XVII. The Background of Keynes’ “General Theory”

XVII THE BACKGROUND OF KEYNES’ “GENERAL THEORY”

A critic of an earlier version of this essay has asked exactly what policies were implied by the non-Keynesian economics of the inter-war period in respect of the situation which prevailed in Britain in the 1920s and 1930s. I propose to answer in terms of the implications of Say’s law; for tacit acceptance of that law is, as I have already said, what chiefly distinguished Keynesian and non-Keynesian thinking. We must remember that, on the whole, the non-Keynesians were content to provide the analysis and leave the formulation of policy to those who were expert in achieving electoral support. Had they been asked, however, “What do you suggest ought to be done to get us out of the present condition of chronic unemployment and stagnation?”, they would have answered, I think, something like this:

As far as the political situation permits, a basic re-reform of the pricing system needs to be undertaken, aimed specifically at releasing or creating incentives for the setting of market-clearing prices for all inputs and all outputs. Our present unhappy condition is crying out for leadership—genuine leadership which does not shrink from the difficult task of explaining the initially unpopular changes required to achieve what Adam Smith called “a plentiful subsistence for the people.”

But to appreciate the difficulties which would have confronted any statesman who had determined to grasp the nettle, let us look at the conditions which preceded the appearance of The General Theory.

There was no effective anti-monopoly law in Britain. Even the ancient common law against restraint of trade had been so emasculated by judicial decisions that it was of little consequence. But most serious of all in my judgment, duress-imposed labor costs in the unionized sector were gravely constraining profitable outputs in crucial industries, thereby repressing the wages and income flow, and forcing down market-clearing wage-rates in other fields. At the same time, the opinion-makers—press and politicians—were doing virtually nothing to encourage public sympathy for the required reforms. British industrial assets had not suffered serious physical damage during World War I, but their composition had been distorted to meet war demands; in many parts of the economy industrial plants were obsolescent; drastic modernization was often needed if British products were to compete as effectively in world markets as they had before 1914; yet the attitude of organized labor and the attitude of the politicians towards strike-threat exploitation were such as destroyed the prospect of “adequate” yields to the enormous capital investments which effective modernization demanded. Large-scale scrapping of existing plant would have been called for and its replacement with highly specific—i.e., non-versatile—plant; while the incentive to shoulder the formidable risk of supplying it was all too often eradicated through the fear of future strike-threat pressures.1

From time to time an editor, or some other public figure, would reprimand British industrialists for their lack of enterprise—their failure to electrify, or mechanize, or modernize. But I do not think that such admonishment ever referred, in that context, to the reality that, in the absence of radical reform, acceptable yields could hardly be predicted for capital devoted to expensive re-equipment. A situation had emerged in which entrepreneurs could expect that, for the very reason that investment had been made in non-versatile assets, they could expect labor costs to be forced up sooner or later through the threat of a strike.

This was the reason for the technological backwardness of British industry. The fact of (together with fear of) duress-determined labor costs, in crucial spheres, was repressing the means of recovery and rendering plausible government attempts to render high cost productive activities profitable by other means than the removal of privately imposed obstacles to lower costs.

Almost all the labor-economizing innovations which entrepreneurs did try to introduce in exploitable fields were bitterly fought by the unions. The union officials (as well as the rank and file) were oblivious to the reality that, ever since the invention of the wheel and the lever, the achievement of given outputs or objectives with fewer workers or a smaller value of capital assets had been multiplying the number of employment outlets at any given real-wage level.

But because influential leadership was lacking, the unionized sector was allowed to become riddled with demarcations, restraints on entry and restrictive practices generally. Moreover, official policy itself was indirectly fostering cost and price rigidities and, through the form taken by “unemployment compensation,” creating wholly avoidable but apparently chronic unemployment.

The British labor market had indeed become chaotic. Through the influence of the strike-threat in the “sheltered” industries (i.e., in industries selling their outputs primarily at home, or for other reasons not subject to competition from abroad), demands for the inputs and outputs of the “unsheltered” occupations were distressingly constrained. But the blame for the consequential repressed wage-rate levels which could minimize the burden on workers employed in “unsheltered” activities, was typically attributed to the avarice of investors and not ascribed to the “sheltered” culprits. And when efforts were being made to mitigate the hardships of the most conspicuous among the “unsheltered” victims, namely, the unemployed coal miners, by trying to get the employed in that occupation to permit their idle comrades to price themselves into the labor market, Keynes, ignoring the humanitarian motives which had inspired the initiative, helped to sabotage it by crying that it violated “social justice”; and in this context he described the miners as victims of “the Economic Juggernaut.”2 He did not mean by “the Juggernaut,” of course, the powerful unions which had been raising costs and prices in the sheltered sector.

