...we’re seeing a much more widespread attack on demand-side economics. More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.First, the fact that something might appear in a textbook -- even for 62 years -- does not make it correct. It seems that Krugman is taking a chapter out of the "market test" view of economics that the Chicago School has used in an attempt to discredit the Austrian School.
Krugman, like Keynes, bases his viewpoint on a misstatement of Say's Law, in which he presents a caricature of what J.B. Say wrote in his Chapter XV of Book I in A Treatise on Political Economy. He writes:
First, Keynes was right: Say’s Law — the notion that income must be spent, and hence that supply creates its own demand — really is at the heart of the issue. Many, many people just can’t see how it’s possible for there to be an overall shortfall of demand.Number one, what Krugman writes is NOT Say's Law, not even close. It is what Krugman and others of his intellectual generation WANT Say's Law to proclaim, yet as one who has read this chapter many times and who published a paper a year ago on it, I can say that what Krugman has written is nonsense.
The chapter in question dealt with the very issues Krugman raises, although it was done more than 130 years before The General Theory was written. In Krugman's caricature, he misinterprets Say's chapter as being written to claim that "aggregate demand" always is sufficient to purchase everything that is produced, as though it is impossible for there to be what Thomas Malthus and others claimed would be a "glut of commodities" that would exist because people would not spend their income.
Say did not deny that there could be a "glut" at times; in fact, he addresses that very issue, beginning with a situation in which there are unsold goods and the economy seems to be in the tank. (This should be a tipoff to the intellectual dishonesty of Krugman's position; Say addresses the very thing that Krugman claims that Say claimed was impossible.)
What Say did argue, and what I have argued in the paper I linked, was that there could be proportional imbalances in the economy, that there would be -- at least temporarily -- "too much" of something produced (Housing bubble, anyone?) and simultaneously, too little of something else.
However, what Say does not do is to lay out the causes of such problems. In his chapter, he only addresses the pre-Keynes/Krugman argument that the problem is due to a lack of "aggregate demand" (they did not use that term in 1803) brought about by a lack of money or a "general overproduction."
The issue Say covered was the source of demand itself: production of goods that could be traded for other goods. Keynes, and later Krugman, would argue that because people are paid in money for producing things, and because they have a tendency to save (and especially the wealthy, which is why Krugman believes that they should be taxed at higher rates -- so government will spend that money), that the market system itself has an internal contradiction that always leads to the problem of overproduction/underconsumption.
Say demolishes that argument in his Chapter XV, and I would invite readers to look at it for themselves, as opposed to taking Krugman's interpretation as gospel. However, Krugman is not satisfied at just attacking that point of view. No, he has to claim that anyone who thinks J.B. Say had a good point is doing so because of irrational moral scruples:
It’s becoming clear to me that a substantial number of writers on economics find the whole idea that the economy can suffer because people are too thrifty, insufficiently willing to spend, deeply repugnant. I’m the sort of person who finds the notion that sometimes virtue is vice and prudence folly interesting; but it’s clear that a number of people find that notion just plain evil. The world shouldn’t be like that — and therefore it isn’t.And so he continues:
It’s kind of shocking if you think about it. Here we have a huge, hard-won intellectual achievement, one that accounts very well for the world we actually see, and yet it’s being thrown away because it doesn’t go along with ideological preconceptions. Once that sort of thing starts, where does it stop? The next thing you know, the theory of evolution will get the same treatment. Oh, wait.In other words, this is not an argument about the efficacy of savings versus investment or even the perceived role of "aggregate demand." No, it is an argument between the Smart People (like Krugman) and the Yahoos who are so stupid that they might even believe in Creationism, which every writer at the NY Times knows is a notion that only Really Stupid and Immorally-Ignorant People will embrace.
In other words, in the end, this isn't even an argument about economic theory. No, it is not worthy even of argument. Krugman is saying that those people who disagree with his Keynesian views are so ignorant and so lacking of any regard at all that it would be better for the world if they were not alive. And they certainly deserve not even to be in the presence of Krugman at all, unless, of course, they agree to be treated as people once regarded children: people to be seen but not heard.