The History of Macroeconomics: Fiscal Policy, Fama's Fallacy, and Say's Law Yet Once Again
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Friedrich A. von Hayek as a Possible Originator of the Full (as Opposed to Hawtrey's Limited) Fama...

Maynard writes:

The History of Macroeconomics: Fiscal Policy, Fama's Fallacy, and Say's Law Yet Once Again: Try Friedrich Hayek.

Hayek came to Cambridge in January 1931 to give a one-lecture version of his theory to the Marshall Society before starting on his LSE lectures. His exposition was greeted with complete silence. Keynes was in London, but Richard Kahn, who was in the audience, felt he had to break the ice. 'Is it your view', he asked Hayek, 'that if I went out tomorrow and bought a new overcoat, that would increase unemployment?' 'Yes,' replied Hayek, turning to a blackboard full of triangles, 'but it would take a very long mathematical argument to explain why. --Robert Skidelsky, John Maynard Keynes: The Economist as Saviour, 1994, p. 456. [Quoted from Kahn, The Making of Keynes's General Theory, p. 182.]


From Joan Robinson:

Joan Robinson (1972), "The Second Crisis of Economic Theory" (Richard T. Ely Lecture): What was the state of orthodox opinion when the world was struck by the great slump? First of all, there was the famous Treasury View of 1929.... Lloyd George was campaigning for a policy of public works; Keynes with Hubert Henderson produced the pamphlet Can Lloyd George Do It?, which first adumbrated the theory of the multiplier and of the relation of saving to investment. To answer Lloyd George, the Conservative government produced a White Paper in which various ministers stated the case against spending money in their respective departments on housing, schools, roads, etc. The Chancellor of the Exchequer was Churchill; he could not bring himself a second time to defend deflation and sound finance. It was left to the officials to produce the argument for the Treasury. Their case was very simple. It was based on the idea that investment is governed by saving. If the government borrowed £100 million to spend on public works, there would be £100 million less for foreign investment. The surplus of exports would fall by a corresponding amount. There would be a transfer of employment but no change in the total. It is not fair to put much weight on this. The Treasury, after all, was required to say something and this was what they thought of to say. The fact that it appeared to be a respectable argument, however, certainly was a symptom of the state of opinion at that time....

The main orthodox reaction to the slump was the argument that wages were too high. This could be backed up by statistical argument. In those old days, prices used to fall when there was a decline in demand, so that prices were lower relatively to money-wage rates than when employment was higher. In a style of argument nowadays familiar in another context, a correlation was exhibited as a cause. The theory that unemployment could be due only to wages being too high received solid support from the evidence....

While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attrac- tion to Keynes. I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time. The general tendency seemed to be to show that the slump was caused by [excessive] consumption. R. F. Kahn, who was at that time involved in explaining that the multiplier guaranteed that saving equals investment, asked in a puzzled tone, "Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemploy- ment?"' "Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

This pitiful state of confusion was the first crisis of economic theory that I referred to...

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