XIV. Harry G. Johnson’s View of Pre-Keynesian Orthodoxy

XIV HARRY G. JOHNSON’S VIEW OF PRE-KEYNESIAN ORTHODOXY

We are now in a position to consider Harry G. Johnson’s judgment (as disclosed in his 1970 Richard Ely Lecture1) of the economists whose teachings Keynes is generally believed to have “debunked”. The most important attribute of what Johnson calls “the prevailing orthodoxy” or “the established orthodoxy” of the 1920s and 1930s was its tacit reliance upon Say’s law. Johnson does not specifically refer to the supposed deficiencies of this law and now quite possibly accepts it; he does not defend the original Keynesian teachings that seemed to challenge it; and his diagnosis of the reasons for the infectious spread of Keynesian ideas (reasons wholly unconnected with the scientific merit of those ideas) is incomparably the most convincing that has yet appeared.2 Nevertheless he charges that, in the 1930s, there existed “. . . an established orthodoxy which (was) clearly inconsistent with the most salient facts of reality . . . its principles and slogans. . . . (were) . . . demonstrably in conflict with the facts of every day experience . . . the prevailing orthodoxy could neither explain nor cope with” the situation which had been created.3 The pre-Keynesians were “hypnotized by the notion that money is merely a veil cast over real phenomena . . . and attempted to explain what were essentially monetary phenomena by real causes.”4, 5 And Johnson accepts Patinkin’s charge that the prevailing school of the 1930s assumed “a tendency to automatic full employment.”6 Hence the “obvious irrelevance of orthodox economics to real problems”7 at that time opened the way for a new theory. But have I not shown how Say’s law explains the periodic emergence of an automatic tendency to unemployment as long as governments are allowed to act (as they typically do, of course) for the private benefit of vote-controlling interests, and neglect their “classical” function of preventing the depressive consequences of scarcity contrivance through private coercion or collusion?

In 1961, Johnson wrote that Keynes had been “polemically right”8 in the shock tactics he employed in 1936, because it had become essential to destroy respect for the “orthodox” tradition which simply did not have the right or acceptable answers. Such answers as it offered were not “sensible,”9 whereas “The General Theory rationalized a sensible policy that had hitherto been resisted on purely dogmatic grounds.”10

Johnson’s attitude is clarified in his 1970 lecture. “New ideas,” he says, “win a public and professional hearing, not on their scientific merits, but on whether or not they promise a solution to important problems that the established orthodoxy has proved itself incapable of solving.”11 He intends this truth to apply (I believe) both to the established “classical orthodoxy” of the 1920s and 1930s as well as to the established Keynesian orthodoxy of today. But there is a radical difference between the two “orthodoxies.” When Keynesian ideas were revolutionary, they were tailor-made for political acceptability. The “classical” ideas that Keynes tried to ridicule would have demanded outstanding statesmanship for their electoral acceptance, and there was no outstanding British statesman in the mid-thirties who had really grasped the issues.

A possible interpretation of Johnson’s contention (and I guess that it is at any rate partly what is in his mind—although he does not say so) is that the economists of the 1920s and 1930s who adhered to “the prevailing orthodoxy” were failing to communicate—failing to persuade governments to apply classical constraints (and hence failing to inspire the policies needed to bring about non-inflationary full employment and prosperity). “Orthodox” theories were incapable of solving the problems of the day, not through their “scientific” demerits, but because it was absurd to expect governments to accept them. If this is the charge it has some substance; but we must not forget that governments were being assured all the time, by Keynesian academicians, that there was an easier way out than remedies which would antagonize a pressure group of dominating political influence.

Now it occurs to me that, assuming this interpretation of Johnson’s position does not misrepresent it, quite possibly he himself is “polemically right” today in disparaging economists who failed to recommend politically acceptable remedies. If his insistence that “classical” economics was “wrong” in the 1930s means (a) that economists did not effectively press for the policies required for the restoration of prosperity; or (b) that through poor exposition of “classical” economics, opinion-makers and governments did not understand what the economists were saying; or (c) that governments dared not formulate policies in the light of “classical” principles if they wished to retain office; or (d) that governments procrastinated in the hope that there might be a less painful way out (as Keynes and his supporters seemed to be promising), then Johnson can contend that now, in the 1970s, “classical” economics is right because circumstances are such that governments may at last be forced to listen to its message. Just as the “established orthodoxy” of the 1930s was, through political unacceptability, “inconsistent with the most salient facts of reality” of that period, so in the 1970s Keynesian economics suffers (Johnson’s words) from an “inability to prescribe for what has come to be considered the major social problem—inflation. . . .”12 The times are therefore propitious for the abandonment of the dominant economic theories and policies of the last three decades.

