Reply To: Steven Kates on Say's Law


Thanks again for your time. I entirely understand if you do not care to discuss further, but please allow me one final rejoinder, if only for the benefit of anyone else who may come across this exchange.

As a reminder, there are three points of disagreement:
1) Whether Mill interpreted Say’s analysis as only being necessarily true in a barter economy
2) Whether such an interpretation is in any way justified
3) Whether the best defense of the Law of Markets is the mathematically-demonstrable equality between (ex post) aggregate supply and demand in a barter economy, with necessary modifications to allow for money

Addressing each in turn:

1) The purely exegetical question of Mill’s interpretation of Say is admittedly of lesser importance. But note that when I said that I wouldn’t be particularly surprised if you could find something in Mill to support your position, I was a) partly making a very bad joke about Mill’s penchant for vacillation and/or writing in a convoluted manner that leaves his meaning unclear, and b) being intellectually responsible, making clear that I do not pretend to be familiar with Mill’s entire output.

Nonetheless, I had a reasonably strong prior that your claim here was simply a repetition of the standard (but very flawed) interpretation of Mill’s Unsettled Questions essay, an interpretation that has been making the rounds in the secondary literature on Say’s Law throughout the 20th century. If I am right, then this is an unfortunate perpetuation of an error that has contributed to the enduring misunderstandings over the Law of Markets, examples of which (so I claim) are found in points 2 and 3 below. So a valid answer to my challenge here would surely be to show me your actual source, rather than simply to dismiss the question out of hand because I don’t claim to be proving a negative.

EDIT TO ADD: And I never said that even if you could show me where Mill said this, I would not accept it as valid. Obviously, if you can show me where Mill made an explicit adjustment to the logic of the Law of Markets itself (NB: NOT an explanation of how there can be recession given that the Law of Markets is valid) then of course I will concede this particular point.

2) I am aware that you literally quoted Say on the relationship between money and commodities. I explicitly acknowledged that quote, and tried to show you that it does not mean that what you seem to think it does: namely that Say’s reasoning was confined entirely to a world of barter, and that the conclusion must therefore change substantially in a monetary economy with changing demand for cash balances.

I can see why you would think that the fact that Say was addressing an issue that can be described as “fear of a deficiency of money” is a decisive consideration in your favor here. But this is really not the case. Let me try putting the matter a different way:

In Say’s day, when people said things like “products are not selling because there is not enough money”, this was just naïve mercantilist thought at work. People did not fully understand that it is production – not money per se – that generates the ability to demand products in exchange. So back then, when people complained about a deficiency of money, it was useful to adopt a barter-economy thought experiment as an expository device.

The Classical economists were quite successful in banishing naïve mercantilist errors from respectable debate. So by the time of the Keynesian revolution, the battleground had shifted: the question became whether production implies a concomitant willingness to demand. When modern-day economists claim that Say’s Law is only true in a state of barter, it is clearly because they give a negative answer to this question: they believe that people have a tendency to “hoard” money, and will therefore not be willing to purchase everything that is produced. So when the likes of Brad DeLong complain about a deficiency of money in a world of hoarding, it obviously does no good at all to counter with a barter-economy thought experiment – this just proves their point.

Now, surely you can see that these are two very distinct questions that happen, by an unfortunate linguistic coincidence, to share a common description: “deficiency of money.” Does it follow that because Say used a barter-style analysis to construct his answer to the first question, that he would have been forced (or inclined) to concede immediately on the second question? Of course not! It simply means that the question that he was actually confronted with was best answered in this manner.

Not only does it not follow, but it is virtually inconceivable that he would in fact have been willing to make such a concession, as this would render the Law of Markets – which, recall, he took great pains to defend throughout all the editions of his Treatise, and in a great deal of private correspondence – a comparatively unimportant insight. Even if monetary concerns were not at the forefront back then, the Classical economists would have to have been completely stupid not to understand that there were potential differences between the world of barter and the world in which they actually lived.

So yes, you quoted Say accurately when he “removed money from the picture” in order to address concerns over a deficiency of money. But this does not mean that Mill – or anyone else – would be correct in interpreting his analysis in a manner that makes such an enormous concession to the contemporary Keynesian challenge.

3) I tried to show last time that the Classical economists did not generally have the “mathematical tautology” proof in mind as their justification for the Law of Markets – and that even if they did to some extent, this is not the most effective approach. I gave a quote from Ricardo, but here is an even better one from J.S. Mill:

“If any man produces more, it must be because he desires more; not more cloth, or corn, perhaps, but more of something: and if all produce more, it is because all desire more. The requisites for demand are, the wish to consume, and the means of purchasing. By increasing their supply, they prove themselves to have the desire, and they obtain the means, of consuming.”

For one thing, this should put to rest any notion that Mill interpreted the analysis as holding only for a barter economy. More importantly, note that this has nothing to do with ex post quantities actually realized in transaction, the sort of thing that would figure in a mathematical argument. The meaning here is pretty clearly that supply must equal demand ex ante, and that any ex post inequality must be due to a specific miscalculation on the part of a given supplier. “Men err in their productions…”

I continue to maintain that this insight is a) a fair representation of how Classical economists (including Say) thought of the Law of Markets, b) unequivocally true, and c) fatal to the entire conception of modern macroeconomics, which treats “aggregate demand” as an independent quantity that can fluctuate with or without any particular error having been made.

If nothing else, I hope this post shows you that I was not “looking for a fight” here, in the sense of raising nit-picky issues for the sake of it. If I am wrong about any of the above, I would very much like to find that out sooner rather than later. Since there is literally no one in the world whose opinion on economic topics I value more highly than yours, I was sincerely curious if you could show me why my understanding is flawed.