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Origin of the Idea
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Expenditures Model
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The theories of consumption and investment articulated by
John Maynard Keynes (1883-1946) form the basis for the
aggregate expenditures model, but Paul Samuelson (b. 1915)
synthesized the model. Samuelson was the first American to win
the Nobel Prize in Economics.
The aggregate expenditures model is an example of Keynesian
economics, and not directly the economics of Keynes (the
distinction is explained below). Still, the mark Keynes left
on the model is indelible.
John Maynard Keynes was, arguably, the most influential
economist of the 20th century. His seminal
contributions to macroeconomic theory, his philosophical shift
from the conservative neoclassical mainstream in economics,
and the sheer number of economists and policy-makers who bore
his banner, all serve to make Keynes a leading economic
figure.
Keynes was destined to a life of intellectual pursuits from
the very beginning. His mother served as a justice of the
peace, an alderwoman, and the mayor of Cambridge. His father,
John Neville Keynes, was an accomplished logician and
political economist. John Maynard Keynes studied at Cambridge
under the guidance of prominent economists Alfred Marshall
(1842-1924) and A.C. Pigou (1877-1959).
Following his studies at Cambridge, he became editor of the
Economic Journal, and successfully managed the
investments of the Royal Economic Society, its publisher, and
King's College of Cambridge, as well as his own. Keynes was a
speculator, but interestingly, had this to say about
speculators: |
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Speculators may do no harm as bubbles on a steady
stream of enterprise. But the position is serious when enterprise
becomes the bubble on a whirlpool of speculation. When the capital
development of a country becomes a by-product of the activities of
a casino, the job is likely to be ill-done. The measure of success
attained by Wall Street, regarded as an institution of which the
proper social purpose is to direct new investment into the most
profitable channels in terms of future yield, cannot be claimed as
one of the outstanding triumphs of laissez-faire capitalism
– which is not surprising, if I am right in thinking that the best
brains of Wall Street have been in fact directed towards a
different object.(1)
Keynes was a prolific writer and a prominent social and political
figure. He was the main representative of the British Treasury at
the peace conference after World War I, given the power to speak for
the Chancellor of the Exchequer. He was highly critical of the Paris
negotiations and the eventual Treaty of Versailles, causing him to
resign his position in 1919 and begin writing The Economic
Consequences of the Peace, published in 1920. In this work he
predicted that the reparations imposed on Germany were excessive and
would lead to political and economic conditions conducive to future
armed conflict. He also served as trustee of the National Gallery,
chairman of the Council of the Encouragement of Music and the Arts,
chairman of the Nation and New Statesman magazines,
and chairman of the National Mutual Life Assurance Society. He
organized the Camargo Ballet (his wife, Lydia Lopokova, was a
renowned star of the Russian Imperial Ballet), and built the Arts
Theatre at Cambridge.
Keynes published The End of Laissez-Faire in 1926. While
not his best known work, it did clearly articulate his feelings
about capitalism and establish his philosophy that government
involvement was necessary to bring about long term economic
security. Keynes believed laissez-faire capitalism resulted in
significant inequalities of wealth, excessive unemployment, and
inefficiency:
Yet the cure lies outside the operations of individuals; it may
even be to the interest of individuals to aggravate the disease. I
believe that the cure for these things is partly to be sought in
the deliberate control of the currency and of credit by a central
institution, and partly in the collection and dissemination on a
great scale of data relating to the business situation…. These
measures would involve Society in exercising directive
intelligence through some appropriate organ of action over many of
the inner intricacies of private business, yet it would leave
private initiative unhindered...
Devotees of Capitalism are often unduly conservative, and
reject reforms in its technique, which might really strengthen and
preserve it, for fear that they may prove to be first steps away
from Capitalism itself... For my part, I think that Capitalism,
wisely managed, can probably be made more efficient for attaining
economic ends than any alternative system yet in sight, but that
in itself it is in many ways extremely objectionable. Our problem
is to work out a social organization which shall be efficient as
possible without offending our notions of a satisfactory way of
life.(2)
Keynes' magnum opus was The General Theory of Employment,
Interest, and Money, published in 1936. Writing in response to
the Great Depression and the seeming impotence of classical economic
theory to provide a solution, The General Theory articulates
most of the economics of Keynes that would later evolve into the
theories we recognize today.