When governments are becoming increasingly distraught, owing to a growing recognition that only accelerating inflation or totalitarian-type price and wage controls can prevent unemployment (through planned inflation at last coming to be almost universally expected), when they perceive (as they are at least beginning to suspect) that they have “a tiger by the tail,”13 they may be in a mood to learn that unless they apply “the classical medicine,” they are heading for disaster. Hence, for the purposes of press, political platform and pulpit, we may perhaps fruitfully try a tactical (although false) admission that, in the 1930s, “classical” economics was wrong on essentials. But things have now changed. Today the old, discarded teachings are right! In other words, it is conceivable that any case for returning to sound economic doctrine must, to be plausible, and hence to be effective, pander to long inculcated stereotypes about “classical” economics having plunged the western economic world into catastrophic depression, despite the reality being diametrically opposite. I am not sure that this is partly Johnson’s position, although I think it is a tenable position.

In fact, however, the truths of “classical” economics, as I interpret them, are universal. They hold and are equally relevant for the understanding of all historical periods and under all economic frameworks and, where opinion-makers have grasped the message, equally relevant for policy. And they will be no less true when today’s economists have disguised and obscured them by clothing them in the modern jargon and setting them to mathematics.

But suppose I have here misinterpreted the reasons for Johnson’s judgment that pre-Keynesian “orthodox” economics was not “sensible” and could neither cope with nor explain the situation which preceded the “Keynesian revolution.” Suppose he means that charge to be taken literally. In that case, I ask the reader to consider the question: exactly what teachings of the “prevailing orthodoxy” or the “established orthodoxy” are considered not to have been “sensible”? When I myself try to think of the most apposite description of the approach of the majority of the non-Keynesian economists of the 1920s and 1930s it is just that word “sensible” which first occurs to me.

I should say that the chief attributes of the pre-Keynesian “classical” approach to economics were (i) a realistic recognition of the dynamic character of the economic process—clearer in the Austrian tradition than in the Marshallian—and in particular an awareness of the importance of the continuous revision of entrepreneurial expectations in response to continuous changes in the data (“market signals” as we term them today); (ii) a realistic recognition of the sluggishness with which, in certain sectors of the economy, values in exchange (prices) asked or offered, particularly in the case of labor, were adjusted to changing circumstances14; (iii) a realistic awareness of the irrationalities which were influencing the valuing and pricing function, and particularly what we today call “the money illusion”15; (iv) an intuitive perception that Say’s law explained the phenomena which resulted from sluggishness in adjustment to change, such as boom, depression, and cycles of idleness in men and assets.16

Now as we have seen, it is in respect of the relations between monetary (including fiscal) policy and economic policy as a whole that the alleged inadequacies of the “prevailing orthodoxy” are most often assumed to lie, and in the next chapter I shall first direct attention to the teachings of the 1930s on that branch of the subject. Just what were the relevant blind spots of the non-Keynesians here? How far did they in fact try “to explain what were essentially monetary phenomena by real causes”?

17Apart from my own!18

19Johnson’s assertion would have been acceptable if he had written “pricing causes” instead of “real causes.”

20Hayek’s phrase. See A Tiger by the Tail, a symposium of Hayek’s writings on Keynesianism, edited by Sudha Shenoy, I.E.A., 1972.

21In the current political and institutional setup.

22The subjective valuation of the money unit and money’s worth on people’s scales of preference in a manner which is not correlated with the purchasing power (real value) of the unit.

23Idleness which occurred in spite of the fact that services of idle men and assets were valuable, i.e., capable of being demanded.

24. H. G. Johnson, The Keynesian Revolution and the Monetarist Counter-Revolution, A.E.R., May, 1971.

25. “Reflections on the Keynesian Episode,” in Toward Freedom, Ed. F. A. Harper, 1971.

