More anti-Keynes humbug

In the February issue of Quadrant, Steven Kates laments the resurrection of Keynes, and warns his readers not to fall for the doctrines of a man who denied one of the key laws of economics. According to Kates, Say’s Law

is a proposition that since 1936 every economist has been explicitly taught to reject as the most certain obstacle to clear thinking and sound policy. Economists have thus been taught to ignore the one principle most necessary for understanding the causes of recessions and their cures. Worse still, they have been taught to apply the very measures to remedy downturns that are most likely, from the classical perspective, to push them into an even steeper downward spiral.1

Anyone who takes the trouble to follow up Footnote 3 will find Kates’s thesis unravelling immediately:

3. It might be hard for non-economists to appreciate just how deeply felt the rejection of Says Law is. Such attitudes are, however, not universal. Schumpeter, in full knowledge of what Keynes had written, was himself still able to write Says Law is obviously true. It is neither trivial nor unimportant. (2 1986: 617)

‘Deeply felt’ apparently refers to the economist’s sense of despair that such a hard won insight as Say’s Law was jettisoned at the instigation of this wrongheaded Cambridge demagogue. Schumpeter is presented as a bastion of sanity and a beacon of hope that truth will prevail.

However, it turns out that Schumpeter’s first sentence, when rendered completely, is actually ‘As stated, Say’s Law is obviously true.’ Like every other serious scholar of economic thought — that is, the ones who don’t have an axe to grind — Schumpeter recognises that Say’s Law covers a cluster of distinct but interrelated propositions which the early classical economists, including Say, Malthus, Ricardo and James Mill, tended to muddle, one with the other, in the most excruciating fashion. This particular section of his History of Economic Analysis is devoted to unpicking the tangle and isolating the proposition that constituted a genuine insight — that is, both true and non-trivial.

Next Schumpeter considers Keynes. And guess what? It turns out that ‘Keynes, of course, never meant to contradict the proposition that has been called Say’s Law above. (p.623)’ So what is Kates playing at?

Say’s Law of Markets emerged out of the debate on free trade, when the enlightened voices pointed out that Country A can’t expect to sell its exports to B and C unless it’s prepared to import their goods as well. Each country’s exports give it the wherewithal to import goods of equivalent value from other countries. Say noticed that the principle applies to domestic trade as well: as long as producers intend to spend the proceeds from the sale of their products — and why wouldn’t they? — their combined output constitutes a fund adequate to purchase that same output.

This was always a point worth making, and was at the time a useful corrective to the popular wisdom that a nation should be wary of producing too much in the aggregate, just as an individual enterprise or industry may overestimate its market and produce too much of a particular good. The most lucid exposition of the argument, discussed at some length in Kates’s own book, comes from JS Mill, who couldn’t have made it clearer that was refuting arguments by Lauderdale and Sismondi (and Malthus on a bad day) that a country could simply produce too many goods, necessitating government measures to restrain the over-production. He pointed out that demand could never be insufficient, neither in the sense that purchasing power is insufficient to pay for the goods (covering the costs of production), nor in the sense that the public’s desire to acquire commodities in general would be satiated. There could be a mismatch between the particular good’s supply and demand, but that was all. It didn’t matter if sellers deferred their consumption, because they would use their saving to expand their capital; to the classical economists this meant employing more workers, who would do their spending for them.

Both Schumpeter and Kates quote parts of this passage from Mill’s Principles:

I have already described the state of the markets for commodities which accompanies what is termed a commercial crisis. 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. It is simply the consequence of an excess of speculative purchases. It is not a gradual advent of low prices, but a sudden recoil from prices extravagantly high: its immediate cause is a contraction of credit, and the remedy is, not a diminution of supply, but the restoration of confidence.

The problem for the Keynes-as-vandal thesis is that there’s not a word here that Keynes would have disagreed with. But unfortunately he often wrote as if the classical economists had maintained something far more extreme, namely that recession and unemployment were a logical impossibilities, and in doing so he created unnecessary confusion.

Such an interpretation was definitely not justified, as Kates himself documents at length in his book Say’s Law and the Keynesian Revolution. But instead of concluding, like Schumpeter, Blaug, Sowell and every other authoritative scholar to have considered the issue, that Keynes caricatured the classical theory and exaggerated the disagreements in order to enhance his own credentials as a theoretical revolutionary, Kates is bent on beating up the difference. He wants to turn the tables on Keynes, casting him as the real captive of logical error.