His reckless injustice here illustrates what was really amiss—the deplorable situation which, according to Professor Johnson, classical teachings were powerless to correct. I use the word “reckless” of Keynes’ polemic because (in Melchior Palyi’s phrase) “the men primarily responsible for sterling’s return to the old parity were not ‘reactionaries’, insensitive to the sufferings of their fellow men. Nor did they consider unemployment as an ‘incurable disease,’ ”3 which is a libel that has been repeated more than once.

The “classical economists” of the 1930s, convinced though they were that chronic unemployment was avoidable (even under the deflationary pressures required for the return to gold and the maintenance of the re-established parity), did not emulate Keynes’ polemics. Perhaps they should have done so. They felt, I know, that it was hopeless to expect the politicians to heed them, unless they could concoct reasons for fashioning their recommendations in a politically acceptable form. But the politicians knew what the economists were thinking and teaching, namely, that labor’s inputs were being priced inconsistently with full employment. The situation is made most abundantly clear in F. Benham’s thoughtful but seldom quoted study, British Monetary Policy, published in 1932.4, 5

Because the pre-Keynesian economists diagnosed these pricing phenomena (presumably what Johnson means by “real phenomena”) and abuse of unemployment compensation6 as responsible for low employment stagnation, and because they had no faith in any Keynesian-type prescription, except as a temporary palliative, can we justly charge them with having been “hypnotized by the notion that money is merely a veil . . .”?

Let the reader consider the fact that the situation then ruling, when even Sidney and Beatrice Webb could privately describe the General Council of Trade Unions as “pigs,”7 seems to be almost exactly duplicated in Britain today, in spite of about four decades of experiment with Keynesian policies. The main difference now is that recession has become compatible with inflation, so that monetary palliatives require an accelerating depreciation of the pound’s purchasing power to achieve the vote-acquisition objective. The Chief Secretary to the Treasury (Mr. Patrick Jenkin) was arguing in late 1972 that, because inflation had been expected, its cessation would bring disastrous depression and unemployment. Hence, he claimed, a return to an incomes policy was inevitable. There was the same unwillingness to consider any policy of grasping the nettle and challenging the current acquiescence in strike-threat repression of the wages-flow together with inflationary validation of the consequences. I maintain that the pre-Keynesian economists whom Johnson appears to be disparaging were right in their conviction that attempts at inflationary rectification of a price-disco-ordinated economy would leave the crucial problem unsolved. Is not the present generation still confronted with that problem?

It is common for economists today to refer to the high costs required for adjustment to a convertible currency in 1925, and to blame for failing to predict the costs those economists who believed at that time that Britain should keep her promises and restore the prewar parity. But the formidable and costly difficulties actually experienced had, I believe, a political rather than an economic origin. The burden of transition did not arise out of the inevitable imperfections of the pricing system, but out of restraints upon it. The institutions of representative government under universal suffrage were undergoing revolutionary changes; the long view was being increasingly inhibited; and the chronic depression of the 1930s was one of the major consequences—a politically created pricing chaos which was experienced as the Great Depression.

D. E. Moggridge, in otherwise excellent studies of Britain’s return to gold in 1925 and her attempts to persevere with the gold standard until September, 1931,8 disparages the pre-Keynesian economists for their faulty judgment on the adjustment costs issue during the few years preceding 1925. But the real weakness of the economists of whom Moggridge is thinking must, I suggest, be attributed to their political assumptions, not their economic assumptions. In siding with the broad consensus that Britain could not think of “demeaning herself” (Cannan’s words)9 by breaking a solemn, long reiterated contract to aim at the restoration of the traditional parity with gold, they failed to foresee, or effectively to warn the community of the political implications—that is, of the extremes to which governments could be expected to go in order to avoid temporary unpopularity. Certainly the “classical economists” recognized and spoke out against the injustices to the unemployed and the repressed productivity caused by so-called “unemployment insurance.” But they did not expressly warn of the likelihood that governments would tolerate private restraints or themselves impose restraints on the co-ordinative market pressures (including bank-rate pressures), pressures which could have restored prosperity (even if the gold parity accepted had meant that sterling was initially over-valued10). Of course, it was difficult for economists to predict how future governments would act. But following 1925, through passivity where action was called for, or through intervention where market freedom was called for, governments were destined (after 1925) to magnify the burdens of change.

