation economics) or to put it another way, there are those who believe economics, and those who don't. Say to Malthus stressed to him that since he believed economics and the role of prices, he should be on his side of the issue. Mathlus was salvageable. Underconsumption theorists such as Foster and Catchings, but also Tugwell, etc., actually denied economics ... as Tugwell put it one time "the jig is up, there is no invisible hand and there never was one". I would say Keynes moved from someone who understood economics and relative price dynamics and how money impinged on the functioning of the price system, so someone who believed the introduction of modern finance had destroyed the functioning of the price system basically. Not managed from above, nor effectively managed from below to assure that private and social costs are aligned is how he put it in the End of Laissez Faire. It is also why he claims to be part of the rouge gallery of 'economist'.

So Keynes effectively in rhetoric pinned Walras's Law on economists who were arguing for Say's Law, and in so doing pointed out (a) the absurdity of that position empirically, and (b) the logically inconsistency of those economists trying to explain the empirical reality in a theory of crisis if they had a theory that said that crises were not possible. Sound familiar!!!!

I am actually somewhat surprised Jerry by the critical stance you have taken with respect to Steven Kates. I get that there are subtle interpretations of theory that we can disagree with on, but Kates's work really does challenge the rather blanket rejections of Say's Law and its relevance to understanding the self-correcting mechanisms of a laissez faire economy -- even a modern monetary one. And this understanding is critical to countering the various forms of the instability of capitalism thesis that one can find in overconsumption theories, underconsumptions theories, and animal spirit theories OLD and NEW.

I am not sure what I am missing there, so Ebeling's discussion over at Liberty Matters in his first reply seems spot on -- at least if my memory is right.

One final thing on this, as my own post from today suggests -- Hayek thought economic science pursued with ruthless consistency yielded certain practical policy conclusions that Marxists, Historicists, Institutionalists, Keynesians and even Monetariests ignored at their own peril. Pundits and politicians held onto popular fallacies; economists became blinded due to philosophical confusion. The role of the economist was to explode both with clear-sighted reasoning.

The truth content of an economic proposition isn't determined by popular vote, but through reason and evidence, and the ability to persuade "reasonable" partners in the scientific/scholarly enterprise.

I certainly don't consider Mill or Say to be peddling nonsense, but instead laying out a core proposition for understanding how economies function the absence of understanding will produce a weaker vision of how markets work.

Perhaps this discussion is beyond where I am willing to go in painting with broader brushes until we get to Menger, Bohm-Bawerk and especially Mises and Hayek, but I don't think so.



Sorry that I am not going to reply to you. If my long post that got lost had gotten posted, you would have seen some response to parts of Kates that I have not responded to in what is here, but I am not going to respond to him further for reasons already stated. If you want to be impressed by his arguments, that is your business, but I will simply say that what is admirable in Say and Mill is not what Kates thinks it is.

Steve H.

Thanks for the link to Mario's piece. This shows the overlap of Mill and Keynes, which I prefer to emphasize rather than the war that Kates wants with somebody getting a "victory." I never claimed any victory for Keynes, and I would hope everybody noted that I took him to task on several points, including his misrepresentation of Say's Law.

On the matter of Mill's Fourth Law, well, I am not sure what you are referring to, and I hate to be so conventional, but if you are going to replace the textbook story of the demand for labor as coming from marginal revenue product for the outpur of firms, which is certainly coming (at least partly) from the demand for the firm's products, then what is the source of the demand for labor? Or is talking about demand for labor simply not the issue? I am mystified, but I wish to stay out of this discussion further.


You raise some big issues. One problem, which I have thus far avoided pointing out, is that I don't think there is agreement on Say's Law among those participating in this discussion.

Hayek didn't specify his interpretation, but he didn't think it held in a monetary economy. The rigid link between the demand and supply of real goods of economic theory is broken once money is introduced. He later coined the phrase "loose joint."

You are asking whether money is neutral in the long run. In the paper I recently sent you, I question whether Hayek ever solved the problem of inter temporal equilibrium in a monetary economy. At least not in his economic work. In LLL Vol. I, he introduces pattern coordination. Rizzo and I adopt that framework in the Economics of Time and Ignorance.

Hayek doesn't offer a theory of the downturn, but just offers some comments on the secondary depression. As you know, Hayek's argument against intervening to counteract a depression is that we don't know enough to be sure we will actually improve economic conditions. I'd argue that he was prescient on that point.

I'd rather not comment further on Kates. like Barkley, I will exit the discussion.

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