President Trump is applying Say’s Law in managing the American economy

For almost everyone, Say’s Law is something they know nothing about, and especially among economists, who themselves not only do not know what Say’s Law is, but are taught that it is unambiguously wrong. But as the success of the American economy most clearly shows, Say’s Law is the most important single element in understanding how an economy can be made to grow. And as we find out, the American economy is being managed based on the application of Say’s Law.

The passage below begins at 13:13 of the video, and it is Donald Trump’s economic advisor, Larry Kudlow, specifically stating that the economic policies of the United States at the present time are based on the application of Say’s Law to the American economy. The greatest disaster in the history of economic theory was the Keynesian Revolution and the forced disappearance of Say’s Law. If you would like to see some of this, there is my article on Keynesian economics and Say’s Law that I published in February 2009 just as the stimulus was beginning across the world: The Dangerous Return to Keynesian Economics. It is not just about how damaging modern macroeconomics is, but how disastrous economic theory has become with the disappearance of Say’s Law. This is exactly what Donald Trump believes as is made clear in this discussion from Larry Kudlow.

I just want to note that we are in a boom. We had this blockbuster jobs number today. There is no inflation. There is no inflation. More growth, more people working does not cause inflation.

These old Federal Reserve models are outdated and have proven to be incorrect. Right now the inflation rate is probably less than one and a half percent even while unemployment is low and jobs are soaring and we are growing at three per cent. Why do I say that?

Because that is a point of view which the President holds and I think the President is exactly right.

This is supply side revolution. We’re creating more goods and services. We’re increasing the capital stock and business investment and that’s what creates incomes and jobs.

I’m sure you remember Jean-Baptiste Say. He wrote in the early part of the nineteenth century. He was a French economic philosopher. I met him awhile back, you perhaps did also.

Say’s Law: supply creates its own demand. This is not government spending from the demand side, this is lower tax rates from the supply side, and it is businesses that ultimately drive the economy.

I would like Jay Powell to hear that argument from President Trump who knows the argument very well. Now Jay I think does too – he’s a very smart guy. So I’m just saying that they can benefit from an exchange of views.

Let’s understand that more people working and solid percentage growth is not – IS NOT – causing higher inflation, and therefore Fed policies should take that into account.

Say’s Law. He may have to go and commune with him to fully understand it.

Everyone will need to commune with Say’s Law if they are going to understand how an economy works. If these sorts of things interest you, the third edition of my text, Free Market Economics, sets it all out in fine detail. And let me add this, the endorsement of the book found on the back cover from Art Laffer of Laffer curve fame, who drove the economic policies of the Reagan administration back in the 1980s.

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

A restoration of Say’s Law is an essential if we are ever going to get our economies to thrive and grow.

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15 Responses to President Trump is applying Say’s Law in managing the American economy

  1. Confused Old Misfit

    Wondered if you’d pick that up!
    I posted it on an open thread earlier but without the informed commentary.
    Pity so few will understand it.

  2. max

    “A restoration of Say’s Law is an essential if we are ever going to get our economies to thrive and grow.”

    End FED,
    bring back commodities money
    end fractional reserve banking
    Government should not be in banking business, they should enforce contracts.
    right of free coinage

  3. I am sure that when the next economic downturn comes, you will also blame that on Say’s Law.

  4. Chris M

    Excellent Steve, thanks for posting! Let’s hope this goes on to become a global gamechanger now we have so much evidence Keynes was a dud. But then some just folks keep on and on trying the Marxism…

  5. mh

    Kudlow’s appointment was an inspired choice.

    COM, didn’t you go back and look at the previous Kate’s thread?

  6. Sinclair Davidson

    Steve – I seem to recall you being very hostile to Say’s law being described as “supply creates its own demand”.

  7. Confused Old Misfit

    Steve – I seem to recall you being very hostile to Say’s law being described as “supply creates its own demand”.

    He likely did.
    But anything that can counter the idea that increasing aggregate demand is the be all and end all of economic policy is a good thing.
    Lets not throw out the good just because ot’s not perfect.

  8. Bad Samaritan

    C’mon Cats. Everybody knows supply comes first. How else to explain that we do not have a clue what will be the big sellers in future? And also why we are now surrounded by stuff which was unavailable / did not exist/ was not demanded ten years ago. You (mostly) do not know what to demand until it’s been put in front of your nose.