26. Johnson, A.E.R., 1971, op. cit., p. 3.

27. Ibid., p. 4.

28. Ibid., p. 11.

29. Ibid., p. 4.

30. H. G. Johnson, The General Theory after 25 Years, A.E.R., P & P, May 1961, p.26.

31. Ibid., p. 26.

32. Johnson, A.E.R., 1971, op. cit., p. 12.

33. Ibid., p. 12.

34. Ibid., p. 7.

1 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
2*Apart from my own!
3 J. M. Keynes, The General Theory (See note above), p. 19.
4 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
5*Johnson’s assertion would have been acceptable if he had written “pricing causes” instead of “real causes.”
6 J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.
7 Ibid., p. 625.
8 James Mill, Commerce Defended (London, C. and R. Baldwin, 1808), p. 76.
9 Schumpeter, op. cit., p. 617.
10 Ibid.,p. 618.
11 J. J. Spengler, “The Physiocrats and Say’s Law of Markets,” in J. J. Spengler and W. R. Allen, Essays in Economic Thought (Chicago, McNally, 1960), p. 170.
12 Quoted in Ibid., p. 204.
13*Hayek’s phrase. See A Tiger by the Tail, a symposium of Hayek’s writings on Keynesianism, edited by Sudha Shenoy, I.E.A., 1972.
14*In the current political and institutional setup.
15*The subjective valuation of the money unit and money’s worth on people’s scales of preference in a manner which is not correlated with the purchasing power (real value) of the unit.
16*Idleness which occurred in spite of the fact that services of idle men and assets were valuable, i.e., capable of being demanded.
17We are now in a position to consider Harry G. Johnson’s judgment (as disclosed in his 1970 Richard Ely Lecture) of the economists whose teachings Keynes is generally believed to have “debunked”. The most important attribute of what Johnson calls “the prevailing orthodoxy” or “the established orthodoxy” of the 1920s and 1930s was its tacit reliance upon Say’s law. Johnson does not specifically refer to the supposed deficiencies of this law and now quite possibly accepts it; he does not defend the original Keynesian teachings that seemed to challenge it; and his diagnosis of the reasons for the infectious spread of Keynesian ideas (reasons wholly unconnected with the scientific merit of those ideas) is incomparably the most convincing that has yet appeared.* Nevertheless he charges that, in the 1930s, there existed “. . . an established orthodoxy which (was) clearly inconsistent with the most salient facts of reality . . . its principles and slogans. . . . (were) . . . demonstrably in conflict with the facts of every day experience . . . the prevailing orthodoxy could neither explain nor cope with” the situation which had been created. The pre-Keynesians were “hypnotized by the notion that money is merely a veil cast over real phenomena . . . and attempted to explain what were essentially monetary phenomena by real causes.”* And Johnson accepts Patinkin’s charge that the prevailing school of the 1930s assumed “a tendency to automatic full employment.” Hence the “obvious irrelevance of orthodox economics to real problems” at that time opened the way for a new theory. But have I not shown how Say’s law explains the periodic emergence of an automatic tendency to unemployment as long as governments are allowed to act (as they typically do, of course) for the private benefit of vote-controlling interests, and neglect their “classical” function of preventing the depressive consequences of scarcity contrivance through private coercion or collusion?
18 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
19We are now in a position to consider Harry G. Johnson’s judgment (as disclosed in his 1970 Richard Ely Lecture) of the economists whose teachings Keynes is generally believed to have “debunked”. The most important attribute of what Johnson calls “the prevailing orthodoxy” or “the established orthodoxy” of the 1920s and 1930s was its tacit reliance upon Say’s law. Johnson does not specifically refer to the supposed deficiencies of this law and now quite possibly accepts it; he does not defend the original Keynesian teachings that seemed to challenge it; and his diagnosis of the reasons for the infectious spread of Keynesian ideas (reasons wholly unconnected with the scientific merit of those ideas) is incomparably the most convincing that has yet appeared.* Nevertheless he charges that, in the 1930s, there existed “. . . an established orthodoxy which (was) clearly inconsistent with the most salient facts of reality . . . its principles and slogans. . . . (were) . . . demonstrably in conflict with the facts of every day experience . . . the prevailing orthodoxy could neither explain nor cope with” the situation which had been created. The pre-Keynesians were “hypnotized by the notion that money is merely a veil cast over real phenomena . . . and attempted to explain what were essentially monetary phenomena by real causes.”* And Johnson accepts Patinkin’s charge that the prevailing school of the 1930s assumed “a tendency to automatic full employment.” Hence the “obvious irrelevance of orthodox economics to real problems” at that time opened the way for a new theory. But have I not shown how Say’s law explains the periodic emergence of an automatic tendency to unemployment as long as governments are allowed to act (as they typically do, of course) for the private benefit of vote-controlling interests, and neglect their “classical” function of preventing the depressive consequences of scarcity contrivance through private coercion or collusion?
