Say’s Law is Coming Back

First there was the material from the Heritage Foundation posted on this site last week. The data showed that the greater the Keynesian stimulus the worse performing an economy was.

And now we have in today’s Australian, Michael Stutchbury’s “Crisis puts nails back in Keynesian coffin”. The first paragraph of this story reads as follows:

Last year’s global financial crisis heralded the stunning return of Keynesian fiscal policy as governments pumped up their budgets to stave off a feared global depression. This year’s European sovereign-debt crisis signals its spectacular fall as governments are suddenly forced to cut their budgets even when their economies are weak.

Let me therefore quote myself from an article published in the March 2009 Quadrant. There I wrote:

But just as the causes of this downturn cannot be charted through a Keynesian demand-deficiency model neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

The bitter pill that will need to be swallowed by various governments will be matched by the need for the economics profession to renounce at long last the Keynesian infection that is burrowed deep within macroeconomic theory. And not for the first time do I mention that the problem is the loss of Say’s Law. No economist before Keynes would have been unaware of the impossibility of spending one’s way to recovery and they would have understood it because they understood in their bones what Say’s Law meant.

You can find any of this out in reading my Say’s Law and the Keynesian Revolution (Edward Elgar 1998, paperback edition 2009). And what you will find there are translations into modern forms of discourse the meaning that Say’s Law held for classical economists.

They used to write that there is no such thing as a general glut. In today’s jargon, this would be: demand deficiency is never the cause of recession.

Or they would say that demand is constituted by supply. To translate this into modern discourse: to increase demand in aggregate it is first necessary to increase value adding supply in aggregate. And I cannot stress the words “value adding” enough.

The evidence that Say’s Law is an absolutely necessary part of any economist’s understanding of the world is everywhere to be seen. The lessons of Say’s Law will come back, it seems, rather quicker than many had thought it would. An actual return to Say’s Law itself will unfortunately take much more time because of this Keynesian rot. But eventually back it will come.

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30 Responses to Say’s Law is Coming Back

  1. Butterfield, Bloomfiled & Bishop says:

    the Heritage paper was complete rubbish and as the market marks down Ireland worse than Spain the effects Stuch writes about are in fact contradictory.

    notice where austerity economics is introduced the economy gets worse, the deficit gets worse and debt gets worse. Welcome to Catallaxy land

  2. TerjeP (say Taya) says:

    John Quiggin is writing a book glorifying the return of Keynesian pump priming. The title is something about Zombie Ideas and the thrust of it is that the GFC has finally vindicated the Keynesian worldview and should kill opposition to Keynesianism. This debate is far from dead and will probably still rage when we are all feeding worms.

  3. jC says:


    Please stop trolling and infesting the site with your garbage comments, as they detract from the important threads such as this one.

    If you have a comment to make explain why you think that rather than plaster the site with useless, ungrammatical and incoherent drivel like you always do now.

    Go away.

  4. AndrewR says:

    I am enjoying the increased regularity of Steven Kates articles. In particular those which focus on Say’s Law.

    I have the ’98 book on order and still deciding about the ’09 Hardback…

  5. Lloyd says:

    “The data showed that the greater the Keynesian stimulus the worse performing an economy was.”

    Which must be the reason the Australian economy is performing so well at ther moment.


  6. Butterfield, Bloomfiled & Bishop says:

    Forrest you are an idiot and ignorant and therefore have no idea about the topic so you are ideal to write about it.

  7. Butterfield, Bloomfiled & Bishop says:

    yeah Steve is right . trying to spend your way out of a recession will only make it worse.

    just look at Latvia, Ireland for example oh wait they took his advice and their recession got worse!

  8. jC says:

    How do you know their recession got worse as a result of what you say. You need to prove that, homer, you audacious troll.

    Present the facts of get back to the cellar.

  9. jtfsoon says:

    please learn some norms of argumentation before you post again.

  10. Butterfield, Bloomfiled & Bishop says:

    really you idiot.

    They adopted austerity policies i.e.e tried to reduce the deficit but increased it by a large margin BECAUSE the recession got WORSE.

    A country needs to adopt polices that will increase growth not reduce it.

    As Robert Rubin said with clinton in bad times you increase the deficit but always looking to have a surplus in the good times.

    Markets at the moment have no idea. why is Ireland marked down more than Spain when it was an early adopter and Spain a laggard in adopting austerity policies.

  11. jC says:


    Please provide evidence of what you say is true. Provide verification of your claims about Ireland and Latvia or we’ll take the view that this is another set of your audacious lies and general dishonesty.

  12. AndrewR says:

    “A country needs to adopt polices that will increase growth not reduce it.”

    I read two publications every year: the OECD’s “Going for Growth” and the World Economic Forum’s “Global Competitiveness Report”. I also have a bunch of books on Economic Growth (which I mostly don’t understand).

    Almost none of these books identify simple policies which will cause economic growth in the medium to long-term. Multi-factor productivity seems complicated… So I am curious why all that gets ignored when a recession comes and the solution is simply increased spending?

