After completing Kahneman's brilliant (but partially flawed) book some days ago I reverted to Steve Kates's book, Free Market Economics which I had started but had not found time to complete. I've finished it now.
Steve's is an introductory book, short and accessible. It is written from a completely different angle to the usual books on introductory economics – an angle based on the underlying dynamics of entrepreneurship. It is best seen as a continuation of the original (classical) economics.
The critical (and comparative) commentary in this book is brilliant. Instead of reading Samuelson (or such books) to begin their study of economics it would be so much better if students read Kates's book, instead. Particularly outstanding are the sections relating to the many flaws of modern macro-economics.
Kates ends with the simple chapter that explains how central banks around the world continue to work on the false "theory" of the natural unemployment rate that underpins the Philips curve – which has been long discredited empirically. While on key aspects of micro-economics I'd prefer Demsetz's work (From Economic Man to Economic System) as a supplement to Kates's book, Kates's book is well worth owning by every serious student of public policy.
In this regard, I was reviewing JS Mill's ideas on money (particularly sound money), and on what would be called "macro-economics" – in his Principles of Political Economy. In doing so I came across his detailed Ricardian analysis on the impossibility of excess supply (or demand deficiency) which lends support to Kates's analysis.
Keynes clearly didn't understand basic economics; his Malthusian notion of demand deficiency had long ago been put to rest by Mill. I am reproducing below Mill's chapter that rebuts the possibility of demand deficiency. It would be good if "modern" students of economics read this chapter (and other related material written by the classical economists).
Note how, at the end of the essay, Mill attributes this analysis to Say. That's perhaps how the phrase "Say's Law" ultimately came into being (Kates's book has a detailed analysis of Say's law).
Of Excess of Supply
§1. After the elementary exposition of the theory of money contained in the last few chapters, we shall return to a question in the general theory of Value, which could not be satisfactorily discussed until the nature and operations of Money were in some measure understood, because the errors against which we have to contend mainly originate in a misunderstanding of those operations.We have seen that the value of everything gravitates towards a certain medium point (which has been called the Natural Value), namely, that at which it exchanges for every other thing in the ratio of their cost of production. We have seen, too, that the actual or market value coincides, or nearly so, with the natural value only on an average of years; and is continually either rising above, or falling below it, from alterations in the demand, or casual fluctuations in the supply: but that these variations correct themselves, through the tendency of the supply to accommodate itself to the demand which exists for the commodity at its natural value. A general convergence thus results from the balance of opposite divergences. Dearth, or scarcity, on the one hand, and over-supply, or in mercantile language, glut, on the other, are incident to all commodities. In the first case, the commodity affords to the producers or sellers, while the deficiency lasts, an unusually high rate of profit: in the second, the supply being in excess of that for which a demand exists at such a value as will afford the ordinary profit, the sellers must be content with less, and must, in extreme cases, submit to a loss.Because this phenomenon of over-supply, and consequent inconvenience or loss to the producer or dealer, may exist in the case of any one commodity whatever, many persons, including some distinguished political economists, have thought that it may exist with regard to all commodities; that there may be a general over-production of wealth; a supply of commodities in the aggregate, surpassing the demand; and a consequent depressed condition of all classes of producers. Against this doctrine, of which Mr. Malthus and Dr. Chalmers in this country, and M. de Sismondi on the Continent, were the chief apostles, I have already contended in the First Book;*45 but it was not possible, in that stage of our inquiry, to enter into a complete examination of an error (as I conceive) essentially grounded on a misunderstanding of the phenomena of Value and Price.The doctrine appears to me to involve so much inconsistency in its very conception, that I feel considerable difficulty in giving any statement of it which shall be at once clear, and satisfactory to its supporters. They agree in maintaining that there may be, and sometimes is, an excess of productions in general beyond the demand for them; that when this happens, purchasers cannot be found at prices which will repay the cost of production with a profit; that there ensues a general depression of prices or values (they are seldom accurate in discriminating between the two), so that producers, the more they produce, find themselves the poorer, instead of richer; and Dr. Chalmers accordingly inculcates on capitalists the practice of a moral restraint in reference to the pursuit of gain; while Sismondi deprecates machinery, and the various inventions which increase productive power. They both maintain that accumulation of capital may proceed too fast, not merely for the moral, but for the material, interests of those who produce and accumulate; and they enjoin the rich to guard against this evil by an ample unproductive consumption.