Saturday, July 26, 2014

A Neglected Point in Connection with Crises -- N. A. L. J. Johannsen

Joseph Dorfman, "Heterodox Economic Thinking and Public Policy," Journal of Economic Issues, March 1970, p. 20:
My last exhibit of an influential heterodox thinker is a man who had no college training whatever. The self-taught Nicholas August Ludwig Jacob Johannsen (1844-1928) dared long ago to espouse the greatest of heresies; namely that there could be a chronic condition of overproduction of goods, or in modem terminology, a "general deficiency of demand." Because of this, his audience among the orthodox economists was extremely limited. While he labored in relative obscurity any impression that this might give that his work was of little importance or influence would be misleading, for his limited audience included many of the best minds of the day both at home and abroad; to wit, J. B. Clark, J. M. Clark, Foster and Catchings, Friedrich von Hayek, John A. Hobson, Keynes, Mitchell and F. W. Taussig.  
His major work, A Neglected Point in the Theory of Crises, (1908) with its clear presentation of the multiplier and of the inability of unlimited saving to find investment has been hailed as one of the earliest successful formulations of what has become known as Keynesian economics.  
Johannsen followed up his intricate analysis with policy proposals that were likewise quite modern. For example, in one of his innumerable pamphlets appealing to the profession to attempt to understand his theory, he wrote that there were two alternative ways to "guard against depressions." One was to "create unlimited opportunities for building up new productive capital, so that the savings funds constantly accruing can always find investment in the beneficent way." The alternative was to "restrict or regulate the saving activity, . . . so as to keep it in healthy limits." Since "the greater the concentration of wealth in individual hands, the greater the saving power; such concentration . . . is not desirable, so far as the interests of society are concerned." 

1 comment: said...

Apparently Johannsen was the first to propose the multiplier, probably in an article a few years before the book.

As for the broader idea that one should supplement aggregate demand by government policies when it falls, this had certainly been around since the period after the Napoleonic Wars, with not only Malthus and Sismondi advocating public works spending and other such policies, but even J.B. Say himself doing so at the time.