The reciprocal of a period of production is turnover.  Turnover is the
flow/fund (or sales/capital) ratio. Dorfman, "Waiting and the Period of
Production", QJE 1959, did a brilliant job of expounding this - he
whimsically calls it "The Bathtub Theorem", and supplies all the math one
could desire.

All the fooferaw of duels between Clark and Boehm-Bawerk, and later Knight
and Hayek, came simply from their clumsy math.  Dorfman shows how hydraulic
engineers had solved the problem long since.

Mason Gaffney

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On
Behalf Of Rosser, John Barkley - rosserjb
Sent: Thursday, February 06, 2014 2:42 PM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la deman de

Per,
     This is a sideshow, but I shall make a reply.  Yes, I am well aware of
heterogeneous capital, with some of my earliest publications dealing with
capital theory debates over such matters,such as my 1983 paper in JET,
"Reswitching as a Cusp Catastrophe."  I note in this regard that while many
Austrians used het cap to spell out their mechanism for readjustments, it
was Hayek in his 1941 Theory of Capital (his least read book, I believe,
particularly among self-styled Austrians) who among Austrians realized the
limits of this analysis as he came to understand the same critique Sraffa
would make later (and that Irving Fisher had made earlier), that in a world
where capital investments can have complicated future streams of net
returns, one cannot unambiguously rank them in order of the "average period
of production" on some "longer" vs "shorter" time horizon.  As interest
rates rise, A may look better than B, then B may look better than A, but
(oooops!) we may see a reswitch where A looks better than B again.  Careful
Austrian theorists such as Roger Garrison are well aware of this, as was
Hayek himself, with some saying that it was this that led him to turn from
trying to further study "Austrian business cycle theory" and to move on to
other topics later in his career (although I am prepared to be corrected on
this point by the leading expert on Hayek, if he is paying attention, namely
Bruce Caldwell).

       My use of the term "mere" implied that if adjustment costs were low,
this readjustment of malinvestment would in principle not imply (or,
"explain") aggregate downturns such as the Great Depression.  Ahiakpor has
hinted that disequilibria in one market just get offset by opposite ones in
others so that in aggregate Say's Law can still hold now and at all times
forevermore.  It is only if there are some lags or adjustment problems that
we might see a temporary slippage of total output or employment (What?  That
laid off steel worker in Pittsburgh is not instantly moving to Iowa to grow
corn or to Silicon Valley to develop software???).  However, Haberler, who
was from Vienna and knew most of the leading Austrian theorists of his time,
indeed, is often considered to be at least an Austrian fellow traveler,
expressed his open dissatisfaction with this sort of argument, labeliing it
unsatisfactory, while noting that several of the Austrian theorists failed
to go beyond it and failed to notice how unsatisfactory it was.  He makes it
clear that from his view, one needs something more than just this (dare I
use my term again?) mere readjustment to derive a more general downturn, and
that mechanism indeed presented by various Austrians is the secondary
deflation.  I shall not repeat my discussion of the significance or nature
of it again, other than to remind that the concept of "hoarding" shows up in
some of those discussions, and we know that is a violation of Say's Law,
unless you want to argue like James Ahiakpor that people "spend their
incomes" when they "buy" cash to hoard.

      I am sorry you find my use of the term "underconsumption" to be "very
strange."  You are welcome to your opinion, and I fully agree that not many
have openly or clearly made the link between such ideas and those of
"overinvestment."  Now I see that you argue that the latter involves some
failure of expectations regarding essentially future viable equilibrium
levels of demand, although if those future demands are insufficient to
purchase the output of completed capital investments rather than the
uncompleted ones (assuming those are all is involved is how Hayek avoided
this conundrum), then why is it unreasonable to describe these insufficent
levels of demand to meet this future supply as being "underconsumption,"
aside from your finding it "very strange"?  Not enough is being bought to
fulfill the supply.  This will mean that there will need to be some
adjustments of price, quantity supplied, quantity demanded, and so on,
although these may not happen neatly, which is where all this discussion of
lags and problems of adjustment comes in.