§2. When these writers speak of the supply of commodities as outrunning the demand, it is not clear which of the two elements of demand they have in view—the desire to possess, or the means of purchase; whether their meaning is that there are, in such cases, more consumable products in existence than the public desires to consume, or merely more than it is able to pay for. In this uncertainty, it is necessary to examine both suppositions.First, let us suppose that the quantity of commodities produced is not greater than the community would be glad to consume: is it, in that case, possible that there should be a deficiency of demand for all commodities for want of the means of payment? Those who think so cannot have considered what it is which constitutes the means of payment for commodities. It is simply commodities. Each person's means of paying for the productions of other people consists of those which he himself possesses. All sellers are inevitably and ex vi termini buyers. Could we 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 supply: everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange. It is probable, indeed, that there would now be a superfluity of certain things. Although the community would willingly double its aggregate consumption, it may already have as much as it desires of some commodities, and it may prefer to do more than double its consumption of others, or to exercise its increased purchasing power on some new thing. If so, the supply will adapt itself accordingly, and the values of things will continue to conform to their cost of production. At any rate, it is a sheer absurdity that all things should fall in value, and that all producers should, in consequence, be insufficiently remunerated. If values remain the same, what becomes of prices is immaterial, since the remuneration of producers does not depend on how much money, but on how much of consumable articles, they obtain for their goods. Besides, money is a commodity; and if all commodities are supposed to be doubled in quantity, we must suppose money to be doubled too, and then prices would no more fall than values would.§3. A general over-supply, or excess of all commodities above the demand, so far as demand consists in means of payment, is thus shown to be an impossibility. But it may perhaps be supposed that it is not the ability to purchase, but the desire to possess, that falls short, and that the general produce of industry may be greater than the community desires to consume—the part, at least, of the community which has an equivalent to give. It is evident enough that produce makes a market for produce, and that there is wealth in the country with which to purchase all the wealth in the country; but those who have the means may not have the wants, and those who have the wants may be without the means. A portion, therefore, of the commodities produced may be unable to find a market from the absence of means in those who have the desire to consume, and the want of desire in those who have the means.This is much the most plausible form of the doctrine, and does not, like that which we first examined, involve a contradiction. There may easily be a greater quantity of any particular commodity than is desired by those who have the ability to purchase, and it is abstractedly conceivable that this might be the case with all commodities. The error is in not perceiving that though all who have an equivalent to give might be fully provided with every consumable article which they desire, the fact that they go on adding to the production proves that this is not actually the case. Assume the most favourable hypothesis for the purpose, that of a limited community, every member of which possesses as much of necessaries and of all known luxuries as he desires: and since it is not conceivable that persons whose wants were completely satisfied would labour and economize to obtain what they did not desire, suppose that a foreigner arrives and produces an additional quantity of something of which there was already enough. Here, it will be said, is over-production: true, I reply; over-production of that particular article: the community wanted no more of that, but it wanted something. The old inhabitants, indeed, wanted nothing; but did not the foreigner himself want something? When he produced the superfluous article, was he labouring without a motive? He has produced, but the wrong thing instead of the right. He wanted, perhaps, food, and has produced watches, with which everybody was sufficiently supplied. The new comer brought with him into the country a demand for commodities, equal to all that he could produce by his industry, and it was his business to see that the supply he brought should be suitable to that demand. If he could not produce something capable of exciting a new want or desire in the community, for the satisfaction of which some one would grow more food and give it to him in exchange, he had the alternative of growing food for himself; either on fresh land, if there was any unoccupied, or as a tenant, or partner, or servant, of some former occupier, willing to be partially relieved from labour. He has produced a thing not wanted, instead of what was wanted; and he himself, perhaps, is not the kind of producer who is wanted; but there is no over-production; production is not excessive, but merely ill assorted. We saw before, that whoever brings additional commodities to the market, brings an additional power of purchase; we now see that he brings also an additional desire to consume; since if he had not that desire, he would not have troubled himself to produce. Neither of the elements of demand, therefore, can be wanting, when there is an additional supply; though it is perfectly possible that the demand may be for one thing, and the supply may unfortunately consist of another.Driven to his last retreat, an opponent may perhaps allege that there are persons who produce and accumulate from mere habit; not because they have any object in growing richer, or desire to add in any respect to their consumption, but from vis inertiæ. They continue producing because the machine is ready mounted, and save and re-invest their savings because they have nothing on which they care to expend them. I grant that this is possible, and in some few instances probably happens; but these do not in the smallest degree affect our conclusion. For, what do these persons do with their savings? They invest them productively that is, expend them in employing labour. In other words, having a purchasing power belonging to them, more than they know what to do with, they make over the surplus