Reply To: Steven Kates on Say's Law


Let me, in turn, zoom out and provide a high-level overview of where I am coming from:

There are, essentially, two ways in which you can justify the conclusion that in the aggregate, supply and demand must be tightly linked. Let’s call these two different versions of Say’s Law.

Version A: Look at the supplies and demands actually realized in transactions ex post. Here it is mathematically necessary that supply and demand are equal in a world of barter, and the question becomes how much of a dislocation is effected by the adding money to the picture.

Version B: Look at the issue ex ante – the relationship between supply and demand before any transaction is realized. Here, even without any math, it turns out to be logically (or, better yet, praxeologically) necessary that supply and demand are equal. In this version, the barter/money distinction is completely irrelevant – if the logic holds at all, it does so equally well in a monetary economy.

My claim, simply stated, is that Version B is what we should think of as Say’s Law. Not only does it conform much more closely to the actual writings of the Classical economists, but it is also much more relevant to contemporary economic debate – if valid, it clearly packs a powerful punch against the very foundations of modern macroeconomics.

On the other hand, Version A is, if I may borrow the term, a complete nothingburger. As far as I am aware, it has no basis whatsoever in the actual writings of the Classical economists – it is purely the invention of 20th century economists who were unable to remove their math/empiricism goggles for long enough to understand the actual point at issue. It also turns it into a relatively unimportant principle – as you said in your lecture, it ultimately becomes little more than an empirical discussion over price flexibility.

Note that this should immediately raise some red flags. One inescapable conclusion that emerges from a perusal of the 19th century writings on the Law of Markets is that the protagonists – whether right or wrong – cared deeply about the issue. Why on earth would they have bothered to engage in such extensive debate over a principle that only held strictly in a world of barter?

I have belabored this distinction at the outset because, while I appreciate that your last response made more of a genuine effort to engage with what I actually wrote, you still seem to be taking it as an indisputable given that Version A IS Say’s Law. And this is precisely what I wish to challenge. With all the good will and respect in the world, I suggest that by endorsing Version A (and ignoring Version B) in your lecture, you are unfortunately perpetuating the intellectual travesty that has been wrought on the Law of Markets by the post-General Theory economics profession – about on par with teaching a class on ABCT and calling it an “overinvestment theory”.

(Though on the other hand, if you were indeed operating under the assumption that Version A was the only game in town, I now understand why you must have been confused as to what in the world I could have been complaining about! I’ll admit that I was baffled [and a little insulted] by your suggestion that I was just “looking for a fight”, but it begins to make more sense now).

So to relate this back to the main thread of the discussion: in my points 1 and 2, I am challenging your primary-source support for Version A as the meaning intended by Say. In point 3, I am asking why, in any case, you do not at least give equal billing to a discussion of Version B.

With that out of the way, on to the actual points.

1) I am glad that, at long last, we have established that we are indeed thinking of the same essay from J.S. Mill! Not to be flippant, but you do realize that I referred to the exact passage that you just quoted a few posts ago, right? [“Mill DOES introduce the barter/money distinction in this essay (paragraphs 70-71.”)]

And yes, I certainly do deny that this particular passage constitutes his exposition of the Law of Markets, for the exact reason that I stated back in that first post. The Law of Markets itself is no longer the focus at this point in the essay – he already summarized it way back in paragraphs 4-5. Here, as you correctly observe, he is showing how recessions can happen anyway, pointing out that, in contrast with a world of barter, there can be temporal dislocation between buying and selling. But this is only synonymous with the Law of Markets if you accept the Keynesian strawman that Say’s Law denied the possibility of recession. (Many 20th century economists have accepted this premise, of course, which is doubtless why it has become so widely accepted in the modern secondary literature that Mill was indeed still talking about Say’s Law here).

Now, I’ll grant you this much: Mill certainly leaves himself open to misinterpretation by spelling out something that sounds very much like Version A in paragraph 69, and then referring to it in paragraph 70. I am not 100% sure what his purpose was here – if I had to guess, I would say that he is working through the logic of those who (erroneously) believed that the impossibility of general overproduction meant that the phenomenon of recession would never happen – if supplies and demands are the same in general, how can they even appear to be dislocated? He then says no, that would only hold true in a world of barter – in the real world, even given the impossibility of general overproduction, there can be temporal imbalances caused by the use of money, and this is what leads to recession. If nothing else, this is very much consistent with his earlier reference to the “considerable price” that we pay for the convenience of using money. It also explains why the reasoning here, in contrast to virtually all of his other writings on this issue, is so clearly rooted in “ex post” world.

