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Classical Economic Theory and the Modern Economy

Author(s):Kates, Steven
Reviewer(s):Numa, Guy

Published by EH.Net (November 2020)

Steven Kates, Classical Economic Theory and the Modern Economy. Cheltenham: Edward Elgar, 2020. vi + 264 pp. $125 (hardcover), ISBN: 978-1-78643-356-5.

Reviewed for EH.Net by Guy Numa, Department of Economics, Colorado State University.


This book is about how little Steven Kates thinks of the “modern economy,” an umbrella term for all variants of Keynesian economics. Bold and pretentious statements abound. “Just about the whole of modern economic theory is perniciously wrong … there is virtually nothing useful one can learn from a modern economics text in how to manage an economy” (p. 1). “Economists know nothing whatsoever about the analytical depth of the classical economists” (p. 16). Kates aims “to explain why classical economics is vastly superior” (p. 17). Kates wants to convince us that he is “almost uniquely placed” to do so, though he acknowledges “how obscure [he is] within the world of economics” and notes that “virtually no one sees things as [he does]” (p. 17). This does not prevent him from boasting about how, as chief economist of Australia’s national employers’ association, he “never made a single wrong call on the economy or the effects of public policy” (p. 20). Unfortunately, the book is filled with errors. Relevant quotes and texts are omitted or distorted for the sole purpose of justifying his anti-Keynesian narrative.

Throughout the book, Kates acts more like a pamphleteer than a convincing analyst. In almost all of the twelve chapters that comprise the book, he rants about Keynesian macro, his long-standing target. He even scolds Austrian economists for being too cozy with Keynes (p. 215). Kates asserts that “the number of jobs is unrelated to the level of demand for goods and services … It is a proposition that is … absolutely correct both in theory and also from the evidence of every attempt to use a stimulus to increase the level of employment” (p. 4). He insinuates that a legal mandate on employers to pay higher wages is tantamount to theft (p. 18)! Kates is more persuasive when he reminds the reader that classical economists considered recessions and government intervention, though the topic is superficially discussed. Overall, Kates’s arguments are quite repetitive.

The centerpiece of Kates’s anti-Keynesian manifesto is his own definition of Say’s Law. His mantra is that “Say’s Law is different in meaning and implications from the nineteenth century’s loi des débouchés … properly attributed to Say” (p. 13). Kates makes three claims: i) Say’s arguments was that “demand is constituted by supply” (pp. 13, 69); ii) “Fred Taylor noted that the principle denying the possibility of overproduction and demand deficiency did not have a name … He supplied that name, calling it ‘Say’s Law’ after J.-B. Say. ‘Say’s Law’ is, however, not Say’s loi des débouchés” (p. 14; see also pp. 67-69). Ironically, the claim contradicts a previous statement, where Kates (1998, p. 151) argued correctly that “Taylor was the first to use the term ‘Say’s Law’ to describe what had previously been referred to as ‘the law of markets’ or the ‘théorie des débouchés’;” iii) “Keynes was not trying to deny that demand is constituted by supply. He was denying that economies never enter recession because of a deficiency of demand” (p. 15).

In fact, all three propositions are erroneous. Kates’s faulty definition of Say’s Law has previously been demonstrated (Jonsson 1999). The problem is that Kates conveniently avoids quoting relevant passages which disprove his manufactured arguments. In some instances, these passages follow immediately Kates’s quotes, but they are conspicuously omitted.

First, apparently Kates is not familiar with Say’s writings. It is no wonder that he never quotes Say. Contrary to Kates’s claims, Say’s loi des débouchés (law of outlets) cannot be reduced to the argument that goods buy goods (pp. 67, 91). Indeed, in the first edition of Say’s Traité the discussion of the law is not limited to the chapter on outlets (Book I, chapter XXII). In Book IV, chapter V, Say ([1803] 2006, p. 688) wrote: “the scope of the total demand for means of production, does not depend upon the scope of consumption. Consumption is not a cause: it is an effect. One must buy in order to consume; yet one can buy only what has been produced. The quantity of products demanded is therefore determined by the quantity of products created? Undoubtedly so” (original emphasis). Thus, Say never declared that “demand is constituted by supply.” Say’s focus was production not supply, an important distinction. For him, products consisted of goods or services produced or traded at cost-covering prices. Kates recognizes that this element “was the core of classical thought” (p. 12), but he fails to apply this crucial reasoning to Say’s thinking. Moreover, Kates maintains that “following the publication of Malthus’s Principles, Say agreed completely with Malthus’s critics and denied the possibility of demand deficiency” (p. 68). This statement, too, is incorrect. Recent studies have demonstrated, with ample evidence, that in several instances Say admitted that a general demand shortfall was possible and could cause economic crises (Béraud and Numa 2018, 2019). Following Say, most classical economists believed that production was the source of demand. That is the essence of what later became known as Say’s Law. However, for Say the law need not imply that supply was necessarily equal to demand, nor that demand deficiency could not cause crises. Because Say and other classical economists carefully distinguished supply from production, Say’s law of outlets differed from Keynes’s interpretation.

