Misunderstanding Say’s Law of Markets

If you would like to see what passes for a discussion of Say’s Law in the modern world, see below. My comments are in bold and found in square brackets. An utterly and thoroughly Keynesian description of the Law of Markets with almost no understanding of the classical theory that sits beneath it. And I even think this is supposed to be a defence. Why is it impossible for someone writing on Say’s Law to read my book. He even sources Horwitz in the book I edited but hasn’t even bothered to read my intro. Useless junk! No wonder no one understands Say’s Law. The question I always ask anyone who tries to defend Say’s Law is why classical economists thought it was so important. What major principle was involved? What instructions did it give to makers of policy or what did it tell them not to do? From what you see below, the writer could not possibly give a coherent answer to any of these questions. But at least he did give it the perfect title.

Misunderstanding Say’s Law of Markets

– By Garrett Watson, St. Lawrence University

Few ideas in the history of economic thought have achieved a level of perplexity and criticism than Say’s Law. Perhaps one of the most misunderstood and elusive concepts of the Classical economics, Say’s Law of Markets, first postulated by John Baptiste Say in 1803 [They only think this because it was given the name Say’s Law in the 1920s], underwent considerable support and eventual decline after its assault by John Maynard Keynes in The General Theory. Many of the fundamental disagreements we observe in historical debates surrounding macroeconomics can be traced to different conceptions of how Say’s Law operates in the market economy and the scope used in the analysis. By grasping a thicker idea of Say’s Law, one is able to pinpoint where disagreements in both macroeconomic theory lie and judge whether they necessarily must be dichotomized.

Say’s Law is best known in the form Keynes postulated it in The General Theory: “supply creates its own demand” (Horwitz 83) [He needs to footnote Horwitz! Why hasn’t he read The General Theory if he’s going to talk about Say’s Law?]. Despite the apparent eloquence and simplicity [!] contained in this definition, it obscures the genuine meaning of the concept. For example, one may interpret this maxim as meaning that whenever one supplies a good or service, it must be demanded – this is clearly untrue (83). Instead, Say’s Law can be interpreted as saying that the ability to produce generates their ability to purchase other products (84). One can only fully grasp Say’s Law when analyzing the nature of the division of labor in a market economy. Individuals specialize in producing a limited range of goods or services, and in return receive income that they use to buy goods and services from others. The income one receives from production is their source of demand. In other words, “all purchasers must first be producers, as only production can generate the power to purchase” (84) [Not right. The notion is being reduced to individual buyers when it is an aggregate concept where demand in aggregate is constituted by supply in aggregate. Purchasers are often borrowers who have produced nothing but intend to buy more than their incomes will allow. Lots of other possibilities right down to giving my children their allowance.]. This idea is intimately linked to the Smithian idea that the division of labor is limited by the extent of the market (89).

The result of this fascinating principle in the market economy is that (aggregate) supply will equal (aggregate) demand ex ante as demand is equally sourced by previous production (Sowell 40) [And having repeated exactly and with no modification the very conclusion reached by Keynes, we can dispense with any thought that our author has any idea whatsoever about the meaning of Say’s Law in pre-Keynesian times. ]. Another important point made by Say’s Law is that there exists a trade-off between investment and consumption (40). In contrast to the later Keynesian idea of falling investment leading to a fall in consumption and therefore aggregate demand, an increase in investment means falling consumption, and vice versa. This idea can be analogized to Robinson Crusoe [RC is a terrible example since in a discussion of Say’s Law we are of necessity talking about an exchange economy. This is a discussion explaining that saving is the feedstock for investment.] abstaining from consumption to build a fishing net, increasing his investment and his long-term consumption of fish (42). Therefore, a higher savings rate pushes up investment and capital accumulation, increasing growth and output (as Smith eloquently argues) (40). In another stark contrast to Keynesian analysis, there is only a transactions demand for money, not a speculative nor a precautionary demand (40). The implications of this are that money cannot affect real variables; it is a veil that facilitates transactions only – money is neutral (Blaug 148).[This is just Keynes repeated. Does he really think classical economists believed that no one ever held money as an asset and that the amount of money held was a constant. Thinking in terms of the quantity theory of money – MV=PQ – meant that V would fall during recession.] Finally, Say’s Law also shows that there cannot exist a “general glut”; an economy cannot generally overproduce [Why? Needs explanation. I don’t think he understands the reasoning so can’t provide one.](Sowell 41). While relative over and under-production can occur, there is no limit to economic growth [He seems to think Say’s Law is an argument against secular stagnation!](41).

