Barkley Rosser wrote:

"The original issue was the efficacy or lack thereof of changing real output (and employment) by means of changing aggregate demand. We were told that because of Say's Law and its general acceptance by everybody who was not a completely ignorant moron, along with the general acceptance of the natural rate of unemployment, vertical aggregate supply curves, and (at least long-run) vertical Phillips Curves, even discussing aggregate demand was something that should probably be removed from all textbooks, to the extent that this particular purge has not already occurred, and certainly it should not be mentioned further in polite conversation in seminars on economics."



Not quite what I said but it will do for now. 

I have reverted to the original message line because it refers to 1936 which is apparently a date of some significance. In that year, a book was published authored by one John Maynard Keynes which some people argue created a revolution in economic thought. What the nature of that revolution was, or even whether there was any revolution at all, has been argued over ever since. But the one and certain aspect of that book written by Keynes was that he said that he was going to overturn something he referred to as Say's Law which he defined as "supply creates its own demand". 

Every economist before he published his book, with a few trifling exceptions such as Malthus, had, according to Keynes, believed that this principle -- this entity called Say's Law -- was true. After the publication of Keynes's book, we were universally taught for around the next thirty to forty years that Say's Law was wrong, at which point hardly anyone bothered to mention it any longer since something called classical theory had all but disappeared from the conscious memory of the entire economics profession. At no stage, however, did anyone ever say that perhaps Say's Law, whatever that is, might be right after all. But whether we any longer refer to Say's Law, or bother to defame classical economists in our introductory texts for their sheer blundering idiocy in not recognising the existence of involuntary unemployment, we definitely do maintain variants of the Keynesian legacy in everything we teach in macro. 

What then is that legacy? There has been quite a bit of ink spilled over this question but why not take Keynes's word for what he was intending to accomplish. He was incontrovertibly writing a book about Say's Law. And about this principle, this is what he said:

"Thus Say's law, that the aggregate demand price of output as a whole is equal to the aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile." (p 26) 

There it is, aggregate demand and aggregate supply. This is where they make their entry into economic theory. Pick up any macro text published today and this represents the terms of the argument found. IS-LM was the first of the formulations, followed by C+I+G and now AS-AD. But however you look at it, this was the "vitally important chapter of economic theory" which Keynes did indeed write and which has shaped macroeconomic theory to this very day. 

I, of course, believe that the Keynesian legacy has been a blight. It has, in my view, made macro as we teach it to our undergraduates all but unusable as an apparatus to make sense of the actual operation of economies. It has made macroeconomic policies incoherent and economically hazardous -- just look at the results of the Japanese expenditure policies of the 1990s. To argue as I do that the aggregate demand curve is deeply flawed as a theoretical construct is to restate Say's Law which merely argued that deficient demand is never the cause of recessions * or in classical terminology, there is no such thing as a general glut. The language is archaic but the principle is unmistakeable in what they wrote. Just to take one example, Ricardo in his correspondence with Malthus over this very principle wrote with exceptional clarity: "men err in their productions, there is no deficiency of demand" (Works and Correspondence of David Ricardo. Volume VIII: 277). 

That was written in 1820 so we think of this as part of the deeply dead past of an archaic view of economic processes that was rapidly superseded. But the reality was that economists a century later believed exactly that and said so. It is only economists, post-1936, who think otherwise. And to the extent that this is so, economic theory is in my view wrong and should be changed. 

But if we are only interested in what difference did the General Theory make, then the answer is that it caused the principles underlying what we now call Say's Law to disappear almost entirely from the discourse amongst economists to be replaced by various versions of aggregate demand, an entity that had no place whatsoever in economic theory prior to 1936. 

Steven Kates