“Pure fallacy from beginning to end”

Here is Milton Friedman stating Say’s Law. He is asked this question (35 seconds in):

Isn’t there some benefit to having the government steal our money . . . . They take this money and they give it mostly to government employees. Well the government employees spend it . . . . And so the people who were robbed have to do something creative to get the money back? And isn’t this creative activity the real wealth?

In his answer, Friedman first makes the obvious point that is, unfortunately, almost impenetrable to the modern economic mind. He says that the premise behind the question is:

Pure fallacy from beginning to end.

Friedman explains why but this is his summary in his own words:

Spending isn’t good; what’s good is producing.

Play the tape for yourself and listen to the full answer. And it is interesting that Friedman states this so clearly since what he is stating is the obvious logic of a market economy, a logic now all but lost.

I wrote to Friedman in 1994 at the latter stages in the writing of my thesis to ask him if he had ever discussed Say’s Law. The problem, unfortunately, is that he intuitively understood Say’s Law as a practical explanation of how economies worked, as the above quotation unmistakeably shows, but did not know that this is Say’s Law. So in his reply – excerpted from a letter more than a page in length and personally typed – he wrote this:

I do not recall ever having written anything specifically about Say’s Law. The closest I have come would be in the various discussions of Keynes’s theory, such as my article on the quantity theory of money in the New Palgrave. The issue of whether there can be a long-run underemployment equilibrium is essentially the Say’s Law issue and my discussion of that indirectly is a discussion of Say’s Law, though not directly.

He unfortunately understood “Say’s Law” in the way it has been bequeathed to the modern world by Keynes and recognised that his explanation is indirect rather than specific. But as far as understanding how an economy worked, he most definitely understood Say’s Law in exactly the way it needs to be understood. You cannot drive an economy from the demand side.

[My thanks to JP for sending the video of MF.]

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