of it for the general benefit of the labouring class. Now, will that class also not know what to do with it? Are we to suppose that they too have their wants perfectly satisfied, and go on labouring from mere habit? Until this is the case; until the working classes have also reached the point of satiety—there will be no want of demand for the produce of capital, however rapidly it may accumulate; since, if there is nothing else for it to do, it can always find employment in producing the necessaries or luxuries of the labouring class. And when they too had no further desire for necessaries or luxuries, they would take the benefit of any further increase of wages by diminishing their work; so that the over-production which then for the first time would be possible in idea, could not even then take place in fact, for want of labourers. Thus, in whatever manner the question is looked at, even though we go to the extreme verge of possibility to invent a supposition favourable to it, the theory of general over-production implies an absurdity.§4. What then is it by which men who have reflected much on economical phenomena, and have even contributed to throw new light upon them by original speculations, have been led to embrace so irrational a doctrine? I conceive them to have been deceived by a mistaken interpretation of certain mercantile facts. They imagined that the possibility of a general over-supply of commodities was proved by experience. They believed that they saw this phenomenon in certain conditions of the markets, the true explanation of which is totally different.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. 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. 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.The other phenomenon from which the notion of a general excess of wealth and superfluity of accumulation seems to derive countenance, is one of a more permanent nature, namely, the fall of profits and interest which naturally takes place with the progress of population and production. The cause of this decline of profit is the increased cost of maintaining labour, which results from an increase of population and of the demand for food, outstripping the advance of agricultural improvement. This important feature in the economical progress of nations will receive full consideration and discussion in the succeeding Book.*46 It is obviously a totally different thing from a want of market for commodities, though often confounded with it in the complaints of the producing and trading classes. The true interpretation of the modern or present state of industrial economy is that there is hardly any amount of business which may not be done, if people will be content to do it on small profits; and this, all active and intelligent persons in business perfectly well know: but even those who comply with the necessities of their time, grumble at what they comply with, and wish that there were less capital, or, as they express it, less competition, in order that there might be greater profits. Low profits, however, are a different thing from deficiency of demand; and the production and accumulation which merely reduce profits, cannot be called excess of supply or of production. What the phenomenon really is, and its effects and necessary limits, will be seen when we treat of that express subject.I know not of any economical facts, except the two I have specified, which can have given occasion to the opinion that a general over-production of commodities ever presented itself in actual experience. I am convinced that there is no fact in commercial affairs which, in order to its explanation, stands in need of that chimerical supposition.The point is fundamental; any difference of opinion on it involves radically different conceptions of Political Economy, especially in its practical aspect. On the one view, we have only to consider how a sufficient production may be combined with the best possible distribution; but, on the other, there is a third thing to be considered—how a market can be created for produce, or how production can be limited to the capabilities of the market. Besides, a theory so essentially self-contradictory cannot intrude itself without carrying confusion into the very heart of the subject, and making it impossible even to conceive with any distinctness many of the more complicated economical workings of society. This error has been, I conceive, fatal to the systems, as systems, of the three distinguished economists to whom I before referred, Malthus, Chalmers, and Sismondi; all of whom have admirably conceived and explained several of the elementary theorems of political economy, but this fatal misconception has spread itself like a veil between them and the more difficult portions of the subject, not suffering one ray of light to penetrate. Still more is this same confused idea constantly crossing and bewildering the speculations of minds inferior to theirs. It is but justice to two eminent names to call attention to the fact, that the merit of having placed this most important point in its true light belongs principally, on the Continent, to the judicious J. B. Say, and in this country to Mr. [James] Mill; who (besides the conclusive exposition which he gave of the subject in his Elements of Political Economy) had set forth the correct doctrine with great force and clearness in an early pamphlet, called forth by a temporary controversy, and entitled,Commerce Defended; the first of his writings which attained any celebrity, and which he prized more as having been his first introduction to the friendship of David Ricardo, the most valued and most intimate friendship of his life.Notes for this chapter
Supra, pp. 66-8.Book III. Chapter XIV. Section 4
Infra, book iv. chap. 4.Book III. Chapter XVII. Section 2
While Adam Smith is revered for liberating mankind from the clutches of government – by showing how we can settle our best interests through voluntary trade, Keynes is detested (or should be) for placing our lives in the hands of PETTY, HALF-BAKED BUREAUCRATS who are supposed to "improve" our well-being and prospects by directing our energy and time into TOTALLY unproductive work.
