Reply To: Steven Kates on Say's Law


Thanks for the reply!

Just to clarify the general issue a bit before diving into the details, I know that you know that Keynes butchered Say’s Law pretty badly. The problem (or so I maintain, following Steven Kates) is that the way people tend to think about economics has changed so fundamentally in the 20th century that even those who seek to defend Classical economists from baseless Keynesian accusations still often fail to grasp the essence of the issue. Becker and Baumol are Exhibit A here, but even Thomas Sowell misses the point on a number of occasions. So I just want to be clear at the outset that I am not saying anything as elementary as “OMG, did you know that Keynesians get Say’s Law wrong?!?”

Now for the specifics:

1) ca. 28:05, you say “That’s how John Stuart Mill interpreted what Say was arguing” [viz. that supply has to equal demand in a barter economy, but that this ceases to be necessarily true when money is introduced]. This is the only statement of yours that I would call “false” – I do not believe that Mill understood Say in anything resembling this manner. Unless you have another primary source in mind, I assume you are referring to Mill’s essay Of the Influence of Consumption on Production, from his Unsettled Questions. Now, Mill DOES introduce the barter/money distinction in this essay (paragraphs 70-71). But, if you look at the structure of the entire essay, it is really quite clear that he DOES NOT intend this to be a concession as far as the Law of Markets is concerned. In paragraphs 4-5, he restates all of the familiar “Say’s Law” maxims, and then in paragraphs 6-7 states that his purpose in reexamining the question is only to explore how it could have seemed so apparent to so many people that this was not the case – that consumption stimulation really was a necessary ingredient in national wealth. So he discusses the difficulties associated with a monetary economy (as opposed to barter) merely in order to show how there can be recessions, or slow circulation of capital in general – phenomena which make it appear to the uninitiated that Say’s Law is false, and that consumption can stimulate production.

2) Immediately after that (ca. 28:15), you say “there is some fairness to [Mill’s interpretation], since Say went out of his way to take money out of the picture.” I disagree with this evaluation – even if this had been Mill’s interpretation, it would not have been a good one. The problem is that the relation between money and goods is not Say’s primary point – his main objective, as I think you will agree, is to show that there is no reason to fear demand deficiency. (Recall Mises’s comment here: “Whenever business turned bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in “The Wealth of Nations,” exploded the first of these myths. Say devoted himself predominantly to a thorough refutation of the second.”) Demand deficiency could be due either to insufficient ability to demand, or insufficient willingness. Most of Say’s discussion centered on the first of these two elements, showing that it is production [not money, per se] that creates the ability to demand – it is in this context that he says “you say you want money, I say you want commodities”, etc. But when you point out that there can be excess demand for the monetary commodity in a non-barter economy, you are addressing the willingness side of the equation, which has nothing to do with what Say was talking about. It is true that Say did not believe that deficient willingness to demand could be a big deal, but that was not the possibility that he was trying to refute directly in this part of the discussion. And Say clearly knew that there could be excess demand for money – witness his comment in a letter to Ricardo about “capitals sleeping quietly at the bottom of the coffers of capitalists” (or something like that). In short: when Say reduces money to a veil on top of the real economic activity, he is addressing the naïve mercantilists of his day, not a modern Keynesian who is concerned about the fetish for liquidity.

I have more to add, but this is quite lengthy already, and should give us enough material to start with. Thanks again for your willingness to discuss this with me.