A Rehabilitation of Say’s Law

XV THE POSITION OF “THE PREVAILING ORTHODOXY” OF THE 1920s AND 1930s

A difficulty we meet in considering H. G. Johnson’s views on the issue raised in Chapter I is that of identifying “the prevailing orthodoxy,” unless the common, but usually tacit, acceptance of Say’s law is supposed to define the group disparaged. That this may perhaps be meant is suggested by Johnson’s allegations that “a tendency to automatic full employment” was assumed and that money was thought of as a mere “veil.” But when (in 1932) Cannan blamed “the reigning school of monetary experts” for the economic troubles of that time (in his Presidential address to the Royal Economic Society), he was obviously not thinking of money as a “mere veil.” Nor were the “monetary experts” he was blaming those whom Keynes was to call the “classical economists” in 1936. Hence one cannot be sure which economists are charged with having adhered to principles “in conflict with the facts of everyday experience.” How can we pinpoint passages which are thought to reflect the grave error that Johnson alleges? As Clower has pointed out, “Keynes . . . had to deal with doctrines of which no authoritative account had been given.”1 If it is mainly a question of monetary economics, for instance, there were really considerable differences among such “classical” exponents as Mises, Marshall, Knight, Pigou, Viner, Roepke, Marget, Lavington, Ohlin, Palyi, Wicksteed, Angell, Hardy, Cannan, Eucken, Robbins, Kemmerer, Hayek, Simons, Hawtrey, Benjamin Anderson, Gregory, Benham, Browne (H. G.), and Mints.2

None of these was a minor figure. Of course, they may well have been all wrong or confused in some degree on one point or another. I have no doubts about that possibility. Monetary theory is by no means an easy subject. And they were necessarily ignorant of the jargon and models which have been developed by post-Keynesian economists! But it is by no means certain that the developments which have characterized economic theory since The General Theory have really contributed so very much to our understanding. As I see things, the truly vital issues are quite simple. In my judgment the modern economists have, with laudable mathematical erudition, erected an imposing and analytically rigorous framework upon an inadequate foundation in respect of conceptual clarity. At all events, I do not think that, using words in their everyday meaning, it can be shown that the economists I have listed above were more wrong than their contemporary critics on any important issue. Still less can I accept Clower’s casual suggestion (quoted before) that the economics of these scholars was “a nearly decadent science.” Moreover, I do not think that the policy implications of their analyses or their explicit recommendations can be shown to have been “demonstrably in conflict with the facts of every day experience,” as Johnson charges. They were, I believe, all realistically and intelligently aware of the facts about which they speculated,3 even though they may sometimes have seriously misunderstood them.

What they can be accused of (or praised for) is having assumed as almost unchallengeable that it was beneficial for mankind to be served by an international monetary system based on contract, disciplined by social (i.e., market) pressures, and entrenched by powerful convention or law against currency debasement (inflation). They may have given too high a priority to such objectives. But this must not be taken to imply that they were oblivious to the possibilities of the inflationary way out of depression. They understood as clearly as their Keynesian critics did that inflation could mitigate or cure unemployment as long as costs lagged in relation to prices. Hence the fact that they urged the avoidance of inflation like the plague (except for emergencies) does not mean that they failed to understand it.

Curiously, it was the Keynesians who seemed to deny, sometimes vehemently, that their proposals were inflationary. During the decade preceding The General Theory, Keynes’ early disciples occasionally suggested “a little inflation.” But with all the woolliness of The General Theory references to “true inflation,” the Keynesians of the late thirties shunned any description of their recommendations as inflationary, in spite of the fact that they were disparaging non-inflationary policies and (in Harrod’s phrase) removing “inhibitions against inflation.”

In respect of economic policy in depression the basic controversy between the non-Keynesians and the Keynesian orthodoxy which supplanted it can be expressed as follows. The so-called “classical” orthodoxy of the 1920s and 1930s had two prongs to its depression policy implications: (1) to avoid the development of an inflationary situation which, requiring subsequent deflationary rectification if contractual monetary obligations were to be honored, would eventually precipitate depression through predictable resistances to the necessary price adjustments; and (2) if depression had emerged for this or other reasons, then in the light of insights derived from an understanding of Say’s law, to encourage or take steps to permit the pricing (of inputs and outputs) needed to restore the aggregate flow of purchasing power (as distinct from raising aggregate “money-spending power”—the money valuation of a given flow of purchasing power). The Keynesian orthodoxy on the other hand, instead of seeking recovery through policies calculated directly to restore aggregate purchasing power, aimed at reducing the measuring rod of value in which previous contracts had been concluded,4 so that an unchanged aggregate purchasing power would be expressed as a greater aggregate “money-spending power”,5 in the conviction that the increased spending would cause aggregate purchasing power to rise, even if less than proportionally to money-spending power.