This idiot Keynes thought that wealth could be conjured up STUPID BUREAUCRATS (from the Treasury department) forcing us to dig up TRASH.
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again …, there need be no more unemployment and, with the help of the repercussions [MULTIPLIERS], the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.The wisdom of Mr John Maynard Keynes(General Theory, p.129)
That this TOTAL FOOL still finds followers among "economists" shows how a bad idea can get a life of its own (just as the "man-made climate change" idea) once powerful people make a hue and cry about such nonsense.
This man would have failed a BASIC economics class. Not even "F" grade, not even ZERO would do. A minus grade. I would have been forced, as lecturer, to send him for remedial tuition.
Now his ideas are widely practiced by statist bureaucrats and politicians, in their desperate urge to conjure up wealth through DESTRUCTION of human incentives. The fool Keynes did not explain from WHOSE POCKET these "banknotes" (that are to be buried in town rubbish) are to come. These can only come from THEFT, either from inflation or by extorting from the rich:
This article, on which Steve Kates gave a talk today, is a must-read for those who missed the lecture. I won't have time to colour-annotate it, but I've created a Word version for those who prefer to read that way. The full text in HTML is provided below.
Steven Kates, RMIT University, Melbourne
Department of Economics, Finance and Marketing
The General Theory… is a mutant notwithstanding Keynes’s own expressed belief that it represents a ‘natural evolution’ in his own line of thought.Paul Samuelson 1946, 194The basic axiom of an exchange economy (sometimes called ‘Say’s Law’) [is] that the supply of one commodity is the demand for another and vice versa, and that consequently the aggregate demand and supply are necessarily equal, with money a mere intermediary.Frank Knight in 1928, 91
The change in title was significant – the influence of monetary manipulation on production rather than prices. (Tarshis in Rymes ed. 1988, I1)
‘Problem of curing unemployment is a problem in monetary economics’. (Tarshis in Rymes ed. 1988, I27)
(3) Spending is good for trade – the extravagant man benefits his neighbours – in a society where S > I generally, the young gentleman would perhaps be conferring a benefit….(4) Held by A[dam] S[mith] that labour is essentially the standard of value – the level of wages determines prices – explanat[ion] of prices was to be found in effective demand.(Rymes ed. 1988, I28; the ellipses and square brackets are found in the original)
Historical – Ideas held at earlier date, etc.Traditionally uncultured at Cambridge EconomicsBut the habit of browsing among old books to get ideas held – merely for cultural interest, etc.(Bryce in Rymes ed. 1988, A48)
The popular view that spending is good for trade– if saving is ahead of investment, the spendthrift is helping the community Only economists believe that saving would be good – O Economists [!](Rymes ed. 1988, A 50; square brackets, including the exclamation mark, are found in Bryce’s notes as recorded by Rymes)
Cf. H.L. McCracken, Value Theory and Business Cycles, [New York, 1933], 46, where this part of Marx’s theory is cited in relation to modern theory.(cw, xxix, 81, fn.; square brackets in the original)
The analysis appears to show that no embodied value theorist can logically explain a business cycle. He either involves himself in a dual theory of value, a logical inconsistency, or explains nothing but a secular trend. The presentation is quite critical, since it deals, as we believe, with the ‘false trails,’ based upon an erroneous theory of value, formulated by Ricardo.(McCracken 1933, v)
Malthus serves as a logical starting point for the consideration of business cycles, first, because he stressed the importance of ‘short run’ factors, and second, because his value approach was from the demand side. Consistent with his theory of value, he held that business might be depressed, either by a voluntary failure of demand on the part of those who had the power but not the will, or by an involuntary failure of demand by those who had the will but not the power.(McCracken 1933, v-vi)
Dear Dr. McCracken,Having now read your book, I must again thank you for having sent it to me. For I have found it of much interest, particularly perhaps the passages relating to Karl Marx, with which I have never been so familiar as I ought to have been.In the matter of Malthus, you will perhaps have seen from my account of him in my lately published “Essays in Biography”, which appeared before your book was out, but after I think you had written it, that I wholly agree with you in regarding him as a much under-estimated pioneer in the line of thought which to-day seems to me by far the most likely to lead to progress in the analysis of the business cycle. Your contrast between Ricardo and Malthus contains, I am convinced, the essence of the matter.Yours very truly,J. M. Keynes