I would not bet my house (if I owned one) that this interpretation is correct. But regardless, I AM pretty confident that whatever “the argument” was in paragraph 69, it was not a statement of what Mill actually believed the Law of Markets to be. If his point really were that it only holds strictly in barter, how could he (in paragraph 77) then revert to saying things like “The argument against the possibility of general over-production is quite conclusive” and “Nothing is more true than that it is produce which constitutes the market for produce, and that every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand” ? He never says anything remotely close to “I have shown that these conclusions only hold in a fictional barter world – so here in the real world we need to start talking about price flexibility.”

2) In the lecture, you link [what you claim to be] Mill’s interpretation directly back to Say, by referring to the latter’s “you say you want money, I say you want commodities” quote. My point is that whether you are right or wrong about Mill, you clearly do violence to Say’s meaning when you try to use this statement in this way. It is pure bait-and-switch, applying the quote to a context completely alien to the one in which it was made.

I think I covered this point sufficiently last time, but in any case, that is what I meant when I said that my second question was whether such an interpretation was justified, and answered in the negative. The choice of Version A is in no way supported by Say’s remarks to his hypothetical merchant.

So to recap at this point: I maintain that the two pieces of documentary evidence you offer in support of a “Version A” interpretation of Say’s Law are inadequate – one is dubious at best, and the other is a complete non-starter. And (again, without claiming to prove a negative) I don’t believe that you will find such support elsewhere in the writings of Classical economists either, if only because they clearly viewed the Law of Markets as being much too important as to only be strictly true in a world of barter.

And now for the crucial question: even if Version A did appear in their writings at some point, why should we care? (This is my Point 3). After all, Version B clearly appears throughout their writings as well – most clearly in Ricardo and J.S. Mill, examples of which I have already given – less explicitly in Say, though on balance I think this is clearly what he meant as well. (William Hutt also gives something very much like Version B in his “Say’s Law Restated” chapter of A Rehabilitation of Say’s Law).

And isn’t it clear that Version B is incomparably more interesting? The logic appears unanswerable*, and it clearly poses serious problems for the concept of aggregate demand as an independent factor in economic analysis.

In its simplest form, the basic proof goes something like this:

Supply of X constitutes demand for Y, i.e. supply is a necessary condition for demand. But (and here is the quasi-praxeological insight) supply of X also implies ex ante demand for some Y, so supply is also a sufficient condition for demand.

Of course, there is plenty of room for total demand to deviate from total supply ex post, if a given supplier’s expectation concerning the conditions under which he will be able to sell his product proves to be mistaken. But this is subject to standard price system/entrepreneurship analysis, with no room for “macroeconomics”. There is no sense in which demand-in-general can fall short of supply-in-general, the great fear of naïve amateurs in the 19th century, and of equally naïve economists in the 20th.

So when I said that my Point 3 was about the “best defense” of the Law of Markets, I was asking if you can show me what is wrong with Version B – why we should not prefer it to Version A, even if we could find any reason to believe that the Classical economists ever considered Version A to be the Law of Markets in the first place.

That is really the million-dollar question here. Even if you do not care to butt heads over our respective interpretations of Mill, I hope you will at least give this question some consideration.

So to summarize my position: the oft-repeated notion (these days) that the barter/money distinction is a significant factor in evaluating Say’s Law is completely false. It is just a red herring retroactively imposed on the discussion by the economists of the 20th century, who viewed the issue through their own methodological prism. In its own way, this is almost as much of a distortion as Keynes’s charge that the Classical economists assumed full employment. “Say’s Identity” and “Say’s Equality” have very little to do with what Say and co. actually meant when they discussed this issue. They almost certainly meant something like what I have called Version B above – which, in any case, is much more interesting and effective.

* Yes, Sowell does confront this logic head-on at several points in his book – sometimes citing writers like Marx and Hobson, sometimes offering his own insight. Instead of pre-emptively explaining why I think he is mistaken in each instance (this post is long enough already!) I will wait to see what you have to say on the subject.