Rueff’s Macroeconomics: Minding Your P’s and Q’s

Previous article: The Problem with Keynes

The preceding sections laid out the problems raised by the quantity theory of money, Say’s Law, and Keynes’s theory – the antecedents to today’s monetarists, supply-siders and neo-Keynesians. How does Rueff solve them?

Rueff’s macroeconomics, unlike that of Keynes, starts from the bottom up, not the top down. Rueff begins by noting that the equilibrium of the quantity supplied (s) and demanded (d) in the market for any good can be described

D = pq = s

where p and q are the price and quantity actually exchanged. This is what is described by normal supply and demand curves. We assume that prices are flexible, or that the period under consideration is long enough so that p and q reach equilibrium.

If we sum up the demand and supply of all goods exchanged, we get

D – PQ = S

D is the total demand of money against goods, S is the total supply of goods exchanged, and P and Q are indexes of the average price level and the volume of goods sold in a given period, compared with some base period. (Actually, Rueff’s equation is D = kPQ, where k is a constant relating current dollars to the values of P and Q in the base period. To keep the notation simple, I have omitted k, and in what follows I assume that the price index P = 1 to begin with.)

Rueff showed that when P and Q are weighted by the volume of each good actually exchanged, their value is independent of shifts in demand among the various goods exchanged. And so “the general price level index varies directly with total supply of goods against money, and thereby conforms to the general law of supply and demand, like all particular prices” (Theorie des Phenomenes Monetaires, II/19).

In short, the change in the price level is equal to the difference between total demand and total supply:

D = Q + dP


D – Q = dP

So we find Rueff, in 1927, discarding the quantity theory of money, and speaking in terms of aggressive demand a decade before Keynes. And he points out that the price level is inversely related to the total supply of goods, five decades before the American supply-siders with the “policy mix.”

Like Irving Fisher, Rueff envisions the indexes P and Q as including “the total value of the goods, services, securities or assets of all types, which have given rise to payments during the period of time considered” (idem, I/14).

Rueff remarks: “As a matter of fact, although most civilized countries have established various indices, such as wholesale price indices, retail price indices, cost-of-living indices and, sometimes, wage indices, all of which provide information on changes occurring in a given price group, we do not believe that any country as ever calculated a general price level index” (idem). This is still true today: there are no indexes for such a general price level. However, as we will see, this does not diminish the usefulness of the theory.

Rueff’s relationship between total demand, total supply and the average price level is “static”; it does not explain what causes total demand or total supply to change.

In L’Ordre Social, Rueff showed that a change in the price level (dP) – which is also the difference between total supply and total demand for goods – can be due to only one thing: the difference between the actual supply of money (M) and the amount of money that people wish to hold (L). Or,

D – Q = dP = dM - dL.

If people wish to reduce their holdings of cash below their actual cash balances, they will purchase goods, so that total demand for goods will exceed total supply; if they wish to increase their holdings above their actual cash balances, total demand for goods falls below total supply.

Next Installment: Rueff Restates Say’s Law



Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff

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