To express the controversy in different terms, it can be said that the “classical” theory of recession diagnosed what was wrong in a particular kind of human action, namely, in the pricing process. Monetary factors were regarded as vitally relevant, but always as subsidiary to a particular monetary phenomenon, namely, the pricing process—the valuing of services and goods in terms of money. Problems such as recession or unemployment were to be blamed upon the existence of a framework of laws that permitted the determination of costs and prices in a socially deleterious manner, and the overriding of the collective interest by sectionalist interests. Fuller employment, they felt, had to be sought through fundamental reform of pricing or valuing activity. Prosperity would not come about “automatically” unless the institutional framework were deliberately planned with the aim of facilitating or permitting people to price their services, and those of their assets, in accordance with what they thought it profitable to offer one another, and to determine the composition and location of their assets, as well as their skills and domiciles, in the light of their interpretations of consumers’ sovereignty. The Keynesians, on the other hand, avoided criticism of the framework and relied upon a sort of invisible hand which, they held, would be operative under “the maintenance of” (i.e., the inflationary dilution of) “aggregate demand” through fiscal and monetary policy and centralized “controls.”

It is important to insist then that the economic theory which Keynes attacked did not teach or assume (as the present generation of economists seem mostly to have been taught) that “there was an automatic tendency towards full employment”. H. G. Johnson states this explicitly. Possibly I am overlooking some passages in the works of the economists I named above (on p. 117), but my own search has failed to find any phrases which might be responsible for the misconception or justify the charge. For me, at any rate, the implication was precisely the opposite,6 namely, that unless government performed its classical role there was an automatic tendency for groups acting in collusion to price their inputs or outputs in such a way that a cumulative tendency for economies to run down could be set in motion, especially when the honoring of solemn promises to convert, following a “suspension” of currency convertibility, was accorded unquestioned priority.

Where pre-Keynesian teachings may have tended to mislead, was in the associated insight that this automatic tendency towards recession was aggravated by central banks giving way to political pressures for cheap money. As I have just explained, the “classical” economists thought that a period of inflationary ease engendered an inevitable retribution—deflationary rectification. But in spite of their awareness of man-made restraints on the co-ordinative valuing and pricing of inputs and outputs, they did believe (i) that it was possible to set values (and hence prices) of inputs and outputs under the disciplinary pressures of the market; (ii) that these pressures were conducive to the emergence of market-clearing prices and hence to full or optimal employment; and (iii) that economic policy could consciously aim at facilitating or encouraging the required pricing.7

It is on this pricing issue, however, that the theoretical cleavage between the “prevailing orthodoxy” and the Keynesians is most blatant. The latter thought that the inherent weaknesses of the system were to be found in freedom to value and price, not in private or collective restraints on that freedom8; although they held also, as I have already pointed out, that, if sufficient money-spending power were maintained through fiscal or monetary policy (i.e., if “effective demand” were adequate) the valuing and pricing system would function efficiently.

The “classical” objections to the Keynesian policies (which policies Johnson thinks were “sensible” for the 1930s), as distinct from Keynesian economics, were simply the time-honored objections to inflation. The real income transfers which inflation effected (a) from contractual claimants to residual claimants on the value of outputs, (b) from creditors to debtors, and (c) from those whose money incomes rose less than the average to those whose incomes rose more than the average, were regarded as a crude and unjust method of enabling larger outputs to be priceable so as to cover costs9; while the real income transfer effected (d) from the ruled to the rulers was regarded as an undemocratic method of taxation, with governments obtaining funds thereby without overt parliamentary authorization.