The Automatic Production-Consumption Economists [ie those economists who accept Say’s Law] who insisted that supply created its own demand, that goods exchanged against goods and that a money economy was only refined and convenient indirect barter missed the significance of the money economy entirely.(McCracken 1933, 159; italics added)
It is readily discernible that Malthus was introducing a psychological element into value and price, and the law of demand and supply… By a rigorous application of the principle of diminishing utility, Aftalion showed how the intensity of desire for any given good declines as additional units are acquired or consumed, and in like manner intensity of desire for all goods declines as we climb down the scale of needs from the more necessitous goods to the less necessitous.(McCracken 1933, 214-215)
Psychological observation reveals the existence of a long scale of desires, but desires of diminishing intensity… The intensity of desire diminishes as we increase our power to satisfy the lesser needs.(Ibidem, 145)
If Aftalion has succeeded in establishing the possibility of a voluntary failure of demand by those who have purchasing power but insufficient keenness of desire, when facing expanded production under the influence of the principle of diminishing utility, then it constitutes one of the greatest contributions to economic theory in a generation. Say’s Law of Markets, according to which production financed consumption and supply generated adequate demand is in serious need of modification.(Ibidem, 149, fn.; italics in the original)
It followed that Ricardo’s remedy for overproduction of some goods was more production of other goods. It followed that Malthus’ remedy for overproduction was an increase in unproductive consumption, such as taxes, public employment, highways, improvement of landed estates and more employment of menial servants instead of ‘productive’ laborers.(Ibidem)
This question [Sismondi] argued heatedly with J. B. Say and Ricardo. The two latter consistently held that ‘goods exchange against goods’ and therefore supply could never exceed demand.(Ibidem, 251, fn.)
Commons, an institutional economist who taught at Wisconsin University, is an important, if unacknowledged, influence on Keynes. Indeed, Keynes wrote to him in 1927 that ‘there seems to me to be no other economist with whose general way of thinking I feel myself in such general accord’.(Skidelsky 1992, 229)
A final feature of Institutional Economics centers around the word ‘futurity.’ Commons definitely anticipated Keynes by approximately twenty years.(McCracken 1961, 69)
It is the judgment of the writer that Commons and Keynes have here given us the greatest single contribution to economic theory in this century.(Ibidem, 70-71; italics in the original but the bolding has been added)
After an immense lot of muddling and many drafts, the proper definition of the marginal efficiency of capital linked up one thing with another.(cw, xiv, 85)
Although he does not call it the ‘marginal efficiency of capital,’ Professor Irving Fisher has given in his Theory of Interest (1930) a definition of what he calls ‘the rate of return over costs’ which is identical with my definition… Professor Fisher uses his ‘rate of return over cost’ in the same sense and for precisely the same purpose as I employ ‘the marginal efficiency of capital’.(cw, vii, 140-141)
Now, in the General Theory (p. 141) Keynes himself had attributed priority for the notion of the marginal efficiency of capital to Fisher; and only recently have we (with the help of Paul Samuelson) learned the fascinating story of how this priority was brought to Keynes’ attention by Redvers Opie, at almost the last minute before publication.(Patinkin 1982, 9)
My definition of the marginal efficiency of capital is quite different from anything to be found in [Marshall’s] work or in that of any other classical economist (except for a passage which he makes little subsequent use of in Irving Fisher’s latest book).(cw, xiii, 549)
Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The conception of an objectively measurable probability or chance is simply inapplicable.(Ibidem, 231)
By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is merely probable. The game of roulette is not subject, in this sense, to uncertainty. Or, again, the expectation of life is only slightly uncertain. The sense in which I am using the term is that in which the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention are uncertain. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.(Keynes 1937, 213-214)
This essay having gone out of print, the London School of Economics has done its author the signal honour of including it as a number in its series of reprints.(Knight, op. cit., xi)