While it was uncontroversial among the Classical economists that there wasn’t a limit on economic growth [Say’s Law is not a theorem about secular stagnation.], several economists took issue with the fundamental insights of Say’s Law (44). One of the most well-known criticisms was that of Thomas Malthus. Malthus was an early proponent of the “Paradox of Thrift” [What an anachronism!] – an excessive amount of savings could generate an economy with less than full employment (43). One could describe the view of Malthus as fundamentally “under-consumptionist” (Anderson 7). Unlike his contemporaries [Wrong, wrong, wrong!!!!! This is drenched in Keynesian idiocies.], Malthus did not view money as inherently neutral (Sowell 41). Other classical economists, such as Smith, argue that money “will not be allowed to lie idle”, effectively dismissing a precautionary motive for holding money and therefore monetary disturbances [He should at least read Becker and Baumol to cure him of at least some of his ignorance.] (38). This is where we see the inherent difference in perspective in the analyses of Smith and Malthus. Smith is focused on long-run conditions of money (its neutrality and importance of real fundamentals) versus the short-run disturbances money can generate in output (39).

Money is half of every exchange; a change in money can therefore spill over into the other half of every exchange, real goods and services [This is not a defence of Say’s Law, it is a criticism from someone who has no idea what the proposition means.] (Horwitz 92). In effect, “The Say’s Law transformation of production into demand is mediated by money” (92). This means that Say’s Law may not hold in conditions in which monetary disturbances occur.[Then Keynes is right!] John Stuart Mill recognized this possibility and affirmed Walras’ Law: an excess of money demand translates to an excess supply of goods [How wrong can you get.] (Sowell 49). An excess money demand manifests itself by individuals attempting to increase their money balances by abstaining from consumption. This therefore generates an excess supply of goods, which some would argue can be self-correcting, given downward adjustment of prices [More Keynes.] (Blaug 149). Malthus (and later on, Keynes [He is explicitly siding with Malthus and Keynes!!!!!!!!!!!]) argues that downward price and wage rigidities (which can be the result of game theoretic problems in firm competition, efficiency-wages, or fixed wage contracts [This is Malthus? Would have been news to him.]) can short circuit this process, yielding a systematic disequilibrium below full employment (Sowell 65). In terms of the equation of exchange, instead of a fall in V (and therefore a rise in money demand) being matched by a fall in P, the fall in V generates a fall in Y. This point was taken into further consideration by later monetary equilibrium theorists, including Friedman, Yeager, and Hutt. The same analysis can be used to understand the effects of drastic changes in the money supply on short term output, as Milton Friedman and Anna Schwartz would demonstrate in the contraction of the money supply during the formative years of the Great Depression [As if classical economists would be unaware that a fall in money supply would constrict economic growth. What does he think the quantity equation shows?].

When analyzing the large disagreements over Say’s Law, it becomes clear that they stem from a difference in scope: supporters of Say’s Law analyzed the macro economy in terms of long-run stability, while Malthus and others after him focused on short-run disequilibrium generated by monetary disturbances (Sowell 72)[Neither he nor Sowell understand Say’s Law. I never liked Sowell’s explanations as can be seen from my book.]. Smith and other classical economists, pushing back against mercantilist thought, emphasized that money was merely a ‘veil’ that does not affect economic fundamentals, and that quantities of money ultimately didn’t matter [Every sentence gives me pain.](72). The Malthusian grain of truth regarding disequilibrium caused by monetary disturbances in the short-run does not refute Say’s Law; it reveals the necessity of getting monetary fundamentals correct in order for Say’s Law to cohesively operate. [This is an Austrian version that is deeply mixed with Keynes. If you accept this, arguments against the stimulus are much weakened since there really is a shortfall of demand.] It becomes increasingly clear that once we look at the disagreements through the lens of scope, the two conceptions of the role of money in a market economy need not necessarily be incompatible.

And now that you’ve read this, you should read Understanding Say’s Law of Markets.


Anderson, William. “Say’s Law: Were (Are) the Critics Right?” Mises Institute1 (2001): 1-27. Mises Institute. Web. 19 Oct. 2012.

Blaug, Mark. “Say’s Law and Classical Monetary Theory.” Economic Theory in Retrospect. 4th ed. Cambridge: Cambridge University Press, 1985. 143-160. Print.

Horwitz, Steven. “Say’s Law of Markets: An Austrian Appreciation,” In Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Steven Kates, ed. Northampton, MA: Edward Elgar, 2003. 82-98. Print.

Sowell, Thomas. On Classical Economics. New Haven [Conn.]: Yale University Press, 2006. Print.

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