Steven Kates on Say's Law

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    Professor Murphy,

    Thank you for the terrific lecture series. In your lecture on J-B Say, you mention Steven Kates’s book “Say’s Law and the Keynesian Revolution”. Not to go all Smiling Dave on you here, but I’m curious if you have read Kates’s book, and if so, what you thought of it.

    The reason I ask is that one of his central theses is that the version of “Say’s Law” that you introduce in your lecture is not really what the Classical economists actually had in mind. Their point (he claims) was that whatever might be the cause of recession, it could not be – as many naive observers believed from that day to this – a deficiency of (aggregate) demand. If valid, this a profound conclusion that pre-emptively refutes the entire conception of modern macroeconomics.

    Please correct me if I am wrong, but your discussion seems to be based more along the lines of the Say’s Identity/Say’s Equality formulation introduced by Becker and Baumol, and picked up on by Thomas Sowell in his book. Kates argues (convincingly, at least to an amateur like me) that this modern interpretation is a distortion of what Say/Ricardo/Mill actually meant, and obscures the enduring power of Say’s Law as an anti-Keynesian weapon.

    So I am just curious if you have a) actually read Kates’s book, and found something to disagree with – in which case I would be very interested to hear what he got wrong – or b) not read it at all (in which case I would highly recommend it to you!)

    Thanks in advance!


    Let me be more explicit on the points where I (very respectfully) disagree with your presentation.

    1) You present Say’s Law as being essentially an accounting tautology, with total supply equaling total demand by definition. Kates shows pretty convincingly that this is not at all how people thought of the Law of Markets until the mid 20th century – this formulation was introduced by Lange in 1942, and subsequently christened “Say’s Identity” by Becker and Baumol in their landmark paper. Unfortunately, this essay exerted such influence that it has been more or less taken for granted, throughout all subsequent discussion within the economics profession, that this is what Say et al were getting at.

    So, what did they mean by the Law of Markets? It was a logical insight into how economies work: demand in general can never fall short of supply in general. The reasoning essentially goes something like this: it is impossible to (effectively) demand Good Y without first supplying Good X, and it is impossible to supply Good X without intending to demand some Good Y (unless the producer of X intends to consume it himself, in which case there is no problem in the first place). Therefore, “aggregate supply” must equal “aggregate demand”, and any apparent imbalance between them must be due an error on the part of the suppliers of X or Y, failing to correctly anticipate the market rate of exchange for the product in question. As Ricardo succinctly put it: “Men err in their productions, there is no deficiency of demand.”

    Note that there is nothing special about money in this reasoning – it holds equally valid whether or not one of the goods considered happens to be money. So in addition to being more historically accurate, this formulation is a much more powerful argument – it is not subject to any of the barter vs. monetary qualifications that are often included in modern discussions of Say’s Law, even by its would-be defenders.

    2) You cite J.S. Mill as being one of the first to introduce the barter/money distinction. Admittedly, I will not be particularly surprised if you can show me where Mill actually said something like this, as it seems that you can find Mill saying just about anything if you look hard enough. But my suspicion is certainly that this idea also comes from Becker/Baumol, who used Mill’s monetary explanation of the business cycle in his “Unsettled Questions on Political Economy” in order to shoehorn the discussion of the Law of Markets contained in that essay into their own “Say’s Identity” framework. I think Kates is correct to be skeptical of this interpretation. Why would Mill bother to make such a big deal over the Law of Markets in the essay, only to then turn around say “well, it doesn’t really hold when you try to apply it to a monetary economy, and that’s why we have recessions”? Isn’t it far more likely that Mill actually meant something along the lines of what I suggested above, and that Becker/Baumol merely misapprehended it?

    3) A minor quibble here, but your analogy of a country being able to pay for its imports with financial assets, rather than exports, is beside the point when it comes to Say’s Law. It is only meant to apply to an economy in the aggregate, as an individual can similarly borrow, rather than produce, in order to demand a good in exchange.



    I am very aware that there have been distortions of what “Say’s Law” means, in going from his actual view to the 20th century understanding. Probably the best example of this is Keynes’ version of it (which he then easily knocked down).

    I am about to leave for a week in Europe, so in the meantime can you point to the specific time markers in my lecture where you think I said something that is false? I’m not being defensive, I just want to efficiently get to the bottom of our different interpretations.


    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.


