I very much appreciate Steve Marglin's latest comments.  He appears to 
be heading in the direction of a better appreciation of classical 
economic analysis than Keynes did.  There are yet a few points of 
clarifications to be made.

First, I don't recognize what he calls Mill's "'temporary' deviations 
from Say's Law" as deviations at all.  The law says there cannot be an 
overproduction of all goods at the same time. Mill is simply pointing 
out that money (cash or currency) is also a good (or commodity).  Thus, 
should there be an excess demand for money (or insufficient supply) 
there would be an excess supply of all other goods and a fall in the 
price level.  That's not a deviation. We derive that conclusion even 
from the Quantity Theory of Money.

Second is his treatment of Keynes's definition of saving, which he still 
employs, hence his acceptance of the meaningfulness of Keynes's "paradox 
of thrift" proposition.  As his previous quote from Smith on the meaning 
of saving, in his reaction to Gary Mongiovi, savings are used to 
purchase interest- and dividend-earning assets.  These assets are issued 
by banks (and other financial firms acting as intermediaries between 
savers and ultimate producers) and producers in the form of stocks, 
bonds, and corporate paper.  Thus, contrary to Keynes's 
misrepresentation, savings supply the funds for producers to use in 
purchasing equipment, machinery, raw materials, hiring workers, and 
having cash on hand to run their enterprises.  That is why, given 
producers' demand for loanable funds, an increase in savings (demand for 
financial assets) causes interest rates to decline (price of financial 
assets to rise), enticing increased borrowing (increased quantity of 
financial assets supplied) by producers. On the other hand, a decrease 
in savings (decreased demand for financial assets) causes interest rates 
to rise (price of financial assets to fall) as well as a decrease in the 
quantity of loanable funds borrowed (decrease in the quantity of 
financial assets supplied).

When one appreciates this mechanism--the link between savings and 
borrowing for production (investment) through the rate of interest--one 
readily can recognize the error of Keynes's paradox of thrift 
proposition.  Only when one defines saving as the hoarding of cash, as 
Keynes incorrectly did, does an increased saving deny firms the means to 
engage in more production, leading to less employment, less income 
creation, and less actual subsequent saving.  It's quite unfortunate 
that people like Paul Samuelson did not recognize this problem with 
Keynes's definition of saving and rather crystallized Keynes's confusion 
over the meaning of saving into the algebra (equations) and geometry 
(graphs) that illustrate the paradox of thrift. (I elaborate in my "A 
Paradox of Thrift or Keynes's Misrepresentation of Saving in the 
Classical Theory of Growth?" /Southern Economic Journal/, July 1995, pp. 
16-33).

Third, I don't think Friedman was wrong in pointing out that pure fiscal 
policy does not change aggregate demand.  If government spending is 
financed by taxes and/borrowing from the public, such spending merely 
displaces private sector spending for a closed economy.  In other words, 
Friedman was disputing (correctly) the Keynesian designation of 
government spending as "autonomous"; neither government spending (not 
financed by a central bank) nor investment is autonomous of current 
income.  Both are financed by current taxes and savings (purchase of 
interest- and/or dividend-earning assets).  If increased government 
borrowing causes interest rates to rise and a decrease in the demand for 
money (cash) to hold, there may be an increase in total spending 
(although some contraction of private investment spending).  But even 
here, it must be recognized that the increased spending results from a 
reduction in the demand for money to hold.  In the absence of an 
increased government demand for loanable funds having induced the 
increased interest rates and the reduced demand for money, that is, an 
increase in the desire of the public to hold more financial assets 
(IOUs) at the expense of money (cash), would have induced a fall of 
interest rates and increased borrowing for investment spending.  (Of 
course, one needs to think of the economy in motion -- dynamics rather 
than comparative statics -- to appreciate how government and investment 
spending must depend upon current income and savings of the public.)

Keynes's argument instead is to claim that increased government spending 
simply substitutes for the public's savings (non-spending), which is 
indefensible.  I don't know the textual basis upon which Steve would 
like to rescue Keynes's argument about the expansionary effect of 
increased government spending in terms of his trying to change money's 
velocity of circulation.  I would be glad to see the evidence.

Indeed, classical economics can handle the issues that Keynes 
incorrectly thought were beyond its capabilities, particularly because 
he assumed that classical theory is relevant only to the condition of 
full employment and the long run.

Finally, the Mill (1874, 71) quote from is from /Essays on //Some 
Unsettled Questions of Political Economy/, 2nd ed., reprinted, Augustus 
M. Kelley, 1968.

James Ahiakpor

Marglin, Stephen wrote:
> 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-----
>     

-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

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