It is true that goods and not ‘money’ are needed to produce in the technical sense. But if we conclude from this that money is only an intermediate link, merely of technical importance, and set about substituting it for it the goods which are obtained with it and for which therefore in the last analysis interest is paid, we at once lose the ground from under our feet. Or more correctly expressed: we can indeed take a step or even a few steps away from the money basis into the world of commodities. But the road suddenly ends because these premiums on commodities are not permanent – and then we see at once that this road was wrong, for an essential characteristic of interest is that it is permanent. Therefore it is impossible to pierce the money veil in order to get to the premiums on concrete goods. If one penetrates through it one penetrates into a void. Thus we cannot move away from the money basis of interest.(Ibidem, 184; italics added)
My theory is essentially not a theory that the rate of interest is the factor which, allowing for changes in the level of income, brings the propensity to save into equilibrium with the inducement to invest. My theory is that the rate of interest is the price which brings the demand for liquidity into equilibrium with the amount of liquidity available. It has nothing whatever to do with saving.(cw, xiii, 550)
The remarkable extent to which they anticipated the Keynesian theory of income determination and post-Keynesian growth economics has not been fully appreciated.(Ibidem, 157)
The similarity of certain aspects of the theories of Foster and Catchings to the later views of Keynes is evident from the preceding discussion. Like Keynes, they stressed the independence of decisions to save and invest. They recognized that cyclical instability could result from failure of decisions to invest to offset decisions to save. They were also aware that stability was possible at less than full-employment levels and that chronic unemployment of resources was a serious economic problem. ‘Those who regard stability as the goal appear to overlook the fact that business can be just as stable in the midst of poverty as in the midst of plenty.’ … ‘Even in years of greatest prosperity, industry falls far, far short of using its resources, human and material, to produce all that might readily be produced.’(Ibidem, 161)
Keynes himself did not mention Foster and Catchings in the General Theory. In the Treatise on Money, however, he dealt with the theories of Foster and Catchings, Hobson and Bouniatian as a group. In this discussion he showed that he was unaware at the time that Foster and Catchings, unlike Hobson, treated decisions to save and decisions to invest as largely independent of each other and attached little importance to the distribution of wealth as a contributor to the business cycle.(Ibidem, 161-162)
Among the fallacious notions in popular thinking that have gained very wide currency are to be found a number which grew out of misconceptions as to the real source of the general or total demand for goods, and as to the methods by which that demand is increased or diminished. Several types of these fallacious notions may be cited. Thus, governmental improvements of all kinds, including even those of questionable value, are often supported by business men and others on the ground that such improvements increase the total demand for goods.(Taylor 1925, 196)
The points just brought out with respect to the relation between demand and the output of goods are so evident that some will consider it scarcely legitimate to give them the dignity derived from formal statement. On the other hand, the continued prevalence throughout the larger part of the community of the fallacious notions which these considerations are designed to correct seems to furnish ample ground for any procedure which gives these points adequate emphasis. I shall therefore put the proposition we have discussed in the form of a principle. This principle, I have taken the liberty to designate Say’s Law; because, though recognized by many earlier writers, it was particularly well brought out in the presentation of Say (1803).(Ibidem, 201; italics added)
tory and policy: the 1920s and today», Journal of Economic Issues, xlii, 225-242.
I chanced upon a 1936 review by University of Chicago economist Henry Simons (more on Simons here) which I've OCRd and converted into text, below (Word version here). (Do read Richard Ebeling's comment here!)
Keynes's socialist underpinnings ("wise government") are ripped apart by Simon. He notes how Keynes supports the labour theory of value (something refuted 50 years before him!) and even mercantalism – which was thoroughly rebutted in 1776 by Adam Smith. Keynes, according to Simons, is "the academic idol of our worst cranks and charlatans—not to mention the possibilities of [his] book [being used] as the economic bible of a fascist movement". Also: "only a kind fate can spare him the approbation which he has invited from fools." Unfortunately there are more fools than the wise. It should not surprise us that the VAST majority of "economists" today are Keynesians – and they've done a "wonderful" job of DESTROYING freedom in US and Europe.