Kates tries to achieve this by means of two pieces of subterfuge, deployed at every step of his argument. The first is to use the terms ‘demand deficiency’ and ‘over-production’ interchangeably. More precisely, every time he presents this or that author’s rebuttal of the former — that is, of the Lauderdale-Sismondi over-production theory sketched above — he summarises by saying that the author has demonstrated that demand deficiency — and by implication Keynes’ theory — is a logical impossibility. Now, there might be some contexts in which the two terms refer to the same thing, but this is not one of them: the simple fact of the matter is that Keynes did not subscribe to the over-production fallacy that Say and Mill usefully refuted, any more than he believed in the physiocratic theory of value or the mercantilist analysis of trade.

The second ploy involves some peculiar word play about causality. Although the classics agreed with Keynes that recessions occur, and that they occur because households and firms delay their purchases, Kates assures us every few pages that there is a key difference. Keynes attributed the slack spending to a failure of demand, by which Kates means ‘demand having suddenly evaporated for no good reason’, as he puts it in the Quadrant piece. By contrast, the classics (knowing that demand failure, aka overproduction, is logically impossible), attributed it to other causes, like a shortage of credit, the collapse of an asset bubble, or a crisis of confidence in the face of uncertainty over energy prices.

Do those other causes sound a million miles from what Keynes was talking about? Did Keynes claim that a failure of demand was some kind of spontaneous psychological event that couldn’t in turn be attributed to other events further up the chain of causation? Would the classics have denied that unemployed workers cut back on their spending? Would they have objected to calling this a lack of demand? No, no, no and no. But, having shown us that the classics acknowledged there was not enough spending, Kates will not rest until he has shown that Keynes’ deficient demand concept was something altogether different.

Even when confronted with the awkward fact that AC Pigou (Keynes’ favorite ‘classic’) recommended public works expenditure as a means to dampen ‘industrial fluctuations’ (the title of his book) by ‘transfer3 demand from good times to bad’, Kates insists that ‘Pigou seems to understand demand in a Say’s Law sense’. He opts for this kind of contortion every time his thesis is starkly contradicted by the evidence.

Kates’s book was praised for its scholarship, and it covers a huge number of writers, but there’s scarcely any analysis at all. In fact one gets the feeling that the impressive parade of authors serves as a distraction from analytical issues. Say’s Law is a straightforward proposition, is the message: either you get it or you don’t, and the purpose of Kates’ long survey is to sort the goats from the sheep.

One can acknowledge that a given supply of goods to the market entails both the willingness and ability to pay for it. The question is when that ability will be exercised. That’s the point of the concept of effective demand, but Kates barely discusses the meaning of the term.

The main difference between Keynes and the others was that he went a step further in investigating the consequences of the drop in demand, highlighting in particular that when firms cut production in response, this will cause a further decline in spending. (If anything Kates should be happy with these induced falls in demand, because they are actually induced by reductions in supply!) The truly original part of Keynes’ contribution was to identify a level of activity that generates just enough effective demand to sustain itself, and to characterise this a kind of equilibrium. It’s not an equilibrium in the Walrasian sense that everyone is happy at the prevailing prices: there is still involuntary unemployment after all. But the unemployed workers find it impossible to signal the future demand for commodities that would justify firms in hiring them — a catch 22 that deserves the term equilibrium even if it isn’t one in the usual sense of the term.

In fact the bulk of the disputes between Keynes and the classical economists (starting from Mill) boil down to empirical questions concerning the ability of the system to right itself without government intervention, and in particular: whether a general price adjustment can by itself reignite spending; and whether investment is primarily constrained by credit (undoubtedly the case in Mill’s day) or by expectations of future sales (more important in Keynes’s). But none of these are disagreements about fundamental economic logic.

Nonetheless, we are confronted with this wearying phenomenon of the self-styled classical economist, often these days wearing an ‘Austrian’ badge, claiming either that Keynes was a duffer who couldn’t grasp Say’s Law in the first place — which is a bit like accusing Rutherford of failing to comprehend the plumb pudding model of the atom — or that he was a prankster who beguiled whole generations of economists into accepting a patently absurd doctrine.

The narrow purpose of this campaign is easy enough to see. It lays down a foundation that makes it easier dismiss Keynesian economics with ridicule rather than engaging with the arguments. It provides the army of ‘Austrian’ autodidacts with another useful talking point, to add to the one about how Keynes didn’t understand that saving is necessary for capital formation, and the one about how Keynes thought governments could generate any amount of growth just by spending more.

The broader purpose of the demonisation of Keynesian macroeconomics is no harder to fathom. It forms part of long-term program to discredit government involvement in the economy, which includes protesting against any increase in either tax or government spending, irrespective of the macroeconomic contingencies of the day. At the same time, it’s just further evidence that common sense nostrums are heroically resilient, whether we’re talking about the Ptolemaic solar system against Copernicus, the design argument against Darwin or the Treasury View against Keynes.

