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In the posting by Robin Neill he noted that I had previously written,  
"to a classical economist the notion of aggregate demand was  
utterly fallacious". He then added:   
 
"I could not find substantiation for this assertion in the preceding  
discussion, and I cannot find a substantiation in my own scattered  
recollections of what the classical political economists had to say.   
Still, I find the assertion interesting, and, if it can be substantiated,  
important. Its a tall order, because what has been asserted is not  
only that the classical economists had the notion of aggregate  
demand, but that they explicitly stated it to be a false notion; that  
is, they conjured up aggregate demand then stated that there was  
no such thing.  So, Steve, could you submit some indication as to  
how your statement is or might be substantiated?"   
 
The classical statement on Say's Law was that there was no such  
thing as a general glut. The clear meaning was that it was  
impossible for supply to outrun demand. Whatever might be the  
cause of recession, it would never be too little demand for output  
(demand deficiency) or, to put the same thing the other way round,  
that there could never be more produced than there was demand  
(over-production). This was the issue of the general glut debates  
and it was settled absolutely in favour of those who denied this as  
a potential cause of recession.   
 
That this was the matter at hand was stated by Keynes himself in  
the General Theory. There, in noting the outcome of the general  
glut debates, he wrote:   
 
"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 [ie Say's Law]  
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 the 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 the economic literature." (John Maynard Keynes,  
General Theory, p 32)   
 
This is exactly right. It had disappeared from the literature because  
the matter had been settled. Demand deficiency, a general glut,  
was impossible and there was nothing more to add. It was this  
conclusion that was universally accepted by the entire economics  
community throughout the entire succeeding century.   
 
That demand deficiency was what the general glut debate was  
about is shown, I think, clearly enough in the writings of the  
classical economists generally, but I will focus on two examples.  
The first is from a letter written by Ricardo to Malthus on October  
9, 1820. Interestingly, the letter is largely a discussion of the  
inadequacies of Say's Letters to Mr. Malthus in which Say  
attempted to defend his law of markets. In the follow excerpt, the  
last sentence is the one that really matters.   
 
"I quite agree with you in thinking that M Say's letters to you are  
not very well done. He does not even defend his own doctrine with  
peculiar ability, and on some other of the intrinsic questions, on  
which he touches, he appears to me to be very unsatisfactory.... I  
think more may be said in defence of his doctrine of services - they  
are I think the regulators of value, and if he would give up rent, he  
and I should not differ very materially on that subject.... With  
abundance of capital and a low price of labour there cannot fail to  
be some employments which would yield good profits, and if a  
superior genius had the arrangement of the capital of the country  
under his controul [sic] he might, in a very little time, make trade  
as active as ever. Men err in their productions, there is no  
deficiency of demand." (Works and Correspondence of David  
Ricardo, Volume VIII, Letters 1819-1821, pp 276-77)   
 
"Men err in their productions, there is no deficiency of demand."  
This, in a single sentence, sums up the entire issue which lay  
behind the law of markets. Recessions were due to maladjustment  
in the structure of supply relative to the structure of demand; they  
were never due to there being too little demand for output in  
general.   
 
The second example is from John Stuart Mill's chapter on the law  
of markets in his Principles of Political Economy. This passage not  
only makes the central issue of what was at stake crystal clear,  
but also states that Keynesian-type economic theories are  
guaranteed to make it impossible to understand how an economy  
actually works. This is from the most authoritative economics  
textbook of the latter half of the nineteenth century, a text used  
well into the twentieth. Mill wrote in summing up his discussion on  
the law of markets:   
 
"The point is fundamental; any difference of opinion in it involves  
radically different conceptions of Political Economy, especially in  
its practical aspect. On the one view, we have only to consider how  
a sufficient production may be combined with the best possible  
distribution; but, on the other, there is a third thing to be  
considered - how a market can be created for produce, or how  
production can be limited to the capabilities of the market."  (John  
Stuart Mill, Principles of Political Economy, Book III, Chapter XIV,  
Section 4 - p 562 of the Ashley edition)   
 
In the continuation of this passage, Mill highlights what he believes  
to be the consequences for economic theory if one adds demand  
deficiency to its concerns:   
 
"A theory so essentially self-contradictory cannot intrude itself  
without carrying confusion into the very heart of the subject, and  
making it impossible even to conceive with any distinctness many  
of the more complicated economical workings of society. This error  
has been, I conceive, fatal to the systems, as systems, of the  
three distinguished economists to whom I before referred, Malthus,  
Chalmers, and Sismondi; all of whom have admirably conceived  
and explained several of the elementary theorems of political  
economy, but this fatal misconception has spread itself like a veil  
between them and the more difficult portions of the subject, not  
suffering one ray of light to penetrate. Still more is this same  
confused idea constantly crossing and bewildering the  
speculations of minds inferior to theirs."  (ibid.)   
 
The chapter is, in Mill's own words, an attempt to refute the belief  
that "there may be a general over-production of wealth; a supply of  
commodities in the aggregate surpassing the demand" (ibid. pp  
556-57). Prior to the publication of the General Theory, this  
conclusion was almost universally accepted. Keynes, in quoting  
from this very chapter on page 18, took the most radical step,  
fundamentally changing the nature of the theory of the cycle, and  
turning what had until then been seen as utterly fallacious into the  
mainstream. The judgement that Mill makes on Malthus, Chalmers  
and Sismondi is a judgement, I suspect, he would make on  
macroeconomic theory today to the extent that it continues to  
depend on demand deficiency to explain the nature and causes of  
recession.   
 
Steven Kates 
 
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