Tag Archives: François Hollande

Say’s Law and the law of markets are not the same

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I have belatedly come to realise that Say’s Law is not the law of markets. How weird is that, after all these years. I have put the following up on the SHOE website as a continuation of my previous post L’offre crée même la demande. Hollande, as a result of the bitter experiences in trying to manage the French economy, now has a better grip on our fundamental economic principles than pretty well the whole of the economics profession.

There are a number of facts that are relevant in any discussion of Say’s Law which I thought I might set out. What I find something of a problem is the common assumption that Say’s Law refers to something that was believed during the early parts of the nineteenth century and was of little significance thereafter. No discussion ever seems to get past Malthus, Say and Mill in looking at what was an embedded principle right up until 1936.

The first thing that might be noted is that the term “Say’s Law” is not classical in origin but was consciously invented by Fred Manville Taylor and introduced into general economic discourse with the publication of his Principles of Economics text in 1921. Before Taylor no one called this association of demand with previous supply “Say’s Law”. Taylor introduced the term because he thought economic theory needed to identify one of its most important underlying principles. The ironies of what followed next are too obvious for comment.

This continuous fixation on the early classical economists has had a number of unfortunate consequences. The first is that economists are always returning to Say as if he provided the definitive statement on Say’s Law. He did not. If you want the point of origin, it is in James Mill in his Commerce Defended published in 1807. Here is the passage that matters, although the whole of his discussion is well worth the effort:

“No proposition however in political economy seems to be more certain than this which I am going to announce, how paradoxical soever it may at first sight appear; and if it be true, none undoubtedly can be deemed of more importance. The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced.”

The final sentence should be familiar but is not the actual origins of the specific words used by Keynes.

It is also important to appreciate James Mill’s role since I see his statement not only as exactly right, but he wrote his book in response to an argument in which too much saving and too little demand were seen as the causes of recession. This was the first instance in which an argument that economies are driven by demand was rejected. Mill was saying an economy could not be stimulated from the demand side. That was the point of Say’s Law, and still is.

This nameless principle was universally accepted by the mainstream. But if you would like to find Say’s Law as clearly stated as it is possible to find it in the classical literature, this is David Ricardo writing to Malthus just after the commencement of the General Glut debate in 1820. Malthus said the post-Napoleonic recessions had been caused by too much saving and too little demand. To this, Ricardo replied:

“Men err in their productions, there is no deficiency of demand.”

That’s it. Say’s Law. Recessions are caused by mis-directed production, not deficient demand. This was the foundation for the entire theory of the cycle that would develop over the following century. It is the disappearance of the theory of the cycle that may be the greatest loss economists have experienced because of the General Theory.

There is then this. At the end of the General Glut debate in 1848, John Stuart Mill published his Principles of Political Economy, which included his fourth proposition on capital. This may be the most enigmatic statement ever made by a great economist, but if you want to see the principle behind Say’s Law, whether you agree with it or not, this is what Mill wrote:

“Demand for commodities is not demand for labour.”

Or as we might put it today, an economic stimulus will not create jobs. This is a statement whose reasoning is perfectly clear to me. I teach it to my students and it is in my text and few ever have any trouble with it. Described in 1876 as “the best test of a sound economist”, in my view it still is. It was a conclusion that policy makers accepted right through until the 1930s and perhaps even for a while after. But it was an enduring concept.

So I take you back to Francois Hollande. What he said in French was this:

“Le temps est venu de régler le principal problème de la France : sa production. Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux. C’est donc sur l’offre qu’il faut agir. Sur l’offre ! Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.”

This is the whole thing in my free translation:

“The time has come to work through the number one problem in France: which is production. Yes, that’s what I said, production. We must produce more, we must produce better. Hence, it is upon supply that we must concentrate. On supply! This is not in opposition to demand. Supply actually creates demand.”

It is true the point Hollande makes takes you back to J.-B. Say, David Ricardo and James and John Stuart Mill, all of whom are, of course, classical. But he also takes you back to Fred Taylor whose book was published only a few years before the General Theory, where he was trying to state what every economist of his own generation knew and accepted. Today, so far as aggregate demand goes, we are all Keynesians now, with some very few exceptions.

And while we’re at it, you might also ask yourself how Taylor’s very much twentieth century phrase ended up in The General Theory. The standard story of the trek from the Treatise to the General Theory has a lot of gaps, even after the hundred million words that have been devoted to explaining what the General Theory means and how it came to be written.

Krugman and his continuing ignorance of Say’s Law

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Following my post on Hollande and Say’s Law, there has so far been just one response, which merely carried an article by Paul Krugman, Scandal in France. The scandal, as seen by Krugman, has nothing to do with

I haven’t paid much attention to François Hollande, the president of France, since it became clear that he wasn’t going to break with Europe’s destructive, austerity-minded policy orthodoxy. But now he has done something truly scandalous.

I am not, of course, talking about his alleged affair with an actress, which, even if true, is neither surprising (hey, it’s France) nor disturbing. No, what’s shocking is his embrace of discredited right-wing economic doctrines.

You would think that the way he writes that the recovery that followed the American stimulus has been a light unto the nations and that the US and Keynes have much to teach us about economic management.

Mr. Hollande, in announcing his intention to reduce taxes on businesses while cutting (unspecified) spending to offset the cost, declared, “It is upon supply that we need to act,” and he further declared that “supply actually creates demand.”

Oh, boy. That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true, and it’s very much not true as a practical matter at the beginning of 2014. All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. For proof, one need only look at inflation, which is sliding fast. Indeed, both France and Europe as a whole are getting dangerously close to Japan-style deflation.

That Krugman is as innocent as the day is long of the actual meaning of Say’s Law is merely evidence that he is like 99% of the profession who have been mis-educated on a principle that was at the centre of the classical theory of the cycle. He wouldn’t know that either. It is actually shocking to see someone so ignorant of the things about which he so confidently speaks. Well the fact of the matter is that Krugman is an ignoramus who is continually pushing economic advice that is keeping the American economy low and is impoverishing millions of his fellow citizens.

The European economies, and Australia as well, emerged from the Great Depression faster than we have today because they used classical theory and policy to work things out. The UK famously balanced its budget in 1933 at the very trough of the Great Depression. We cut spending here in 1931 and was the first economy to come out of the Great Depression with the Australian trough being reached in 1931 from which time things continually improved.

Only the American economy, with its Keynesian-Roosevelt road to recovery remained in the Great Depression right up until the US entered the war at the end of 1941.

There’s more to the world economy than the US, and even if that is all Krugman knows, even that should make him just a bit more cautious, perhaps a whole lot more cautious in speaking about things he knows nothing about.

L’offre crée même la demande

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In the AFR today there is an article reprinted from The Financial Times dated 19 January and written by one of the FT‘s columnists, Wolfgang Münchau. And here is the relevant para:

Last week, we heard another Frenchman, President François Hollande, proclaiming: “L’offre crée même la demande”, which translates as ‘supply actually creates its own demand’. If you want to look for the real political scandal in France today, it is not the sight of the president in a motorcycle helmet about to sneak into a Parisian apartment building. It is that official economic thinking in Paris has not progressed in 211 years.

If you want to understand the financial crisis and the subsequent recession, Say’s Law is of no help whatsoever.

What does this guy know? The Socialist President of France, who more than anything else would have liked to spend the French economy into recovery, having personally experienced the consequences of trying to use Keynesian economic policies, has concluded that economies are not driven by demand. That the writer of this article knows no better is just par for the course. All he knows is Keynes, and wrong or right, one stimulus-generated economic catastrophe after another, on he goes. But at least Hollande has finally understood what needs to be known and has embraced Say’s Law as best he understands it.

You may be sure Hollande did not do this lightly. This awareness has come as the result of the bitter fruits of experience. The stimulus packages of 2009 are today’s debt and dying economies. There will be no recovery until demand is again constituted by actual value adding supply. The article tries to explain the significance of the shift towards thinking in terms of Say’s Law, tries to explain what’s wrong with Say’s Law but discusses nothing with anything resembling economic content, and ends with this:

The third significance lies in the fact that the new consensus spans the entire mainstream political spectrum. If you live on the European continent and if you have a problem with Say’s Law, the only political parties that cater to you are the extreme left or the extreme right.

The problem remains that while they are all trying to walk away from Keynes there are no longer any guideposts on what to do since no economics text, with only a single exception that I know of, will explain the actual meaning of Say’s Law, the classical theory of the cycle and what needs to be done to generate a recovery when the economy is in recession.

Reply to a Question Asked: Stateless, free and happy asked this:

Steve, I have a simple question: Why is there only one textbook on the subject (your book)?.
The market place for ideas works rather well. So, a good idea will gain currency and there should be more than one textbook.
Can we infer that the market for ideas assigns little value in this idea and hence you are left in the wilderness?

Dear Stateless, F&H

This is a question I have also asked myself. And while the simple answer is that it goes against the overwhelming judgment of all mainstream opinion today, that only puts the same question but in a different way. And the problem I have encountered time and again is that to understand the very essence of Say’s Law all you have to do is understand that there is no such force in an economy as aggregate demand, and therefore demand cannot exist without supply, is such a difficult concept that hardly anyone can grasp it. I learned Say’s Law from John Stuart Mill and he complained that in his own time it was difficult to keep this idea straight, and at the time classical theory was the mainstream, I can only wonder that hardly anyone gets it today. But it’s worse. Keynes made acceptance of Say’s Law the equivalent of the flat earth society so that to this day no respectable economist would be caught dead saying that Say’s Law was valid. It is professional death for an economist. But because no one can lay a glove on the arguments I use, and since they are in 100% accord with the views of John Stuart Mill, I have been left this tiny patch of economic theory to keep for myself. But since no one aside from myself will ever admit they agree with Mill’s Fourth Proposition on Capital – “demand for commodities is not demand for labour” – and that is Say’s Law in seven words. If you understand what those words are trying to explain, and therefore understand that the stimulus could not possibly have led to higher growth and more jobs, then you too can be shunned by economists and your papers ignored. But Mill was right and I have done no more than repeat what he tried to explain. Where the odd part is is that I am the first person to do this since 1876.