[gpm2313]

Sheyboer,

That is an excellent question. The pre-Keynesian beleif that chronic and sustained unemployment is not a market phenomenon was based on Say’s Law. One of the primary goals of Keynes’ General Theory was, of course, to critique Say’s Law and therefore to prove that the free market could and does often generate periods of widespread unemployment.

In the process of critiquing Say’s Law, however, Keynes “straw-manned” it, i.e., he caricatured what economists before him believed was the content of the law and then proceeded to criticize this caricature. Unfortunately, many economists just adopted Keynes’ rendition of the Law as the correct and true one and completely forgot about what the pre-Keynesian economists actually said and believed.

Thus, the history of interpretation regarding Say’s Law is rather tortured. The best source to understand what the pre-Keynesians actually believed is found in the work of Steven Kates, especially his work titled “Say’s Law and the Keynesian Revolution.”

I urge you to read Kates’ book if you are interested in this topic as well as the book by William Hutt titled “Say’s Law: A Re-statement” that is available for free on mises.org. Hutt’s work re-states Say’s Law and improves on the formulations of the pre-Keynesians. While this book is a vital and important contribution to economics, it is rather difficult to understand at first, so you may have to persevere!

Austrian business cycle theory provides an understanding of why a boom turns into a bust. It does not, however, provide an explicit theory of why the bust turns into a recession, i.e., a period of chronic unemployment.

GP Manish