XVI. Some Aspects of Edwin Cannan’s “Orthodoxy”

XVI SOME ASPECTS OF EDWIN CANNAN’S “ORTHODOXY”

Carman’s work (fallible though it is) is appropriate for my theme because it might be claimed for him that he was the staunchest of all among opponents of the inflationary solution for employment or recession. But did he for that reason try to explain “what were essentially monetary phenomena” by attributing the causes to “real phenomena”? Actually, it was because of the vagueness of the Keynesian monetary notions, as they were left after Keynes’ Treatise on Money, that Cannan, in his Presidential Address to the Royal Economic Society in 1932, after disassociating himself from economists who believed “that great inconvenient changes of the price-level are as unavoidable as changes of weather,” criticized “the reigning school of monetary experts.” He charged that they had produced so much confusion that “the treasuries, which know very well, are afraid of medicine of which an overdose is easy.”1

Cannan’s suggestions about what had to be done (in his words) “if the world is too stupid to prevent great declines of price levels”2 are not irrelevant to the reforms which are needed today.3 In 1917, declaring that he was “not a monetary expert” but maintaining that “it does not require a monetary expert to judge of the policy at present pursued . . . ,” Cannan warned the British Board of Trade that, if inflation continued, and if the declared policy of restoring effective convertibility after the war were adhered to,4 “complete collapse of prices and general gloom and depression are bound to come”5 (after the war). But writing in February, 1920, before the postwar boom had broken, he argued that “if peoples’ real wealth is decreasing I think it most important to diminish their money means at least equally, so as to make them appreciate their really unhappy position and take the necessary steps to improve it, instead of whining about profiteers”6 [my italics]. It would be easy to ridicule such an attitude today but the words “at least equally” show that Cannan was not advocating deflation. He was here envisaging a measure of what I have termed “monetary flexibility.” Modern critics of the pre-Keynesians ought to consider whether it could not be justly claimed that the eagerly accepted Keynesian nostrum enabled the world’s rulers to postpone taking what Cannan called “the necessary steps” for over four decades. For the problems to which he was referring were just those for which I earnestly believe the coming generation will be forced somehow to find non-inflationary solutions.

Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.”7 The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.”8 He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916).9 The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”10, 11 His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.12, 13 And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.”14 “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.”15 Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.”16 [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .”17 Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.”18 But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared.19 He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”20, 21 And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down,22 he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation”23 (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby24).

I ask now: In what senses can it be claimed that the implications of teachings such as Cannan’s, which I have here sketched in his own words, were “not sensible,” “demonstrably in conflict with the facts of everyday experience,” or “clearly inconsistent with the most salient facts of reality,” and so forth? Surely the answer is, only in the sense that governments and parliamentary oppositions were not primarily concerned with achieving “a plentiful subsistence for the people,” or with prosperity, high wages and full employment, but with the retention or achievement of office, while it was becoming increasingly obvious that “a little inflation” (especially if it was not so described) could achieve contentment and electoral approval for an indefinite period ahead, without arousing angry reactions.

In my judgment at least, the politicians in the treasuries (and outside) were afraid, when Cannan was writing, of the vote-acquisition consequences of the sort of situation which reliance on Cannan-type teachings would create, while parliamentary oppositions were equally scared of solutions which would confront them with the hostility of powerful vested interests—especially the leaders of organized labor. And (as I have already stressed) the economists did not stand together.25 Uncompromisingly “classical” notions were in fact inert.

26But the present world [this time, in my words] seems to be “too stupid to prevent” a creeping rise, or even an accelerating rise in the “price level.”

27About the time he was writing this, Cannan had been reprimanded by “a high authority” for “insinuating” that British currency notes were “inconvertible.” He had actually asserted that they were “practically inconvertible” because it had been made a crime to export gold currency or melt it down for other purposes.28

29He did not regard such a monetary standard as “managed,” except in the sense that the gold standard had to be managed.

30A few months later, Cannan wrote, “There is not the slightest chance of the various nations agreeing on any uniform system of limitation of currencies by prices which would give us the stability of international changes which we possessed before the war.”31

32As early as 1915 he had forecast that “the remedy” for the obvious defects of gold “would have to be found in a cosmopolitan regulation of whatever may be adopted as the standard of value.”33

34Cannan was not, of course, alone in this belief. It was widely held in influential circles. At times Keynes seemed to share the belief.

35. E. Cannan, “Not Enough Work for All,” quoted from the reprint in Cannan, Economic Scares, London, P. S. King, 1933. pp. 40-41.

