The Economist discusses Say’s Law

From the latest Economist: Say’s law: supply creates its own demand. Even before I have begun to read what is written, let me point out that Say didn’t invent “Say’s” Law nor did he understand it properly. And to begin with Keynes’s garbled form of words, “supply creates its own demand”, does not bode well. But at least the title in the magazine itself, “Glutology”, gives me some small hope. So now onto the article.
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Good but not great. Getting there but not there yet. And without any doubt, the author has read my books and articles, as how could they not have been consulted since I am the only one who has been writing in defence of Say’s Law for these past 30-40 years or so. Sowell and Hutt in the 1970s and not much since. This, then, is the bit that I thought took the issue forward and out of the dreary Keynesian depths such discussions have usually been mired in.

To grasp Say’s point requires two intellectual jumps. The first is to see past money, which can obscure what is really going on in an economy. The second is to jump from micro to macro, from a worm’s eye view of individual plants and specific customers to a panoramic view of the economy as a whole.

These are both such fixed points of classical theory that without them there is a great deal that cannot be understood, with Say’s Law almost the least of it. Classical economics brings money only after the real relationships have been understood. It does absolutely bring in money, which has an enormous power to distort all economic relationships, but money comes in only at the end. Second, Say’s Law is about macroeconomics only. There is always lots of monetary purchasing power sloshing around unrelated to value adding activity so to get to the basic idea you cannot introduce money until you see what is happening beneath. It thus says that the aggregate demand for output is determined by the aggregate supply of output.

Now let me get into explaining what goes wrong after that.

First, in the very next para the author brings in money and, moreover, does so within a microeconomic setting, instantaneously breaking both rules!

Firms, like coal plants and cotton mills, sell their products for money. But in order to obtain that money, their customers must themselves have previously sold something of value. Thus, before they can become a source of demand, customers must themselves have been a source of supply.

There we are looking at money and in a micro setting. The thread has been completely lost.

Second, there is this which again completely misstates the point.

Today, many people scoff at Say’s law even before they have fully appreciated it. That is a pity. He was wrong to say that economy-wide shortfalls of demand do not happen.

Unless you start with the assumption that classical economists chose to ignore the frequent and devastating occurrence of recessions, it is absurd to think they equated the existence of recession with a deficiency of demand as we now do. That is specifically what Say’s Law was meant to deny. The best short statement on Say’s Law is from David Ricardo in a letter to Malthus in 1820: “men err in their productions, there is no deficiency of demand”. There are lots of reasons for recessions, just not this one.

The odd and dismal part of all this is that classical economists understood the operation of an economy better than our moderns, who have been blinded by Keynesian theory. If you would like a succinct and very clear statement on the correct meaning of Say’s Law, let me suggest the chapter on “Supply and Demand” in J.E. Cairnes 1874 Some Leading Principles of Political Economy Newly Expounded. Our economies are being ruined by faulty economic theories. If you would like to know why, you should read Cairnes and then perhaps my own Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way . And let me emphasise that the subtitle really is the point.

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12 Responses to The Economist discusses Say’s Law

  1. Louis Hissink

    Steve,

    The easiest way of explaining Say’s Law is to focus on the total necessity for all humans to eat in order to stay alive. All economic activity reduces to this primary need to stay alive.

    There are various choices in satisfying hunger by acquiring food:
    1. Steal it.
    2. Beg for it.
    3. Produce something in order to exchange it for what you need, vis. food.
    4. Starve.

    Option 3 is Say’s Law. Producers are also consumers, but if the producer can’t make a profit, due to any thing that hampers the market process, then the producer will not produce, and the dominos fall in sequence.

    We work in order to stay alive, to put bread on the table, and for no other reason. All the intellectual flummery of demand and etc., macro and micro is simply economic persiflage.

  2. closeapproximation

    There we are looking at money and in a micro setting

    Why is this necessarily a bad point to start ? At least there, money is readily understood as “barter”.

  3. Mother Lode

    Well.

    Its a start.

    And the writer must have realised how many people he was flying into the face of.

    Now, if he gets replies…who knows…a discussion could occur and keynesian flaws might be spoken of in more than hushed, timid whispers and held up to the light.

  4. Entropy

    Louis, you forgot
    1. Make it yourself. Although you may want to put it before 3 in your list.

    (Like a clever little red hen)

  5. Gavin R Putland

    Apropos of nothing at all, it would appear to me that Barnaby Joyce’s NZ citizenship was rectifiable, and that he didn’t take all reasonable steps to rectify it – http://www.news.com.au/national/politics/barnaby-joyce-embroiled-in-dual-citizenship-saga-and-has-referred-himself-to-the-high-court/news-story/68bfb48953c7cc314a03e6ba99873e4c

  6. Gavin R Putland

    Oops, sorry, I confused the previous post with an earlier one and consequently didn’t notice that this issue already has its own post.

  7. Jannie

    Its tricky and while I don’t think I really understand it I had a flash of insight while talking with an artist friend who bemoans his lack of painting sales. He is a poor artist because he cannot sell his post impressionist baroque paintings. He cannot sell his weird paintings because “ignorant” people don’t like them. He cannot change consumers demand preferences, and he cannot force them to buy his paintings unless he gets a government contract. If he wants to eat he has to sell some paintings, so he has to go back to his easel and produce something that people actually want. He is a reasonably competent artist but his problem is he doesn’t know what the consumers want. He can produce stuff but he cannot supply what the market demands

  8. Tel

    He is a poor artist because he cannot sell his post impressionist baroque paintings. He cannot sell his weird paintings because “ignorant” people don’t like them.

    I would suggest otherwise, if you look on eBay there’s massive supply in all type of weird paintings. People are buying them, but the supply is easily keeping up with it.

  9. Jannie

    People are buying them, but the supply is easily keeping up with it.

    But but but Tel doesn’t that imply that demand is driving supply, and support the Keynsian thesis of deficiency of demand? Is the artist’s problem just a marketing issue or is he producing the wrong paintings?

  10. max

    Say did not argue that production creates its own demand. What he described is an economy in which personal production creates the possibility of making a bid for the output of another person’s production. Production creates demand, but this demand may not be sufficient demand to obtain an exchange.
    Every free-lance author knows that production doesn’t automatically create its own demand. The author wails: “But I worked so hard too write this book!”
    Say’s law never taught that production creates demand, which is how Keynes misstated Say’s Law. It says that, if markets are left free from coercion by the government, prices will fluctuate to clear prior production. At some price, there will be a buyer for just about anything.
    It is not that production creates its own demand. It is that lack of production fails to create any demand. He who possesses no results of production cannot register economic demand. He can register a robber’s demand: a gun in your belly. He can also register a political demand: a tax official’s gun in your belly. But he cannot register economic demand.
    https://www.lewrockwell.com/2003/08/gary-north/demand-what-with/

  11. Louis Hissink

    Entropy,

    Why thank you – completely off the radar – how on earth could I not include that choice……..

  12. Pingback: My letter to The Economist on Say’s Law | Catallaxy Files

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