The Economics of Keynes v. Keynesian Economics
It should be noted that while Keynes' writing provided
inspiration for a number of economists who would come to be known as
Keynesians, many of the well-known theories bearing his name were
not developed by Keynes himself. For example, the IS-LM model, a
Keynesian model you are likely to see in an intermediate
macroeconomics course, was the result of work by Alvin Hansen
(1887-1975) and John R. Hicks (1904-1989).
- John Maynard Keynes, The General Theory of Employment,
Interest and Money (New York: Harcourt, Brace and World, 1936), p.
159. Reprinted by permission of Harcourt Brace and Company.
- John Maynard Keynes, The End of Laissez-Faire (London:
Hogarth, 1926), p. 47-58.
Photograph courtesy of: Cambridge University Press 1985,
Mark Blaug, Great Economists Before Keynes
10.2 Say's Law
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As indicated in the text, Say's Law is
attributed to the French economist, Jean-Baptiste Say
(1767-1832). Born in Lyon, France, Say led a life of varied
professional activities. He worked as a life insurance
salesman, a journalist, a government official under Napoleon,
an entrepreneur (he opened a cotton spinning mill), and
finally a professor of political economy. Say declined an
invitation from Thomas Jefferson to teach at the newly
established University of Virginia, and instead became the
first professor of economics at a French university. The
interesting question about Say's Law (also referred to as
Say's Law of Markets) is how much of Sa's Law we should credit
to Say. This question has two dimensions to it: First, did Say
develop the ideas, and second, is the modern version of Say's
Law really what Say intended? Say was not the first to
articulate the ideas now embodied in Say's Law. Francis
Hutcheson, one of Adam Smith’s teachers, was first credited
with writing about the impossibility of overproduction. Smith
wrote, "A particular merchant, with abundance of goods in his
warehouse, may sometimes be ruined by not being able to sell
them in time, [but] a nation is not liable to the same
accident." James Mill, credited with coining the phrase
"supply creates its own demand," wrote in 1808 that, "If a
nation's power of purchasing is exactly measured by its annual
produce … the more you increase the annual produce, the more
by that very act you extend the national market, the power of
purchasing and the actual purchases of the nation."(1)
Finally, we get to Say's remarks on the matter:
It is worth while to remark, that a product is no sooner
created, than it, from that instance, affords a market for
other products to the full extent of its own value. When the
producer has put the finishing hand to his product, he is most
anxious to sell it immediately, lest its value should vanish
in his hands. Nor is he less anxious to dispose of the money
he may get for it; for the value of money is also perishable.
But the only way of getting rid of money is in the purchase of
some product or other. Thus, the mere circumstance of the
creation of one product immediately opens a vent for other
products ...(2) The theory did not officially become known as
Say's Law until John Maynard Keynes (1883-1946) used the
phrase in 1936, when Keynes was attempting to discredit the
theory. Given Keynes’ motives, it is reasonable to ask whether
Keynes represented accurately the ideas of Say. The most
recent word on Say's Law comes from economist William Baumol.
Despite what we "know" about Say's Law, Baumol asserts that
there are still unresolved issues, regarding both substance
and origin. As revealed above, Say's Law was not the creation
of one individual, but was born of an intellectual dialogue
that began in the late 18th century. Who created Say’s Law? In
Baumol’s words, "they probably all did," (with "all" referring
to not only J.B. Say, James Mill, and John Maynard Keynes, but
also to classical economists such as Adam Smith and David
Ricardo). William O. Thweatt, "Early Formulators of Say's
Law," Quarterly Review of Economics and Business 19 (Winter
1978): 79-96. J. B. Say, A Treatise on Political Economy
(Philadelphia: Claxton, Remsen & Haffelfinger, 1880), p.
134-135. [Originally published in 1803].
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Origin of the
Idea