36. Ibid., p. 41.

37. An Economist’s Protest, London, P. S. King, 1927, pp. 114-116.

38. Ibid., p. 109.

39. Ibid., p. 220.

40. Ibid., p. 229.

41. Ibid., p. 355.

42. Ibid., p. 96.

43. Economic Journal, June, 1924, p. 160.

44. Ibid., March, 1924, p. 64.

45. Ibid., June, 1924, p. 160.

46. Ibid., pp. 160-161.

47. An Economist’s Protest, p. 369.

48. Ibid., p. 406.

49. Ibid., pp. 406-7.

50. J. M. Keynes, in Manchester Guardian Reconstruction Number, April 20, 1922.

51. Economic Journal, June, 1924, p. 161.

52. An Economist’s Protest, p. 218.

53. Ibid., p. 17.

54. Ibid., p. 368.

55. Ibid., p. 369.

56. See Hutt, Politically Impossible . . . ?

1 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
2 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
3*But the present world [this time, in my words] seems to be “too stupid to prevent” a creeping rise, or even an accelerating rise in the “price level.”
4*About the time he was writing this, Cannan had been reprimanded by “a high authority” for “insinuating” that British currency notes were “inconvertible.” He had actually asserted that they were “practically inconvertible” because it had been made a crime to export gold currency or melt it down for other purposes.
5 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
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*He did not regard such a monetary standard as “managed,” except in the sense that the gold standard had to be managed.
11 Ibid.,p. 618.
12*A few months later, Cannan wrote, “There is not the slightest chance of the various nations agreeing on any uniform system of limitation of currencies by prices which would give us the stability of international changes which we possessed before the war.”
13 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.
14 Quoted in Ibid., p. 175.
15 Quoted in Ibid., pp. 205-6.
16 R. W. Clower, Monetary Theory (London, Penguin, 1969), p. 20.
17 P. Sweezy, “Keynes the Economist,” in Science and Society, 1946, p. 300.
18 W. H. Hutt, Theory of Idle Resources (London, Jonathan Cape, 1939).
19 W. H. Hutt, Keynesianism—Retrospect and Prospect (Chicago, Regnery, 1963), p. ix.
20*As early as 1915 he had forecast that “the remedy” for the obvious defects of gold “would have to be found in a cosmopolitan regulation of whatever may be adopted as the standard of value.”
21. An Economist’s Protest, p. 218.
22. Ibid., p. 368.
23. Ibid., p. 369.
24*Cannan was not, of course, alone in this belief. It was widely held in influential circles. At times Keynes seemed to share the belief.
25. See Hutt, Politically Impossible . . . ?
26Cannan’s suggestions about what had to be done (in his words) “if the world is too stupid to prevent great declines of price levels” are not irrelevant to the reforms which are needed today.* In 1917, declaring that he was “not a monetary expert” but maintaining that “it does not require a monetary expert to judge of the policy at present pursued . . . ,” Cannan warned the British Board of Trade that, if inflation continued, and if the declared policy of restoring effective convertibility after the war were adhered to,* “complete collapse of prices and general gloom and depression are bound to come” (after the war). But writing in February, 1920, before the postwar boom had broken, he argued that “if peoples’ real wealth is decreasing I think it most important to diminish their money means at least equally, so as to make them appreciate their really unhappy position and take the necessary steps to improve it, instead of whining about profiteers” [my italics]. It would be easy to ridicule such an attitude today but the words “at least equally” show that Cannan was not advocating deflation. He was here envisaging a measure of what I have termed “monetary flexibility.” Modern critics of the pre-Keynesians ought to consider whether it could not be justly claimed that the eagerly accepted Keynesian nostrum enabled the world’s rulers to postpone taking what Cannan called “the necessary steps” for over four decades. For the problems to which he was referring were just those for which I earnestly believe the coming generation will be forced somehow to find non-inflationary solutions.
27Cannan’s suggestions about what had to be done (in his words) “if the world is too stupid to prevent great declines of price levels” are not irrelevant to the reforms which are needed today.* In 1917, declaring that he was “not a monetary expert” but maintaining that “it does not require a monetary expert to judge of the policy at present pursued . . . ,” Cannan warned the British Board of Trade that, if inflation continued, and if the declared policy of restoring effective convertibility after the war were adhered to,* “complete collapse of prices and general gloom and depression are bound to come” (after the war). But writing in February, 1920, before the postwar boom had broken, he argued that “if peoples’ real wealth is decreasing I think it most important to diminish their money means at least equally, so as to make them appreciate their really unhappy position and take the necessary steps to improve it, instead of whining about profiteers” [my italics]. It would be easy to ridicule such an attitude today but the words “at least equally” show that Cannan was not advocating deflation. He was here envisaging a measure of what I have termed “monetary flexibility.” Modern critics of the pre-Keynesians ought to consider whether it could not be justly claimed that the eagerly accepted Keynesian nostrum enabled the world’s rulers to postpone taking what Cannan called “the necessary steps” for over four decades. For the problems to which he was referring were just those for which I earnestly believe the coming generation will be forced somehow to find non-inflationary solutions.
28 J. M. Keynes, The General Theory (See note above), p. 19.
29Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
30Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
31 Quoted in Ibid., p. 204.
32Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
33. Ibid., p. 17.
34Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
35While 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.
36I 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.
37In 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).
38*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).
39Controversy 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.*
40Controversy 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.*
41*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.
42Schumpeter 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.”
43Schumpeter 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.”
44The 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.*
45The 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.*
46The 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.*
47Turgot, however, discerned the confusion due to supposing that “saving and hoarding are synonymous,” and insisted that although “savings” are made “in the form of money,” the savers have no use for money “than to convert it immediately into different kinds of effects. . . . ” Turgot’s statement is, of course, an exaggeration because it tacitly assumes that the prospective productivity of money is not changing in relation to that of non-money. But his tacit assumption is reasonable enough for most circumstances and his criticism of his contemporaries on the point had, I suggest, validity. It was because of the Physiocrats’ misconceptions on the very issue Turgot had in mind that, in developing his “theory of markets,” Say strongly criticized the school of economists from whom his inspiration may have originated.*
48*E.g., R. W. Clower thinks that “however beneficial” the Keynesian revolution “may have been in its practical effects on a nearly decadent science, it added nothing novel or worthwhile to the theoretical foundations of economic science.”
49One critic of a draft of this essay holds that Keynes regarded Say’s law as a truism of no useful application. Certainly Keynes enunciated the law at one place—quite wrongly—as though it was an identity (“Walras’ identity,” see pp. 33-34). But early protagonists of the “Keynesian revolution” certainly did not take this line. They went to great trouble to refute Say; and I have felt it essential to devote Chap. IV and pp. 24-29, to evaluating some of their objections. Moreover, Keynes’ “unemployment equilibrium” thesis, which the original Keynesian disciples proclaimed as the great insight of their leader, was obviously intended to be a refutation. In one of the most famous of the early defenses of The General Theory, Sweezy triumphantly admitted that “all” the arguments of that book “fall to the ground if the validity of Say’s law is assumed.”
50Although Say’s law is no truism (indeed, I regard it as the most fundamental law in all economic theory) it is not difficult to grasp provided we are not confusing ourselves through defective notions. In my first reading of The General Theory, I was left with the impression that the crucial weakness of that book lay in its conceptual inadequacy. I developed this assertion in the Theory of Idle Resources, 1939, and I made it clear that my main purpose was to establish conceptual clarity in respect of the notion of “unemployment” of men and assets. I devoted a special section to the general question of definitions in economics.* In the Preface of my Keynesianism, 1963, I referred to the feeling I acquired in verbal discussion with friends at the London School of Economics during 1949 and 1956, that I was “not talking the modern language.” I explained how I had perceived “that there are some kinds of language the habitual use of which hinders the perception of certain things as well as the saying of them”; and how I had come to see “that the weaknesses of the system which Keynes had built rest in its conceptual foundations”. And my quarrel today with the surviving Keynesian influences which inspire attempts to inhibit recognition of Say’s law is not with the manipulatory methods used but chiefly with the arbitrariness or sheer woolliness of the notions on which the critical models are constructed. In this essay therefore I shall at the outset carefully define certain very simple yet basic concepts as I shall be using them. This procedure alone may, I think, dissolve many predictable objections to my defense of the law of markets.
