James Ahiakpor is of course correct that Mill qualified the bald statement I quoted in my post.  But I believe that it is the bald statement, not the qualifications, which informed the commitment of the economics profession to Say's Law, typified by the Watkins piece I cited further down, published in 1933: on what other basis than Say's Law can one dismiss underconsumption theories as cavalierly (I said contemptuously in my post) as Watkins does?

By the way, Mill, like Viner, appears to view the problem caused by "temporary" deviations from Say's Law summarized in Professor Ahiakpor's second Mill quote as one of unbalanced deflation-which makes sense in terms of the quantity (of money) theory (of the price level).  Right after the quote that ends "the remedy is, not a diminution of supply, but the restoration of confidence," Mill writes
        It is also evident that this temporary derangement of markets is an evil only because it is temporary.  The fall being solely of money prices, if prices did not rise again no  dealer would lose, since the smaller price would be worth as much to him as the larger price was before (Principles of Political Economy, Book III, Ch XIV, ¶4).

With respect to Viner: I agree with Professor Ahiakpor that Viner sees deficit spending as a means of conducting monetary policy. Precisely my point: his framework did not allow him to conceptualize fiscal policy as directly affecting aggregate demand because he did not have a concept of aggregate demand as a distinct element of his theory.  At least Viner did not share Milton Friedman's fallacious belief that fiscal policy can work only if it involves changes in the money supply.  Viner rather sees fiscal policy as changing the velocity of circulation.  Indeed, if you are so inclined, you can describe Keynes as providing a theory of changes in velocity, but this would be like describing Copernicus, Kepler, and Newton as providing a theory of Ptolemaic epicycles.

I'm not sure what the relevance of Professor Ahiakpor's  observation that during the depression "there was a contraction in savings, not the over-saving that Keynes thought was taking place."  In a Keynesian perspective, this is classic "paradox of thrift": the excess of desired saving over desired investment at full employment leads to a contraction in output and income, and thus to a contraction in actual saving-the mechanism that brings desired saving and investment into line with one another.  So, yes, Professor Ahiakpor, there can be over-saving and a contraction in saving,  the second the result of the first.

Steve Marglin

PS Professor Ahiakpor, could you provide me with a reference to the first Mill quote, which you cite as (1874, p 71)?

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of James C.W. Ahiakpor
Sent: Friday, December 14, 2012 2:00 AM
To: [log in to unmask]
Subject: Re: [SHOE] Keynes and his discontented critics

I wish Steve Marglin had done a more complete job in latest post than he did. Alas, he missed noting J.S. Mill's explanation of Say's Law's relevance to the condition of the early 1930s and in connection with Jacob Viner's passage. Mill (1874, p. 71) writes: "In order to render the argument for the impossibility of an excess of all commodities applicable to the case in which a circulating medium is employed, money must itself be considered as a commodity. It must, undoubtedly, be admitted that there cannot be an excess of all other commodities, and an excess of money at the same time."

With bank runs and contagion, it was imperative for banks' own survival to turn more of the community's savings with them into cash hoards (excess reserves) in order to meet depositors' demand. Thus, during those years, there was a contraction in savings, not the over-saving that Keynes thought was taking place. This is why it is helpful to recognize Keynes's (new) definition of saving in contrast with the classical (or ordinary) definition such that savings constitute the purchase of interest or dividend assets, and thus are spent by borrowers.

Another of Mill's explanation that Steve could have used with advantage to his appreciation of the unhelpfulness of Keynes's dismissal of the relevance of classical economics is this:
> At such times there is really an excess of all commodities above the
> money demand: in other words, there is an under-supply of money. From
> the sudden annihilation of a great mass of credit, every one dislikes
> to part with ready money, and many are anxious to procure it at any
> sacrifice. Almost everybody therefore is a seller, and there are
> scarcely any buyers: so that there may really be, though only while
> the crisis lasts, an extreme depression of general prices, from what
> may be indiscriminately called a glut of commodities or a dearth of
> money. But it is a great error to suppose, with Sismondi, that a
> commercial crisis is the effect of a general excess of production. ...
> its immediate cause is a contraction of credit, and the remedy is, not
> a diminution of supply, but the restoration of confidence.
> (Mill /Works/, 3: 574)
It is from such understanding that Mill also declares that "In no manner does this phenomenon answer to the description which these celebrated economists have given of the evil of over-production. The permanent decline in the circumstances of producers, for want of markets, which those writers contemplate, is a conception to which the nature of a commercial crisis gives no support" (pp. 574-75).

