Steve Kates,

I guess you are correct that Keynes invented the phrase, "supply creates its 
own demand."  Googling shows various folks
attributing it to James Mill, but when one looks further for an actual 
quote, they always come out somewhat longer and
more complicated.

You argue that AD is a distraction from the wisdom of the classiicals who 
attributed collapses of investment to "the wheels
of the economy did not mesh, and until the economy was back in synch, high 
levels of unemployment would prevail."  Maybe
I am bit too much of a mathematically oriented type, but this kind of 
formulation looks awfully vague to me.  How do we know
that "the wheels of the economy" are not "meshing"?  When unemployment 
levels go up?  This seems rather tautological.  Now
if one is a strong supporter of laissez-faire, then one may simply say, "sit 
back, folks, until those wheels get back in synch and
start meshing," or perhaps you would recommend some ending of some silly 
regulation or whatever.  Fair enough.

But let me note that in fact we have a pretty nearly exact measure of when 
AD does not equal AS.  These are not just abstractions
or things that are automatically equal.  Indeed, in this very crude sense, 
the very crude version of Say's Law is simply false.  The
measure is net changes of inventories, the same measure we have at the micro 
level for individual markets.  How do we know when
they are in disequilibrium?  Look at changes in inventories, that is how you 
know if quantity supplied does not equal quantity demnded
(of course one must correct for planned changes in inventories, but the 
unplanned variety most certainly occur).  Now inventory
management is something that has drastically improved over time at the micro 
level, and I suspect that this has played a bigger role
in stabilizing short term macro fluctuations than many credit it with.  But 
we regularly see aggregate net changes in inventories,
and these are nothing other than nearly exact measures of differences 
between aggregate supply and demand.  It is a vulgar and
simple, empirical fact: supply does not always create its own demand.  It 
only creates an income equal to itself that underlies demand.

You are right, of course, that many classicals understood that spurring 
public works spending could help overcome unemployment.
But how is that this helps "mesh the wheels of the economy" or get it "into 
synch," especially if the original shortfall came out of a
private sector financial collapse, possibly triggered by the collapse of a 
speculative bubble, a case much discussed by John Stuart
Mill in particular in great depth and sophistication.  I may be wrong, but I 
do not remember seeing Mill write anywhere (feel free
to correct me if I am wrong) that when a financial collapse happens, 
expanding public works spending is a good way to get the
financial institutions back on their feet and lending out money to private 
businesspeople.

OTOH, looking at it from the standpoint of AD is perfectly straightforward. 
AD fell because of a collapse of investment from a
financial collapse, so increase it to get employment back up by increasing 
gool old G.

I think that one way of realizing the usefulness of thinking in terms of AS 
and AD does in fact involve fiscal policy, although James
Ahiakpor and I think Pat Gunning are out to ban the use of fiscal policy as 
one of those terrible "myths," even as you recognize
that a lot of the classicals were just fine with increasing public works 
spending in the face of a recession.  So, let us think about
tax cuts, a much-discussed aspect of fiscal policy.  There is now a large 
literature that claims that cuts in capital income taxes
stimulate economic growth more than do cuts in consumption or income taxes. 
I have mixed feelings about this literature and am
not sure that the conclusion is correct.  But the argument that is made is 
that the capital income tax cuts stimulate AS through
stimulating capital investment, whereas the consumption or income tax cuts 
only stimulate AD, which can sometimes increase
economic growth, especially in the short run, but are less effective at 
doing so in the long run.

James A.,

I find your claim that the money supply must be cash to be, well, 
idiosyncratic.  If we evolve to a world without cash where
everybody uses debit cards, would you deny that the demand deposits being 
drawn down by the use of those debit cards
is the money supply?  You argue that the problem in the GD was the rush to 
cash, which Keynes called the liquidity crisis,
and I think that was part of what went on.  But, do you deny that if people 
get worried about their status or businesspeople
lose their optimism and become afraid of investing at any interest rates, 
that people cannot let their demand deposits pile up,
even in a world of no cash?

Regarding your argument from Mill that there cannot be a general glut 
because surpluses of one commodity will be offset by
deficits of another one, well, this is simply the claim that not only does 
supply create income equal to itself, but that aggregate
supply always equals aggregate demand.  But, as I have noted above, this is 
simply empirically false.  We do see fluctuations
of inventories, and a rise in aggregate inventories has long been one of the 
leading economic indicators that is considered to
forecast the possibility of a downturn in economic activity, a recession, 
indeed one due to a "general glut."

Barkley Rosser