20When governments are becoming increasingly distraught, owing to a growing recognition that only accelerating inflation or totalitarian-type price and wage controls can prevent unemployment (through planned inflation at last coming to be almost universally expected), when they perceive (as they are at least beginning to suspect) that they have “a tiger by the tail,”* they may be in a mood to learn that unless they apply “the classical medicine,” they are heading for disaster. Hence, for the purposes of press, political platform and pulpit, we may perhaps fruitfully try a tactical (although false) admission that, in the 1930s, “classical” economics was wrong on essentials. But things have now changed. Today the old, discarded teachings are right! In other words, it is conceivable that any case for returning to sound economic doctrine must, to be plausible, and hence to be effective, pander to long inculcated stereotypes about “classical” economics having plunged the western economic world into catastrophic depression, despite the reality being diametrically opposite. I am not sure that this is partly Johnson’s position, although I think it is a tenable position.
21I should say that the chief attributes of the pre-Keynesian “classical” approach to economics were (i) a realistic recognition of the dynamic character of the economic process—clearer in the Austrian tradition than in the Marshallian—and in particular an awareness of the importance of the continuous revision of entrepreneurial expectations in response to continuous changes in the data (“market signals” as we term them today); (ii) a realistic recognition of the sluggishness with which, in certain sectors of the economy, values in exchange (prices) asked or offered, particularly in the case of labor, were adjusted to changing circumstances*; (iii) a realistic awareness of the irrationalities which were influencing the valuing and pricing function, and particularly what we today call “the money illusion”*; (iv) an intuitive perception that Say’s law explained the phenomena which resulted from sluggishness in adjustment to change, such as boom, depression, and cycles of idleness in men and assets.*
22I should say that the chief attributes of the pre-Keynesian “classical” approach to economics were (i) a realistic recognition of the dynamic character of the economic process—clearer in the Austrian tradition than in the Marshallian—and in particular an awareness of the importance of the continuous revision of entrepreneurial expectations in response to continuous changes in the data (“market signals” as we term them today); (ii) a realistic recognition of the sluggishness with which, in certain sectors of the economy, values in exchange (prices) asked or offered, particularly in the case of labor, were adjusted to changing circumstances*; (iii) a realistic awareness of the irrationalities which were influencing the valuing and pricing function, and particularly what we today call “the money illusion”*; (iv) an intuitive perception that Say’s law explained the phenomena which resulted from sluggishness in adjustment to change, such as boom, depression, and cycles of idleness in men and assets.*
23I should say that the chief attributes of the pre-Keynesian “classical” approach to economics were (i) a realistic recognition of the dynamic character of the economic process—clearer in the Austrian tradition than in the Marshallian—and in particular an awareness of the importance of the continuous revision of entrepreneurial expectations in response to continuous changes in the data (“market signals” as we term them today); (ii) a realistic recognition of the sluggishness with which, in certain sectors of the economy, values in exchange (prices) asked or offered, particularly in the case of labor, were adjusted to changing circumstances*; (iii) a realistic awareness of the irrationalities which were influencing the valuing and pricing function, and particularly what we today call “the money illusion”*; (iv) an intuitive perception that Say’s law explained the phenomena which resulted from sluggishness in adjustment to change, such as boom, depression, and cycles of idleness in men and assets.*
24While Keynes was writing his famous work I was engaged on a book that appeared a month or two later than his. In my contribution I maintained that “every independent and serious economist . . . must, if his beliefs lie in the path of ‘orthodox’ or Classical tradition, be aware of a periodic recurrence of a sense of utter helplessness. . . . He recognizes that in spheres in which policy and action can be influenced, he is doomed to virtual dumbness today.”* Thus, where Johnson blames the prevailing orthodoxy of the 1930s, I blamed (in 1936) the ignoring of its basic teachings for the emergence and perpetuation of depression.
