----------------- HES POSTING ----------------- [If successful, this will be the third book to emerge from HES posting over the past four years. Congratulations to our participants! - RBE] It has been suggested that the exchange of postings on Say\'s Law which occurred over the period from April 13 to April 22 has potentially provided an opportunity for those of us interested in these issues to contribute collectively to an edited work on the various points of view which emerged. If this were of interest to those who had provided postings at that time, as well as to others who also might wish to become involved, I would very much like to hear from you. My email address is [log in to unmask] As I see it, the book would begin with the individual postings of each of the participants in the original exchange. There would then be a further set of papers provided by each person in which more considered positions would be staked out. As a stimulus towards continuing this controversy, I am forwarding a more extended reply to the issues as they stood just before Easter when the exchange on Say\'s Law came to an end. It will also give me an opportunity to respond to a number of issues which were raised at that time which in my view were left hanging. As someone who has dwelt on these matters for quite some time, it is clear to me that the significance of Say\'s Law lies not just in the history of economics but is crucial to an understanding of economic theory in general. In essence, the major issues seem to be these: . What does Say\'s Law mean? - Is it a set of propositions which were accepted to economists prior to the publication of the General Theory or is it instead a modern characterisation of the positions of classical economists which in fact describes views never actually held by anyone? That is, is what we call Say\'s Law different from the classical law of markets? . What was the significance of the Keynesian Revolution in relation to Say\'s Law? - The General Theory is specific about having rejected Say\'s Law which Keynes said was at the heart of classical thought. How much should we take Keynes\'s words seriously or was it just a bit of polemical window dressing to get the General Theory rolling? . What was revolutionary about the Keynesian Revolution? How different would economic theory be today were it not for the General Theory? Did Say\'s Law actually influence pre-Keynesian economic theory and policy and in which way? How has the removal of Say\'s Law from the conceptual framework of economists made a difference? . Where does Austrian economic theory fit into the equation? Is Austrian theory the one remaining strand of pre-Keynesian theory which has survived the influence of the General Theory? Does someone from an Austrian perspective accept the classical law of markets, and if so, what does it mean in an Austrian context? These questions are still far from answered even now. What I am interested in doing is editing a collection of writings on all of these questions as well as any other issues which writers might think important. At this stage expressions of interest would be helpful in furthering discussions with a publisher. As a starter for continuing this debate, from my point of view this is where the controversy had gone when it came to an end. There is a summary of the position I had outlined at the time, followed by a number of reflections on specific issues. It was noted that both the general glut debate and the Keynesian Revolution were initiated by Malthus. In 1820, the publication of Malthus\'s Principles of Political Economy began a generation long debate over the possibility of effective demand failure as the cause of recession and unemployment.. This controversy ended with the complete rout of Malthus\'s position. In 1936, however, Keynes, having in late 1932 come across Malthus\'s correspondence with Ricardo over the law of markets, weighed in on behalf of Malthus and reversed the earlier judgement so that the conclusions that Malthus had tried to establish in the 1820s were finally accepted across the broad spectrum of the economics profession. To understand the Keynesian Revolution it is first necessary to understand Say\'s Law properly. Keynes understood with perfect clarity the conclusion that Malthus had been trying to establish: that an economy could go into recession because there was too little demand for its output. Production would be stopped for the straightforward reason that there was not enough demand for the output produced (demand deficiency), or to put it in the way which was more familiar in classical times, that recessions could occur because there was too much output relative to the demand (overproduction). And in spite of how different they may sound, they are formally the same phenomenon. The law of markets (Say\'s Law) was the proposition that stated demand deficiency/overproduction never occurred. It said nothing about any other types of problem that might arise in an economy nor did it suggest that an economy would never go into recession or that involuntary unemployment was an impossibility. These are, of course, the accusations Keynes made about virtually all of his contemporaries in the midst of the Great Depression. These were not side issues to the General Theory nor were they simply attempts to draw attention to his own theories. These were the specific beliefs Keynes held about any economist who had been educated