No economist questioned Keynes’ assertion (announced in The General Theory in challenging language as though it was a revolutionary discovery10) that “labor” tended to respond to money wage-rate offers rather than to real wage-rate offers. Nor were any of his critics skeptical about the corollary—that if at any moment many real wage-rates were being held higher than was consistent with the maintenance of the normal wages and income flow, a reduction of real wage-rates generally via inflation was a politically acceptable (though crude and unjust) method of restoring that flow (thereby restoring employment of men and assets). The controversy was largely on the points: (a) how long the money illusion would persist when the cost of living rose discernibly; and (even more important) (b) whether a general system of economics could be usefully constructed on the assumption of a distress-precipitating illusion which, the non-Keynesians thought, wise policy should have been planning to dispel. No one questioned that the illusion was a crucial factor in the explanation of depression and chronic unemployment. But a courageous minority of economists did question the wisdom of an approach to economics in which resignation to or acquiescence in an intolerable system of pricing labor in a crucial segment of the economy was elevated into a major premise. To them it seemed preposterous to accept that “just a little inflation” could restore prosperity while “just a little reasonableness in respect of wage-rates” had to be ruled out. I must stress that the recognition by such economists of the wages-restoring power of market-selected wage-rate adjustments did not mean that they were blind to the injustices caused thereby in many individual instances. It was a question of preferring temporary smaller injustices to greater permanent injustices.

Moreover, the pre-Keynesian economists feared the ultimate consequences of “cheap money” as normal policy; for that was what the Keynesians then seemed to be advocating. And they perceived that inflationary palliatives, even if envisaged as temporary, tended to create powerful vested interests in the continuance of inflation.11 It was felt that future governments, anxious to escape from the sociological and political evils which inflation begets, would suddenly discover that they had (in Hayek’s words) “a tiger by the tail.” (See p. 113).

Certainly the pre-Keynesians were biased in favor of a rigid measuring rod of value. But just as a defined (i.e., rigid) ounce, pint or yard protected purchasers, so they thought that a money unit of defined value (such as the gold standard) could protect the public from discrimination, arbitrary dictates and totalitarian tendencies in government generally. They felt that, with all its shortcomings, the gold standard did provide a very effective safeguard against inflation, by reason of the power it conferred on every individual (or on every corporation under the “bullion” form of the standard) to show lack of confidence in the official money unit by preferring gold to paper or deposits.

They recognized further that the gold standard had been remarkably effective in providing orderly and efficient (i.e., cheap) international economic relationships, with credit transactions and investment occurring on a global scale—an achievement for which the costly I.M.F. and the vast and incredibly expensive national bureaucracies which now monitor foreign exchange dealings have in fact turned out to be blatantly ineffective substitutes.

In 1936, I expressed the fear that Keynes of The General Theory, far from proving to be “an inspired missionary who is to rescue us from idolatry” could turn out to be “a false prophet who can lead us to damnation.”12 Nevertheless I do not think that any economist who shared such fears could predict, before the end of the Second World War, just how disastrously the actual adoption of Keynesian policies would drive us all along “the road to serfdom.” It was only as concrete monetary experience of national currencies disciplined only by the I.M.F. agreements began to be judged that those economists who had resisted pressures to conform to the Keynesian creed began to see how justified their misgivings had been. They could then perceive that, relieved of any obligation to maintain a money unit of defined value, central banks were becoming political instruments manipulated for the profit of governments. The search for prosperity through collective control of “expenditure” accelerated a gradual destruction of the independence of central banks from the vote-acquisition process. (See below, pp. 141-142). The general fear then emerged that, once the inflation drug had been administered over any extended period, the economic system would become hopelessly addicted. Creeping, crawling, chronic inflation would seem to be essential for continuing economic health, and increasing doses would eventually appear necessary just to keep the system functioning. Ultimately, it was feared, a proliferation of totalitarian controls would become necessary to prevent individuals from using the remnants of the free market to protect themselves from some of the consequences. But for a long period the non-Keynesians seemed to be cowed by the sheer weight of academic opinion arrayed against them.13

If the Keynesian era is regarded as an experiment, then it can be claimed that the most pertinent difference between the “classical” and Keynesian remedies for depression is that the “classical” ideas were never tried—never submitted to experimental testing.14 The blame for that may lie as much with the economists of the day as with the governments, a possibility which brings us back to my first interpretation of Johnson’s diagnosis. The economists were so eager to be helpful and influential, and so anxious not to appear to be advising unsophisticated, unrealistic, “politically impossible” programs that they all made their own tacit allowances for the political factor. Unfortunately, their judgments about what would be politically acceptable differed so widely that they failed to speak with the united voice that normally characterizes, say, the expressed opinions of practitioners versed in medical science, and any authority with which they spoke was weakened.15