    3) The crux of our entire disagreement centers around your “mathematical tautology” version of Say’s Law. For a sample timestamp, at around 32:20 you say “[In a monetary economy] you can still maintain or defend some version of Say’s Law, but it’s no longer a mathematical proof[…]now you have to make an empirical case, and say that as long prices are flexible, markets will clear pretty quickly.”

    You are right, of course, that there is no mathematical proof that excess demand for non-monetary commodities must sum to zero. Where I believe you are mistaken is in thinking that this “mathematical proof” angle is particularly relevant in the first place, or that in its absence, we have no choice but to downgrade the discussion to an empirical question. The Classical economists pretty clearly intended the Law of Markets to be an a priori demonstration showing conclusively that there could be no such thing as demand in general failing to keep pace with the volume of goods produced. And they surely would not have bothered to make such a big deal over the Law of Markets if it were only intended to apply to a barter economy.

    As I mentioned earlier, my favorite statement of the Law of Markets was given by Ricardo: “Men err in their productions, there is no deficiency of demand.” Here is an example of how he justifies this conclusion:

    “Whoever is possessed of a commodity is necessarily a demander, either he wishes to consume the commodity himself, and then no purchaser is wanted; or he wishes to sell it, and purchase some other thing with the money, which shall either be consumed by him, or be made instrumental to future productions. The commodity he possesses will obtain him this or it will not. […] If it will not what does it prove? That he has not adapted his means well to his end, he has miscalculated.”

    As you can surely see, there is nothing mathematical about the reasoning here – it is a quasi-praxeological demonstration in the best Misesian tradition! If someone goes to the trouble of producing a good, he MUST either be intending to use it for his own purposes, or to obtain something for it in exchange. In general, supply implies demand, and therefore, abstracting from particular entrepreneurial errors, demand in general cannot fall short of supply.

    And more importantly, note that Ricardo’s reasoning applies just as much to money as to any other good. A supplier can intend to sell his product in order to obtain the services of higher cash balances. His designs may be frustrated if too many other “liquidity fetishists” try to pull the same trick – but this merely shows that he failed to anticipate the actual market conditions under which he would be able to realize his transaction.

    Like many praxeological theorems that appear at first glance to be little more than a truism, the Law of Markets as expressed in this manner is deceptively powerful. In particular, it remains in my view the clearest, most efficient refutation of the entire Keynesian program. For example, consider the famous passage from Chapter 3 of the GT where Keynes lays out his agenda for the rest of the book: “The outline of our theory can be expressed as follows. When employment increases, aggregate real income is increased. The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income” etc. etc. , the point being that we need to find enough investment to serve as an outlet for the increased income.

    The Law of Markets immediately exposes this as hogwash. “Aggregate real income” cannot increase without being supported by an increase in production. And if people bothered to produce more, then following Ricardo’s reasoning, they must already have intended to exchange it for something else. Keynes’s attempt to separate the two sides of the transaction is completely invalid.

    Apologies again for the length here, but given the subtlety of some of the issues, I wanted to err on the side of excessive clarification. Enjoy your time in Europe – and maybe see if you can find a copy of Kates’s book for the plane ride home. ☺



    You have been extremely courteous and so I want to reciprocate by saying I appreciate your comments, and I realize you are just trying to avoid repetition of what you take to be a common misconception among economists, even free-market ones.

    However, having said all that, I think you came into this lecture “looking for a fight” and found what you wanted. 🙂

    After reading your complaints about my treatment, I went back and listened to most of my lecture. Here’s what I found:

    5:30 I say that the modern economist gets it wrong when he says what “Say’s Law” is.

    6:25 I tell the listener we are going to let Say make his case in his own words, without putting a modern spin on it through the prism of other economists.

    7:05 I show how Say is responding to the common misconceptions among merchants about the cause of recessions. This includes the worry that there is a scarcity of money.

    9:00 I literally quote Say when he writes “You say you only want money; I say you want other commodities…”

    16:00 – 18:00 I summarize Say’s overall point as being that *general* overproduction is impossible; no, that is what prosperity is.

    ** Thus far, I can’t see how you could possibly complain that I’m misinterpreting what Say’s point was. This is especially so, since I literally quote extensively from him and just paraphrase his words. I repeated many of the points you yourself made above, when you were trying to show what Say was saying, in contrast to (what you took to be) my erroneous interpretation. **

    21:25 Now, at this point, I proceed to talk about how subsequent economists have interpreted Say.

