DeLong and the History of Economic Thought

From Brad DeLong's Why History of Economic Thought Is Important

I only took the first part of his post title because I'm only looking at the first part of his post. I'm leaving out Arthur Laffer and the Wall Street Journal.

Allow me to do a little secretarial work also on this excerpt from DeLong's post:

As every even casual student of the history of economic thought knows: back before 1829, whether it was sensible to talk about

increases in economic agents' planned spending raising and decreases lowering economic activity in the short run

was an active research question in economic theory. Back then Say's Law ruled: since nobody produces for sale without intending to purchase, by "metaphysical necessity" planned spending must be equal to and could not be raised above or lowered below production. Thomas Malthus complained that this "Say-Ricardo doctrine" seemed sound in theory but did not appear to fit the world in practice, but he had no theoretical resolution to the problem.

As every even casual student of the history of economic thought knows, the question was definitively resolved by John Stuart Mill in 1829. Mill observed that people plan to spend their incomes not just on currently-produced goods and services, but also on financial assets. When economic agents in total plan to leverage up, planned spending in the short run is in excess of production--and then production rises and the economy booms. When economic agents in total plan to deleverage, planned spending in the short run is below production--and then production falls and the economy slumps.

That's a nice summary. Fits with what I believe. Reminds me of a Mill quote Milton Friedman used in Free to Choose:

There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money ... and ... it only exerts a distinct and independent influence of its own when it gets out of order.

Unfortunately, I'm not even a casual student of the history of economic thought. I think it's hugely important, far more than the history of (say) physics. I just don't have the time. Nick Rowe says read a textbook, dammit, it'll only take a day or two. But economics texts are 900 pages. It would take the rest of my life to read that much.

I'm a student of the economy. I look at graphs.

Anyway, I liked this part:

Back then Say's Law ruled: since nobody produces for sale without intending to purchase, ...planned spending must be equal to and could not be raised above or lowered below production.

I liked it, because it is so obviously wrong.

And I liked this part:

Mill observed that people plan to spend their incomes not just on currently-produced goods and services, but also on financial assets.

Because it is so obviously right.

One hundred and seven years later, Keynes shot down Say's Law again, in the midst of the Great Depression when it was pretty clear to everyone except economists that the demand for money and the demand for output are not always precisely coordinated. People do sometimes produce for sale without intending to purchase. Everybody wants a bigger nest egg.

But now, again, the message has been forgotten.

How often must this correction be made? If you want the five-digit years, if you want the Hari Seldon thing, you're gonna have to treat a few rules like facts. This is one of them. It doesn't hurt the economy if everybody saves a little. So, your nest egg is safe. But it hurts the economy plenty when there is too much savings or too much spending on financial assets, to put it Mill's way.

I know. Everybody wants a bigger nest egg. That's why the problem recurs. But if we want to fix the economy, we have to establish serious rules limiting the growth of finance relative to the productive economy. Savings, and all that.

Then, the only choice is whether we want everybody to be able to have a decent nest egg, or whether we allow some few people to have all of it. Those are the options.