I do not think that any of the British economists who gave highest priority to the keeping of promises (i.e., the maintenance of convertibility) were surprised when the abandonment of that objective, followed by hesitant experiments in undisciplined monetary expansion, began to bring about a gradual recovery of outputs. The inflation set going through the era of competitive depreciation of national currencies in terms of gold (inaugurated by the British devaluation of September, 1931) raised prospective yields to investment in replacement and growth, which fear of strikes (or actual strikes) had for long been repressing. But in so doing it initiated the political tradition of validating duress-imposed costs by creeping inflation. Hence when British policy-makers in the 1930s are charged with lacking an adequate appreciation of the importance of money in facilitating economic growth, the word “money” is really a euphemism for “unanticipated inflation.”

In addition to a general acceptance of the idea that there were great advantages, domestically and internationally, in the existence of a defined, contractually based measuring rod of value, the economists Keynes is supposed to have “debunked” recognized, tacitly or explicitly, the validity of Say’s law. And it was against this aspect of the prevailing orthodoxy that Keynes’ assault was really directed. Indeed, as I mentioned before, one of the most influential of the extremist Keynesians (Sweezy) admitted, in 1946, that the arguments of The General Theory would all be untenable if the validity of Say’s law could be established.16 If, then, Johnson’s point is that it was acceptance of the “law of markets” which rendered “the prevailing orthodoxy” of the 1930s so futile, I must respectfully differ diametrically. I claim indeed to have shown that, through an understanding of Say’s law, an all-sufficient explanation of the source of depression and the way to avoid it is available.

Admittedly, the economists whose insight into the working of that law toned their approach to the economic problems of the 1930s could well have been gravely in error on some incidental yet practically decisive matters. Perhaps, then, it is in respect of subsidiary yet imperative issues that the economists Johnson disparages are thought of as unsatisfactory. To consider this possibility, I propose to examine the relevant teachings of a great scholar of the old school whom I have already quoted—Edwin Cannan.

 

 

17Johnson, relying on a recent article by Patinkin, seems to have the early Chicago school mainly in mind. (See p. 142).

18I do not include here Cassel, Robertson, Henderson or Fisher because, although “classical” economists of stature, they tended to side with Keynes during the pre-General Theory period.

19On one important issue they were misled through official secrecy. (See PP. 141-3).

20As I have just asserted, they avoided putting it in this way. They stressed fiscal policy—spending (which they confused with demanding) which could be increased via budgetary deficits.

21Cannan’s plea in 1924 for a distinction to be made between “purchasing power” and “money-spending power” did not, unfortunately, become part of the standard nomenclature of economics. Cannan pointed to the absurdity of saying that “the purchasing power of the German people was increased when they had trillions of marks to buy with.”22 As things are, modern economists still talk of “aggregate purchasing power” (or “aggregate demand”) increasing through “newly activated money” or “newly created money.”

23That this was my own position prior to the appearance of Keynes’ General Theory is proved by my Economists and the Public, 1936, and my claim in The Theory of Idle Resources, 1939, that it was “pure orthodoxy,” a claim which was never challenged. See also, in particular, F. Benham, British Monetary Policy (1932).

24The “classical” economists may in general have given insufficient weight to the political factor. But they certainly tried to interpret the concrete vote-acquisition phenomena of their day, even when they failed to perceive the policy consequences of a growing awareness of the profits to be won (by politicians and pressure groups) through realistic exploitation of universal suffrage. They never expected miracles.

25A difficulty is that at times Keynes and his disciples were assuming restraints on market freedom as causes of recession.

26“Crude and unjust” partly because such a constraint of the wages and income flow is not due to all real wage-rates being too high but to some being too high. Inflation hits the innocent as well as the culprits.

27Cannan referred to it, for instance, in 1933, in the passage quoted in Chap. VIII, pp. 57-58.

28Although, in spite of recognizing such dangers, they did not dogmatically rule out “temporary” inflation in all circumstances. Still less would they have ruled out “monetary flexibility” under my definition when, say, gold standard pressures were strongly deflationary, as they seem to have been in the United States between 1929 and 1933. Compare Cannan’s reference (in 1932) to the world being “too stupid to prevent great declines in price levels” (quoted later in Chapter XVI, p. 128).