Published in The Christian Century, July 22, 1936, p.1017 (PDF here).Keynes Comments on MoneyTHE GENERAL THEORY OF UNEMPLOYMENT, INTEREST AND MONEY. By John Maynard Keynes. Harcourt, Brace & Company, $2.00.THE PUBLICATION of a general treatise on money by the most famous economist of our time is, of course, an important event. Mr. G. D. H. Cole has announced—as promptly and as injudiciously as did Sir Josiah Stamp in reviewing Mr. Keynes’ earlier “Treatise on Money”—that it marks a new era in the progress of economic thought; and the book has received serious and respectful attention in circles where its contents must be about as palatable as the communist manifesto. Mr. Keynes is popularly accepted as one of the authentic geniuses of his generation; and, in spite of his warning that he is writing for specialists, the book will enjoy a wide circulation outside, as well as within, academic circles. It is thus a choice item for laymen who cultivate reputations for serious reading and brilliant conversation.The book is largely in the nature of a revision (if not a repudiation) of the first volume of the “Treatise on Money” and, like that work, is full of brilliant insights and occasionally devastating criticism of other writers. As a general treatise on money, however, it lacks form and structure and represents simply a collection of interesting propositions, expounded awkwardly and presented with little or no indication of the special assumptions and postulates within which they might be valid or meaningful. Strange and novel terms of the analysis are seldom explicitly defined; and those necessary assumptions which the author does recognize (e.g., the assumption of fixity of wage-rates) are insinuated obscurely. Nowhere, moreover, can one discover, even from insinuation, the nature of the monetary system which the argument presupposes. Thus the author gives us a theory of unemployment, interest and money which attains generality by being about nothing at all.Mr. Keynes’ main point is that our economic system has been excessively exposed and subjected to deflationary pressures—that individual savings are likely to get dammed up in hoards, instead of flowing on to finance the production of investment-assets. With this judgment, the reviewer is inclined definitely to agree. Indeed, if the whole book could be interpreted simply as a critical appraisal of the traditional gold standard, implemented through central-bank operations, one’s judgment of its main ideas might be extremely favorable. The author, however, does not invite such interpretation. Moreover, if the book is good as criticism of monetary arrangements of the past, it certainly is not to be commended for its suggestions and implications regarding the desirable arrangements for the future.Announcing a general theory, Mr. Keynes delivers merely a collection of generalizations and practical judgments which have substantial validity with reference to the particular conditions of post-war England, and of other countries since 1930. The nominal eschewing of practical proposals serves only to keep them in an obscure and ambiguous form. Clearly, however, his notions of solution run now in terms of a great and curious variety of expedients—in terms of a highly diffuse kind of political interference. The analytical passages indicate, often illuminatingly, how monetary disturbances are manifested in different aspects of economic behavior and in different phases of the economic process; and they seem intended to demonstrate that wise governmental policy must deal directly with many particular relationships. Thus, the state should use taxation to curtail private saving; it should supplement private consumption and investment with its own spending; and it should force down and keep down the rate of interest to promote new enterprise. At times the author seems to suggest outright fixing of the volume of investment and of the rate of interest by the government.Mr. Keynes nowhere suggests the need for economy in the kinds of governmental interference; and he seems to disregard or grossly to underestimate, the possibilities of controlling all the variables which his analysis emphasizes merely by controlling the quantity of money—i.e., by ordering fiscal practice (spending, taxing, borrowing and currency issue) in terms of deliberate monetary policy. He overlooks the need (clearly suggested by his own analysis) for the minimizing of monetary uncertainties and the achievement of a monetary system based on definite and stable rules. Thus, while expressing decided preference for an economic system of free enterprise, he does not seriously consider what monetary arrangements or what implementations of monetary policy are most and least compatible with that system.