      I am tempted to ignore James Ahiakpor, who has now decided to diss
Wicksell.  OK, whatever.  But I do wish to differ with his strong claim
about there never having been a pure credit economy.  The new book by David
Graeber, "Debt," may be historically inaccurate, but it is not a priori
completely implausible.  He argues that what historically preceded the
appearance of commodity money in simple, hunter-gatherer societies was a
pure credit economy.  In small social groups people help each other out, and
everybody knows who has helped whom out and by how much.  These social
credit accounts can be maintained as long as the group is small enough and
the economy simple enough.  As it gets larger or more complicated, these
accounts can no longer be properly kept, so impersonal money appears.
Again, wee do not know if this is really the case, but he provides at least
some anthropological evidence for it.  Your straightforward claim simply is
not as certain as you claim it to be, sorry, James.

________________________________________
From: Societies for the History of Economics [[log in to unmask]] on behalf of
Bylund, Per L. [[log in to unmask]]
Sent: Thursday, February 06, 2014 12:16 PM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la deman de

Barkely Rosser, thanks for your kind and elaborate response. I did not
realize you discussed from the point of view of Haberler's view of the
business cycle, which deviates in some important respects from the
"mainline" Austrian (Mises-Hayek) view. It seemed your references to the
Austrian business cycle theory were yours rather than an account of
Haberler's view of it.

Anyway, even though this is perhaps slightly off topic, I think you make
some points that I would like to address. One such is what you infer from
the "secondary deflation" following what you call "mere redistribution of
capital investment from longer to shorter." If you think of the economy's
whole capital stock as homogeneous, then I can understand the word "mere,"
but otherwise not. Yet this is not the full Austrian (by which I mean the
Mises-Hayek) argument; the problem is the redistribution between market
sectors of production forced by the expansion of credit. If the new money
first enter the house construction market, actors in this market will bid up
prices for those capital goods used in house construction - and cause
specific assets to shift/move from other sectors (adjusted toward *real*
consumer preferences) toward construction. There is relative
"overinvestment" in construction and, as a consequence (and "later"), in
supporting sectors, and relative "underinvestment" in other sectors. Hence,
malinvestment in the economy.

But an important part of the Austrian story is that the demand for capital
goods in construction is here driven by the newly created money through
credit, the volume of which is not yet reflected in market prices. So, in a
sense, the market is blind to consumers' real preferences. It also means
that while prices will eventually be bid up overall in the market, this will
happen only as time passes (as Cantillon effects). There is an "illusion"
(it is partly real due to the non-neutrality of the effect of added money)
of relative profitability in construction, so investments are made there.
Production processes are also lengthened in construction, since longer
processes are (by definition, one might say, since they would otherwise not
be adopted) more efficient and thus increases output.

But the problem is that prices do not yet reflect the true money supply;
there are plenty of "old money" prices in the market for quite some time
before they are eventually adjusted through exchange (making winners and
losers simply from their "closeness" to where the credit money first hits).
This lacking adjustment means the existing volume of money can buy more
capital goods than actually exist in physical reality; this means,
ultimately, that production processes cannot be completed. Investments made
are, in other words, greater than real savings in the market.

But a perhaps greater problem is the lack of real [future] demand for
houses, since the increased savings signaled by the lower interest rate
(meaning consumers' time preference has changed so that they prefer more
future consumption to present consumption than was the case before) doesn't
exist. In other words: entrepreneurs' investments in housing construction
are, in aggregate, aiming for a nonexistent potential equilibrium (much
higher demand than is actually the case). To call this "underconsumption" is
very strange to me. To call the necessary correction of capital investments
and production structures toward real consumer demand a "mere
redistribution" is an understatement that in my view is well situated for
winning the grand prize in the Understatement of the Century Competition.
The market is in a complete mess (from the point of view of the consumer
wants-orientedness of the production apparatus), which means the relative
prices are distorted and no longer represent real consumer demand.

That deflation follows from this (and similar) scenario(s), at least in the
boom sectors, is neither unexpected nor a problem. Relative prices always
eventually (re)adjust to real consumer preferences, but this takes time as
it is effectuated only through real people trading for real goods (and
capital goods are quite heterogeneous and specific). Falling prices
("deflation") in the bloated sectors simply means capital [goods] will more
quickly be made available to be (recombined/readjusted and) used to produce
other consumers' goods.