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Nicholas Gruen
15 years ago

Nice post James – thanks. It is truly depressing when people put in a great deal of time but don’t really engage with the material, and simply ignore what small amount of progress us humangoes painstakingly manage to make. There is no shortage of them. Of course this doesn’t mean that Keynes is or was right, but that he made a little progress.

I recently read and enjoyed what would have to be the best titled paper on the subject for a while Nudge, Nudge, Wink, Wink, Say no more by Steve Keen. Anyone who wants to get the hang of it all should go and check it out.

15 years ago

Good job, there, James.

Nick, Keen’s piece was interesting in that it gave some ancient (relatively speaking) historical background.

It’s restatable in a couple of sentences, though, viz:

Say’s law is true if an economy is Pareto optimal. If an economy is not Pareto optimal, then rent extraction is possible.

Maybe there’s something less obvious in there that I didn’t notice, maybe not.

Tony Harris
15 years ago

It is quite likely that the humbug is on the side of Keynes in the General Theory, after all he reverted to the much maligned classical approach after the war. The humbug is the claim that the classicals could not envisage anything other than full employment, but as Hutt pointed out in one or other of his books on Keynes, they were aware that rigidities in markets could result in idle resources. That means that the spotlight needs to shine on the cause of those rigidities. What did Keynes have to say about the militancy of the trade unions in keeping men out of work (while Sydney Webb described the trade union leadership in his private diary as vandals and wreckers of the economy)?

15 years ago

Nick beat me to it- I was going to link to Steve Keen’s paper which is well worth reading.

Rafe, you keep repeating the same old slogans and as per usual provide no evidence to back up your claims although you have once again done same name dropping. Militant trade unions CAN cause unemployment in various ways but it is rarely a major factor. Australia had comparatively militant trade unions in the 50s and 60s but extremely low unemployment. The USA today has probably the weakest and least militant union movement in the western world but it has a higher rate of unemployment than Sweden, which has the strongest and most influential union movement in the western world.

American unemployment-

Swedish unemployment-

Joshua Gans
15 years ago

Rafe, you’re just going through the motions here, aren’t you? I see no evidence that you’re acquainted with the classical literature on the Law of Markets, or the General Theory, or Kates’s book. You haven’t responded to a single specific point in my post. You claim that Keynes changed his mind about something, but don’t say what, or provide a citation, or say whether the change of mind is relevant to the issue of Say’s Law. In throwing the ‘humbug’ charge back at Keynes, you refer to his simplistic view of classical thinking, which is a point that I made, and explained at some length, myself. Finally, and most preposterously (doesn’t everyone know that Keynes is the ‘sticky wage’ guy?), you drag in the issue of wage rigidities as if that were some kind of trump card, when anyone who’s read the GT knows — and here I despair, because I remember explaining this to you years ago — that he agreed on the need for an economy-wide real wage cut, but argued that an economy-wide nominal wage cut would be impossible to engineer.

Butterfield, Bloomfield & Bishop
Butterfield, Bloomfield & Bishop
15 years ago


you have to make allowances for people afterall Keynes devoted a WHOLE chapter to how to reduce real wages.

Sinclair Davidson
Sinclair Davidson
15 years ago

Next Schumpeter considers Keynes. And guess what? It turns out that Keynes, of course, never meant to contradict the proposition that has been called Says Law above. (p.623)

I think it most extraordinary to claim that Lord Keynes never meant to contradict Say’s Law and then ask “What is Kates playing at?” It would be far better to explain what Schumpeter meant by that statement. The operative word there being “above”. Lord Keynes’ definition of Say’s Law is set out on page 26 of the GT.

Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment.

But as Schumpeter makes clear, Lord Keynes had unique definitions of both aggregate demand and aggregate supply as set out on pages 25 and 26 immediately prior to the statement on what Say’s Law implies. Keynes warns, and Schumpeter reminds us (pg. 623 – 4), that his functions “must not be confused with supply and demand functions ‘in the ordinary sense’.” Schumpeter then makes the argument that Keynes didn’t need to rubbish Say’s Law. For Keynes’ purposes all he need have argued was “the operation of Say’s law, though it states a tendency correctly, is impeded by certain facts which Keynes believed important enough to be inserted into a theoretical model of his own” (Schumpeter pg. 624). Although the footnote Schumpter then indicates that this would have implied that Keynes GT was only a special case. That is not how he sold his ideas.

Now many people argue that Keynes had a quirky sense of humour and that some of his writing was a bit over the top and he never really meant what he said and so on. That may indeed all be true, yet in hs absence to speak for himself all we are left with is his own words. In the first instance we should interpret him as saying what he wrote, until other evidence suggests otherwise.