[Sanjeev: Keynes, the fabian socialist, was a "pretend" liberal. He pretended to support the market system while seeking to ENTIRELY undermine it - and he has succeeded beyond his wildest imagination, given the results he has achieved in USA and Europe.]Mr. Keynes submits his treatise as a frontal attack upon traditional economic theory. Orthodox economists are rather defenselessly exposed to the charge of making bad applications of their relative-price analysis—of applying carelessly an analysis which abstracts from monetary disturbances in the discussion of practical questions for which monetary problems are crucially important. (The usual academic lecture or textbook chapter on foreign trade and tariff policy is the striking case in point.) But the author attacks, not the bad applications of traditional theory, but the theory itself—with results which will impress only the incompetent.If the attack upon orthodoxy is misdirected, it is also indiscreet. Not content to point out the shortcomings of traditional views, Mr. Keynes proceeds to espouse the cause of an army of cranks and heretics simply on the grounds that their schemes or ideas would incidentally have involved or suggested mitigation of the deflationary tendencies in the economy. The fondness for a labor theory of value may be pardoned an mere intellectual dilettantism; but the author might adequately have criticized economists for their neglect of monetary problems without endorsing mercantilism, autarchie, social credit, stamped money, fantastic governmental spending, the single tax, underconsumption theories and usury laws. The reviewer is not inclined to be more generous toward monetary orthodoxy than is Mr. Keynes. But the sophistical academic leg-pulling which he perpetrates in this volume, however delightful and entertaining in its proper place, should not be done publicly in times like these, least of all by persons of Mr. Keynes’ repute.Readers should be warned against the presumption that the author has eschewed advocacy of practical expedients in favor of objective analytical inquiry, and cautioned against hasty or credulous acceptance of analysis, arguments and critical judgments which are always highly sophisticated and often merely sophistical. Critical readers will find grounds for suspicion either that Mr. Keynes has become overly susceptible to his own clever persuadings or that, having few more laurels to win as an economist, he now aspires to be remembered also as a great wit. Attempting mischievous and salutary irritation of his peers, however, he may only succeed in becoming the academic idol of our worst cranks and charlatans—not to mention the possibilities of the book as the economic bible of a fascist movement.Many economists, including the reviewer, will welcome opportunity to defend Mr. Keynes against all advocates of reactionary monetary policies, and against those who think they can talk sense about our urgent economic problems while abstracting them from monetary disturbances. But only a kind fate can spare him the approbation which he has invited from fools.HENRY C. SIMONS.
From Richard Ebeling's comment cited above:
most of the leading economists of the 1930s wrote highly critical and sometimes devastating reviews of Keynes' "The General Theory" when it was first published. And, yet, Keynesianism "triumphed" anyway.
Henry Hazlitt collected some of the leading ones in his edited volume, "The Critics of Keynesian Economics." But there were many, may others, such as Henry Simon's sharp review.
Joseph Schumpeter was no less hard-hitting. He ended his review in the "Journal of American Statistical Association" (Dec. 1936), with the words:
"The less said about [Keynes' "The General Theory"] the better. Let him who accepts the message there expounded rewrite the history of the French ancien regime in some such terms as these: Louis XV was a most enlightened monarch. Feeling the necessity of stimulating expenditure he secured the services of such expert spenders as Madame de Pompadour and Madame de Barry. They went to work with unsurpassed efficiency. Full employment, a maximum of resulting output, and a general well-being ought to have been the consequence. It is true that instead we find misery, shame and, at the end of it all, a stream of blood. But that was a chance coincidence."
Dennis Robertson, Arthur Pigou, Bertil Ohlin, Gottfried Haberler, Clark Warburton, were devastating in some of their essays and reviews of Keynes' ideas in "The General Theory." Even Alvin Hanson, who became the American "guru" of Keynesianism, said in his first review of the book in 1936 that is was not the basis for a "new economics."
Carl Landauer, a noted socialist who taught at Berkley, wrote a critical analysis of Keynes' theory of interest in the AER in 1937, basically challenging it from a Bohm-Bawerkian perspective on capital and interest!
Swedish economist, Erik Lindahl, wrote a two-part piece on "Keynes' Economic System" that appeared in the Australian "Economic Journal" in 1954 that focused on Keynes' confusions and inconsistency in dealing with the long-run and the short-run, and "statics" and "dynamics" in "The General Theory."
And in 1952, Austrian Economist, Hans Mayer, wrote a fairly detailed critique of Keynes' "New Foundations" for economic theory that bring out the fundamental problems with Keynes' "macro," aggregated approach from an "Austrian" micro, process perspective (alas, the piece is only in German).