    As Robert Rubin said with clinton in bad times you increase the deficit but always looking to have a surplus in the good times.”

    Just curious what happens when policy makers ignore this. And over repeated cycles they don’t to what they should. Eg: Italy for the last decade?

  13. Butterfield, Bloomfiled & Bishop says:


    France has NEVER had a balanced budget let alone surplus since WW2!

  14. AndrewR says:

    Expressed differently: i have many books on Economic Growth which I don’t understand.

    But I understand “aggregate demand” and increasing budgetary spending to boost it.

    When we have simple/easy to understand ideas to understand complex systems I get a bit nervous.

    But I studied science not economics…

  15. Andrew Reynolds says:

    To an extent that is the case – it is easy for those that are true Keynesians to argue that his (or is that His) prescriptions are not being followed – that you have a surplus to ensure that when you do have a recession you can afford to pay for the deficits during the bad times.
    To me at least that means that Howard was one of the few that actually did that – he and Costello timed it (from a Keynesian perspective) just about perfectly – paying of the full debt just at the point where the economy turned.
    That meant that Rudd and friends were about the only ones that could afford to borrow to deficit spend.
    The results, of course, were not brilliant, but if you wanted to write a textbook justification of Keynes over the last cycle it would be Howard (or Costello) followed by Rudd.
    The converse is also true – if you wanted to show how ineffective and wasteful Keynesian demand stimulus is you would use Rudd as well.

  16. jC says:

    France has NEVER had a balanced budget let alone surplus since WW2!

    Evidence please.

  17. Butterfield, Bloomfiled & Bishop says:

    Andrew R is partly correct and partly incorrect.

    Howard was Keynesian up to the mineral boom. after that the Structural deficit rose each budget culminating in the final one of 1% of GDP.
    A Keynesian would have had a structural surplus of around 2-3% of GDP.

    Rudd correctly used fiscal policy to offset the GFC and consequently the deficit is lower, debt is lower and growth is greater. however Rudd’s policy was not Keynesian.

    Forrest it is not hard to look up . Stop being so lazy and do it.

  18. jC says:

    however Rudd’s policy was not Keynesian.

    That’s right it was homerarian.

    You really are an audacious moron. Go away.

  19. asf says:

    Yes homer, everything was going great in Ireland, Spain, Greece etc until they tried to stop spending.

  20. jC says:

    The twerp thinks the greek government just magically decided it wanted to cut the deficit. It didn’t, the market placed pressure on them to do so.

    Homer thinks it was only the Nazi that have ever got Keynes right. He gets very impassioned about them.

  21. Butterfield, Bloomfiled & Bishop says:


    Greece is the exception to the rule.
    Ireland up to 2008 had run surpluses in 7 of the 8 years.
    Spain ran surpluses up to quite recently.

    What happened. Austerity economics imposed when it shouldn’t have been. It has made the nations immeasurably worse but under the heritage definition they are wild spenders!

    no Rudd’s policies were not Keynesian. They were when they first attempted a larger surplus however Australia merely had impaired monetary policy not a liquidity trap.

    Does Fiscal policy work. Well Adam Posen has shown it does in Japan easily. A stimulus increased growth and then contraction in spending brought a recession.

    Easy peazy.

    A shame no-one here can understnd basic fiscal poicy and resorts to goeballian tactice to prove white is black

  22. Sinclair Davidson says:

    Homer – I’m starting to get a lot of complaints about you trolling threads. Please make some sort of contribution.


    There are no easy solutions using either monetary or fiscal policy. There are bits and pieces above that make sense but no useful general picture.

    Microeconomic reform can gradually make a difference but not quickly or easily. Politically it is very difficult to stand up to vested interest groups, Greenish fads and ferocious Nimbyism, but prosperity can only come from greater efficientcy.

    The real problem with Keynes is not that he was particularly wrong, but that his ideas can be used as an excuse for irresponsible waste of public money.

  24. AndrewR says:

    re: Ireland

    Out of interest I just looked up its external debt… it seems to be in a class of its own:

    External debt (as % of GDP): 1,312%
    Gross external debt: $2.32 trillion
    2009 GDP (est): $176.9 billion

  25. Butterfield, Bloomfiled & Bishop says:

    to make things even more interesting Ireland has the largest difference between GDP and GNP in the OECD

  26. Butterfield, Bloomfiled & Bishop says:

    Sinkers I have pointed out your ignorance of basic fiscal policy.

    What more can I do.

    I am the only one who has actually contributed to this actual thread.

    Either put up or shut up

  27. dover_beach says:

    How, in god’s name, can Ireland continue with figures like that?

  28. John H. says:

    How, in god’s name, can Ireland continue with figures like that?

    Gee, enough to drive ém to drink. At least that will breed another generation of great Irish literacy.

  29. Sinclair Davidson says:

    Homer – this isn’t my thread.

  30. John H. says:


    If I may presume to be directive, ban him.

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