The Price of Tomorrow

Keynes’ hypothesis and greatest fallacy lay in a failure to understand Say’s law. He understood it to mean that recessions were caused by failure of demand.

Say had proposed that recessions were caused by failure in the structure of supply and demand.

What it meant was fairly simple: recession follows production errors. When a producer fails to determine just what a consumer really wants, he continues to make and stockpile goods that cannot be sold at a profit (if at all). It was a common situation in the USSR where goods were estimated to be worth less than the value of the materials used in their manufacture.

As the stockpile increases, producers cut back on production, income (the profit margin) shrinks, and there is less capital available to buy consumption goods. The end result is that consumer spending eventually drops to precipitously low levels.

Keynes did not want to fix capitalism; he wanted to build his own tower. Unfortunately for us all, it is a tower of cards that has repeatedly fallen over in the wind of change due to having been built on a foundation of logical flaws and grossly misrepresenting errors.

The Classical School of Economics prevailed roughly from the time of Adam Smith’s The Wealth of Nations (1776) to the mid-19th century. It focused on the supply side of the economy. Production was the wellspring of prosperity

Say’s message was clear: a demand failure could not cause an economic slump. This message was accepted by virtually every major economist, prior to the publication of Keynes’ The General Theory of Employment, Interest and Money in 1936. So, before The General Theory, even though most economists thought business cycles were in the cards, demand failure was not listed as one of the causes of an economic downturn.

All this was overturned by Keynes. Keynes set J.B. Say up as a straw man so that he could remove Say’s ideas from economic discourse and the public’s thinking. Keynes had to do this because his entire theory was based on the analysis of demand failure, and his prescription for putting life back into aggregate demand — namely, a fiscal stimulus (read: lower taxes and/or higher government spending).

Keynes was wildly successful. With the publication of The General Theory,the supply side of the economy almost entirely vanished. It was replaced by aggregate demand, which was faithfully reported in the national income accounts. In consequence, aggregate demand has dominated economic discourse and policy ever since. The structure of the economy — the supply side — is nowhere to be found.