Not just about Say’s Law but also why almost the whole of modern economic theory is useless

You may think such a thing is impossible, and certainly impossible to prove, and even more certainly impossible for me to prove, but before you say that first you have to watch the presentation yourself. The venue is Los Angeles.

I also replied to the fellow who had invited me and sent the video because he wrote that “I suggest the phrase Supply Creates the Means to Demand” which is his own way of explaining Say’s Law to himself. And this is the way someone brought up in a Keynesian environment will understand these issues because it has become second nature to think in relation to demand. But unless you can break the habit that thinking an economy is driven by demand and not supply, it becomes impossible to understand classical theory, and in my view impossible to understand how a market economy works. So I wrote back with this:

Your note does remind me how difficult it is to understand since the issue of spending never seems to go away, which a supply-side economist, like Mill and myself, see as about as irrelevant to aggregate economic outcomes as it is possible to be. If you tell me that in a recession there is some kind of panic and credit freezes up and business ventures are not commenced at the same rate as in good times, I will say of course, but so too did JSM.

Thinking in money flows and in relation to spending will stop you from understanding Mill and thus, in my view, from understanding how an economy adjusts. Once you are thinking about whether people will spend their money and not whether entrepreneurs will try to open new businesses and expand old ones, you fall into the Keynesian trap from which economic theory has been unable to emerge for more than eighty years. A financial crisis stops the flow of credit but does not stop the desire of business people to set up new firms or expand the ones they already run, nor does it stop wage earners from trying to find jobs. A really bad downturn can take 2-3 years to get back to normal but things do re-arrange themselves. Having a government stimulus on top of all of the other disruptions in the flow of capital and labour into their most productive forms of contribution can extend the recession outwards for a much longer period of time, and like the situation right now everywhere round the world, it can prevent a serious recovery from ever gathering pace. The Japanese lost decade of the 1990s is now 25 years long! The notion that buyers will stop buying for years on end and businesses will stop trying to find ways to earn profits because there has been a downturn is not just incoherent but contrary to every historical situation in which a downturn has ever occurred. It might be what an academic would do – just give up and wait for a government subsidy – but it is not the kind thing people who make a living by running businesses are apt to do. A stimulus can kill off a recovery but it can never cause one. All this is perfectly obvious to me, but very difficult to explain. This is my own variant on demand for commodities is not demand for labour: employment varies directly with productivity and inversely with the real wage. I developed the theory as an employer advocate in our national wage cases in the 1980s and then when I found the same thing in Mill, which is his explanation for his fourth proposition on capital,* I had found the parent stem for everything which I now believe, and see demonstrated everywhere I go.

Mill noted that even in his own time how difficult it was to keep these things straight, and every economist of his time had read his text. Much more difficult now because of the Keynesian presuppositions and terminology that infuse modern theory with virtually no supply-side economics to be found anywhere at all.

* Mill’s fourth proposition on capital – the Fermat’s Last Theorem of economics – states that “demand for commodities is not demand for labour”. Universally accepted by mainstream economics in Mill’s lifetime, even described in 1876 as “the best test of a sound economist”, which it is. You can read my entire paper on it if you are interested: MILL’S FOURTH FUNDAMENTAL PROPOSITION ON CAPITAL: A PARADOX EXPLAINED.

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10 Responses to Not just about Say’s Law but also why almost the whole of modern economic theory is useless

  1. Is Say’s Law compatible with the concept of Social Credit proposed by C.H. Douglas in 1924?

  2. Lutz

    You might just try saying one day: Nobody will walk up to someone and say “will you grow me some tomatoes”. But people will come and buy them once a farmer has put them up for sale.

  3. Biota

    #2496555, posted on September 13, 2017 at 2:28 pm
    I like that ++

  4. Jannie

    Yes that helps Lutz. If you want some tomatoes but live on the lee side of the hill and can only grow potatoes, potatoes will get you into the market to exchange for tomatoes. I think.

  5. IRFM

    I have been involved in the resources industries both in the USA and here in Australia especially in unconventional oil and gas exploration or upstreaming. In the USA there were two events that effected the price of gas. The first was tax relief that drove the price down and the second one which drove the price up was the rule that coal fired power stations had to have a provision for 10% gas as a feedstock. As usual oversupply roared in when oversupply took place and the price dropped. The USA tax system allowed for mergers, restructuring write offs, failures etc.
    And this is where I hope I am beginning to understand Says Law. The supply side of the USA gas market emerged at the lowest price and kept it there. The reason for the supply was the unconventional part of the petroleum industry has greatly reduced its capital and operating costs per unit of product delivered at prices at the level of the mid1990’s. Rig numbers were reduced and there were fewer wells drilled. However, with fraccing etc the resources per drill site shot up dramatically. This level of efficiency led for the USA changing to become a net exporter of petroleum products and greatly assisted in keeping the current prices around the US$ 50 per barrel mark down from over a $100 in recent times.
    Recently, Santos reported similar efficiency improvement at the giant Moomba Field in South Australia, as in the USA. This was done without government incentives and at a low median price. A fine effort indeed.
    The regulatory environment in the USA is mature and has the ‘cookie cutter’ approach well established. This is in direct contrast to this country where every development is so ‘new’ that it requires a whole new approach each and every time. I forget to mention ad hoc banning of CSG development.

  6. Rich

    I like this reply, Steve. It sums up things very succinctly. The Keynesians are obsessed with money and credit and how liquidity lubricates demand, but forget that we would bypass it entirely with barter and that it’s the goods that are bartered… The labour to produce them is irrelevant. I will put your post in my debating scrap booj

  7. RobK

    I find personally, and in observations of others, that it is all too easy to extinguish the desire to follow through on enterprise in the face of bureaucracy. Bureaucracy’s response is to fund things like business enterprise centres and the like. These are of limited use compared to lifting red and green tape. If people are allowed to produce stuff with minimal impost, prosperity will follow.

  8. Fulcrum

    A mixed econony seemed to work pretty well for a long time, while state controlled economies have a recurring failure rate second to none.

    Personally, eeking out a living in the refuse dumps in Caracus doesnt inspire me as the wages, health and safety, social benefits, medical services and superanuation are all but non existent.

    Naturally, something binds the elite in society together but , to be fair, its nothing to do with the common people, like me.

  9. JohnA

    Jannie #2496699, posted on September 13, 2017, at 4:57 pm

    Yes, that helps Lutz. If you want some tomatoes but live on the lee side of the hill and can only grow potatoes, potatoes will get you into the market to exchange for tomatoes. I think.

    Prior question: How does Farmer-on-the-lee know about tomatoes, unless he sees Farmer-in-the-sun at market with those green and red things?

    You can’t “demand” what you don’t know about – so you have to be able to see the “supply” of the goods and become interested in them.

  10. Tel

    Money is a veil over barter.

    If you can only see the money and not the barter, then you are not really looking at the economy.

    Every transaction must simultaneously be one person’s supply and another person’s demand, with money merely as a facilitator to the next and the next transaction.

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