29I confess that I was cowed. See the Preface to my Keynesianism.

30This was a principal theme of my Economists and the Public which appeared only a month or so after the publication of Keynes’ General Theory in 1936.

31My recent book, Politically Impossible. . . . . . ?,32 largely deals with this issue.

33See p. 10.

 

 

34.  R. Clower, Monetary Theory, p. 271.

35.  E. Cannan, Economic Journal, March, 1924, p. 59n.

36.  W. H. Hutt, Politically Impossible. . . . . ?, I.E.A., London, 1971.

• 1*Johnson, relying on a recent article by Patinkin, seems to have the early Chicago school mainly in mind. (See p. 142).
• 2*I do not include here Cassel, Robertson, Henderson or Fisher because, although “classical” economists of stature, they tended to side with Keynes during the pre-General Theory period.
• 3*On one important issue they were misled through official secrecy. (See PP. 141-3).
• 4*As I have just asserted, they avoided putting it in this way. They stressed fiscal policy—spending (which they confused with demanding) which could be increased via budgetary deficits.
• 5*Cannan’s plea in 1924 for a distinction to be made between “purchasing power” and “money-spending power” did not, unfortunately, become part of the standard nomenclature of economics. Cannan pointed to the absurdity of saying that “the purchasing power of the German people was increased when they had trillions of marks to buy with.” As things are, modern economists still talk of “aggregate purchasing power” (or “aggregate demand”) increasing through “newly activated money” or “newly created money.”
• 6*That this was my own position prior to the appearance of Keynes’ General Theory is proved by my Economists and the Public, 1936, and my claim in The Theory of Idle Resources, 1939, that it was “pure orthodoxy,” a claim which was never challenged. See also, in particular, F. Benham, British Monetary Policy (1932).
• 7*The “classical” economists may in general have given insufficient weight to the political factor. But they certainly tried to interpret the concrete vote-acquisition phenomena of their day, even when they failed to perceive the policy consequences of a growing awareness of the profits to be won (by politicians and pressure groups) through realistic exploitation of universal suffrage. They never expected miracles.
• 8*A difficulty is that at times Keynes and his disciples were assuming restraints on market freedom as causes of recession.
• 9*“Crude and unjust” partly because such a constraint of the wages and income flow is not due to all real wage-rates being too high but to some being too high. Inflation hits the innocent as well as the culprits.
• 10*Cannan referred to it, for instance, in 1933, in the passage quoted in Chap. VIII, pp. 57-58.
• 11*Although, in spite of recognizing such dangers, they did not dogmatically rule out “temporary” inflation in all circumstances. Still less would they have ruled out “monetary flexibility” under my definition when, say, gold standard pressures were strongly deflationary, as they seem to have been in the United States between 1929 and 1933. Compare Cannan’s reference (in 1932) to the world being “too stupid to prevent great declines in price levels” (quoted later in Chapter XVI, p. 128).
• 12 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
• 13*I confess that I was cowed. See the Preface to my Keynesianism.
• 14*This was a principal theme of my Economists and the Public which appeared only a month or so after the publication of Keynes’ General Theory in 1936.
• 15*My recent book, Politically Impossible. . . . . . ?, largely deals with this issue.
• 16*See p. 10.
• 17A difficulty we meet in considering H. G. Johnson’s views on the issue raised in Chapter I is that of identifying “the prevailing orthodoxy,” unless the common, but usually tacit, acceptance of Say’s law is supposed to define the group disparaged. That this may perhaps be meant is suggested by Johnson’s allegations that “a tendency to automatic full employment” was assumed and that money was thought of as a mere “veil.” But when (in 1932) Cannan blamed “the reigning school of monetary experts” for the economic troubles of that time (in his Presidential address to the Royal Economic Society), he was obviously not thinking of money as a “mere veil.” Nor were the “monetary experts” he was blaming those whom Keynes was to call the “classical economists” in 1936. Hence one cannot be sure which economists are charged with having adhered to principles “in conflict with the facts of everyday experience.” How can we pinpoint passages which are thought to reflect the grave error that Johnson alleges? As Clower has pointed out, “Keynes . . . had to deal with doctrines of which no authoritative account had been given.”* If it is mainly a question of monetary economics, for instance, there were really considerable differences among such “classical” exponents as Mises, Marshall, Knight, Pigou, Viner, Roepke, Marget, Lavington, Ohlin, Palyi, Wicksteed, Angell, Hardy, Cannan, Eucken, Robbins, Kemmerer, Hayek, Simons, Hawtrey, Benjamin Anderson, Gregory, Benham, Browne (H. G.), and Mints.*
