Even the Keynesian version of Say’s Law, that “supply creates its own demand”, gets you at least towards the core idea. More accurately, and using the language of the classics, it is “demand is constituted by supply”. To buy something you must first produce and sell something. The selling is what gets you the money, but the production of value adding output is what first allows you to sell. Without value adding activity, there is nothing to sell and therefore there is no basis for demand.
As for Keynes, he argued you could leave out the middle part of the process, that you could raise demand without having first produced something that added value. Just spend and the value adding production will follow. What we are finding at the moment, however, and in every country in the world, is that this is infinitely not the case. There has been plenty of stimulus money spent, but almost none of it has been value adding. The results are massive deficits in every economy that attempted a serious stimulus but with no revenue streams to repay any of the debts incurred. This is just what anyone who understood Say’s Law would have forecast with perfect clarity.
Paul Krugman has written an article for The New York Times in which he discusses how the production of the iPhone 5 will now bring a boost to GDP of something like half a percent. It may or it might not, but that’s not my issue. It is that he uses the production and sale of a very much value adding item of technology to prove that Keynes was right when what he is really doing is proving that Keynes was wrong and that Say’s Law is right. This is what Krugman says:
So is the new phone as insanely great as Apple says? Hey, I’ll leave stuff like that to David Pogue. What I’m interested in, instead, are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two.
Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.
Well, I have news for Paul Krugman. Whether he knows it or not, he’s a classical economist. He has argued that when a private sector firm produces a value adding good or service that it adds to economic growth. This is not Keynes, this is classical economics which always looked at economics from the supply side. Keynes’s “innovation”, a disaster of the highest order, was to argue that you could stimulate an economy from the demand side by simply buying things without having had value adding production first.
Krugman should pay close attention to this example, one he invokes himself, to understand what classical economic theory, and Say’s Law in particular, actually said. My Free Market Economics: an Introduction for the General Reader would be just the place for him to start.
Where to get the book: I am happy to see there is some interest in the book but unless you are library, don’t buy the hardback edition. There is a paperback edition and you can can find it on the Edward Elgar website. If you do a search, eventually you come to this:
Kates, S. Free Market Economics
‘A refreshing theoretical counterattack to the established Keynesian world view that has left the West financially overpromised, disastrously broke, and vulnerable to crank ideas. Professor Kates has … read more…
Hardback £95.00 on-line price £85.50
Paperback £29.95 on-line price £23.96
£24 is about $36. I have now been through it for the eighth time with my students since I wrote it in the first semester in 2009 and for the third time since it was published in 2011. And while there were a few gremlins that crept in that have now been fixed, and there are a few bits I might have wished to explain a bit better, it still says what I think needs saying.
I’ve also mentioned this before but I do find its uniqueness the most remarkable part of all. I thought the book would be one of many anti-Keynesian introductory tracts that would be published after the failure of the stimulus but to my knowledge it remains the only one of its kind. As an extra bonus, it is the only book written since 1937 that explains at an introductory level the classical theory of the cycle. If any of you do read it, suggestions for improvements or changes would be very welcome.
Law of Markets 