This correction process, and the price deflation that it entails, is only
"bad" if one adopts a[n unscientific] normative position such as claiming
workers in the bloated sectors must not be unemployed. What's "bad" from my
and the Austrians' perspective is the distortion of the market's production
apparatus due to expanded credit (that is, not supported by real saving).

I suppose the rough image of the Austrian process above should in part
explain why Austrians "did spend much time criticizing the policies of the
central banks as playing a central role in the Great Depression."  Of course
they did! So-called stimulus (both by the central bank and through the
expansionist policies of Hoover and Roosevelt) only augments the problems
and hinders the correction process, so the outcome is - from an Austrian
perspective - greater distortion and, consequently, a more difficult (and so
longer) correction process further down the road.

But I don't see how Austrians criticizing the central bank's policies in any
sense negates what I said: that the cycles can be caused " also in a
fractional reserve banking system without a central bank" but that "a
central bank greatly augments the problem."

One last point. I've reread the section of Prices and Production that you
quote from Haberler, and I cannot see how it supports your view. Hayek is
contrasting the change in proportion savings/consumption (and consequent
change in the structure of production) due to a change in time preferences
with (your quote) a change due to new money. The former change, he says, can
be expected to be "permanent" since it is based on a real change in
preferences and because those abstaining from present consumption will
benefit from the increased production. The latter is a forced decline in
consumption due to higher prices (inflation due to increased money volume).
And, he says, if these consumers would increase their incomes (that is,
their penalty is lessened), they would then attempt to consume in the same
proportion as before the credit expansion. Eventually they will rise, but
there is no reason to assume a gain (as in the previous case).

From my perspective, there is no reason to assume that these consumers will
regain the full extent of their lost purchasing power until the correction
is carried out fully *and* there has been real economic growth through
productivity increases in sectors that satisfy real consumer wants.


Per

_____________________
Per L. Bylund, Ph.D.
Baylor University

[log in to unmask]
(573) 268-3235

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On
Behalf Of Rosser, John Barkley - rosserjb
Sent: Wednesday, February 5, 2014 1:29 PM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la deman de

Per,
      A couple of points in reply.  First, there is no agreed upon and
generally accepted Austrian business cycle theory, and I am fully aware that
much of the discussion involves structural readjustment of the capital
structure, but that alone does not explain a general downturn.  There are
important divisions within that school on various points, as well as some
loose ends.  However, the point is not what some nonexistent agreed upon
theory is, but what Haberler said about their views, since it was Haberler
who was brought into the discussion by Steve Kates as supposedly providing
the bottom line disproof of Keynes and his view of Say's Law, even though
Haberler notes Keynes's contributions to several of the theories of business
cycles that he discusses, particularly the psychological one.  I would also
note before discussing your more specific points that nowhere in Haberler's
excellent book does he ever even mention either "Say's Law" or the "law of
markets." It does not come up.
      Regarding Haberler's discussion of the Austrian view, it is true that
he never specifically says that it is the failure to buy output that is the
sign of overinvestment, although this becomes an apparent factor in the
"secondary deflation" that is invoked by many Austrians in order to explain
how a mere redistribution of capital investment from longer to shorter time
horizon investments could turn into a general economy-wide depression.  You
are right that some Austrians, most notably Hayek, do emphasize this point
that you mention about capital investments being unfinished and left so as a
mechanism for initiating the downturn.  However, not only does Haberler
criticize him for this, he notes that other Austrians recognized that there
will be a problem with already completed capital stock that must ultimately
be disposed of due to the inability of its output to be purchased,
mentioning Neisser in particular in this regard.
     He also notes that there are two different views among the Austrians
regarding the secondary deflation, essentially over whether it is
unavoidable or not.  He identifies Hayek, Mises, Machlup, Robbins, and
Strigl with unavoidable view, identifying Strigl as stating the "most
coherent"  version of this view, "He admits that the breakdown of the boom
induces a process of hoarding and deflation," with this then involving a
cumulative downturn process (p. 58, Prosperity and Depression).  He
identifies Ropke as a leader of the other view, which (p. 57), but in noting
the cumulative aspect of it, he says, "Hawtrey, Keynes, Pigou and Robertson
have contributed most to the understanding of this phenomenon," not exactly
a dismissal of the contribution of Keynes.  And, while Say's Law is never
mentioned, the previous quote about Strigl's view explicity mentions
hoarding, which, well...
      I certainly grant that the fluctuations of interest do not require a
central bank in the views of all Austrians.  It is however historically
accurate to note that many of them at the time did spend much time
criticizing the policies of the central banks as playing a central role in
the Great Depression.  One can find Haberler's discussion of the Austrian
views on pp. 45-72.
      Oh, in fact digging through this section, I have found a more specific
quote from Haberler highlighting the failure of demand.  Indeed, the quote
is from Hayek himself (p. 49, Prosperity and Depression, from p. 57 of
Prices and Production) and involves consumption in general, "Now the
sacrifice is not voluntary and is not made those who will reap the benefits
from the new investments.  It is made by consumers in general who, because
of the increased competition from the entrepreneurs who have received the
additional money, are forced to forgo part of what they used to
consume...There can be no doubt that, if their money receipts should rise
again, they would immediately attempt to expand consumption to the usual
proportion."   Haberler then does say that those receipts "will rise sooner
or later," but in the meantime, there is underconsumption until they do (he
does not use the term underconsumption).
     BTW, I take full blame/credit for making the analytical identification
between overinvestment and underconsumption.  Haberler did not do so, so to
the extent that my argument regarding that is incorrect, it is my fault, not
Haberler's.  I grant that it is not immediately obvious on the surface that
the Austrian capital adjustment model involves such underconsumption, but it
certainly does seem to enter in for the adjustment to lead to an
economy-wide depression, even if it is not labeled precisely as such, but
merely as "hoarding," which we all know is the most famous violation of
Say's Law.