The faith of the non-Keynesians that, following the restoration of convertibility, unrestrained market pressures could create the required incentives for reductions of such wage-rates and prices as might otherwise further depress the wages and income flows, has never been shown to be wrong. The reductions needed were far less drastic than those which had been brought about during 1920 to 1922 in order to restore some measure of prosperity. Can the economists be blamed, then, for not stressing sufficiently forcibly the danger that unrestrained market pressures were destined to be suppressed? But what did happen was that private or sectional interests with vote-controlling power (acting through government or via monopolistic collusion and strike-threat duress) were allowed gravely to hinder the co-ordinative task of the pricing system. And can the orthodox economists be blamed, in particular, for failing to anticipate how, following the adoption of convertibility, the tradition of disinterested administration of the monetary and credit system would gradually become subject to Treasury pressures dictated by political expediency?

Even before the return to the gold standard, the Bank of England, until then a politically independent central bank, which had been performing, with judicial disinterestedness and expert judgment, a vital yet purely technical task, was beginning to be subjected secretly to “moral suasion” by the Treasury and the Government.11 The most important of the market pressures, the overruling of which multiplied the costs of adjustment to the re-established parity, were bank-rate pressures. But after 1925, “moral suasion” (unauthorized by any legislation and termed “blackmail” by one commentator) impeded, with growing frequency, a crucial co-ordinative control. Again, I ask, who could have been expected to foresee this development?

A different form of disparagement of the non-Keynesian economists of the 1920s and 1930s refers to alleged defects of orthodox monetary theory. Economists like Patinkin, Johnson, and Clower make this charge.

It is true that there were economists of standing in Britain during the first decade of the inter-war period who believed that chronic unemployment may have been due in some measure to over-population, or who blamed it in part on the satiation of human wants, or who seemed to think that public works could serve as a remedy for depression. Johnson refers to them as evidence of the defects of pre-Keynesian economics. But the ideas mentioned here would, I think, have been rejected by all the economists I listed above (on p. 117), and certainly if they had really grasped the meaning of Say’s law. When I think of the prevailing pre-Keynesian “orthodoxy,” I envisage economists who, simply through familiarity with the economic literature of their day, understood Say’s law (without necessarily having read Say or James Mill), who perceived the overriding importance and universal relevance of that law, and who tacitly tested every proposition of economics in the light of its implications.

The fact that there may have been substantial progress in monetary theory since the 1920s and 1930s does not mean that the “classical” teachings of that era had harmful implications. In fact, theoretical progress had been continuous since the beginning of the century. Cannan referred to it in 1924 when he described “the textbooks (on monetary theory) of years ago—not only elementary ones”—as “muddled, unsatisfactory. . . .” He stressed then “the improvement which has taken place,” mentioning inter alia as important steps forward, recognition that “an expected change of prices causes prices to change” and recognition that the demand for money is a demand for holding it.12 I am inclined to think that, had there been no Keynesian disturbance, even more progress in our understanding of monetary phenomena could well have been achieved. For subsequent monetary theorists seem to have felt constrained, even when they have thought of themselves as critics of Keynes, to use models, concepts and jargon derived from The General Theory and to try to reconcile their analyses with his.

Of course, not being prophets, economists in the 1920s and 1930s did not use the jargon and models of the dominant modern economics. In my judgment Patinkin’s article, which Johnson thinks justifies his disparagement of the non-Keynesians (of the inter-war period and later), shows little more than that the early economists of the Chicago school did not use today’s language.

But as I have already insisted, the relevant content of the economics which Keynes attacked was not its monetary theory but its tacit acceptance of Say’s law; while if Johnson’s reference to the failure of “the prevailing orthodoxy” envisages this tacit recognition of the relevance of Say’s law, then his charge cannot be sustained. Looking back on the 1930s in Britain, and regarding the period as an historical economic phenomenon, I believe that, whether or not contemporary non-Keynesians really perceived the full relevance of Say’s law, it offers a complete and wholly satisfactory insight into the nature of the chronic unemployment and the depression which emerged and persisted so disastrously. But if Johnson’s contention can be interpreted (as I hope it can) to mean that the pre-Keynesian economists somehow failed to explain what their economics explained, I agree wholeheartedly.

13The main theme of my recent book, The Strike-Threat System (Arlington House, 1973), is that fear of strikes does much more damage to the wages and income flow than actual strikes or strike-threats because that fear deflates prospective yields to the provision of the most effectively wage-multiplying types of assets, which tend to be the least versatile kinds.

14Quoted in Melchior Palyi, The Twilight of Gold.15 “The slogan ‘social justice,’” wrote Palyi, has been used “for many purposes, legitimate or otherwise, but outside France scarcely, if ever, in favor of widows and orphans living on fixed pensions. Keynes never explained the meaning of this emotion-laden term.”16

17In his very important recent book of the same title, British Monetary Policy, D. E. Moggridge does not refer to Benham’s contribution, even in his his bibliography.

