A brief history of Say’s Law – which was not invented by Say

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 his Principles of Political Economy published 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 the book. 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, the focus of economic theory 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.

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7 Responses to A brief history of Say’s Law – which was not invented by Say

  1. Alex Davidson

    An interesting summary, but surely the argument should be against the whole idea of “getting macro principles and policy right”, because that implies central planning is good for us. The best macro-economic policy is to leave well alone – let individuals economise as only they know best.

  2. Norman Church

    Steve, please forgive me if this is a stupid question from a non-economist. Is this the essential point for policy purposes? As productive (ie, wealth generating) activity is a necessary pre-requisite for vibrant economic activity in the form of demand for non-competing goods and services, policy settings can only ‘stimulate’ economic activity effectively if they promote an expansion of production (or at least, the productive capacity of the economy) rather than attempting to generate economic activity artificially by seeking to stimulate aggregate demand via public spending. Expressed in this way, Say’s Law appears to be a matter of common sense. However, common sense does seem to be in short supply these days.

  3. Steve Kates

    Ah common sense. You would think that the dismal outcomes from the stimulus would have made at least some aware that these valueless public sector stimuli don’t work. You would have thought that the sheer stupidity of arguing that unproductive spending could cause economies to grow would have got to people after a while. You would even just think that just for something different, there might be some kind of interest in investigating a different direction. But nothing makes a difference, not even the great inflation of the 1980s nor the Lost Decades in Japan. We still teach it because that is all every teacher knows and it’s in all the texts. But it is indefensible although politically very popular.

  4. ar

    You would think that the dismal outcomes from the stimulus would have made at least some aware that these valueless public sector stimuli don’t work.

    They’re not meant to work.

  5. Tel

    … interview for a podcast with Tom Woods …

    Hitting the big time now. 🙂

  6. Louis Hissink


    The reason nothing makes a difference is for the same reason trying to convince a Roman Catholic that God does not exist will never succeed. Keynesianism is a quasi religion in the sense that the believer’s thoughts and hence actions, are determined whether the data fit, or not fit, the theory/authority, Keynes via his General Theory; macro economics in other words. (It’s also the result of the intellectual disability of mathematitus).

    Since authority is not fallible by definition, proponents of dogmatic authority will thus try to blame it on anything else, in this case recessions being due to demand insufficiency, since the policies cannot be the problem. Etc.

    It’s the religious mind you are trying to counter and like the rest of us, have to accept the fact they will not change, not matter how cogent the argument. The rot has been in academia since the late 1960’s where the profession of scientist appeared, people who do science as a lifestyle choice, whether that science is in the hard sciences, or soft sciences like social policy and economics.

    A very short easy to read summary of the collapse of science was written by Bruce Charlton, “Not Even Trying: The Corruption of Real Science”, $3.99 Kindle version. Recommended reading for all undergrads and postgrads readers here. After reading it you might then understand. 🙂

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