“Men err in their productions, there is no deficiency of demand”

There’s not a lot I agree with Paul Krugman about but his definition of Say’s Law is most certainly one of them. This is from a blog post he wrote on February 10:

When John Maynard Keynes wrote The General Theory, three generations ago, he structured his argument as a refutation of what he called ‘classical economics’, and in particular of Say’s Law the proposition that income must be spent and hence that there can never be an overall deficiency of demand.

He’s wrong about the reason, that it is because income must be spent, but he is right about the conclusion. Whatever may be the state of play in an economy, rapid growth or deep depression, the one point classical economists would agree on was that the level of demand in aggregate had nothing to do with what was going on.

I am sometimes asked why I persist with bringing Say’s Law into the conversation. There are a number of reasons, of which these are the most important.

First, Keynes himself made this his point. He was going to refute Say’s Law. It still seems to me the most direct means to demonstrate that Keynes was wrong if it can be shown and understood that Say’s Law is valid after all. This is a point perfectly well understood by Krugman. This is the Maginot Line of Keynesian economics. If it is ever breached in a serious way the whole of the Keynesian position will be overrun and sent into retreat and disarray.

Second, by bringing the great economists of the classical period into the argument, I am siding with some of the smartest people who have ever lived. Just to have John Stuart Mill, the man with the nineteenth century’s highest IQ on one’s side, adds quite considerable weight to one’s own arguments. If you believe Mill got it wrong you had better have a pretty strong reason for thinking you can see into these things more clearly than he could.

Third, there is a genealogy for these arguments that one can look up. I have become all too aware that virtually no one even amongst historians of economic thought actually knows very much about classical business cycle theory. Expertise in this area is vanishingly small. Yet it is there for anyone to access if they would bother to try. I might mention that an obstacle to even looking is that Keynes explicitly stated that classical theory had no explanation for involuntary unemployment, a statement so ridiculously untrue that it is shameful that saying just this didn’t discredit him on the spot. But the upshot is that no one who wishes to stay onside with the mainstream of the profession ever wishes to make anything of this.

Four, it is important to get people to understand that the crucial issue is aggregate demand. This is Keynes’ innovation. I say this to you, that if you use aggregate demand to explain anything at all in economic theory, you cannot and will not understand anything at all about what you are trying to explain.

If every time you used the phrase aggregate demand you substituted “value adding production” then you would start to see things a bit more clearly. As in, “if employment is to rise we need an increase in aggregate demand” now becomes, “if employment is to rise we need an increase in value adding production”. You employ people to produce, not to buy. Alas, between the writers and publishers of economic texts there is enough heft to stop any such adjustment being made in how we teach and explain economics, but you can do it for yourself. And if you do it, you will then see that nothing that transpired as part of the world’s various stimulus packages could ever have led to recovery since none of it led to an increase in value adding production.

Anyway, there is more along the same lines as this in an article that you can find at Quadrant Online.

And let me just mention the reason for the title. The statement is from David Ricardo and was part of a letter to Thomas Malthus written in 1820. Malthus was arguing that the recession that was then current was due to a deficiency of demand. People preferred to save and not to spend. I will only say that if you think that the depressed level of our economies at the present time is due to too little demand, then so far as the operation of our economies goes, like Malthus in 1820 you do not have a clue.

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