The Economist discusses Say’s Law

From the latest Economist: Say’s law: supply creates its own demand. Even before I have begun to read what is written, let me point out that Say didn’t invent “Say’s” Law nor did he understand it properly. And to begin with Keynes’s garbled form of words, “supply creates its own demand”, does not bode well. But at least the title in the magazine itself, “Glutology”, gives me some small hope. So now onto the article.

Good but not great. Getting there but not there yet. And without any doubt, the author has read my books and articles, as how could they not have been consulted since I am the only one who has been writing in defence of Say’s Law for these past 30-40 years or so. Sowell and Hutt in the 1970s and not much since. This, then, is the bit that I thought took the issue forward and out of the dreary Keynesian depths such discussions have usually been mired in.

To grasp Say’s point requires two intellectual jumps. The first is to see past money, which can obscure what is really going on in an economy. The second is to jump from micro to macro, from a worm’s eye view of individual plants and specific customers to a panoramic view of the economy as a whole.

These are both such fixed points of classical theory that without them there is a great deal that cannot be understood, with Say’s Law almost the least of it. Classical economics brings money only after the real relationships have been understood. It does absolutely bring in money, which has an enormous power to distort all economic relationships, but money comes in only at the end. Second, Say’s Law is about macroeconomics only. There is always lots of monetary purchasing power sloshing around unrelated to value adding activity so to get to the basic idea you cannot introduce money until you see what is happening beneath. It thus says that the aggregate demand for output is determined by the aggregate supply of output.

Now let me get into explaining what goes wrong after that.

First, in the very next para the author brings in money and, moreover, does so within a microeconomic setting, instantaneously breaking both rules!

Firms, like coal plants and cotton mills, sell their products for money. But in order to obtain that money, their customers must themselves have previously sold something of value. Thus, before they can become a source of demand, customers must themselves have been a source of supply.

There we are looking at money and in a micro setting. The thread has been completely lost.

Second, there is this which again completely misstates the point.

Today, many people scoff at Say’s law even before they have fully appreciated it. That is a pity. He was wrong to say that economy-wide shortfalls of demand do not happen.

Unless you start with the assumption that classical economists chose to ignore the frequent and devastating occurrence of recessions, it is absurd to think they equated the existence of recession with a deficiency of demand as we now do. That is specifically what Say’s Law was meant to deny. The best short statement on Say’s Law is from David Ricardo in a letter to Malthus in 1820: “men err in their productions, there is no deficiency of demand”. There are lots of reasons for recessions, just not this one.

The odd and dismal part of all this is that classical economists understood the operation of an economy better than our moderns, who have been blinded by Keynesian theory. If you would like a succinct and very clear statement on the correct meaning of Say’s Law, let me suggest the chapter on “Supply and Demand” in J.E. Cairnes 1874 Some Leading Principles of Political Economy Newly Expounded. Our economies are being ruined by faulty economic theories. If you would like to know why, you should read Cairnes and then perhaps my own Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way . And let me emphasise that the subtitle really is the point.

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