    By now, I think the only possible point of disagreement between us, is that you think I incorrectly said that John Stuart Mill said that Say would be unequivocally right in a barter economy, but not “mathematically foolproof” right in a monetary economy, at which point we would need more than accounting to show him right.

    However, you also conceded that maybe I could find JS Mill saying exactly this point, and you weren’t going to make it count because Mill wrote all sorts of stuff.

    I hope you can see why I don’t think it’s worth proceeding at this point, if you are admitting that even if I find JS Mill literally writing what I said his position was, that you aren’t going to accept that as valid.

    (Again, I know tone of voice is hard to convey in print, so I’m saying the above in a perfectly pleasant tone. 🙂 )


    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.


    Hi Daniel,

    Before I turn to your enumerated remaining points of disagreement, let me first restate my general take on all of this:

    ==> Say himself was exploding the common “man on the street” explanation for recessions. Someone who has not first thought through the matter as a classical economist would (in which you typically abstract away from money), would benefit greatly from this. To think about the fact that, say, a doubling of all production would mean we were richer, and not that we were impoverished, is obviously a good first step. It shows how silly the typical businessman’s complaint about a “scarcity of money” is.

    ==> JS Mill and other free-market economists since have appreciated the great wisdom of what Say wrote, and still think it’s critical for the layperson to read it as Say intended. But then they get really anal with it and say, “OK, if you are talking about a barter economy, then it is mathematically true. If you’re talking about a monetary economy, then in principle we could have a glut of all commodities and a shortage of money, but that would be due to prices not adjusting for some reason. Say was aware of all of this, and I still don’t think you need government deficit spending to boost AD, because why won’t prices just adjust?”

    ==> However, someone who wanted to disparage Say’s Law could say “Duh it just assumes away the problem. Of course we’re dealing with a monetary economy and prices/wages are sticky for various reasons.” I think this is a very unfair response, which (a) gives too much credit to the original “man on the street” diagnosis of recessions and (b) is bad policy advice, because the Phillips Curve will simply shift once you pump in more money.

    Now on to your three points. I’ll handle them out of order.

    “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”

    It depends what you mean by “best defense.” Someone who has been trained in economics can think in terms of various markets for goods, and so yes I would have to couch Say’s Law in that framework to show how it is still true (with flexible prices).

    But if you mean, “When I first explain Say’s Law to a regular person,” then I give the historical context and quote Say himself. I.e. just what I did in the lecture.

    “1) Whether Mill interpreted Say’s analysis as only being necessarily true in a barter economy”

    Yes, of course he did. He said so explicitly in “Some Unsettled Questions…”:

    ============[QUOTE FROM JS MILL BEGINS]===========
    <i>There can never, it is said, be a want of buyers for all commodities; because whoever offers a commodity for sale, desires to obtain a commodity in exchange for it, and is therefore a buyer by the mere fact of his being a seller. The sellers and the buyers, for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another.

    This argument is evidently founded on the supposition of a state of barter; and, on that supposition, it is perfectly incontestable. When two persons perform an act of barter, each of them is at once a seller and a buyer. He cannot sell without buying. Unless he chooses to buy some other person’s commodity, he does not sell his own.

    If, however, we suppose that money is used, these propositions cease to be exactly true. It must be admitted that no person desires money for its own sake, (unless some very rare cases of misers be an exception,) and that he who sells his commodity, receiving money in exchange, does so with the intention of buying with that same money some other commodity. Interchange by means of money is therefore, as has been often observed, ultimately nothing but barter. But there is this difference—that in the case of barter, the selling and the buying are simultaneously confounded in one operation; you sell what you have, and buy what you want, by one indivisible act, and you cannot do the one without doing the other. Now the effect of the employment of money, and even the utility of it, is, that it enables this one act of interchange to be divided into two separate acts or operations; one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another. The buying and selling being now separated, it may very well occur, that there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case, in those periods which are described as periods of general excess. And no one, after sufficient explanation, will contest the possibility of general excess, in this sense of the word. The state of things which we have just described, and which is of no uncommon occurrence, amounts to it.</i>
    ===============[QUOTE FROM JS MILL ENDS]==============

    So I don’t know how you can deny that JS Mill did in fact make that concession (if that’s what you want to call it), which is why even sympathetic people like Thomas Sowell said he did.

    Now to be sure, in full context, JS Mill isn’t throwing Say under the bus. Rather, he’s trying to show that the fans and critics of Say’s Law ultimately agree on the facts of the matter of a recession, and he’s trying to show why they are talking past each other.