in the classical tradition. And these accusations were in his hands potent weapons which totally routed the alternate theories of the cycle held by his own contemporaries. Within a decade of the publication of the General Theory no other theory of recession and the cycle but his own was left standing within the English speaking world. To a classical economist there was no such thing as aggregate demand separate from aggregate supply. To the classics, demand was constituted by supply, which was one of the forms in which the law of markets was stated. The following statement from one of the most widely used economics texts of its time, perfectly captures the classical notion of the non-existence of aggregate demand. \"It is only because our exchanges are made through money that we have any difficulty in perceiving that an increase in supply is (not \'causes\') an increase in demand.... Thus an increase in the supply of cloth is an increase in the demand for other things; and vice versa, an increase in the supply of anything else may constitute an increase in the demand for cloth. What is divided amongst the members of society is the goods and services produced to satisfy its wants; and the same goods and services are both the Supply and Demand.\" (Henry Clay, Economics for the General Reader, 1916, p 242) Basically we have had two eras in the history of the business cycle and (more anachronistically) in the development of macroeconomic theory. There is the first era in which demand deficiency as a cause of recession was comprehensively rejected. And there is a second, which exists to this minute, in which demand deficiency is seen as a realistic possibility and a probable cause of recession. Nothing could be farther from the classical tradition than C+I+G+(X-M) or IS-LM or Aggregate Demand = Aggregate Supply. The belief that there is an aggregate demand side to an economy independent of aggregate supply is the grand fallacy of classical economic theory. For Keynes, Malthusian theories of demand deficiency were just what he had been looking for to justify the policy prescriptions that he had already put forward. Keynes had been an advocate of public works for many years. Even before the onset of the Great Depression, Keynes had written (on 1 March 1929) the following statement on the utility of public works to reduce unemployment. The statement was to be used by Lloyd George in an election campaign. \"If the nation entrusts the Liberal Party at the next General Election with the responsibilities of government, we are ready with schemes of work which we can put immediately into operation... The work put in hand will reduce the terrible figures of the workless in the course of a single year to normal proportions, and will, when completed, enrich the nation and equip it for competing successfully with all its rivals in the business world. These plans will add not one penny to national or local taxation.\" (The Collected Writings of JMK, Volume XIX, p 804) This is the policy; the General Theory provided the theoretical support for what he wanted to do. With this as prelude, let me pick up a number of other themes which had been addressed during the earlier correspondence. J. Barkely Rosser provided the following statement from Say\'s Treatise, along with a number of others, to demonstrate that Say had often abandoned Say\'s Law by noting that not all capital would be put to work. For example, he quoted the following from Say: \"Values once produced may be devoted either to the satisfaction of wants of those who have acquired them, or to a further act of production. They may also be withdrawn both from unproductive consumption and from reproductive employment, and remain buried or concealed.\" Nothing Say ever wrote even remotely suggested that productive powers might outrun the willingness of the community to buy. On the other hand, there was nothing in Say that even remotely suggested that condition could never be such that producers were reluctant to lay their capitals on the line. Demand deficiency is reluctance to purchase. Commercial uncertainty is entirely different. Fear of confiscation by government was (and is) a primary reason for production not to occur, but to raise this as a problem does not raise the problem that Malthus had dealt with, which was that unproductive consumers were needed to buy what had already been produced. Failure to spend because of fear that the government will take most or all of the proceeds is not a genuine example of hoarding. The profligate waste of the Ottoman Empire would in fact be the kind of action that Malthus or Keynes might have supported as a means to keep an economy at full employment but would have been denounced by virtually every classical economist. Peter Stillman wrote: \"My question (I am a historian of political philosophy, not an economist!) is, why and how could they argue that overproduction was impossible? Or, perhaps to be more explicit about what is in my mind, both Hegel in the Philosophy of Right (1821), after citing Smith, Ricardo, and Say, and Marx from the Communist Manifesto onwards, thought it was clear that supply could and did outrun demand. (I would also think it would be clear to any observer of economic recessions and depressions from the end of the Napoleonic Wars to the present that supply could outrun demand.)