On Thursday at the University of Auckland Business School, two world authorities are talking on the most important economic debate of the last century, and asking this question: How do you restore health to an economy in difficulty?

It is a question that countries around the world have been pondering since the onset of the Global Financial Crisis. The response of many governments has been to implement programmes intended to boost aggregate demand which, they argue, will restore their economies to health.

It was John Maynard Keynes who most famously advocated this approach. The lyrics of the popular Keynes v Hayek music video reflect it:

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season.

The argument is that, what matters is spending, aggregate demand – and lots of it, no matter whether by consumers or by government.

The logical implication of this view was seen in 2002 when Princeton's Paul Krugman argued "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble," or in 2011 when he suggested that America needed a fake threat from space aliens to kickstart consumption.

This focus on aggregate demand stands in sharp contrast to the views of earlier economists, when the likes of French economist Jean-Baptiste Say argued “the encouragement of mere consumption is no benefit to commerce” and thus “it is the aim of good government to stimulate production; of bad government to encourage consumption.”

Say’s Law, as it is now known – that consumption is made possible by production – became embedded in mainstream economics and provided policymakers with a very different prescription to the approaches of today.

When writing The General Theory, Keynes recognised that for aggregate demand to become embedded in macroeconomics, he first had to invalidate Say’s Law. But did he? If not, Say’s Law is valid. If so, Keynesianism survives. That is the question at issue on Thursday night.

The economist Ludwig von Mises offered his own critique in 1950, arguing “Keynes did not refute Say's Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.”

It is clearly an area of great controversy. But this debate is not just of mere academic interest, for it continues to influence the policies of governments around the world – for good or bad.
 
Caleb Coppersmith is the President of the University of Auckland Economics Group. On Thursday 10 July from 5pm to 7.30pm, the Group will host Dr Steven Kates and Dr Jeremy Shearmur, two internationally respected researchers, who will speak about Say’s Law and the debate between Keynes and Hayek.