As an aside, Hansen in his Guide seems to believe that Pigou did support Say’s Law but that circumstances had changed over time.

Joshua Gans
15 years ago

Sinclair, I was quoting Schumpeter, whom Kates was disingenously claiming as an authority in support of his claim that Keynes denied Say’s Law in the unassailable version set out by JS Mill.

If by Say’s Law you mean something more like what Blaug called Say’s Equality, which merely asserts a general tendency for activity to gravitate to full employment, then it’s fair to say that Keynes’s contemporaries generally assumed it, without thinking deeply about the mechanisms involved, and while he did not. Whether you not you agree with Keynes, it’s very unhelpful to call that a logical fallacy.

To give justice to the meaning of your quote from the GT would require a much longer comment, or indeed another post — which I might do.

The bottom line, though, is that it doesn’t matter which definition of Say’s Law you choose: you just need to be consistent. If it refers to an insight from armchair reasoning (Schumpeter’s version), that’s fine, but don’t claim that Keynes denied it. If you want to use it as a label grouping the issues over which Keynes and his critics actually disagreed (Blaug’s version), that’s fine, but don’t insist that this is the same dispute that Mill had already decisively settled in 1848.

Sinclair Davidson
Sinclair Davidson
15 years ago

Yes, I understand you’re quoting Schumpeter. No quibble there.

I think you’ll need to write that longer post. Lord Keynes set out to rubbish something that he called “Say’s Law”. But there was already a pre-existing doctrine called Say’s Law, actually the Law of Markets. So did Lord Keynes refute that or not, or did he refute a straw man? Schumpeter, to my mind, is suggesting the latter. The problem for Lord Keynes, is that Schumpeter claims that Say’s Law as he (Schumpeter) understands it is “obviously true” but “neither trivial nor unimportant”. Yet Kates’ argument, following Lord Keynes’ intellectual victory, is that all (most) economists believe that Lord Keynes (and successors) showed Say’s Law to be false. That would not matter if (a) Say’s Law was always wrong, (b) if it was trivial, or (c) unimportant.

Tony Harris
15 years ago

James, can you explain why an economy-wide nominal wage cut was impossible to engineer?

Joshua Gans
15 years ago


As I mentioned, there are several distinct propositions that have been conflated over the years. For the purpose of answering your question, we can distinguish three:

(1) That, in the aggregate, demand and supply are not independent. The full employment level of output in principle constitutes the wherewithall and willingness to buy itself.

(2) That there can never be any excess demand or supply for goods and services in a comparative static sense (Walras’ Law, plus the assumption of zero excess demand for money).

(3) That, though (2) doesn’t necessarily hold instantaneously, adjustments in the interest rate and price level will generally restore the balance in, say, the medium term.

Schumpeter calls (1) Say’s Law, and thinks Keynes agreed with it. Blaug calls (2) and (3) Say’s Identity and Say’s Equality respectively. He maintains: that no one really believed (2), which would have been tantamount to ruling out recessions; and that the ‘classics’ really believed (3) while Keynes denied it. Schumpeter, Blaug and Kates all think Keynes falsely accused the classics of believing (2).

No doubt many people think Keynes `showed Say’s Law [in the sense of (3)] to be false’, but I think that’s putting it too strongly. It’s not a question of mathematical logic. What he did was to draw attention to how weak the self-correcting mechanism is, and how durable stagnation could prove under certain conditions.


What I meant to say was that in Keynes’ view economy-wide wage cuts would be politically impossible, but, even more importantly, it was probably not possible to effect a real wage cut anyway by this route. I’ll have to refer you to Chapters 2 and 19 of the GT for the argument.

Sinclair Davidson
Sinclair Davidson
15 years ago

James, I think we’re broadly in agreement on the argument but not the conclusion. If all “he did was to draw attention to how weak the self-correcting mechanism is, and how durable stagnation could prove under certain conditions” we wouldn’t be having this argument. There is nothing wrong with saying the self-correction mechanism might operate more slowly than we’d otherwise like, or that government can create conditions whereby the market would recover more quickly etc. That’s what we do and argue about everyday. My reading of Schumpeter is that is what Keynes should have written and done but did not.

Butterfield, Bloomfield & Bishop
Butterfield, Bloomfield & Bishop
15 years ago

Rafe appears to a strong believer in pattern bargaining

Jefferey Hanks
13 years ago

My employer laid off 800 people…Then wasted more than 200 millions dollars buying foreign companies. Then laid off people at those companies. The troubles in the usa have nothing to do with the government . The inconvenience come from the private sector. The reason is it’s a buyers market, they’re the buyers and they know it..I think it’s going to get worse