Reply To: Cluster of Errors and Say's Law


Say’s law covers all outcomes in a market economy, whether progressing normally or experiencing boom, crisis, bust, and recovery.

The import of Say’s Law is that there can be no general overproduction on the market economy as a whole.

Here’s Murray Rothbard on Say’s Law:

The cluster of error occurs during the boom as cheap credit makes certain lines of production unsustainably profitable. Investment, then, is the locus of errors that must be corrected during the bust. As you say, consumption declines tend to follow declines in investment during the bust.

One can look for asset price bubbles during a credit expansion as evidence of an underlying cluster of error. Of course, these are easier to see after the fact.

Here’s Frank Shostak on asset price bubbles: