More on Say’s Law and Austrian economics

The conversation on Say’s Law continues at The Coordination Problem website. These were posted following my own post yesterday. Neither of the posts are anything other than assertions with no actual text references, but they do raise issues that are raised all the time. But the second, from Barkley Rosser, gets into the issues that truly matter.

Actually, Hayek viewed Say’s Law as an equilibrium concept. He argued it did not hold in a monetary economy because money allows there to be demand without supply. One could say the denial of Say’s Law in a monetary economy undergirds Hayek’s monetary theory of economic fluctuations.

It is not clear that the Law originated with Say. It already appears in the Wealth of Nations.

Then there is the question of whether Say changed his mind. In the fifth edition of the Treatise, never translated, Thomas Sowell argues that Say changed his mind about the Law.

Finally, Mill’s Fourth Fundamental Proposition Respecting Capital is at the heart of Hayek’s cycle theory. Hayek clarifies that in an Appendix to The Pure Theory of Capital. And I analyzed its relevance in Economics as a Coordination Problem. It is not a forgotten concept.

Posted by: Jerry O’Driscoll | July 18, 2015 at 02:43 PM

The quote that Kates provides from Mises is peculiar. It is clearly a criticism of Keynes, but aside from declaring that Keynes failed to disprove Say’s Law, he really provides no defense of it or how it fits into Austrian economics.

I am interested to see that Steve Horwitz basically that the main Austrians said very little about it, and one has to go such figures as Hutt to find much, with followups by Steve himself and some others.

I think Jerry is right that Hayek probably did not accept it in a monetary economy.

Mill took it very seriously and spent much time talking about it and relying on it in his arguments.

Regarding Say himself, he may have changed his mind on it, but from the very beginning he always recognized that it did not universally hold and gave various examples of how and when it might not hold, most of these involving people hoarding money for some reason or other, such as in the Ottoman Empire not to have to spend more on taxes if one engaged in conspicuous consumption, although one can find numerous quotes from him in various places where he certainly states some version of it. As it is, I think it was James Mill who coined the term and promoted it in the English literature, thus making it not too surprising that his son would also be an advocate of it, although I may be mistaken on this last point (and I accept that versions of it may well have been around earlier).

Posted by: Barkley Rosser | July 18, 2015 at 05:31 PM

Understanding Say’s Law may be as difficult an issue as it is possible to find in a world where every economist is taught Keynesian aggregate demand as their first approach to thinking about the nature of recession. Say’s Law is the essence of supply side economics. At the aggregate level, demand has absolutely no role to play. What demand there is originates with supply and can come from no other source. Public spending unbacked by real production is no more a stimulus than the printing of counterfeit money. I have therefore put up the following post:

The fact that this fundamental principle of pre-Keynesian economic theory is named “Say’s” Law has been one of the more damaging aspects of both the history of economics and of economic theory itself. Here is something to contemplate about the true origins of the Keynesian Revolution. The term “Say’s Law” was invented by Fred Manville Taylor and entered into common usage on the American side of the Atlantic in the 1920’s with the publication of Taylor’s Principles of Economics. How, it may be asked, did the term get into The General Theory? Say himself never understood Say’s Law properly. If you do want to understand it properly you need to go to John Stuart Mill and those among the classical school who followed after. J.E. Cairnes is the most accessible source.

Say’s Law states that you can never make an economy grow from the demand side. Mill’s version is a direct refutation of Keynesian economics: “demand for commodities is not demand for labour”. Mill and the classics said you could not make an economy grow by increased expenditure; Keynes said you could. All modern macro continues to argue that it can be done and is to that extent entirely Keynesian. That there is no real world evidence that increases in aggregate demand lead to increases in output and employment confirms in every instance a stimulus has been applied that Say’s Law is valid. If you would like to see my explanation in short form, you have my articles at the Liberty Fund to go to. If you would like to see the longer and more extended version, you could try the second edition of my Free Market Economics. I will just leave you with Ricardo’s reply to Malthus in the midst of the general glut debate (the first attempt to introduce “Keynesian” economics during the 1820s): “men err in their productions, there is no deficiency of demand”. This is the classical and Austrian theory of recession. There has been a disorganisation of markets that has led to recession and unemployment (that is, men have erred in their productions). The problem is not over-saving and a lack of aggregate demand.

Will anyone get it? It is such a frustration.

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