Let me begin with this quote from Tel in the comments on my previous post which was on the just published interview with me on Say’s Law. Tel begins with a quote from my post and then discusses the difficulty in dealing with savings in the form of money versus savings in the form of resources:

Say’s Law remains the single most important principle in all of economics.

Only because Keynesians need to insist they have disproven Say’s Law in order to perpetrate their price manipulation and power grab.

The problem being that there are methods to confuse a lot of people for a limited time, and give a convincing illusion that Say’s Law no longer applies. How long this illusion can be extended is questionable, but with sufficient power behind it, seems like quite a while.

That’s why I prefer the explanation, “Money is a veil over barter” which is easier to understand and contains within it the concept of two layers: the barter layer where every good or service exchanges for another good or service, plus the money layer which attaches prices to these things and (just like any “veil”) also hides something. Say’s Law in it’s pure sense applies to a barter economy and when all we have is a barter economy it becomes so obvious and irrefutable that it seems barely worth a mention. Once the veil is in place it’s possible to lose track of what’s happening underneath.

Say’s Law does, of course, apply to an economy in which money is the medium of exchange, a store of value and the unit of account. If it didn’t, there would be no point in mentioning it at all. And by coincidence, on the same day that Man and the Economy published my article on Say’s Law, Quadrant has published online my article on money and the real economy: That’s the Way the Money Goes. There is a lot in the article – it’s 4500 words long – but this is the core issue:

At the centre of a proper understanding of rates of interest is the recognition that when someone is looking to invest, what they borrow is money but what they are actually seeking are capital assets, labour time and other forms of input such as electricity and transport. There was therefore a dual focus [in pre-Keynesian economic theory] that was essential to make sense of what actually went on. One had to absolutely keep an eye on the market for money and credit, and at the same time to be completely mindful of the supply of real resources available for productive investment.

Money is more than a veil, of course. Things do not go on just as if it were all perfectly visible. The existence of money causes massive misdirection and distortions in the structure of production. You can barely make sense of anything unless you understand the role of money, but you also cannot understand the way money distorts economic reality unless you also understand Say’s Law which explains the nature of the actual reality the existence of money distorts.

An interview with me on Say’s Law by the French journalist Grégoire Canlorbe has just been published in Man and the Economy, the journal of The Coase Society. It is the most comprehensive summary statement I have put together of Say’s Law – it runs to 31 pages – and I could not be more grateful to Grégoire who spent more than a year in discussing the relevant issues with me before we actually got down to the interview. You can download a copy of the article here .

Say’s Law remains the single most important principle in all of economics. Policy decisions that go against the grain of Say’s Law are guaranteed to fail, for which the evidence remains overwhelming. The obvious failure of every one of the stimulus packages that were attempted after the GFC, along with the failures that have been associated with attempts to stimulate investment by reducing rates of interest, ought to have at least made some economists consider that perhaps Say’s Law is valid. The reason this does not happen is that virtually no economist understands even what the underlying principle of Say’s Law is. My article will, I hope, at least create some interest in what had been the bedrock proposition of classical economic theory almost from the time of Adam Smith through until the publication of The General Theory in 1936.

The journal is itself attempting to redirect economic theory in a more fruitful direction. These are the journal’s published objectives.

When modern economics was born in the 18th century, Adam Smith made it a historical study of man and the rising commercial society. For Smith, economics is first and foremost concerned with wealth-creation, where the division of labor is the key organizing principle. In the next century, David Ricardo shifted the focus of economics from production to distribution. Over the course of the 20th century, economics has gradually metamorphosed into the logic of choice and taken mathematics as its language. These two transformations have together made economics a towering discipline in the social sciences. But this achievement comes with a heavy price. Economics has largely become a theory-driven subject, severed from the ordinary business of life. Rather than seeing this disconnection as a fatal flaw undermining the vitality of the discipline, many economists take pride in that economics is no longer confined to any subject matter, but stands as a versatile, subject-free analytical approach.

The Coase Society aims to reorient economics as a study of man and the economy. The human economy is a man-made, evolving complex system of cooperation and competition. The defining character of the market economy is its continuous innovation, churning out novel products from the constantly adapting structure of production. This dynamics is kept alive by entrepreneurship and the growth of knowledge. To understand how this open system works requires both empirical and theoretical efforts. But theory-building, unless informed and disciplined by facts on the ground, can easily degenerate into “blackboard economics”. Empirical work is most valuable only when it changes the way we look at the problem. The paucity of systematic interaction and mutual learning between empiricists and theorists and the lack of competition in research methodology in modern economics have severely sterilized the discipline.

Man and the Economy is not to replace the prevailing paradigm in economics with what the Society believes as a different and superior one. Such a paradigm simply does not exist yet. But economics as currently practiced ought to change. Working with students of economies across disciplines and all over the world, and bringing diversity and competition into the marketplace for economics ideas, Man and the Economy can help to make it happen. We welcome empirical (historical, qualitative, statistical, experimental) investigations and theoretical explorations that deepen our understanding of how the economy works and how it changes over time. Man and the Economy is keen to publish articles that examine how the market economy spreads throughout the globe and adapts to local conditions as well as studies that cross disciplinary boundaries and/or integrate diverse methods to shed light on the working of the economy.

A necessary journal for our times.

The UK History of Economic Thought Conference this year was held in Shanghai because, as I understand it, the Chinese are interested in pursuing HET and want to see how it is done. They get it, that HET brings an extra and extremely important dimension to the study of economics, something it is hard to convince economists in the West about.

The UK meeting is always extremely good, and this one was no exception, in large part because they only have a handful of presentations and they are always plenary sessions so that for presenters, you really are guaranteed the benefit of listening to comments from quite knowledgable people. And on this occasion because all of the fees and expenses were paid (but not the air fares), and partly because it was in Shanghai, it did seem to attract an astonishing array of high quality papers. It was very pleasing to be included. The group photo is above.