25I can think of no economist who has shown greater intellectual courage than has Harry Johnson in abandoning previously held positions. Where he now stands in respect of the “law of markets,” I do not know. But I believe that “the classical economists” who “from Smith to Pigou” (in Keynes’ view and Mark Blaug’s words) “. . . fell victims to Say’s law” were better economists because they were so victimized. I believe also that with all their shortcomings the non-Keynesians of the inter-war period had a deeper insight into the origins of chronic unemployment and depression than the overwhelming majority of today’s professional economists. I shall try to substantiate this thesis after a restatement of Say’s “law of markets” and an examination of typical criticisms of that law. At the end of my essay, in Chapters XIV to XVII, I shall briefly discuss the British situation in 1936 as well as “classical” teachings and government policies in Britain between the first world war and 1936. The environment of that period was one which somehow inspired the most influential book in the history of economic thought, the book which engendered the so-called “new economics” or the “Keynesian revolution” and, at a crucial period, destroyed the authority of the economists whom Johnson still disparages but towards whose position he seems (to me at any rate) to have been veering. I shall finally submit my own brief diagnosis of the grave sickness which was plaguing the British economy during the 1930s; and I shall suggest, (a) that exactly the same fundamental problem is baffling British politicians and opinion makers today that was baffling them in the 1920s and 1930s; and (b) that the solution is to be found through a perception of the light which Say’s law throws upon the nature of co-operation in a free economy.
26In defending the pre-Keynesian “classical economists,” and “Say’s law,” I shall insist that this law dominated the prevailing orthodoxy of the 1930s so naturally that it was seldom if ever stated explicitly and (prior to the “Keynesian revolution”) virtually never challenged. But it was ideas we associate with J. B. Say which constitute the vital insight of the “orthodoxy” that Keynes attacked. In one passage Keynes explicitly recognized that the teachings he was trying to refute involved reliance on Say’s law, although in that passage he referred not to Say himself but to J. S. Mill, from whom he quoted an excerpt out of a not very satisfactory exposition of the principle. (See p. 24).
27*I believe that Keynes (General Theory, p. 18) was the first to use this phrase. It has been repeated in these very words by virtually all other economists who have since referred to Say’s law. Even erudite and careful historians of economic thought repeat Keynes’ words, e.g., Schumpeter, Mark Blaug and Tom Sowell, the latter opening his essay with Keynes’ summary of the law and subsequently using the phrase several times. But I cannot trace its ever having been used before Keynes. Sowell refers to it as a “familiar assertion,” which he admits is not a “direct quotation” from Say or James Mill. Leijonhufvud uses it in quotation marks without attributing it to Keynes. (On Keynesian Economics and the Economics of Keynes, p. 280).
28Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .” Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.*
29Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .” Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.*
30*James Mill referred to Say as “a late French writer” and quoted an anecdote of Say’s to illustrate the absurdity of regarding consumption as the source of demand.
31Schumpeter was by no means anti-Say, in spite of the harshness with which he treated him. Properly formulated, he said, Say’s law is true, and “neither trivial nor unimportant.” But he thought that its main importance arose from its “negative” demonstration that general “restrictions of output” were no cure for crisis or depression. Such phenomena were “never to be causally explained solely by everybody’s having produced too much.” This is, of course, a significant implication of the “law.” But if the arguments I shall be developing in this book are valid, Schumpeter disclosed that, just like Say, he did not fully understand the “law of markets.”
32Schumpeter was by no means anti-Say, in spite of the harshness with which he treated him. Properly formulated, he said, Say’s law is true, and “neither trivial nor unimportant.” But he thought that its main importance arose from its “negative” demonstration that general “restrictions of output” were no cure for crisis or depression. Such phenomena were “never to be causally explained solely by everybody’s having produced too much.” This is, of course, a significant implication of the “law.” But if the arguments I shall be developing in this book are valid, Schumpeter disclosed that, just like Say, he did not fully understand the “law of markets.”
33The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,” and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.” And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.” But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.*
34The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,” and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.” And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.” But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.*

A Rehabilitation of Say’s Law