Governments Are Themselves Always, and Without Any Exception, the Greatest Spendthrifts in the Society, According to Adam Smith

Smith also wrote of the dangers of government spending with the kind of insight that the years since have done nothing to diminish the relevance of. The propensity of governments to profligate waste was recognized by Smith in ways that every generation has had to learn over again for itself:

It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people … They [governments] are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

—Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

The Notion of Aggregate Demand Separate from Aggregate Supply Was Foreign to Pre-Keynesian Economic Thought

Moving forward a century [from when James Mill wrote], the same concept is found in the following passage from one of the most widely used economic texts ever published, in which this principle is stated in very clear terms:

It is only because our exchanges are made through money that we have any difficulty in perceiving that an increase in supply is (not 'causes') an increase in demand . . . An increase in the supply of cloth is an increase in the demand for other things; and vice versa, an increase in the supply of anything else may constitute a demand for cloth. What is divided among the members of society is the goods and services produced to satisfy its wants; and the same goods and services are both Supply and Demand. (Clay, [1916] 1924: 242)

The notion of aggregate demand separate from aggregate supply was foreign to pre-Keynesian economic thought. Aggregate demand grows at the same rate and by the same amount as aggregate supply, and will not grow unless supply has grown. It is not, however, just any production that will lead to an increase in aggregate demand. What creates demand is the production of forms of output for which enough buyers can be found whose payments cover in aggregate the entire costs of production. Only if  the goods and services produced can be sold for more than was paid for the inputs that went into their production can it be said with certainty that value has been added during the production process. Conversely, if the goods and services produced do not create more value than is used up in the production process, there can be no increase in aggregate demand because there has been no increase in aggregate supply in any relevant sense.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

It Was Keynes's Reading of the Malthus Side of the Malthus-Ricardo Correspondence That Turned Keynes's Mind to the Possibility of Demand Deficiency As a Cause of Recession

The Keynesian Revolution, and therefore the origins of virtually all macroeconomic theory today, can only be understood in relation to Keynes's coming across Malthus's economic writings in 1932. In particular, it was his reading of the Malthus side of the Malthus-Ricardo correspondence, which had been unearthed in 1930 by his close associate Piero Sraffa, that turned Keynes's mind to the possibility of demand deficiency as a cause of recession. Until that time, economists had been near unanimous in arguing that insufficient demand as a cause of recession was fallacious, and until reading the Malthus-Ricardo correspondence, this possibility had never crossed Keynes's mind. . . .

It was Malthus, of course, who had been the leading advocate in the nineteenth century of demand deficiency as a cause of recession, and of increased levels of unproductive spending as the cure. Reading Malthus's letters to Ricardo, and then the text of Chapter VII of Malthus's Principles, both of which Keynes did at the end of 1932, ought to be recognized as the single most important reason why Keynes was to write what he wrote in the way that he did.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

There Arose 3 Broad Conclusions based on Say's Law: (1) Goods Buy Goods, (2) Demand Is Constituted by Supply, and (3) There Is No Such Thing As a General Glut

From this principle, there arose three broad conclusions that were accepted by the mainstream of the economics profession through until 1936. These are the conclusions based on an understanding of Say's Law:

1. 'Goods buy goods': to buy, one first has to produce goods of one's own, sell these goods for money and then use the money received to buy the goods produced by others; thus it is the production of one's own goods that leads to the ability to purchase someone else's, even though money is used as the medium of exchange
2. 'Demand is constituted by supply': in an exchange economy one cannot buy unless they have first supplied, since unless someone supplies they have no money with which to demand
3. 'There is no such thing as a general glut': it is impossible for an economy to produce so much output that there would not be enough buyers for what has been produced, so long as what has been produced is what people want to buy; therefore demand deficiency across an entire economy can never be a realistic explanation for recession.

It was the reversal of this last principle in particular, following the publication in 1936 of The General Theory of Employment, Interest and Money by the economist John Maynard Keynes--the most influential text on economics written during the whole of the twentieth century--that led to what became known as the 'Keynesian Revolution'.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

Jean-Baptiste Say Popularized the Arguments of Adam Smith in France, Introduced a Fourth Factor of Production: The Entrepreneur, and Popularized an Economic Principle Now Called Say's Law

Given his subsequent importance, the French economist Jean-Baptiste Say must be brought into the story. Say was for the most part a popularizer of the arguments that had been presented by Adam Smith. His Treatise on Political Economy was published in 1803 to acquaint the French public with Smith's ideas. But it was not merely a restatement of Smith: Say had a number of innovations of his own.

The first of these was the introduction of a fourth factor of production beyond land, labour and capital. This was the additional input that was brought to the production process by the entrepreneur. Say explicitly recognized the crucial importance of the entrepreneur as the initiator and organizer of the production process. It was, as he wrote, through the entrepreneur that value-adding activity was able to take place.

For reasons unknown, independent discussion of the role of the entrepreneur remains relatively uncommon even to this day. Yet without the entrepreneur to identify value-adding possibilities, introduce innovation and then superintend the process all along the way, value-adding production would remain far less common and prosperity would possibly have remained as elusive as it had been in all of the centuries prior to the arrival of the industrial revolution.

But Say's other innovation was the popularization of an economic principle which would be given the name Say's Law, but not until more than a century had gone by since its first discussion by Say in his Treatise. 

Although there were a number of strands to the surrounding principle, in brief it may be stated as: demand for goods and services is created by value-adding production and by nothing else. For goods to be bought not only must goods be produced, but precisely those goods that others would be willing to buy must be the ones that need to be produced.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

Interest Is the Payment Made for the Use of Someone Else's Property, i.e., Someone Else's Purchasing Power

Those who provide finance to others do so to earn interest, which is the name given to the payments made in exchange for the purchasing power that has been made available by others. There is a vast economic literature on the reason that interest is actually paid but here I will only provide the most basic. Interest is the payment made for the use of part of someone else's property--in this case someone else's purchasing power--and can thus be seen as a form of rental. One lends out one's ability to buy at the present time in the same way as one might rent out one's house. At the end of the rental period, the aim is to have the full amount lent out returned, in the same way that one intends to reclaim one's house when the tenant moves out.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

Mill's Fourth Proposition Was Once Considered the Touchstone of Economic Thinking: Demand for Commodities Is NOT Demand for Labour

Mill's fourth proposition was once considered the touchstone of economic thinking, 'the best test of a sound economist' as it was once said. If you could not understand why it is true, you were seen as incapable of understanding how an economy works. This proposition has, however, now grown so far from present usage that it would be a very rare economist who has even heard this statement, let alone accepts what it says. Yet for all that, it remains as valid today as the day it was first penned.

Mill's fourth proposition states that 'demand for commodities is not demand for labour.' Its meaning: when you buy goods and services you are not increasing the number of jobs. . . .

When someone buys goods they are not themselves employing the labour or paying the wages. By the time the good is bought, the work has already been done and workers have already been paid their wages. The employment of labour is an entrepreneurial decision made in advance of production and sale. It is not the consequence of someone having finally bought the product. . . .

The conclusion that should never be lost sight of in understanding how economies work is that buying things creates no value. To purchase is not to produce, nor is it to employ. Demand of itself creates no value and cannot put people to work.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

The Pre-Keynesian Classical Theory of Recession Is Based on Disharmony between the Structure of Supply and the Structure of Demand

The structure of production refers to the way in which an economy as a whole fits together. Every output has their inputs, and each of those inputs has inputs of their own, and so on throughout the whole of the economy. There are literally an unquantifiable number of individual units of capital, workers and potential workers each of every kind who collectively possess a vast array of skills and abilities, along with resources of every kind found in different places undertaking particular roles. All of these inputs must be fit together to produce the output that is part of a process that eventually brings to us the goods and services we consume. Keynesian economics thinks in terms of aggregates, entire blocks of buyers and producers. Economic theory properly conceived instead looks at the atomic structure of the economy, at each of the individual productive components separately to understand how they can all be made to work together in a productive way. Moreover, Keynesian economics focuses almost entirely on final demand and ignores the actual structure of the economy, which it treats as irrelevant. Pre-Keynesian classical theory, on the other hand, thought of the structure as the crucial issue. They focused on whether the structure of production was synchronized with what buyers were spending their money on. For classical economics, it was whether the structure of supply could rapidly conform to the structure of demand that was the matter of first importance in understanding how well an economy worked. The Pre-Keynesian theory of recession was based on explaining why the structure of supply and the structure of demand might no longer be in harmony. Policy during recessions was therefore directed towards restoring this balance by hastening, as best a government could, the readjustment of the economy until the structure of supply and demand were in conformity once again.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.