Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way [Hardcover]

Steven Kates (Author)

Book Description

ISBN-10: 1858987482 | ISBN-13: 978-1858987484 | Publication Date: May 1998

This is an examination of the concept of the Law of Markets, controversial since Keynes' General Theory, and also debated even longer, since James Mill propounded it 200 years ago. Kates suggests that Keynes' General Theory originated in Keynes' discovery of Malthus's writings about Say's Law.

Editorial Reviews

Review

In this fascinating and well-researched book, Kates takes issue with the standard Keynesian interpretation of Says law of markets. -- Thomas M. Humphrey, The Economic Journal

About the Author

Steven Kates, School of Economics, Finance and Marketing, RMIT University, Australia and former Commissioner of the Australian Productivity Commission --This text refers to the Paperback edition.

Product Details

• Hardcover: 252 pages
• Publisher: Edward Elgar Pub (May 1998)
• Language: English
• ISBN-10: 1858987482
• ISBN-13: 978-1858987484
• Product Dimensions: 9.5 x 6.2 x 1.1 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars  See all reviews (3 customer reviews)
• Amazon Best Sellers Rank: #3,849,153 in Books (See Top 100 in Books)

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16 of 16 people found the following review helpful:

4.0 out of 5 stars A Stunningly Thorough Review of Macroeconomic Theory, May 2, 2008

By 

Rich (New York, NY) - See all my reviews

This review is from: Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way (Hardcover)

I would suggest that any reader interested in this book ignore the review above. It is clear to me that the reviewer has not actually read Kates' book, and has misinterpreted the subject matter as being something political. He thus provides a critique of Say's Identity, which is NOT the topic of Kates' book.

Say's Law & the Keynesian Revolution presents an astounding purview of the law of markets throughout time, which is of incredible value to any student of economic history. Essentially what Kates does is to hone in on the development of Say's Law (the law of markets), revealing the progression in thinking about market cycles. His analysis thus moves like a sliding scale, covering Ricardo, Mill, to early 20th century economists like Clay and Lavington, to Keynes, and then onward through contemporary analysis, notably by Becker and Baumol.

The law of markets is thus shown (from Ricardo and Mill onwards) to be the idea that market misalignment is responsible for market recession and unemployment. The idea here is that, because consumption (demand) occurs later in time than production (supply) for some goods, miscalculation among producers leads to a relative lack of demand with respect to supply, market readjustment and recession. Thus, the classical theory of markets did have a robust explanation for recession and unemployment. Keynes is then revealed to have merely changed our perspective from the production to the demand side of this equality (Say's Equality, as per Becker and Baumol).

Since Keynesian macro-economics today is based on this demand-side view of the law of markets, Kates concludes that Keynes was mistaken in his attack on the law of markets. While Kates' analysis is absolutely stunning with respect to the relationship between Say's Law and the Keynesian Revolution--I am not sure that this was the revolution which KEYNES himself had in mind. Notably, Keynes targets inequalities in wealth, and perhaps had Kates scrutinized The General Theory closely (he does not, instead focusing on Keynes' intellectual formation--the one weakness in the book), we might get some insights into how the Keynesian Revolution may have gotten Keynes wrong. Nonetheless, an outstanding take on a very important topic.

3 of 3 people found the following review helpful:

5.0 out of 5 stars A great contribution to economic literature, September 3, 2010

By 

Jimmybox "Jimmybox" (Durham, North Carolina United States) - See all my reviews

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This review is from: Says Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Paperback)

If you want to understand how the broad economy really works, look no further. Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way is a book par excellence. I have never encountered a text that explains the business cycle so cogently (and provides a thorough repudiation of Keynesian economics to boot!) In particular, Kates clearly teaches that changes in liquidity preferences and fluctuations in the general employment level in no way invalidate Say's Law, which, Kates explains, is not captured by the vulgar Keynesian phrase "supply creates its own demand."

While Keynes asserted that Say's Law (as he defined it) is only valid in the "special case" of no involuntary emploment, Kates explains that Classical economists understood recessions and [involuntary] unemployment in the context of the "true" Say's Law- i.e., "a product is no sooner created than it creates a demand for other products to the extent of its value" and "products are paid for with products." Ergo, recessions are caused by a mismatch between the structure of supply and the structure of demand (too much production of this good/serice, not enough of that one), exacerbated by the contraction of credit due to the liquidity constraints of financial intermediaries.

