John Quiggin, Paul Krugman, and Jared Bernstein have all remarked on "zombie economics" - the persistence during this crisis of long-defeated ideas in economics, particularly ideas questioning the efficacy of fiscal and monetary policy. I'm not talking about simple bickering over the effectiveness of any given policy lever - that's inevitable and reasonable in some cases - I mean the wholesale rejection of the idea that our problem is a problem of effective demand and that there are reasonable collective solutions to that problem.
I wonder, though, if this is really a case of "zombie economics" or "Frankenstein economics"? Is this the rising of long dead ideas, or is this a monster that we (specifically, John Maynard Keynes) have created for ourselves.
I was reading an article by Baumol this morning on Say's Law and came across this interesting passage:
"Today’s criticisms of Keynes’s position on Say’s Law emphasize two points. First, Keynes took into account only one of the complex of ideas that preoccupied the writers on the Law of Markets, and represented it as the whole. Second, Keynes offered an egregious mischaracterization of the views of Say and others by claiming that they denied the possibility of depression and unemployment and believed that all forms of intervention in the market to prevent or alleviate such conditions were, at best, redundant and, at worst, harmful. A charitable interpretation of the Keynesian critique might take him to be asserting that the classical premises implied that there could be ‘‘no obstacle to full employment’’ (at least during periods of intermediate length)—even though the classical economists were mistaken in failing to recognize this. But a more plausible conclusion, it seems to me, is that Keynes simply never really studied what Say (and James Mill) had written."
Keynes, in other words, created these undead monsters himself - they are Frankensteins that have gotten out of hand, rather than zombies that are reanimated on their own.
In the past, I've called Keynes's depiction of Say's Law a straw man, but also an important heuristic for understanding his own position. In other words, it should not be read as an intellectual history of Say (Baumol notes that Keynes only mentions Say three times in the General Theory - that doesn't make for much of an intellectual history!), but rather as a discussion of the broader distinctions between Keynesian and "classical" theory.
The fact is, the early Say, and Ricardo, and Smith, and many others did say that income would be spent on consumption or investment. I think it's more than fair to say that they did hold pretty fast to what Blaug has called "Say's Identity", and that that was a mistake - and that we have known that was a mistake since at least Malthus if not earlier. Marx deserves tremendous credit for his treatment of this error as well - particularly given his affinity for Ricardo (Marx has a great line in Theories of Surplus Value where he says, quoting Ricardo on Say's Law, "this is the childish babble of a Say, but it is not worthy of Ricardo"!). The point being, Keynes is not wrong to criticize this. It gets trickier when he moves into criticizing Marshall and Pigou. Keynes says openly that "it is never stated today in its crude form", but that it underpins the "classical" (i.e. - Marshall/Pigou) economics he is criticizing. So I think there's something to Baumol's "charitable" interpretation. Say and Ricardo and Smith actually made the assertions of Say's Law even if they didn't embrace all its conclusions. Likewise, the absence of any consideration of effective demand and underemployment equilibria in Marshall and Pigou implicitly relies on the old mistakes of Say's Law, even though Marshall and Pigou know perfectly well that Say's Law itself was wrong (see Keynes on the Cambridge version of the quantity theory - he does not think Marshall makes the mistakes of Say).
So the Keynes position - in my view - is that this idea called "Say's Law" has been plaguing economics in one way or another for a century. Few people have embraced it in its entirety from axiom to logical conclusion. Even Say didn't do that. But the fallacy is at the root of a lot of what was wrong with pre-Keynesian economics, and the people who almost "got it" - the mercantilists, Malthus, Marx, Fisher, etc. - usually did so by chipping away at Say's Law.
But the question is - in putting forward this view, did Keynes create a Frankenstein that is screwing us over today, in 2011? In conceptualizing "Say's Law" more completely as a system than anyone ever had previously, did Keynes create the opportunity for his twentieth century critics to embrace the Frankenstein?
Just a thought - but it seems like a reasonable thesis to me.