18See pp. 103-108.

19 I heard Cannan use these words (in 1921, I think) during a meeting of the “Sound Currency Association,” at which he was a guest speaker, somewhere in the City of London. A few years later he would have reluctantly accepted a mild devaluation in return for an immediate return to convertibility. (See pp. 131-132).

20The belief that sterling was initially “over-valued” remains a matter of controversy.

21D. E. Moggridge’s latest book, mentioned before, throws new light upon how the Bank of England was gradually coerced in spite of maintaining a posture of independence.22

23. M. Palyi, The Twilight of Gold, Regnery, Chicago, 1972, p. 104.

24. Ibid., pp. 104-6.

25. Ibid., p. 104.

26. F. Benham, British Monetary Policy, P. S. King, London, 1932.

27. Beatrice Webb’s Diaries (Ed., M. Cole), Longmans, 1956, Vol. II, pp. 283-4.

28. D. E. Moggridge, British Monetary Policy, C.U.P., 1972.

29. Ibid., and The Return to Gold, 1925, C.U.P., 1969.

30. E. Cannan, Economic Journal, June 1924, pp. 156-7.

1*The main theme of my recent book, The Strike-Threat System (Arlington House, 1973), is that fear of strikes does much more damage to the wages and income flow than actual strikes or strike-threats because that fear deflates prospective yields to the provision of the most effectively wage-multiplying types of assets, which tend to be the least versatile kinds.
2*Quoted in Melchior Palyi, The Twilight of Gold. “The slogan ‘social justice,’” wrote Palyi, has been used “for many purposes, legitimate or otherwise, but outside France scarcely, if ever, in favor of widows and orphans living on fixed pensions. Keynes never explained the meaning of this emotion-laden term.”
3 J. M. Keynes, The General Theory (See note above), p. 19.
4 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
5*In his very important recent book of the same title, British Monetary Policy, D. E. Moggridge does not refer to Benham’s contribution, even in his his bibliography.
6*See pp. 103-108.
7 J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.
8 James Mill, Commerce Defended (London, C. and R. Baldwin, 1808), p. 76.
9* I heard Cannan use these words (in 1921, I think) during a meeting of the “Sound Currency Association,” at which he was a guest speaker, somewhere in the City of London. A few years later he would have reluctantly accepted a mild devaluation in return for an immediate return to convertibility. (See pp. 131-132).
10*The belief that sterling was initially “over-valued” remains a matter of controversy.
11*D. E. Moggridge’s latest book, mentioned before, throws new light upon how the Bank of England was gradually coerced in spite of maintaining a posture of independence.
12 Schumpeter, op. cit., p. 617.
13There was no effective anti-monopoly law in Britain. Even the ancient common law against restraint of trade had been so emasculated by judicial decisions that it was of little consequence. But most serious of all in my judgment, duress-imposed labor costs in the unionized sector were gravely constraining profitable outputs in crucial industries, thereby repressing the wages and income flow, and forcing down market-clearing wage-rates in other fields. At the same time, the opinion-makers—press and politicians—were doing virtually nothing to encourage public sympathy for the required reforms. British industrial assets had not suffered serious physical damage during World War I, but their composition had been distorted to meet war demands; in many parts of the economy industrial plants were obsolescent; drastic modernization was often needed if British products were to compete as effectively in world markets as they had before 1914; yet the attitude of organized labor and the attitude of the politicians towards strike-threat exploitation were such as destroyed the prospect of “adequate” yields to the enormous capital investments which effective modernization demanded. Large-scale scrapping of existing plant would have been called for and its replacement with highly specific—i.e., non-versatile—plant; while the incentive to shoulder the formidable risk of supplying it was all too often eradicated through the fear of future strike-threat pressures.*
14The British labor market had indeed become chaotic. Through the influence of the strike-threat in the “sheltered” industries (i.e., in industries selling their outputs primarily at home, or for other reasons not subject to competition from abroad), demands for the inputs and outputs of the “unsheltered” occupations were distressingly constrained. But the blame for the consequential repressed wage-rate levels which could minimize the burden on workers employed in “unsheltered” activities, was typically attributed to the avarice of investors and not ascribed to the “sheltered” culprits. And when efforts were being made to mitigate the hardships of the most conspicuous among the “unsheltered” victims, namely, the unemployed coal miners, by trying to get the employed in that occupation to permit their idle comrades to price themselves into the labor market, Keynes, ignoring the humanitarian motives which had inspired the initiative, helped to sabotage it by crying that it violated “social justice”; and in this context he described the miners as victims of “the Economic Juggernaut.”* He did not mean by “the Juggernaut,” of course, the powerful unions which had been raising costs and prices in the sheltered sector.
15 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
16 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