51Although Say’s law is no truism (indeed, I regard it as the most fundamental law in all economic theory) it is not difficult to grasp provided we are not confusing ourselves through defective notions. In my first reading of The General Theory, I was left with the impression that the crucial weakness of that book lay in its conceptual inadequacy. I developed this assertion in the Theory of Idle Resources, 1939, and I made it clear that my main purpose was to establish conceptual clarity in respect of the notion of “unemployment” of men and assets. I devoted a special section to the general question of definitions in economics.* In the Preface of my Keynesianism, 1963, I referred to the feeling I acquired in verbal discussion with friends at the London School of Economics during 1949 and 1956, that I was “not talking the modern language.” I explained how I had perceived “that there are some kinds of language the habitual use of which hinders the perception of certain things as well as the saying of them”; and how I had come to see “that the weaknesses of the system which Keynes had built rest in its conceptual foundations”. And my quarrel today with the surviving Keynesian influences which inspire attempts to inhibit recognition of Say’s law is not with the manipulatory methods used but chiefly with the arbitrariness or sheer woolliness of the notions on which the critical models are constructed. In this essay therefore I shall at the outset carefully define certain very simple yet basic concepts as I shall be using them. This procedure alone may, I think, dissolve many predictable objections to my defense of the law of markets.
52Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
53*As early as 1915 he had forecast that “the remedy” for the obvious defects of gold “would have to be found in a cosmopolitan regulation of whatever may be adopted as the standard of value.”
54Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
55Cannan’s support for the return to an effective gold standard did not mean, then, that he was blind to the advantages of a more stable standard in a more civilized world. He warned (early in 1920) that “the thing most unlikely is that gold would be very stable. . . . If mankind want a stable standard,” he wrote, “they must bestir themselves to make one.” The gold standard was, he wrote in 1923, certainly not “the most perfect standard which can and ever will, be devised by civilized man.” One could claim for gold, he said, only a “very moderate amount of stability of value,” and that had “been largely due to a fortunate collocation of circumstances, on the continuance of which it would be unsafe to rely.” He said many times (the first time, I think, in 1915), that he envisaged a more orderly future when the world would “eventually regulate its currency in some way instead of allowing it to be at the mercy of every gold discovery and every invention in the method of extracting it.” (He wrote this in July, 1916). The maintenance of a money unit of constant real value (which he sometimes termed the “general prices standard”) was, he said, “naturally far more attractive . . . as an ideal to be worked for in the future.”* His hesitation about recommending immediate attempts to maintain the value of the money unit “stable in terms of commodities” (instead of stable in terms of gold) was that, before attempting to fashion such a system “we may as well make sure that we know how to do it.” Also he was doubtful about the likelihood of other countries agreeing to any such standard.* And although he agreed that “to tie the purchasing power of money to that of a single metal” was “. . . an expedient fit only for a barbarous age . . . ,” can anyone “have any doubt,” he asked, “that a barbarous age is precisely what we have at the moment to provide for? The cruder and simpler may serve us best for the present and immediate future. . . . For the advantage of exchange stability we ought to be prepared to sacrifice a good deal of the other stability—stability of domestic prices between one time and another.” “Civilization cannot afford to do without a common standard of value. . . .” And when gold is later “superseded . . . by something more stable, its successor will be international also.” Nevertheless he believed (in 1925) that “the surrender of national autonomy in regard to price levels by the re-adoption of the gold standard” would “not in practice mean the abandonment of a fair prospect of stable levels, but the restoration of a very effective barrier against gross inflation.” [My italics] He had little faith in governments not bound by some such standard. “Experience shows,” he said, “that the general tendency to follow ‘managed’ currencies is towards rapid over-issue. . . .” Three years before Cannan took this line Keynes himself had declared that he saw “no solution of (international) stabilization except this traditional solution—namely a gold standard in as many countries as possible.” But there had been no doctrinaire dogmatism on Cannan’s part. “I do not say that gold must forever continue to be the best popular standard,” he declared. He simply thought (in 1920) that Britain had first to “get back to the gold basis and stand on it along with America,” and only then “take part in the international consideration of means of stabilizing that basis itself.”* And in opposing the “just a little inflation” school, in February, 1924, and suggesting that “we should do well to go a little further” in keeping prices down, he added that, if it would hasten the return to convertibility, “we should do well to submit to some devaluation” (although those of us who knew him then were aware of his belief that the prestige of the City of London, which had been a factor of no small importance to the British economy, would be adversely affected thereby*).
56In my judgment at least, the politicians in the treasuries (and outside) were afraid, when Cannan was writing, of the vote-acquisition consequences of the sort of situation which reliance on Cannan-type teachings would create, while parliamentary oppositions were equally scared of solutions which would confront them with the hostility of powerful vested interests—especially the leaders of organized labor. And (as I have already stressed) the economists did not stand together. Uncompromisingly “classical” notions were in fact inert.

A Rehabilitation of Say’s Law