• 18A difficulty we meet in considering H. G. Johnson’s views on the issue raised in Chapter I is that of identifying “the prevailing orthodoxy,” unless the common, but usually tacit, acceptance of Say’s law is supposed to define the group disparaged. That this may perhaps be meant is suggested by Johnson’s allegations that “a tendency to automatic full employment” was assumed and that money was thought of as a mere “veil.” But when (in 1932) Cannan blamed “the reigning school of monetary experts” for the economic troubles of that time (in his Presidential address to the Royal Economic Society), he was obviously not thinking of money as a “mere veil.” Nor were the “monetary experts” he was blaming those whom Keynes was to call the “classical economists” in 1936. Hence one cannot be sure which economists are charged with having adhered to principles “in conflict with the facts of everyday experience.” How can we pinpoint passages which are thought to reflect the grave error that Johnson alleges? As Clower has pointed out, “Keynes . . . had to deal with doctrines of which no authoritative account had been given.”* If it is mainly a question of monetary economics, for instance, there were really considerable differences among such “classical” exponents as Mises, Marshall, Knight, Pigou, Viner, Roepke, Marget, Lavington, Ohlin, Palyi, Wicksteed, Angell, Hardy, Cannan, Eucken, Robbins, Kemmerer, Hayek, Simons, Hawtrey, Benjamin Anderson, Gregory, Benham, Browne (H. G.), and Mints.*
• 19None of these was a minor figure. Of course, they may well have been all wrong or confused in some degree on one point or another. I have no doubts about that possibility. Monetary theory is by no means an easy subject. And they were necessarily ignorant of the jargon and models which have been developed by post-Keynesian economists! But it is by no means certain that the developments which have characterized economic theory since The General Theory have really contributed so very much to our understanding. As I see things, the truly vital issues are quite simple. In my judgment the modern economists have, with laudable mathematical erudition, erected an imposing and analytically rigorous framework upon an inadequate foundation in respect of conceptual clarity. At all events, I do not think that, using words in their everyday meaning, it can be shown that the economists I have listed above were more wrong than their contemporary critics on any important issue. Still less can I accept Clower’s casual suggestion (quoted before) that the economics of these scholars was “a nearly decadent science.” Moreover, I do not think that the policy implications of their analyses or their explicit recommendations can be shown to have been “demonstrably in conflict with the facts of every day experience,” as Johnson charges. They were, I believe, all realistically and intelligently aware of the facts about which they speculated,* even though they may sometimes have seriously misunderstood them.
• 20In respect of economic policy in depression the basic controversy between the non-Keynesians and the Keynesian orthodoxy which supplanted it can be expressed as follows. The so-called “classical” orthodoxy of the 1920s and 1930s had two prongs to its depression policy implications: (1) to avoid the development of an inflationary situation which, requiring subsequent deflationary rectification if contractual monetary obligations were to be honored, would eventually precipitate depression through predictable resistances to the necessary price adjustments; and (2) if depression had emerged for this or other reasons, then in the light of insights derived from an understanding of Say’s law, to encourage or take steps to permit the pricing (of inputs and outputs) needed to restore the aggregate flow of purchasing power (as distinct from raising aggregate “money-spending power”—the money valuation of a given flow of purchasing power). The Keynesian orthodoxy on the other hand, instead of seeking recovery through policies calculated directly to restore aggregate purchasing power, aimed at reducing the measuring rod of value in which previous contracts had been concluded,* so that an unchanged aggregate purchasing power would be expressed as a greater aggregate “money-spending power”,* in the conviction that the increased spending would cause aggregate purchasing power to rise, even if less than proportionally to money-spending power.
• 21In respect of economic policy in depression the basic controversy between the non-Keynesians and the Keynesian orthodoxy which supplanted it can be expressed as follows. The so-called “classical” orthodoxy of the 1920s and 1930s had two prongs to its depression policy implications: (1) to avoid the development of an inflationary situation which, requiring subsequent deflationary rectification if contractual monetary obligations were to be honored, would eventually precipitate depression through predictable resistances to the necessary price adjustments; and (2) if depression had emerged for this or other reasons, then in the light of insights derived from an understanding of Say’s law, to encourage or take steps to permit the pricing (of inputs and outputs) needed to restore the aggregate flow of purchasing power (as distinct from raising aggregate “money-spending power”—the money valuation of a given flow of purchasing power). The Keynesian orthodoxy on the other hand, instead of seeking recovery through policies calculated directly to restore aggregate purchasing power, aimed at reducing the measuring rod of value in which previous contracts had been concluded,* so that an unchanged aggregate purchasing power would be expressed as a greater aggregate “money-spending power”,* in the conviction that the increased spending would cause aggregate purchasing power to rise, even if less than proportionally to money-spending power.
