I have just done an interview for a podcast with Tom Woods on my first book, Say’s Law and the Keynesian Revolution which has as its subtitle, How Economic Theory Lost its Way. Some reflections on the interview about what is not well understood about Say’s Law. I will, of course, put the podcast up online when it is broadcast next week. Here are some reflections on that interview.

First, although it was called “Say’s” Law, the name was only given in the 1920s. Say had his law of markets (loi des débouchés), but this was that goods buy goods. Everyone knew that, going back to at least Adam Smith and probably well before. The relevant sequence of events to understand this issue is this:

1803 – Say publishes his Treatise in which he points out that goods buy goods which he did in trying to explain why recessions are not caused by a lack of money.

1808 – James Mill replies to William Spence who had argued that demand is the core necessity in creating employment and economic activity. Mill in his comprehensive reply, emphasises the impossibility of demand deficiency as a cause of recession and unemployment, but picks up Say’s point about goods buying goods.

1813 – Say publishes the second edition of his Treatise in which he re-writes his entire chapter on the law of markets to pick up James Mill’s point that demand deficiency does not cause recession – but gets it wrong by arguing that if Good A doesn’t sell then more of Good B needs to be produced to create an increased demand for Good A. No one thinks of it this way.

1820 – Malthus publishes his Principles in which he argues that recessions and unemployment are caused by general gluts (demand deficiency)

1820s – General Glut debate – virtually the entire mainstream comes to the conclusion that general gluts are never a realistic possibility – but the policy conclusion is that if Good A doesn’t sell, it should stop being produced. Say never gets it and continues to the end with his version that more of other goods (Good B) is the solution

1848 – John Stuart Mill’s Principles is published in which the full explanation of Say’s Law properly understood is found. It becomes the universal position of mainstream economics through until 1936. The conclusion universally held was that demand deficiency never causes recessions and increased demand will not lower unemployment. Only those on the left, especially amongst the followers of Marx, argued on the other side.

1921 – Fred Taylor publishes his Principles text in which he discusses demand deficiency and also notes that although a crucial point, the argument contra demand deficiency has never before been given a name and is therefore often overlooked. He gives it one: Say’s Law.

1920s – By giving this principle a name, it becomes the focus of much criticism but only on the American side of the Atlantic.

1936 – Keynes publishes his General Theory in which he attacks Say’s Law. He defines Say’s Law as “supply creates its own demand”, as close to a meaningless phrase as it is possible to find. But there is no doubt he is really in every way attacking the underlying principle, which he very accurately understands. He explains exactly what he is getting at on page 32 in the para which begins, “The idea we can safely neglect the aggregate demand function . . .”.

The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

[As an additional note, the question I like to ask all my Keynesian friends is where did Keynes get the phrase “Say’s Law” from since he never mentions anyone else from whom he took so much as a single idea. I wrote an entire paper on Keynes’s plagiarism which was rife.]

Second, the most complete statement of the demand deficiency side of Say’s Law was produced by John Stuart Mill in 1848. The Liberty Fund just last month ran a series of papers on The Economics of John Stuart Mill for which my paper was the lead article. As I note in one of these articles [#16], Mill’s specific statements on these principles, which did not have a name in his own time, is scattered around his Principles of Political Economy. But in classical times these were the hardest of hard principles, an absolute bedrock and foundation for economic thinking. These were the conclusions:

1. recessions do occur and when they do the effect on the labor market is prolonged and devastating;

2. recessions are not caused by oversaving and demand deficiency;

3. recessions cannot be brought to an end by trying to increase aggregate demand.

After the marginal revolution of the 1870s, while these conclusions remained in place, economics shifted to the demand side (marginal utility) and the theory of the cycle almost went into hibernation. By the time Keynes writes the General Theory, virtually all of the anti-bodies against demand deficiency as a cause of recession had disappeared from amongst economists, especially those under forty. The conclusions of the General Glut debate had been washed completely away.

Alas, it does get me down that there is so much of this story that no one knows. If we are going to finally reverse the Keynesian Revolution and its poisonous policy prescriptions, we are going to have to reverse the notion of demand deficiency which Keynes introduced into economic theory. There is no issue more important than Say’s Law if we are going to get macro principles and policy right, but as I have found, it is almost impossible to get these things right because of the way the issue has developed over the years. In my view, you have to understand both the principle and its history to see the point given all the mystification that has entered into it over the past 200 years.