A First Dark Age of Macroeconomics…
In 1829 John Stuart Mill, Thomas Robert Malthus, and even Jean-Baptiste Say understood that excess demand for liquid cash money was excess supply for currently-produced goods and services, was a "general glut".
And once you recognize that your key financial asset, your medium of exchange--money--is also a savings vehicle (a store of value) and a safe asset (a unit of account), you immediately see that not just monetary but fiscal and banking policy can have macroeconomic effects. And if you say that Say's Law works except in exceptional circumstances to ensure that aggregate demand cannot be less than supply, it would seem immediate and obvious that aggregate demand cannot be more than current production as well--that just as something unusual and exceptional has to cause the downturn from normal, so something unusual and exceptional has to cause the revival to normal. It is very puzzling. If an excess demand for financial assets is seen to cause a collapse in production and employment, then it would seem immediate and obvious that generating an excess supply of financial assets would cause a revival.
Thus it would seem that back in 1829, when John Stuart Mill wrote his Essays on Some Unsettled Questions of Political Economy under the spur of the British depression of 1825-26 that followed the collapse of the canal boom, that a useful macroeconomics was on the verge of being born.
So what happened over the next century?
Why in 1936 is John Maynard Keynes writing about the complete victory of Say's Law, of how Ricardo had conquered England as thoroughly and completely as the Holy Inquisition had conquered Spain?
And when Alfred and Mary Marshall write about The Economics of Industry in 1885, why are they so eager to invoke the confidence fairy and so unseeing of the supply of financial assets--why do they see only one of the two blades of the scissors? It is as if a nervous breakdown of entrepreneurs is the sole cause of economic downturns, and that admits of none but a psychological cure. Why do Fisher and even Wicksell seem to me, in some ways, to know less than the young John Stuart Mill had known in 1829?
John Maynard Keynes (1936):
The General Theory of Employment, Interest and Money: The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.
The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commanded it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.
But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;— a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.
The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a Society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.