I was pointed in the direction of this article at Mises.org on “The Errors of Keynes” by Philipp Bagus. It is a review of a book written in Spanish by Juan Ramón Rallo and titled, Los Errores de la Vieja Economía part of which deals with Say’s Law.

The really interesting part is that it is becoming better understood that the road to unwind Keynesian economics travels through Say’s Law. Keynes himself could not have been clearer on this, that he was reversing the conclusion of those who believed Say’s Law to be true. Thus, there are two things that need to be done. First you have to know what Say’s Law is. Then you then have to show it is valid.

But the problem, and it is such a massive obstacle that it gets in the way of many such attempts, is that all economists are brought up on Keynesian demand side theory and it infuses every aspect of their thought. Even while recognising that it is the structure of demand that is the key they still hang onto the level of demand as an integral part of how they approach economic problems.

Let me therefore put it this way. If one is to understand the classical theory of the cycle, this is what one must know in one’s very bones. Hoarding NEVER causes a recession. Too much saving is NEVER the problem. An economy NEVER suffers from demand deficiency. If you want to say that after a recession begins people become tentative because of a lack of confidence, this you can find absolutely everywhere on the classical side of the Keynes-classics divide. .

Here is the reviewer’s discussion of Say’s Law.

Let’s have a look of some of Rallo’s arguments, beginning with Keynes’s famous critique of Say’s Law. Keynes’s distorted version of Say’s Law in TGT states that supply creates its own demand. Rallo vindicates Say’s Law in its original version: In the long run, the supply of a good adjusts to its demand. Ultimately, goods are offered to buy other goods (money included). One produces in order to demand, which implies that a general overproduction is impossible [in the long run].

Say’s Laws leads us straight forward to the most innovative argument in Rallo’s book that addresses the old argument against hoarding. Even harsh critics of Keynes, for example from the monetarist or neoclassical camp, admit that Keynes was at least right in that hoarding is a destabilizing and dangerous activity.

Rallo, however, proves and emphasizes the social function of hoarding. To demand money is not to demand nothing from the market. Hoarding is the natural response of savers and consumers to a structure of production that does not adjust to their needs. It is a signal of protest to entrepreneurs: ‘Please offer different consumer and capital goods! Change the structure of production, since the composition of offered goods is not appropriate.’ (My bolding and my additional text in square brackets)

This is how he controverts Keynes by confirming everything he wrote. People really do hoard, Rallo argues, store money rather than spend. There really is a deficiency of demand in the short to medium term which may finally work itself out in the long run, eventually, in five to ten years perhaps. Overproduction is impossible but only ultimately. Involuntary unemployment does apparently occur because of some problem on the demand side of the economy due to hoarding cash. However, rather than this deficiency of demand being a bad thing, it’s a good thing since the hoarding allows business to think about what to do next. But if you are Krugman, it also allows the government to come to the rescue with a stimulus package that will short circuit this delay. Here is the example Rallo uses of how hoarding can work:

In a situation of great uncertainty, it is even prudent to hoard and not immobilize funds for the long run. Rallo provides us a visual example. Let’s assume that uncertainty increases because people expect an earthquake. They start to hoard, i.e., they increase their cash balance, which gives them more flexibility. This is completely rational and beneficial from the point of view of market participants. The alternative is to immobilize funds through government spending. The public production of skyscrapers is not only against the will of the more prudent people; it will also prove disastrous if the earthquake is realized.

A government should not build skyscrapers when everyone expects an earthquake! But if the economy has gone quiet and there are useful things a government can do – perhaps reinforcing existing buildings – why wouldn’t that make sense? I’m afraid it’s a metaphor that doesn’t necessarily make sense and certainly won’t explain why Keynes is wrong and would never convince a Keynesian.

So let me get to the problem as expressed in this para in the review:

As Rallo points out in contrast to TGT, it is not aggregate supply or aggregate demand that is important, but their composition. If, in a depression with a distorted structure of production, in a liquidity trap situation, aggregate demand is boosted by government spending, the existing structure cannot produce the goods that consumers want most urgently. The solution is not more spending and more debts, but debt reduction and the liquidation of malinvestments to make new and sustainable investments feasible. (My bolding)

I can certainly agree with that the solution is to leave recovery to the private sector as they find their way towards profitable outcomes. But to use “aggregate demand” in the same sentence as “structure of production” must leave the argument confused. Even more certainly, to include mention of “a liquidity trap” will bar entry to the classical world. Demand is constituted by supply: supply is demand. Aggregate demand and aggregate supply are not two separate entities. There is no such thing as an independent force that can be described as aggregate demand.

If you want to get to the essence of Say’s Law you must NEVER think in terms of aggregate demand. Just drop it from all conceptual discussions of the economy and I think, although I can’t be sure, you will find yourself necessarily thinking about issues in the same way as the classics. If you want to defeat Keynesian economics, you need to wage war on the idea of aggregate demand. Nothing else will do.