17The “classical economists” of the 1930s, convinced though they were that chronic unemployment was avoidable (even under the deflationary pressures required for the return to gold and the maintenance of the re-established parity), did not emulate Keynes’ polemics. Perhaps they should have done so. They felt, I know, that it was hopeless to expect the politicians to heed them, unless they could concoct reasons for fashioning their recommendations in a politically acceptable form. But the politicians knew what the economists were thinking and teaching, namely, that labor’s inputs were being priced inconsistently with full employment. The situation is made most abundantly clear in F. Benham’s thoughtful but seldom quoted study, British Monetary Policy, published in 1932.*
18Because the pre-Keynesian economists diagnosed these pricing phenomena (presumably what Johnson means by “real phenomena”) and abuse of unemployment compensation* as responsible for low employment stagnation, and because they had no faith in any Keynesian-type prescription, except as a temporary palliative, can we justly charge them with having been “hypnotized by the notion that money is merely a veil . . .”?
19D. E. Moggridge, in otherwise excellent studies of Britain’s return to gold in 1925 and her attempts to persevere with the gold standard until September, 1931, disparages the pre-Keynesian economists for their faulty judgment on the adjustment costs issue during the few years preceding 1925. But the real weakness of the economists of whom Moggridge is thinking must, I suggest, be attributed to their political assumptions, not their economic assumptions. In siding with the broad consensus that Britain could not think of “demeaning herself” (Cannan’s words)* by breaking a solemn, long reiterated contract to aim at the restoration of the traditional parity with gold, they failed to foresee, or effectively to warn the community of the political implications—that is, of the extremes to which governments could be expected to go in order to avoid temporary unpopularity. Certainly the “classical economists” recognized and spoke out against the injustices to the unemployed and the repressed productivity caused by so-called “unemployment insurance.” But they did not expressly warn of the likelihood that governments would tolerate private restraints or themselves impose restraints on the co-ordinative market pressures (including bank-rate pressures), pressures which could have restored prosperity (even if the gold parity accepted had meant that sterling was initially over-valued*). Of course, it was difficult for economists to predict how future governments would act. But following 1925, through passivity where action was called for, or through intervention where market freedom was called for, governments were destined (after 1925) to magnify the burdens of change.
20D. E. Moggridge, in otherwise excellent studies of Britain’s return to gold in 1925 and her attempts to persevere with the gold standard until September, 1931, disparages the pre-Keynesian economists for their faulty judgment on the adjustment costs issue during the few years preceding 1925. But the real weakness of the economists of whom Moggridge is thinking must, I suggest, be attributed to their political assumptions, not their economic assumptions. In siding with the broad consensus that Britain could not think of “demeaning herself” (Cannan’s words)* by breaking a solemn, long reiterated contract to aim at the restoration of the traditional parity with gold, they failed to foresee, or effectively to warn the community of the political implications—that is, of the extremes to which governments could be expected to go in order to avoid temporary unpopularity. Certainly the “classical economists” recognized and spoke out against the injustices to the unemployed and the repressed productivity caused by so-called “unemployment insurance.” But they did not expressly warn of the likelihood that governments would tolerate private restraints or themselves impose restraints on the co-ordinative market pressures (including bank-rate pressures), pressures which could have restored prosperity (even if the gold parity accepted had meant that sterling was initially over-valued*). Of course, it was difficult for economists to predict how future governments would act. But following 1925, through passivity where action was called for, or through intervention where market freedom was called for, governments were destined (after 1925) to magnify the burdens of change.
21Even before the return to the gold standard, the Bank of England, until then a politically independent central bank, which had been performing, with judicial disinterestedness and expert judgment, a vital yet purely technical task, was beginning to be subjected secretly to “moral suasion” by the Treasury and the Government.* The most important of the market pressures, the overruling of which multiplied the costs of adjustment to the re-established parity, were bank-rate pressures. But after 1925, “moral suasion” (unauthorized by any legislation and termed “blackmail” by one commentator) impeded, with growing frequency, a crucial co-ordinative control. Again, I ask, who could have been expected to foresee this development?
22 Ibid., p. 625.
23While 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.
24I 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.
25In 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).
26*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).
27Controversy 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.*
28Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .” Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.*
29*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.
30Schumpeter 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.”

A Rehabilitation of Say’s Law