\" This perfectly captures the issues as they confronted those who engaged in the general glut debates following the Napoleonic Wars. All recognised the existence of depression. The question was not whether recessions occurred, or whether when they occurred that the problem did not have the appearance of overproduction. The issue was what were the actual reasons that goods remained unsold. One can if one likes argue that in 1820 there was such abundance in England that people had run out of demands, and if one does then one may justifiably reject the law of markets. But the unanimous view of the mainstream of the economics profession was that overproduction was not the problem. For an answer to this argument, the following passage from Alfred Marshall may provide some assistance in understanding the logic of pre-Keynesian economists. \"After every crisis, in every period of commercial depression, it is said that supply is in excess of demand. Of course there may easily be an excessive supply of some particular commodities; so much cloth and furniture and cutlery may have been made that they cannot be sold at a remunerative price. But something more than this is meant. For after a crisis the warehouses are overstocked with goods in almost every important trade; scarcely any trade can continue undiminished production so as to afford a good rate of profits to capital and a good rate of wages to labour. And it is thought that this state of things is one of general over-production. We shall however find that it really is nothing but a state of commercial disorganization; and that the remedy for it is a revival of confidence.\" (Marshall and Marshall 1879 Economics of Industry, p 154) Nor do I think of this as standing at a high level of abstraction as has been suggested. Whatever flaws there might be in Marshall\'s underlying logic, of which I think there are none, it was at the time a conclusion virtually never disputed amongst economists who are not a profession noted for their patient acceptance of statements with which they disagree. I also think Marshall\'s statement is a reply to Malcom Rutherford who quotes Mill Principles Book III, Chapter XIV to show that the law of markets was only an equilibrium condition. Marshall would in fact have been doing no more than paraphrasing Mill, particularly as he has the famous quote from Mill just following the passage above. Mill, like Marshall, is arguing that the problem of recession is not caused by excess supply but that other problems create recession and disequilibrium. Finally, a brief observation on Hayek and Say\'s Law. There seems no doubt that Hayek accepted the law of markets. As recently as 1931 he had written the following in its support. \"The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production, although made more often by members of the lay public than by professional economists, is almost as old as the science of political science itself. The question of the utility of \'unproductive\' expenditure was first raised by the Mercantilists, who were thinking chiefly of luxury expenditure. The idea recurs in those writings of Lauderdale and Malthus which gave rise to the celebrated Théorie des Débouchés of James Mill and J.B. Say, and, in spite of many attempts to refute it, it permeates the main doctrines of Socialist economics right up to T. Veblen and Mr J.A. Hobson.\" (F.A. von Hayek, \"The \'Paradox\' of Saving,\" Economica 1931 and reprinted in Profits, Interest and Investment, published in 1939, pp 199-263) It is clear enough that Hayek accepted the law of markets and moreover was prepared to write an article 64 pages in length to defend it against the writings of Foster and Catchings (who had written lengthy underconsumptionist tomes in the 1920s and 1930s). Yet, and this is the curious part, when Keynes published the General Theory in 1936, not only did Hayek not turn to an attack, but even when he did, he did not focus on issues related to the théorie des débouchés. Nor was Hayek the only one to fall into this camp. Dennis Robertson, also a trenchant critic of the General Theory, had written a long critical review in 1914 of Aftalian\'s 1913 attack on the law of markets which arguments Robertson had repeated in his A Study of Industrial Fluctuation published in 1915. Yet in criticising the General Theory he, too, never referred to these issues. It is here that Keynes\'s genius as a polemicist can be seen. In nothing that he wrote did he ever use the words that would have altered his contemporaries to his intentions. Nowhere is found the phrase \"general glut\". He never uses the words \"law of markets\" or \"théorie des débouchés\". He instead referred to it using a form of words entirely unfamiliar in English theoretical discourse, \"Say\'s Law\", and characterised its meaning using a set of words which no one had ever previously used, \"supply creates its own demand\". That is why in all the furious argument that raged around the General Theory the question that Keynes had raised, the validity of the law of markets, never became central. Neither Robertson nor Hayek, nor any other critic of the General Theory, ever focused on this one, central issue and the theory of aggregate demand deficiency became, as it generally is to this day, the basis of our theory of recession and unemployment. Dr Steven Kates Chief Economist Australian Chamber of Commerce & Industry Phone (02) 62732311 ACN 008 391 795 E-mail address - [log in to unmask] ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]