• 22 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
• 23It is important to insist then that the economic theory which Keynes attacked did not teach or assume (as the present generation of economists seem mostly to have been taught) that “there was an automatic tendency towards full employment”. H. G. Johnson states this explicitly. Possibly I am overlooking some passages in the works of the economists I named above (on p. 117), but my own search has failed to find any phrases which might be responsible for the misconception or justify the charge. For me, at any rate, the implication was precisely the opposite,* namely, that unless government performed its classical role there was an automatic tendency for groups acting in collusion to price their inputs or outputs in such a way that a cumulative tendency for economies to run down could be set in motion, especially when the honoring of solemn promises to convert, following a “suspension” of currency convertibility, was accorded unquestioned priority.
• 24Where pre-Keynesian teachings may have tended to mislead, was in the associated insight that this automatic tendency towards recession was aggravated by central banks giving way to political pressures for cheap money. As I have just explained, the “classical” economists thought that a period of inflationary ease engendered an inevitable retribution—deflationary rectification. But in spite of their awareness of man-made restraints on the co-ordinative valuing and pricing of inputs and outputs, they did believe (i) that it was possible to set values (and hence prices) of inputs and outputs under the disciplinary pressures of the market; (ii) that these pressures were conducive to the emergence of market-clearing prices and hence to full or optimal employment; and (iii) that economic policy could consciously aim at facilitating or encouraging the required pricing.*
• 25It is on this pricing issue, however, that the theoretical cleavage between the “prevailing orthodoxy” and the Keynesians is most blatant. The latter thought that the inherent weaknesses of the system were to be found in freedom to value and price, not in private or collective restraints on that freedom*; although they held also, as I have already pointed out, that, if sufficient money-spending power were maintained through fiscal or monetary policy (i.e., if “effective demand” were adequate) the valuing and pricing system would function efficiently.
• 26The “classical” objections to the Keynesian policies (which policies Johnson thinks were “sensible” for the 1930s), as distinct from Keynesian economics, were simply the time-honored objections to inflation. The real income transfers which inflation effected (a) from contractual claimants to residual claimants on the value of outputs, (b) from creditors to debtors, and (c) from those whose money incomes rose less than the average to those whose incomes rose more than the average, were regarded as a crude and unjust method of enabling larger outputs to be priceable so as to cover costs*; while the real income transfer effected (d) from the ruled to the rulers was regarded as an undemocratic method of taxation, with governments obtaining funds thereby without overt parliamentary authorization.
• 27No economist questioned Keynes’ assertion (announced in The General Theory in challenging language as though it was a revolutionary discovery*) that “labor” tended to respond to money wage-rate offers rather than to real wage-rate offers. Nor were any of his critics skeptical about the corollary—that if at any moment many real wage-rates were being held higher than was consistent with the maintenance of the normal wages and income flow, a reduction of real wage-rates generally via inflation was a politically acceptable (though crude and unjust) method of restoring that flow (thereby restoring employment of men and assets). The controversy was largely on the points: (a) how long the money illusion would persist when the cost of living rose discernibly; and (even more important) (b) whether a general system of economics could be usefully constructed on the assumption of a distress-precipitating illusion which, the non-Keynesians thought, wise policy should have been planning to dispel. No one questioned that the illusion was a crucial factor in the explanation of depression and chronic unemployment. But a courageous minority of economists did question the wisdom of an approach to economics in which resignation to or acquiescence in an intolerable system of pricing labor in a crucial segment of the economy was elevated into a major premise. To them it seemed preposterous to accept that “just a little inflation” could restore prosperity while “just a little reasonableness in respect of wage-rates” had to be ruled out. I must stress that the recognition by such economists of the wages-restoring power of market-selected wage-rate adjustments did not mean that they were blind to the injustices caused thereby in many individual instances. It was a question of preferring temporary smaller injustices to greater permanent injustices.
