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Quarterly Journal of Austrian Economics 13,
No 4 Winter 2010, Mises Institute, 32 pgs.,
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Reviewer Comment:
This is the text of an address Mr. Kates delivered to the Austrian Scholar's
Conference at the Ludwig von Mises Institute on 13 March 2010. His theme is to
refute Keynes' refusal to believe in J. B. Say's 'law of markets'. And he
repeates a comment of von Mises that Keynes' entire economic theory is based on
his concept of the importance of demand (lack of enough leading to recession).
He discusses several other falicies and simple refusals to believe what
classical economists had believed for over a century. This is a very important
article. As the author notes, practically the entire economist profession
simply follows Keynes in his fundamental errors. And this is especially a
dangerous falicy on which so many FED economists base monetary policy.
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Ludwig von Mises Lecture
In his lecture opening, Dr. Kates comments on his 'imaginable regard' for von
Mises. He also admires Friedrich Hayek. He claims personal credit for having
discovered Say's Law while reinventing it himself. For this he quotes John
Stuart Mill from 1844, who then wrote about the absurd idea that a government
could benefit a producer by first taking his money and then using it to pay for
his prodution. He ties this to Say's Law by pointing out that government
spending does not necessairly promote economic expansion or employment. 'Demand
does not drive an economy forward, nor does demanddeficiency cause
recessions."
But that theory is fundamental to Keynesian economics.
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Understanding the Keynesian Revolution
Dr. Kates claims the Keynes found his ideas in Malthus' writing to Ricardo. It
was this that caused him to think about the idea that 'demand deficiency' might
cause recession. Prior to Keynes classical economists had denied validity of
this theory. Dr. Kates cites this as a cause for Keynes' change of views in the
1930's immediately after finding the Malthus-Ricardo correspondence. He notes
that it was Malthus who had supported the concept of 'demand deficiency'. And
Keynes reintroduced the theory in his highly influential book - General
Theory..." Keynes knew that Ricardo had opposed Malthus' theory, so
Keynes decided to reimpose it. Dr. Kates writes that: "It was precisely
this issue that is the dividing line between pre-Keynesian economics and the
economics that has dominated theory ever since." He elaborates in Keynes'
importance by noting Samuelson. He points out that this 'theory' is promoted in
practically every undergraduate economics course 'world wide'.
I first found this same result in my economics text by Professor Theodore
Morgan in 1950, but again in my Samuelson in 1954.
Dr. Kates explains: 'The problem of recession as conceived in the General
Theory was that an economy, once it has passed a certain level of
production, will run out of demands for the goods and services it
provides."
Establishment economics stil insists that it is lack of aggregate demand that
creates a business recession and that its cure is to increase government
spending on whatever it likes via expanding government financed spending
deficits. But according to Say's Law such aggregate demand deficit cannot
occur. Hence Keynes' claim to refute Say.
Dr. Kates elaborates: "For the vast majority of the economics profession
even now, this is the way in which Say's Law and its implications are
understood. It is the very meaning of the Keynesian Revolution. Mises made the
same point in 1950:" And he continues: "It is precisely here that we
find the division between the economics of the classics and virtually all
modern economic theory, especially the mainstream variety".
"Aggregatedemaind is intrinsic to themodern understanding of the level of
economicactivity. The implication is that it is the level of aggregate demand
that is responsible for the level of output, the rate of economic growth and
the number of person's employed."
He makes his strong point by writing: "Keynesian economics, that is all of
modern macroeconomics with its focus on aggregate demand, must collapse if the
attack on Say's Law turns out to be wrong."
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Understanding Say's -Malthus and the
"General Glut' debate
He continues by noting that to understand this, that is to understand what J.
B. Say was actually describes, will require some discussion of what classical
economic theory had to say about business cycles around 1800.
"What is relevant about Say's Law cannot be contained within a single
statement. Say's Law, if it is to be understood in full, must be understood as
a series of related propositions which, when taken together, constitute the
basis ingredients of the classical theory of the cycle." So Keynes was
attacking not only Say but the entire structure of classical economic theory.
Dr. Kates next describes the debate as it took place between 1798 and 1848. It
consisted of the arguments put forward by Malthus, Say, and John S. Mill but
involved most contemporary economists. It was not about the existence of
recessions during the business cycle, but about their causes which Malthus
claimed were too much saving and too little demand.
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The Related Propositions of Say's Law
In this section Dr. Kates describes and analyzes eight propositions that
constitute in combination Say's theory.
1. "Recessions are never due to demand deficiency. An economy can never
produce more than its members would be willing or able to buy. A general glut
(i.e.) general overproduction) is impossible....."
2. "Demand is constituted by supply. Aggregate demand is not independent
of aggregate production but is identival with it. A community's purchasing
power is constituted by its value added Aggregatedemand can only increase when
thevalue of thegoods and services produced is greater than thevalue of
theinport used up in the production process."
3. "The Process involved in purchase and sale is the conversion of one's
own goods or services into money and then the re-conversion of the money one
has received back into other goods and services. There is no implication of a
barter economy. Money is intrinsic to the processes involved".
4. "Recessions are common and result in high levels of involuntary
unemployment."
5. "Recessions are due to structural problems of one kind or another,
particular recessions occur where the structure of supply does not match the
structure of demand."
6. "Partial overproductdion of individuaol goods and services
occurscontinuously within economies andcan lead to a general downturn in an
economy.... "
7. Monetary factors most notably structural imbalances in the market for credit
can also be an often are an important cause of recession..."
8. "Because recessions are not due to a failure of demand, practical
solutions to recession do not encomass inceased levels of public spending.
While such expenditure may provide some limited benefit if spending is
concentrated on value adding goods and services, such expenditure is merely a
palliative rather than a cure."
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Men err in their productions, there is no
deficiency of demand
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Say's Law
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Ludwig von Mises - Lord Keynes and Say's
Law
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Hunter Lewis - Where Keynes Went Wrong
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Stephen Horwitz - Understanding Say's Law
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