It is also from the understanding of the law of markets -- all markets are interconnected through the adjustment of relative prices and interest rates -- that 12 Chicago economists, including Viner, Frank Knights, Lloyd Mints, and Henry Simons, in 1932 signed a memorandum urging the Hoover administration to engage in public works projects to be funded by new money as a quicker way to "inject[...] enough new purchasing power so that much larger production will be profitable at existing costs" (quoted in J. Ronnie Davis 1971, p. 26). This because they believed that relying on the economy's own automatic adjustment process would take rather long and entail "tremendous losses, in wastage of productive capacity, and in acute suffering" (p. 25). Had the Fed the
(legal) capacity to expand the quantity of money (cash) quickly enough to meet the surge in the demand for hoarding, the problem would have been avoided. As it turned out, the Fed expanded currency by 1 billion, from 4 to 5 billion, whiles demand deposits contracted by 8 billion between 1930 and 1933. Henry Thornton (1802, p. 196-97) and Ricardo (/Works/, 1: 358-59) also explain the necessity of increasing the quantity of currency to meet its demand during a financial crisis that results in a run on banks as a remedy. Thus, Viner's comments should properly be interpreted, not as an endorsement of the efficacy of fiscal policy /per se/ to stimulate an economy, but as a means to release new money to meet its demand. Upon the establishment of the FDIC that has effectively stemmed the kind of bank runs experienced in the 1930s, there is no reason to resort to such a devise now.

Milton Friedman comes close to making this point when he argues that pure fiscal policy (increased government spending) does not change aggregate demand, but increased government spending funded by a central bank (mixed fiscal policy) does. One just has to ask, From where does the government get the funds to spend? For a closed economy, it has to be from taxes and/or borrowing from the public. Either way, government just gets to spend what would have been spent by the public. The myth of the government expenditure multiplier is just that, a myth. Besides, when one factors in the fact that private spenders of their own incomes are more efficient with such spending than government bureaucrats in spending the funds entrusted to them, then one easily can appreciate that an economy's growth path is diminished when government appropriates more funds to spend. That is, besides the legitimate functions of government to secure an economic environment in which private enterprise thrives, the alleged multiplier effect is negative!

And when one is tempted, as David Colander is, to claim that demand creates its own supply, one also has to ask what makes that demand possible? If it's income, how is the income obtained, if not from production? Smith stated the obvious when he noted that "consumption is the sole end and purpose of all production ... The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it" (/WN/, 2:
179). Such maxim underlies Say's Law. Those who understand the point should endeavor to discover the source or sources of a particular economic contraction in order to prescribe the appropriate remedy rather than the Keynesian view that it must have something to do with insufficient consumption (demand). Such is the value of understanding the classical economic principles that Keynes "disgracefully" (Sam Hollander, 2011) misrepresented.