I could never have written my own book, Waffle Street: The Confession and Rehabilitation of a Financier, absent the influence of Kates' wonderful volume. Thank you Professor Kates for bringing lost truths of Classical economics back into the light!

2 of 18 people found the following review helpful:

1.0 out of 5 stars Keynes's formal statement of Say's Law in GT is mpc+mpi=1, June 9, 2005

By 

Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews
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This review is from: Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way (Hardcover)

Kates has written a book that makes four basic claims,none of which he comes close to supporting effectively.Kates first claim is that no one really knows what it was that Keynes did in the General Theory(GT;1936).Second,Kates claims that classical and neoclassical economists had a theory of recession and involuntary unemployment prior to the publication of the GT.Third,Kates claims that the literary definition of Say's Law given in chapter 3 of the GT,that"Supply creates its own Demand",is incorrect and that by Say's Law Classical and Neoclassical economists meant that it was mathematically impossible for demand deficiency to ever occur in a free market economy.The idea of demand deficiency is thus a logical fallacy as well as being mathematically impossible.Finally,Kates argues that Say's Law needs to be reincorporated in current,modern,macroeconomic theory since increased spending to fight the nonexistent problem of demand deficiency merely leads to the creation of inflation.Kates bases his argument on a compilation of a huge number of literary quotations taken from the works and textbooks of 19th and early 20th century economists,such as Mill,Clay,Ely,Thomas,McCulloch,Southworth,etc.Unfortunately,all of the vast number of quotations assembled by Kates are mere assertions.There is not a single piece of formal and/or technical analysis in any of the quotations presented.The lack of any formal mathematical and/or logical analysis of either Keynes's arguments or the literary arguments of the classical and neoclassical opponents of Keynes points to the conclusion that Kates is mathematically illiterate,inept,and inumerant.This conclusion is supported and borne out by the factthat Kates completely overlooks the fact that Keynes presented a technical analysis of Say's Law in chapters 19-21 of the GT.Kates relies on an introductory chapter of the GT,chapter 3,which contains an informal guide to Keynes's full scale argument in chapters 19-21.There is no formal or mathematical analysis contained in chapter 3 at all.On pp.261-263 of the GT,Keynes presents his major TECHNICAL conclusion-If,and only if,the marginal propensity to spend is equal to 1 will Say's Law hold and no involuntary unemployment will be present in the economy.Keynes then derives the following optimality condition in both of chapters 20 and 21:w/p=mpl/(mpc+mpi),where mpc is the marginal propensity to spend on consumer goods,mpi is the marginal propensity to spend on investment goods,and mpl is the aggregate marginal product of labor derived from a neoclassical aggregate production function.The marginal propensity to spend is equal to the sum of mpc+mpi in a purely competitive private economy with a private commercial banking system and no government sector or foreign trade.If mpc+mpi=mpc+mps=1,then,and only then,will Say's Law hold.Kates has completely overlooked Keynes's discussions of the competing classical and neoclassical business cycle theory contained in chapters 18 and 22 of the GT.Such a theory has two points-(1)The average or mean position of the economy is one of full employment on the boundaries of the static and dynamic production possibilities frontier and(2)Minor and mild inventory recessions will occur as business men will make minor forecast errors concerning the composition of the full employment level of output over time.Such miscalculations about the particular mix of consumption and investment goods to provide a full employment economy will periodically lead to necessary adjustments in employment as the particular product mix is adjusted over time.During this inventory adjustment period there will be an increase in unemployment.A minor and mild recession will occur that is selfcorrecting and selfadjusting as the inventory errors are automatically corrected.Keynes covers this type of outcome on page332 of the GT at the end of chapter 22.This has absolutely nothing to do with the business cycle problem analyzed by Keynes in the GT,which dealt with the effect of uncertainty(Ellsberg's ambiguity)in leading to severe shortfalls in spending on fixed capital goods .The result is a severe recession or depression .Such results are mathematical and statistical impossibilities in the classical and neoclassical theories which assume only risk and no uncertainty(ambiguity).Keynes's theory is that the average operating position of the economy is inside the boundary of both the static and dynamic ppf's, due to the impact on the economy of business decision making under conditions of uncertainty(ambiguity),combined with pessimism about future expected yields from the existing stock of capital goods.I recommend that the reader of this review consider purchasing the General Theory.He will learn a lot more about Say's Law than by reading Kates.