Alfred and Mary Marshall and the Confidence Fairy: Annals of the History of Economic Thought
Alfred Marshall and Mary Marshall (1885), Economics of Industry, Book III: Market Value: Chapter 1: Changes in the Purchasing Power of Money http://tinyurl.com/dl20110818j:
(4) After every crisis, in every period of commercial depression, it is said that supply is in excess of demand. Of course there may easily be an excessive supply of some particular commodities.... But something more than this is meant.... The warehouses are overstocked... in almost every important trade; scarcely any trade can continue undiminished production so as to afford a good rate of profits....
And it is thought that this state of things is one of general over-production.... But it really is nothing but... commercial disorganization... the remedy... is a revival of confidence. To begin with...as [John Stuart] Mill says:
What constitutes the means of payment for commodities is simply commodities.... Could we suddenly double the productive powers of the country, we should double the supply... but... by the same stroke, double the purchasing power....
But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones.... There is but little occupation in any of the trades which make fixed capital. Those whose skill and capital is specialized in these trades are earning little, and therefore buying little.... Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less.... Thus commercial disorganization spreads.... The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others...
In addition to the first explicit invocation of the Confidence Fairy 'touch[ing] all industries with her magic wand' I have found, I find it interesting that Alfred and Mary Marshall quote Mill on the truth of Say's Law without quoting Mill on when Say's Law breaks down--on how excess demand in (and after) a financial crisis for financial assets like money is deficient demand for and excess supply of currently-produced goods and services and labor: a general glut. This failure to note Mill's insights from his Essays on Some Unsettled Questions--this failure to recognize that not just Malthus but Mill and indeed Say himself had big problems with the empirical applicability of Say's Law--is, I think, what lies behind Keynes's peroration in Chapter 3 of his General Theory:
Malthus, indeed, had vehemently opposed Ricardo's [and Say’s] doctrine... but vainly.... Unable to explain clearly... how and why effective demand could be deficient or excessive, he failed... and Ricardo conquered England as completely as the Holy Inquisition conquered Spain.... The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou.... It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas...