Second, it is true that Taylor invented the term “Say’s Law.” However, it is incorrect to claim that Taylor created the term “to describe … the impossibility of demand deficiency as a cause of recession.” Page 73 of the book is the perfect illustration of Kates’s selective quoting and blatant distortions of the historical record and the textual evidence. Kates quotes Taylor twice. The first quote does not contain any reference to the term “Say’s Law.” In reality, Taylor (1925, p. 196) discussed “general demand fallacies;” nowhere in this passage is “Say’s Law” defined as “the impossibility of demand deficiency as a cause of recession,” which is nothing but Kates’s own version of the law. The second quote ends with Taylor’s explicit reference to Say (1803), but Kates omits what follows immediately after, that is, the actual statement of the principle which begins on the same page by the following words. “This principle may be stated as follows: Principle — Say’s Law. The Ultimate Identity of Demand and Product. In the last analysis, the demand for goods produced for the market consists of goods produced for the market, i. e., the same goods are at once the demand for goods and the supply of goods; so that, if we can assume that producers have directed production in true accord with one another’s wants, total demand must in the long run coincide with the total product or output of goods produced for the market (Taylor 1925, pp. 201-202; original emphasis). This passage, Taylor’s actual definition of Say’s Law, is never quoted or mentioned in Kates’s book. The irony is that in the past, Kates (1998, p. 150) correctly quoted it. It should be noted that, like Say, Taylor (1925, p. 203) acknowledged that general demand deficiency could cause economic crises. He also admitted that public expenditures could have expansionary effects, a position that Say also supported. Taylor rightly credited Say with the earliest and clearest formulation of the law of outlets; hence the term “Say’s Law.”

Third, the question is whether Keynes’s definition of Say’s Law is the same as Kates’s. Keynes was very clear. He ([1939] 1973, pp. xxxiv-xxxv) criticized “the doctrines associated with the name of J.-B. Say” and explicitly interpreted Say’s Law as the principle “that demand is created by supply.” For Keynes ([1936] 1973, p. 18), the expression means that “in some significant but not clearly defined sense that the whole of the costs of production must necessarily be spent in the aggregate … on purchasing the product” (see also Keynes [1936] 1973, p. 26). He deduced from this principle the idea that, for classical economists, a lack of demand was not the cause of recessions, but Keynes never defined Say’s Law as “recessions are never caused by demand deficiency.” Kates’s “definition” of Say’s Law is just a straw man to justify his anti-Keynesian propaganda.

The book suffers from other flaws. Kates reduces classical economic theory to John Stuart Mill’s Principles. Even though Mill was a prominent classical economist, this is incredibly simplistic. Kates even admits that much, conceding that “Mill’s economics is very different from the economics of Smith and Ricardo” (p. 32). Kates’s reading of Mill is also incomplete. There is no discussion of Mill’s radicalism (Persky 2016), other than the fact that he was a self-proclaimed “socialist” (pp. 5, 32, 73). Furthermore, the secondary literature is rarely considered. On topics such as Say’s Law, classical political economy, and the Keynesian revolution, one would expect a comprehensive discussion of recent and older studies. Instead, Kates’s volume is a true preacher’s monologue .

There may be legitimate reasons to criticize modern economic theories and policies. However, protesting against Keynesian economics should not be done at the expense of the historical record and the textual evidence.


Béraud, Alain, and Guy Numa. 2018. “Beyond Say’s Law. The Significance of J.-B. Say’s Monetary Views.” Journal of the History of Economic Thought 40 (2): 217–241.

Béraud, Alain, and Guy Numa. 2019. “Retrospectives: Lord Keynes and Mr. Say: A Proximity of Ideas.” Journal of Economic Perspectives 33 (3): 228-242.

Jonsson, Petur. 1999. “‘Say’s Law and the Keynesian Revolution: How Macroeconomics Lost Its Way’ by Steven Kates.” Southern Economic Journal 65 (4): 967–970.

Kates, Steven. 1998. Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way. Cheltenham: Edward Elgar.

Keynes, John Maynard. (1936) 1973. The General Theory of Employment, Interest and Money. London: Macmillan. Reprinted in Vol. 7 of The Collected Writings of John Maynard Keynes. London: Macmillan.

Keynes, John Maynard. (1939) 1973. “Preface to the French Edition.” Reprinted in The General Theory, pp. xxxi–xxxv. Vol. 7 of The Collected Writings of John Maynard Keynes. London: Macmillan.

Persky, Joseph. 2016. The Political Economy of Progress: John Stuart Mill and Modern Radicalism. New York: Oxford University Press.

Say, Jean-Baptiste. [1803, 1814, 1817, 1819, 1826, 1841] 2006. Traité d’économie politique ou simple exposition de la manière dont se forment, se distribuent et se consomment les richesses. Édition variorum in Œuvres Complètes de Jean-Baptiste Say. Paris: Economica.

Taylor, Fred Manville. 1925. Principles of Economics. Ninth edition. New York: Ronald Press.

Guy Numa is an Assistant Professor of Economics at Colorado State University. Recent publications include “Retrospectives. Lord Keynes and Mr. Say: A Proximity of Ideas” (with Alain Béraud), Journal of Economic Perspectives (2019); “Jean-Baptiste Say on Free Trade” History of Political Economy (2019); “Money as a Store of Value: Jean-Baptiste Say on Hoarding and Idle Balances” History of Political Economy (2020).

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Subject(s):History of Economic Thought; Methodology
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII