Tag Archives: Wolfgang Münchau

My letter to the Financial Times on Say’s Law

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I have just sent this letter to the Financial Times following their publication of a column on Say’s Law. This is what I wrote:

To the editor

The Australian Financial Review here in Australia published an article of mine last week, “What Say’s Law has to say about the financial crisis” which may be why they chose to publish Wolfgang Munchau’s “The Real Scandal is France’s Stagnant Thinking” from your pages. The meaning and significance of Say’s Law within economies that are trying to shed their Keynesian past and work their way through recession to recovery is simply an unknown as Munchau’s article demonstrates. I have written at enormous length on Say’s Law, even spoke at a symposium in Istanbul on the work of Alberto Alesina where at the end of my presentation, Alesina said to the entire room, “I agree with everything you say”. I will attach a copy of this article which was published in 2012.

I cannot emphasise this enough. The General Theory was written to show that Say’s Law was wrong. Economic theory has therefore, since 1936, rejected Say’s Law and continues to accept that economies are driven forward by demand. But because of my understanding of Say’s Law, it was obvious to me from the start that the stimulus packages introduced in 2009 would lead to disaster and things have unfolded almost exactly as I wrote they would at the time. I have published a book on Say’s Law itself, Say’s Law and the Keynesian Revolution (Elgar 1998); edited a collection of articles on Say’s Law, each article having been written for this collection, Two Hundred Years of Say’s Law (Elgar 2003); and I have edited a five volume set of readings on Say’s Law, Critical Assessments of Jean-Baptiste Say (Routledge 2000). I also gave the Ludwig von Mises Lecture to the Mises Institute in 2010 and a video of the presentation is attached.

My frustrations with the poverty of Keynesian theory, which has led our economies into one catastrophe after another, is enormous. Say’s Law seems so archaic because it seems to go back to 1803, but the term only emerged in 1921 only a few years before Keynes wrote The General Theory. It is not some musty old long-ago and rightly-forgotten piece of theory like the labour theory of value. It is, instead, the very core concept needed if one is to understand how an economy works and why it goes into recession from time to time.

I am writing to ask for space on your pages, in the same way that they were offered to me in the pages of the Financial Review, to try to explain the actual meaning of Say’s Law, why reducing public spending is so absolutely necessary today and why a Keynesian stimulus can never possibly work. It can be any length you like and I can have it to you within 24 hours.

With kind regards

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.