by Steven Kates, RMIT University

[Professor Steven Kates and the academic journal History of Economic Ideas have kindly allowed to make available free online: Steven Kates, “Influencing Keynes: The Intellectual Origins of the General Theory,” History of Economic Ideas, vol. XVIII, no. 3 (2010), pp. 33-64. Click here. Professor Kates has written the following précis and backgrounder on his essay for us.]

When I was doing my doctorate I would tell people that the thesis was about the classical theory of the business cycle rather than telling them straight up it was about Say’s Law. Even now Say’s Law has an air of antiquity about it, something old, outdated and vintage Model-T. For myself, I understand Say’s Law as economic theory’s Law of Gravity, that without it sense cannot be made of how economies work. There are not a lot of others who think like this, which is why in my view the economies of the world are in such a mess.

To accept Say’s Law as valid, which virtually every economist before Keynes did — think Ricardo, Mill, Jevons, Marshall and then add in everyone else — according to Keynes one was tacitly assuming there is “no obstacle to full employment”. Keynes accused his contemporaries of having no theory of recession and mass unemployment and stated that he, John Maynard Keynes, had remedied this deficiency by writing a book that would first of all get rid of Say’s Law and then with Say’s Law disposed of, explain for the first time the causes of high unemployment so that we could thereafter do something to bring unemployment down.

His hero was Thomas Malthus who had, again according to Keynes, understood all of this well before anyone else, a neglected pioneer in understanding the importance of demand deficiency. His villain was David Ricardo, whose economic theories had been so persuasive that although he had died in 1823, even more than a century later in 1936, it was Ricardo’s totally misguided ideas, based on an acceptance of Say’s Law, that still dominated the way economists understood recession and unemployment.

In writing my thesis, the one matter that became strangely obvious was that this Say’s Law not only was not an impediment to understanding how recessions and unemployment occurred but was actually an essential feature of their explanation. The various ideas that made up Say’s Law were, in reality, the classical theory of the business cycle.

And while it is possible to extract some specific statements and identify these as Say’s Law proper, with other parts seen as extensions into the theory of the cycle, in actuality it was a seamless whole. It ran from understanding that demand was constituted by supply, which might be seen as Say’s Law itself, to recognising that a recession occurred when what was supplied did not happen to coincide with what was being demanded. The classical theory of the cycle explained why that might happen. There were many versions but they all related back to the original point of Say’s Law. The structure of supply did not match up with the structure of demand.

As part of my research I therefore read every book I could find that had been written on the business cycle. I just read across the shelves in the libraries at the University of Melbourne, La Trobe, the ANU and Cambridge which were the places my research was done. If at the end of it I had left something out, I doubt that it would have said anything much different from the others.

But in doing this reading only one book ever stood out. I remember the shock and excitement of reading its opening pages with its nondescript title and its utterly unknown author. Its title was Value Theory and Business Cycles which had been published in 1933 by a lowly lecturer in economics at the University of Minnesota by name of Harlan Linneus McCracken. He is the most influential unknown economist in the history of economics.

And what was this book about? It was about many of the things that the General Theory was about but had been published three years before. It was about why Ricardo’s economics cannot explain recession while Malthus’s can. It is about how demand becomes depleted as incomes rise because of some psychological principle whereby savings rise more rapidly than income as incomes go up. It is notable for arguing that Say’s Law of Markets is wrong and must be discarded. But mostly, it is notable for being the point of origin for Keynes’s most telltale phrase, “supply creates its own demand”. Therefore, if you don’t mention McCracken in explaining the origins of the General Theory you are almost certainly not explaining what the book is about and are with certainty not explaining why it was written just as it was.

The article of mine, “Influencing Keynes: the Intellectual Origins of the General Theory”, outlines the influence of McCracken, Malthus and a host of others on the writing of the General Theory. It is, if I may say so, the only accurate telling of the story available from any source. There are dozens of books written about how The General Theory itself got written and thousands of others will tell you how Keynes saved us from classical economics.

My paper, however, is the only place where you can find out what actually happened. Nowhere else can you find out where Keynes found his original organising principle nor can you turn to any other source across this vast Keynesian literature to find out how his ideas were developed through reading a series of other economists whose influence remains as unacknowledged as McCracken’s. It may seem an extravagant claim, but the paper is there. Read it for yourself.

And if you would like to see this in conjunction with an understanding of the role of Say’s Law in the classical theory of the cycle, you can watch my 2010 Mises Memorial Lecture on “Why Your Grandfather’s Economics was Better than Yours” which is available on Youtube here. The full paper has now been published in the Quarterly Journal of Austrian Economics (Winter 2010), available in PDF here.