-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On
Behalf Of Bylund, Per L.
Sent: Wednesday, February 05, 2014 7:38 AM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la deman de

While the tone in this debate (like all other debates that imply a possible
critique of the “master” (to borrow Skidelsky’s preferred epithet)) makes me
quite unwilling to take part, I feel I must correct Barkley Rosser’s several
simple errors in his description of the “rightist” Austrian school’s
“overinvestment” theory. Surely we can respectfully discuss the pros and
cons of any theory as scholars and do our best to correctly state their
argument?

So, for the record, the Austrian theory is not an overinvestment theory but
a malinvestment theory. The distinction is especially important in a
discussion like this, where some assume aggregate demand/supply and others
do not. Overinvestment should mean “too much” investment, whereas Austrians
use “malinvestment” to emphasize that there is a sectorial mismatch between
supply and demand - there is relative overinvestment in some sectors and so
relative underinvestment in other sectors. Simply saying “overinvestment”
misses the point and completely ignores Austrian capital theory. It is no
small mistake.

Furthermore, to Austrians the relative overinvestment (overproduction) in a
certain sector is not due to an entrepreneur not being able to immediately
sell all that was produced. (It has previously been suggested that even
slight inaccuracy by entrepreneur(s) in estimating future demand somehow
disproves markets, which is why I note the Austrian meaning here.) It is a
structural (“aggregate,” if you will - but for that sector, not the whole
market) phenomenon where the class of entrepreneurs are led to believe there
is more savings than there really is. So they invest in temporally extensive
production processes requiring capital [goods] that do not exist (at least
not at prices in the vicinity of those estimated), and therefore cannot
[profitably] be completed.

This shift in productive investment from certain sectors to others is not
due to a shift (or expected shift) in consumer preference, hence over- and
underinvestment at the same time (though in different sectors). (There’s
also a shift from investment in relative lower-order to relative
higher-order goods, especially in the “overinvested” sectors.)

The structural mismatch between productive investment and anticipated future
demand (or consumer preference) is not a market phenomenon in the sense that
it is due to interest rates having been pushed down below their natural
rate. This is often caused by an increase in money offered through credit,
which tends to hit certain sectors first and then, through Cantillon
effects, spread through the economy’s sectors and produce extra-market
winners and losers.

This does not require a central bank, as Barkley Rosser seems to suggest,
but can be the case also in a fractional reserve banking system without a
central bank. Austrians certainly don’t claim “everything was fine” (as in
“there were no cycles”) before the Federal Reserve was established in 1913;
they say it “got worse” with the Fed, as a central bank greatly augments the
problem.

None of the problems noted above are even noticeable if we adopt an AD/AS
point of view. As far as I know, Austrians don’t see any point in using such
highly abstract aggregates, since the details of what is going on in the
market are no longer visible. And the devil’s in the details, as we know.


Per Bylund

__________________________________
Per L. Bylund, Ph.D.
Baylor University

[log in to unmask]
(573) 268-3235

Sent from my Microsoft Surface

From: Rosser, John Barkley - rosserjb<mailto:[log in to unmask]>
Sent: ?Wednesday?, ?February? ?5?, ?2014 ?5?:?50? ?AM
To: Societies for the History of Economics<mailto:[log in to unmask]>

Before I respond to Steve Kates allow me to thank Tom Humphrey for showing
up to clarify Wicksell's position on this matter.  You now have a standing
invitation to speak at JMU not far from where I think you are.

That said, allow me to reply to Steve, who has just provided low-hanging
fruit for his critics.  Oh, so you want to invoke Haberler?  My remarks
following are more seriously discussed in my "The Conceptual History of
Economic Dynamics" forthcoming in a Handbook on History of Economic Analysis
from OUP and presented last June at the U. of Richmond workshop on HES.  So,
of the 7 sources of business cycles that Haberler identifies, one is on
underconsumption, three are on overinvestment, one is on the monetary
theory, one is on the psychological theory, and one is on "harvest
theories," drawing on Jevons and his sunspot theory, the only one of these
that is unequivocally an exogenous supply side theory.  To quote Buz Brock,
as I did in the paper and the talk (available on video), "the sun is the
only truly exogenous factor in the economy."

So, you sneer at Hobson's underconsumptionism.  Let us get analytical:
underconsumption is identical to "overinvestment."  Sure, the two have very
different political profiles, underconsumption being leftist
redistributionism, while at least the monetary Austrians rightistly
emphasize bad behavior by central banks jerking the interest rate below and
above the supposed "natural rate" (see Wicksell), while the Spiethoff school
emphazised lags in carrying out large-scale capital investments due to ratex
not holding (which it does not empirically in the real world based on
repeated experiments and basically every other data available), with the
third being the accelerator theory first put forward by Carver in 1903 and
then more famously by Aftalion in 1913, with this later being viewed as a
"Keynesian" theory, although he never spoke of it, and for those who do not
like it involving failures of ratex with "overshooting" of investment
involved, all involving situations where capital investment has led to
production of goods that demanders are not sufficiently buying, in short, an
insufficiency of aggregate demand relative to aggregate supply.  A failure
of "Say's Law."  Got it, Steve?"

So, bottom line? Despite political differences where Austrians blame naughty
central bankers for all that awful "overinvestment," while socialist Hobson
whines about poor people "underconsuming," they are analyticallly identical.
We only know there is "overinvestment" if what is produced by the invested
capital stock fails to be purchased due to, oooh, well, "underconsumption"
of what that capital stock is supplying.  Whatever one thinks is the policy
solution to this appearance of "general gluts," a failure of aggregate
demand to fully satisfy aggregate supply, whether better central bank policy
or a redistribution of income, the basic analytical issue comes down to
people not buying all that is produced, even if their ability to buy that is
based on previous production, which is what most statements of the supposed
"law of markets" really amount to, starting with James Mill himself, a
potential aggregate demand to buy the aggregate supply, not a guaranteed
actually existing real one there sufficient to actually purchase all of it
in real time.

Let us be clear.  What you, Steve, claim is a supply side phenomenon looks
mostly like a failure of AD, even if Haberler did not specifically label it
as that.  Real investors overdid it for whatever reason, and we know they
did so because AD was insufficient in the next period to buy their output,
for whatever reason.   AD < AS, "general glut," even if only short run.