• 28Moreover, the pre-Keynesian economists feared the ultimate consequences of “cheap money” as normal policy; for that was what the Keynesians then seemed to be advocating. And they perceived that inflationary palliatives, even if envisaged as temporary, tended to create powerful vested interests in the continuance of inflation.* It was felt that future governments, anxious to escape from the sociological and political evils which inflation begets, would suddenly discover that they had (in Hayek’s words) “a tiger by the tail.” (See p. 113).
• 29In 1936, I expressed the fear that Keynes of The General Theory, far from proving to be “an inspired missionary who is to rescue us from idolatry” could turn out to be “a false prophet who can lead us to damnation.” Nevertheless I do not think that any economist who shared such fears could predict, before the end of the Second World War, just how disastrously the actual adoption of Keynesian policies would drive us all along “the road to serfdom.” It was only as concrete monetary experience of national currencies disciplined only by the I.M.F. agreements began to be judged that those economists who had resisted pressures to conform to the Keynesian creed began to see how justified their misgivings had been. They could then perceive that, relieved of any obligation to maintain a money unit of defined value, central banks were becoming political instruments manipulated for the profit of governments. The search for prosperity through collective control of “expenditure” accelerated a gradual destruction of the independence of central banks from the vote-acquisition process. (See below, pp. 141-142). The general fear then emerged that, once the inflation drug had been administered over any extended period, the economic system would become hopelessly addicted. Creeping, crawling, chronic inflation would seem to be essential for continuing economic health, and increasing doses would eventually appear necessary just to keep the system functioning. Ultimately, it was feared, a proliferation of totalitarian controls would become necessary to prevent individuals from using the remnants of the free market to protect themselves from some of the consequences. But for a long period the non-Keynesians seemed to be cowed by the sheer weight of academic opinion arrayed against them.*
• 30If the Keynesian era is regarded as an experiment, then it can be claimed that the most pertinent difference between the “classical” and Keynesian remedies for depression is that the “classical” ideas were never tried—never submitted to experimental testing.* The blame for that may lie as much with the economists of the day as with the governments, a possibility which brings us back to my first interpretation of Johnson’s diagnosis. The economists were so eager to be helpful and influential, and so anxious not to appear to be advising unsophisticated, unrealistic, “politically impossible” programs that they all made their own tacit allowances for the political factor. Unfortunately, their judgments about what would be politically acceptable differed so widely that they failed to speak with the united voice that normally characterizes, say, the expressed opinions of practitioners versed in medical science, and any authority with which they spoke was weakened.*
• 31If the Keynesian era is regarded as an experiment, then it can be claimed that the most pertinent difference between the “classical” and Keynesian remedies for depression is that the “classical” ideas were never tried—never submitted to experimental testing.* The blame for that may lie as much with the economists of the day as with the governments, a possibility which brings us back to my first interpretation of Johnson’s diagnosis. The economists were so eager to be helpful and influential, and so anxious not to appear to be advising unsophisticated, unrealistic, “politically impossible” programs that they all made their own tacit allowances for the political factor. Unfortunately, their judgments about what would be politically acceptable differed so widely that they failed to speak with the united voice that normally characterizes, say, the expressed opinions of practitioners versed in medical science, and any authority with which they spoke was weakened.*
• 32 J. M. Keynes, The General Theory (See note above), p. 19.
• 33In addition to a general acceptance of the idea that there were great advantages, domestically and internationally, in the existence of a defined, contractually based measuring rod of value, the economists Keynes is supposed to have “debunked” recognized, tacitly or explicitly, the validity of Say’s law. And it was against this aspect of the prevailing orthodoxy that Keynes’ assault was really directed. Indeed, as I mentioned before, one of the most influential of the extremist Keynesians (Sweezy) admitted, in 1946, that the arguments of The General Theory would all be untenable if the validity of Say’s law could be established.* If, then, Johnson’s point is that it was acceptance of the “law of markets” which rendered “the prevailing orthodoxy” of the 1930s so futile, I must respectfully differ diametrically. I claim indeed to have shown that, through an understanding of Say’s law, an all-sufficient explanation of the source of depression and the way to avoid it is available.
• 34While 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.
• 35I 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.
• 36In 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).