A Picky Historical Correction...

Paul Krugman writes:

How The Other Half Thinks - NYTimes.com: [T]he Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean...

The Cochrane-Fama--and also Lucas--view that fiscal policy must necessarily be ineffective was, I think, not a true "classical" view at all.

It is certainly true that it was implied by Jean-Baptiste Say in his 1803 Treatise on Political Economy and his 1821 Letters on Malthus as a corollary. Say (then) maintained that since nobody produced except to use or sell and that nobody sold except to buy, the idea of a "general glut" was incoherent. And if nothing can decrease aggregate demand, than nothing--especially not fiscal policy--can increase it either. But by 1829 Say was no longer attached to Say's Law: the 1825-6 financial crisis and consequent depression in Britain had led him to reconsider his view.

And it was in 1829 that John Stuart Mill put his finger on it: in a monetary economy, excess demand for money will necessarily be associated with excess supply for currently-produced goods and services.[1]

After 1829, the first person I can find to claim that fiscal policy has absolutely no effect is R.G. Hawtrey in his unwise "Treasury View" paper, "Public Expenditure and the Demand for Money" in Economica in 1925. Hawtrey assumes that the velocity of money is completely interest-inelastic but somewhat procyclical, thus monetary policy has effects but fiscal policy does not.

The next person I can find is Friedrich Hayek, whose model I have never been able to understand but seems to entail not only that fiscal policy cannot boost output but that monetary policy cannot either. Maynard quoting Skidelsky:

Hayek came to Cambridge in January 1931 to give a one-lecture version of his theory to the Marshall Society before starting on his LSE lectures. His exposition was greeted with complete silence. Keynes was in London, but Richard Kahn, who was in the audience, felt he had to break the ice. 'Is it your view', he asked hayek, 'that if I went out tomorrow and bought a new overcoat, that would increase unemployment?' 'Yes,' replied Hayek, turning to a blackboard full of triangles, 'but it would take a very long mathematical argument to explain why.'

But Hayek's and Hawtrey's views were not taken up by even the craziest of the post-WWII crazies. Henry Hazlitt believes that fiscal policy could shift demand forward in time from the future to the present:

The Wisdom of Henry Hazlitt: How would that deficit [spending] be financed?... [I]f the money were borrowed, then the previous spending stimulus would be reversed by a deflation when the borrowing was repaid...

And Jacques Rueff did so as well:

[I]nvestment expenditures can... reduce temporary unemployment...they entail secondary effects... Financed by taxes and loans... Purchasing power taken away from individuals... the investment program [may] increase employment...

What seems to have happened is this: John Maynard Keynes, in his General Theory, argued that "classicals" are logically committed to a strong version of Say's Law in which fiscal policy is ineffective, even though they have not recognized it. And so Cochrane, Fama, Lucas, and company pick that up and say "oh, that's what we must believe" even though they have no understanding of why they are supposed to believe it.

[1] Alan Taylor emails that we should not forget Thomas Attwood, who almost had it in 1817:

Thomas Attwood in 1817: http://books.google.com/books?id=IcFHAAAAIAAJ&printsec=frontcover&dq=thomas+attwood&hl=en&ei=DGVFTOLMEoS0lQeNq-XEBA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEEQ6AEwBA#v=onepage&q&f=false. See pages 28-42 ish -- especially 34-35 and 38-40. Does he have the model down 8 years before Mill? Not perhaps in a totally coherent way.

Attwood is the Birmingham School leader whom Mill was ridiculing in the Currency Question pamphlet two decades later (1844). http://en.wikipedia.org/wiki/Thomas_Attwood http://en.wikipedia.org/wiki/Birmingham_School_(economics) http://books.google.com/books?id=e1ZEPd_pQnoC&lpg=PA23&ots=aMKvHOgE7k&dq=thomas%20attwood%20glasner&pg=PA22#v=onepage&q=thomas%20attwood%20glasner&f=false