I had said previously that I would not respond to J. Akhiapor, but he
offered such a doozy of a quote that just slams this point in, even as he as
usually delusionally thinks that yet again he has proved Keynes wrong. So, I
shall simply quote directly from one of his recent posts.  After as firms
face an aggregate inability of demand to buy all their stuff and thus stuck
with rising  inventories, and so either borrowing to hold the inventories
over to the next period or adjusting after that or maybe sooner by either
reducing prices, "The rise of interest rates would put pressure on the
seller to reduce prices or reduce the rate of production."  Ah ha!  The
latter will lead to an increase in unemployment, and maybe these laid off
workers will "spend" their nonexistent income to buy cash to hoard, well....

________________________________
From: Societies for the History of Economics [[log in to unmask]] on behalf of
Steve Kates [[log in to unmask]]
Sent: Tuesday, February 04, 2014 12:43 AM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la deman de


I certainly appreciate the replies to my previous postings by Daniele Besomi
and Barkley Rosser.

Let me begin with a news item reporting on my testimony to the Australian
Senate Economic References Committee. They were reviewing the effects of the
stimulus and had invited me because of my views on Keynesian theory and
policy. This is from the Sydney Morning Herald of 21 September 2009.

“Labor senator Doug Cameron said Prof Kates’ comments had certainly embedded
in his mind that you should never let an ‘academic economist run the
economy’.

“‘Why have the IMF, the OECD, the ILO, the treasuries of every advanced
economy, the Treasury in Australia, the business economists around the
world, why have they got it so wrong and yet you in your ivory tower at RMIT
have got it so right?’”

I can now more clearly see Senator Cameron’s point about academic
economists, but I draw you attention to the second of his statements.

Since J.-B. Say had put together what is in English called the law of
markets, it does not surprise me that the phrase “Say’s Law” may have turned
up on various stray occasions. But as someone who had been curious about the
origins of this term, which is used by none of the major classical
economists, it did finally dawn on me that it had come from Fred Taylor, not
least because he specifically states that he is inventing the term. He used
the phrase in his 1909 article on teaching economics; it is in his 1911 and
six subsequent student editions of his for-students-only principles text
distributed at the University of Michigan and buried in a chapter he titles,
“Certain Fundamental Principles of Trade”. But by the time his text is
released commercially in 1921, Say’s Law is a chapter on its own, titled
“Say’s Law” in big letters, and in that chapter Taylor specifically says he
is giving a name to what he describes as a yet unnamed principle. That
someone used the term in 1920 is not a surprise but the phrase Say’s Law
does not enter into economic discourse in a big way until after that. If it
pleases you to think that Keynes took the name because of one of these stray
mentions picked up by Daniele, be my guest as long as you accept that he
took it from somewhere else. It just seems reasonable to me that Keynes used
the term because it expressed exactly the point he was trying to make.
Whether he was reading Taylor directly, or someone else who had read Taylor
who had used the term, we cannot know. But that he was reading the mostly
American literature on Say’s Law is as near certain as any such thing can
be. And the only reason anyone resists this common sense, indeed obvious
point, is that it is damaging to Keynes’s reputation since it suggests that
his letter to Harrod, about how he had on his own by himself thought up one
idea and then another, is not what actually happened at all.

And perhaps it is Daniel who has not understood my point. His point, he
writes, is that “Say's law was not ACCEPTED throughout the 19th century by
writers trying to explain crises” (his emphasis). I don’t think that’s
right. If you go the Haberler’s 1937 Prosperity and Depression, which is a
compendium of all of the theories of recession that were then in existence,
virtually all of the theories presented are about structural dislocations.
In what was probably the most common theory of recession of the time, people
had used their savings all right – hoarding was not the problem – but had
produced non-saleable output leading to recession, with the reason for such
dislocation often but by no means always related to financial mayhem of one
sort or another. To the extent that classical economists had a view about
saving as a cause of recession, it was that recessions might occur because
the level of saving had been insufficient to complete all of the projects
that had been commenced following the previous trough. There wasn’t too much
saving, there was too little. Read Haberler discussing Hobson and
under-consumption if you are looking for a dismissive view of oversaving as
a theory of recession.

What Say’s Law said to economists was this: when trying to explain the
causes of recession, “there is no deficiency of demand” (and that is a quote
from Ricardo), so you should therefore look somewhere else. I will, for a
change, let Keynes be my authority.

“Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was
impossible for effective demand to be deficient; but vainly. . . . The great
puzzle of Effective Demand with which Malthus had wrestled vanished from
economic literature.” (GT: 32)

It may seem a negative conclusion but it is a crucial one. There is no such
thing as a general glut. Overproduction never occurs. Demand deficiency does
not cause recessions. And so far as policy is concerned, increases in
non-value-adding public spending cannot lead to a recovery but will,
instead, make them worse. That is what I was trying to say to our Senate.
Five years later, who has the runs on the board? Is it the IMF, the OECD,
the ILO, the treasuries of every advanced economy, the Treasury in
Australia, the business economists around the world, or is it our classical
predecessors? Is it Keynes or Mill?

So to come back to my original post. There may well be something to what
classical economists had been saying, which is the point Francois Hollande
has very bravely made. And it is brave since he will be opposed by his
political enemies, by his political friends and by economists who refuse to
think that just maybe perhaps Keynes was wrong.

Let me finish with a quote from another politician, the former Labour Prime
Minister of the UK, James Callahagn, speaking to the Labour Party Conference
in 1976 during the Great Inflation, which was also a period of persistently
high unemployment:

“We used to think that you could spend your way out of a recession and
increase employment by cutting taxes and boosting government spending. I
tell you in all candour that that option no longer exists, and in so far as
it ever did exist, it only worked on each occasion since the war by
injecting a bigger dose of inflation into the economy, followed by a higher
level of unemployment as the next step.”

It’s not as if our economies, as a result of these high levels of public
spending in the period after the GFC, returned to rapid rates of economic
growth and low rates of unemployment. We have seen the effects of the
stimulus and they are dismal. Hollande, who is a first rate economist, went
into government as a Keynesian but a Keynesian he no longer is. Why anyone
else still is remains the central question in economic theory today.


On 4 February 2014 08:24, Daniele Besomi
<[log in to unmask]<mailto:[log in to unmask]>> wrote:
Thank you very much, Richard, for your illuminating post. The story is now
becoming very interesting: not only the story of the origin of Say's law,
but also the story of the criticism of the law.

One obvious connection that springs to mind concerns Marx. His
interpretation of the gluts debate was framed by means of the reproduction
schemes, which he elaborated from Quesnay's Tableaux representing the
circular flow. Marx derived dynamic equilibrium conditions, that showed at
once how reproduction can take place (against Mathus and Sismondi's view),
and how it can go wrong (against Ricardo and Say), to which he added an
explanation of why it must periodically go wrong. Note that, similarly to
Robinet/Mercier and differently from Ricardo, Marx's argument is framed in
terms of equilibrium.

A less known connection concerns another French writer, Aguste Ott. He was a
social economist, who could escape the grip on publication outlets firmly
held by the French liberals because he was writing in a Catholic
encyclopedia. In 1854 he wrote an article on crises where he explicitly
rejected Say's law, and did so by means of tableaux of exchanges that bear
some similarity to Marx's schemes (I do not think Marx had read Ott's
piece). Again, equilibrium and its conditions —that is, the possibility of
the circular flow to take place-- were at the centre of the argument.

A third connection concerns the definition of crises that were formulated in
the 19th century. Obviously most of them were published in dictionaries. In
most dictionaries (in particular in France) crises were defined in terms of
disturbances of the normal flow of business, and occasionally in terms of
some of the features that characterize them. Other writers, however, defined
crises as situations where equilibrium is disrupted. So we have on one side
an undertsanding in terms of normal/abnormal, or health/disease (both
couples are easily understandable, but ill-defined: health, indeed, was
understood simply as the absence of disease, and normality as absence of
abnormalities, without any precise and positive characterization), and on
the other side an understanding in terms of equilibrium/disequilibrium. Now,
all the latter writers were German. This is by no means an accident, since
within a tradition where theorists openly questioned Say's law the debate
was framed in terms of equilibrium between supply and demand, and on the
conditions that guarantee such an equilibrium. Such a question obviously
wouldn't make any sense for the upholders of Say's law, and wouldn't arise
if the validity of Say's law was never questioned. Obviously the analytical
perspectives opened by an analysis in terms of precise notions such as
equilibrium and disequilibrium are further reaching than the possibilities
opened by a discussion in terms of ill-defined concepts.