    Every firm on earth is busy in their R+D departments dreaming up new stuff to supply us with. Every entrepreneur is looking to create something not-yet-demanded to catch our attention, Every current producer is hard at it trying to invent / create / supply what we do not demand at present. And to help them out multiple billions is being spent on advertizing and publicity so’s we’ll eventually demand what they will first supply.

    Every leftist I’ve ever met has decried the seductive temptations of capitalism. Those naughty free marketeers are always out to supply us with stuff we do not need / do not yet want…aren’t they? Isn’t this how those sharks are raping the earth; by supplying stuff before we even demand it? As the old cliche goes “Under Socialism the people are waiting for bread. Under Capitalism the bread is waiting for people”.

    This is all too too obvious. And is also why socialism’s a dud (Keynes was one of these losers, remember?). The central planners can only supply what’s already been demanded, which means their economies are doomed to stagnate. Why would you eat more cabbage soup, borscht and tree bark tomorrow, Comrades?

  9. JohnA

    max #2900801, posted on January 7, 2019, at 11:31 am

    “A restoration of Say’s Law is an essential if we are ever going to get our economies to thrive and grow.”

    End FED,
    bring back commodities money
    end fractional reserve banking
    Government should not be in banking business, they should enforce contracts.
    right of free coinage

    +100!!

    Government should not be in ANY business, because it is the umpire, not a player.

    Fractional reserve banking could be eliminated by ratcheting up the reserve ratio (currently 7%??) until it equates to the value of deposits at call and maturing within the coming period (usually the next month).

  10. Tom

    Steve – I seem to recall you being very hostile to Say’s law being described as “supply creates its own demand”.

    I need to know: is Doomlord a Keynesian?

  11. Tel

    I’m not disputing the basic idea of Say’s Law, but I don’t understand the connection to Jerome Powell.

    The Fed is only in control of the money supply, and money is a device to facilitate trade. Money is not in and of itself a product … you can’t eat it, or live in it, or anything else. Money only serves as an exchange so it cannot improve the supply of any real material goods. Printing new money can redistribute wealth and therefore give some people an advantage over others in terms of ACQUIRING those goods that might be available. But it doesn’t cause any new goods to come into existence.

    From my perspective, Powell seems to be doing quite a good job of managing the value of the US dollar, which is not crashing the way many people expected, nor is it overly strong. Price Inflation is roughly in the target region that the Fed have promised.

    bring back commodities money

    If you look at PPI the US dollar has been operating as something very akin to a commodity money since around 2010. The main purpose of money is to facilitate exchange and economic calculation, and within that context it’s doing the job. The Fed said, “We promise to deliver inflation” and they printed money until inflation started. Now they are reeling that in a bit to stop it getting out of hand. I’m not ruling out the possibility of a lot of nefarious stuff going on in the background, but without direct proof of that, you have to look at the thing on face value and the Fed does what it says on the box.

    Put it this way: what are people expecting that Powell is either just about to do, or really should be doing different to what he is doing right now?

  12. Siltstone

    Bad Samaritan
    #2900980, posted on January 7, 2019 at 3:08 pm
    That is the best summary I have read of the essence of Says Law.

  13. Allan

    Read Prof. William Hutt. He contended that the expression, “supply creates its own demand”, is JM Keynes’ own mischaracterization. It would be better, argued Hutt way back in 1974, to formulate the law as

    all power to demand is derived from production and supply.

    Construed this way, it is easier to understand the gross Keynesian fallacy, a mysticism, really, about allegedly aberrant demand of buyers. Booms and busts come mainly from production errors, so correct economic policy must be on reducing governmental inducement of those errors. Keynesianism, however, demands that production errors, which stem from misallocation of capital, be compounded by coercive allocation of capital.

    A Rehabilitation of Say’s Law

  14. Herodotus

    Sometimes expressed as “build a better mousetrap …” or phone, or tablet, etc.

  15. Nick

    This is an interesting article. Supply as a means of also boosting the income of those who provide factor inputs, is a much better method than Government spending. Perhaps Trump’s success is that factor inputs are consuming rather than saving. Once negative views about the future set in, perhaps such a model will falter.

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