I recently came across the following passage reading an old article written by one of the economic greats. It is Joseph Schumpeter in an article titled “The Explanation of the Business Cycle” and published in Economica in December 1927.
Those economists who really count do not differ so much as most people believe; they start from much the same premises; problems present themselves to them in much the same light. . . .
The problem of the business cycle is a case in point. It presented itself to the classic period and their immediate successors in the aspect of the striking fact of recurring ‘crises’. Two results were speedily established. The one, negative only but of the greatest ‘diagnostic’ importance, was that there can be no such thing as a general glut.
That is, it was unanimously agreed at the highest level amongst economists that demand deficiency is never a correct explanation for recession and therefore recovery can never be driven from the demand side of the economy. This is a principle – now long gone from economic theory because of Keynes – known within the trade as Say’s Law.
The world’s economies are floundering because this principle, understood by all in the 1920s, is now understood by virtually no one. The result is that we now continuously try to drive recovery from the demand side and are on each occasion astonished to find that it does not work.