Knowing now that at the origin of Say's law there was a conceptualization in
terms of the conditions of reproduction of a circular flow helps making
sense of what was lost in the process and regained later, and helps placing
in a broader context  the rescuing of the original problem.

Daniele Besomi

Il giorno 3-feb-2014, alle ore 18.02, Van Den Berg, Richard ha scritto:

> Since we should be concentrating on historical questions in these postings
(roughly 'who said, what when and what could they have meant?' rather then
'were they right?'), it should be pointed out what the origin is of Danielle
Besomi's (translated and very relevant) passage from Robinet's Dictionnaire.
It is a verbatim quotation from Mercier de la Riviere's L'ordre naturel et
essentiel des societes politiques of 1767. The most important thing about
this is not that the date is quite a bit earlier than 1780, but of course
the fact that Mercier's work was one of the great works of physiocracy
(unfortunately never translated into English).
>
> Mercier's discussion is intimately related to Quesnay seminal conception
of the economy of a circular flow of incomes. One finds passages similar to
that of Mercier in other physiocrats. For instance how about this one from
Le Trosne's De 'linterest social of 1777 (my translation):
>
> 'Reproduction and consumption are reciprocally the meause of one another.
Although everything procedes from reproduction, since this is what decides
about consumption and the means to pay for [reproduction], these two causes
react upon one another. Reproduction is the measure of consumption, and
consumption is the measure of reproduction'
>
> Le Trosne also uses the phrase 'products can only be paid for by products
[les productions ne se payant qu'avec des productions]' which is worth
noting since Say used identical words in the Traite of 1803 (p.180). Also
cf. Mill (1808:83).
>
> Commentators like Marx and Spengler have pointed out that Say owed more to
the physiocrats than he let on. Before one can start thinking about the
question what interruption to circular flow are possible one first needs a
clear conception about what circular flow is and here ideas really go back
to the great Quesnay (yes building on authors like Cantillon and
Boisguilbert).
>
> Of course, unlike Say, the physiocrats stressed that interruptions are
possible and can be persistent. One of them is 'hoarding' (besides landlords
spending too small a proportion of their rent income on agricultural
products and wrongheaded government policies like indirect taxes and trade
restrictions). They did however not, as far as I am aware, write about the
possibility of 'general gluts'. Arguably, not even British (pale) imitators
like Gray and Spence (to whom Mill's 1808 work was a response) were talking
about general gluts.
>
> Richard van den Berg
> ________________________________________
> From: Societies for the History of Economics
[[log in to unmask]<mailto:[log in to unmask]>] On Behalf Of Daniele Besomi
[[log in to unmask]<mailto:[log in to unmask]>]
> Sent: Saturday, February 01, 2014 7:34 AM
> To: [log in to unmask]<mailto:[log in to unmask]>
> Subject: Re: [SHOE] L'offre crée même la deman de
>
> If we want to set the facts concerning Say's law straight, let's do it
properly. Its history begins far earlier than Mill, since it is very
precisely stated in a dictionary in 1780:
>
> ‘Nobody can be a buyer unless he is also a seller; since buying implies
paying, nobody can buy unless he sells, because only by selling can he
procure the money to buy what he buys. From the fact that every buyer must
be a seller and that he can buy only if he sells, a second axiom results,
namely, that every seller must also be a buyer, and he cannot sell unless he
buys. Therefore every vendor must, by way of the purchases he performs in
turn, provide everybody else with the money for buying the goods the vendor
wants to sell them.’ There may not be perfect matching between individual
sales and purchases, but if someone becomes richer by selling more than he
buys, someone else is ruined by buying more than he sells, so that ‘by the
opposition between these two sorts of disorder, equilibrium is
re-established in the general mass of sales and purchases (entry on COMMERCE
in Robinet’s Dictionnaire universel des sciences morale, économique,
politique et diplomatique, vol. 12, pp. 444–445).
> ......



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