James Ahiakpor

Marglin, Stephen wrote:
>
> I share most of David Colander's sentiments, particularly the
> recasting (or the casting) of Keynes as one in search of a way to
> replace static equilibrium and comparative statics by dynamic
> adjustment, equilibrium price by price (and other) mechanisms. I
> believe this is what Keynes meant by the passage in the preface to the
> GT in which he says
>
> My so-called "fundamental equations" [in the /Treatise/] were an
> instantaneous picture taken on the assumption of a given output. They
> attempted to show how, assuming the given output, forces could develop
> which involved a profit-disequilibrium, and thus required a change in
> the level of output. But the dynamic development, as distinct from the
> instantaneous picture, was left incomplete and extremely confused.
> This book, on the other hand has evolved into what is primarily a
> study of the forces which determine changes in the scale of output and
> employment as a whole. (/The General Theory of Employment, Interest,
> and Money/, p vii)
>
> Alas he didn't have the tools, and perhaps he was not even clear
> enough on the concepts to do what he set out to do. I am currently
> channeling Keynes in order to see what 75 years of reflection and
> criticism have added to our knowledge.
>
> There is one point on which I can't agree with David, namely, his
> anodyne view of Say's Law. J S Mill had a clear statement of what
> Keynes and others took to be Say's Law:
>
> [If we could] suddenly double the productive powers of the country, we
> should double the supply of commodities in every market; but we
> should, by the same stroke, double the purchasing power. Everybody
> would bring a double demand as well as a supply: everybody would be
> able to buy twice as much, because everyone would have twice as much
> to offer in exchange. (/Principles of Political Economy/, 1961 [1848],
> Book III, Ch. XIV, ¶ 2)
>
> With all the qualifications Mill adds to this bald statement, there is
> a lot more here than that supply and demand are interdependent. And
> this, I believe, was the principle that underlay the contemptuous
> rejection of underconsumptionist theories, for example, the following,
> from a QJE survey of the literature of the depression in 1933:
>
> The whole joint product of industry in any period is the same as the
> aggregate income of the community during that period; it cannot be
> more and it cannot be less. The aggregate income of the community
> represents the total available purchasing power of the community,
> nothing more and nothing less;... an addition to the community's stock
> of capital assets, through savings from whatever type of current
> income derived and in whatever volume effected, constitutes a demand
> for a corresponding part of current production. It follows that the
> total available purchasing power of the capitalistic community must be
> exactly equal to the joint product of industry, however swiftly the
> latter may be increased and however /inequitably/ it may be
> distributed...
>
> [T]he erroneous assumption that production and consumption must
> somehow be kept "in balance,"... rests, in turn, upon the naïve belief
> that income which is not "consumed," but "saved," does not constitute
> a demand for the current output of industry. More puerile nonsense
> than this would be hard to imagine, and were it not for the frequency
> and volubility with which such ideas are put forward, even
> occasionally-alas!-by economists with a respectable reputation,... the
> space of a professional journal would not need to be encumbered with
> their refutation. (Myron Watkins, /Quarterly Journal of
> Economics/,1933, pp 523-524)
>
> To suggest that all that is at issue in Say's Law is that there is a
> relationship between supply and demand is to blur the distinction
> between Keynes and his classical forebears. Keynes's consumption
> function posits a relationship between supply and demand ("men are
> disposed, on the average, to spend a fraction of their incomes...") but
> this is hardly the same as the idea that, one way or another, all
> output/income gets spent.
>
> On the novelty or lack thereof of Keynes's views on deficit spending
> and fiscal policy: as many have argued (Colander, Backhouse and
> Bateman,...), Keynes was no Lerner, at least not until he read and
> digested /The Economics of Control/. And others shared his view that
> countercyclical fiscal policy is a good thing even if the government
> can't find productive employment for people. It was Jacob Viner, not
> Keynes, who wrote in 1933
>
> If the government were to employ men to dig ditches and fill them up
> again, there would be nothing to show afterwards. But, nevertheless,
> even these expenditures
>
> would be an indirect contribution to business recovery. Their major
> importance would not be in the public works or the unemployment relief
> which immediately resulted, but in the possibility of hope that a
> substantial expenditure would act as a priming of the business pump,
> would encourage business men by increased sales, make them more
> optimistic, lead them to increase the number of their employees, and
> so on. They would be using funds that are now lying idle in the banks,
> or which
>
> the bankers are now afraid to create. In the past three years the test
> of a successful banker has been the rate of speed with which he could
> go out of the banking business and into the safety-deposit business.
> Those bankers have survived who have succeeded in the largest degree
> and at the most rapid rate in converting loans into cash. That has
> been good banking from the point of view of the individual banker, or
> of his individual depositors; but from the social point of view it has
> been disastrous. Which is preferable during a depression-a bank that
> continues to finance business and thus endangers its solvency, or a
> bank that acts on the principle that during an acute depression good
> banking means no banking? The latter have survived the crisis and now
> have the confidence of the public. ("Inflation As A Possible Remedy
> For The Depression," /Proceedings of the Institute of Public
> Affairs,/University of Georgia, Athens, GA, May, 1933, May, 1933, p
> 130)
>
> So why do we celebrate (or at least some of us do) Keynes and merely
> remember Viner? In my view, because Keynes, however ambiguous and
> unclear he was about fiscal policy, provided a framework in which
> Viner's prescription (and his own more famous parallel one in the GT)
> make sense. He provided a theoretical home for aggregate demand where
> Viner and the rest had only their intuitions.
>
> Steve Marglin
>
--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

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