    “2) Whether such an interpretation is in any way justified”

    This is ambiguous. If you mean, “Was Say thinking in terms of a Walrasian model and assumed that the money commodity was just like any other?” then no, of course not.

    But if you mean, “Are we allowed to think about individual markets clearing, to test whether it is literally impossible in a monetary economy to have a general glut in everything but money coupled with a shortage of money?” well why can’t we? That is consistent with modern Misesian price theory.

    I think it helps isolate exactly what the difference is between Say and his critics.


    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.


    Hi Daniel,

    I am sorry for the delay.

    I am intrigued by your Version A vs. Version B, and I’m willing to entertain the notion that that is a good way to think about it. (To repeat, the way I have been thinking about it says that Say’s analysis is very important, so I disagree with you that my approach turns his contribution into a trivial thing.)

    However, where I simply cannot follow you, is when you argue that JS Mill wasn’t himself promoting what you think is a 20th century distortion. So, I’m willing to suspend judgment on the question of whether JS Mill, 20th century economists, and me in my lecture, did violence to Say’s contribution, but when you’re trying to tell me I’m wrong for thinking JS Mill said what he said, I have to disagree. I mean, can you at least see how you are the one making a difficult claim? It sure seems like I found a quote from Mill saying exactly what you had denied his position was.

    At this point I don’t think I can carry this particular argument much further. If I get Kates’s book, is your view his? I.e. if I want to see someone make your Version A versus Version B case, does Kates do it in his book?


    Sorry in turn for my late response. My understanding of Say’s Law owes a huge debt to Kates, and I am reasonably confident that he would agree with everything I have written here. But I should acknowledge that he is in fact much less explicit about the ex ante/ex post distinction than I would like – ironically, despite having (in my view) a far inferior understanding of the subject, Sowell is much clearer on this front.

    I certainly recommend Kates’s book to you without reservation – I think you will find his scholarship impressive, and perhaps he may even convince you on the question of Mill! Nonetheless, I do have a couple of caveats:

    1) He is very unfair to Keynes, essentially blaming him for all of the modern misunderstandings of Say’s Law. In my view, Keynes was in fact the last major economist to understand Say’s Law correctly (!) and the “villains” in the story are clearly Lange, Becker and Baumol.

    2) Despite (correctly) pointing out that Say’s own articulation/defense of the law is inferior to that of either Mill, he still seems content to base his defense of Say’s Law on reasoning that goes “supply constitutes demand, and wants are unlimited, so willingness to demand is not an issue”, which is essentially what you get from Say. He does not seem to fully appreciate the superior logical force of J.S. Mill’s “supply constitutes demand, and supply also implies demand”.


    By the way, here is what must surely be a slam-dunk refutation of the Lange/Becker/Baumol version of Say’s Law (the version that you outline in the lecture).

    To recap, this version starts with Walras’s Law, that the excess demands in all markets have to sum to zero, and then defines Say’s Law as the additional assumption that excess demand in the money market is zero. A corollary of Walras’s Law, of course, is that general overproduction is logically impossible in a barter economy. (I’m not putting words in anyone’s mouth here, Baumol says exactly this in his 1977 paper on Say’s Law).

    But something is obviously wrong here. Take the simple case of a two-good economy, where Smith produces more of Good A than Jones is interested in buying at any exchange rate, and Jones also produces more of Good B than Smith is interested in buying at any exchange rate. Sure, you can say that they will probably learn from their mistakes and stop doing this, but how on earth can you say that it is logically impossible?

    The answer here is that the “proof” of Walras’s Law is based on a budget constraint equation, where it is simply assumed that each individual demands as much as he possibly can given his budget. This is not a problem in the context of establishing the possibility of general equilibrium, which is how Walras originally used the equation. But in the context of Say’s Law, the question of whether or not an individual will spend his whole income is kiiiiind of the whole point!! So in order to take Walras’s Law as a starting point for Say’s Law, you have to assume that Say’s Law is essentially true. But once you do that, there is no need to bother with Walras’s Law at all, let alone add the highly unrealistic assumption of perpetual monetary equilibrium.

    This paragraph will admittedly be an argumentum ad hominem, so please take it as somewhat tongue-in-cheek. (I believe I have given sufficient proof of the case above).
    Recall that this definition of Say’s Law (as Walras’s Law + assumed monetary equilibrium) traces back to Oskar Lange’s 1942 article in a compilation called “Studies in Mathematical Economics”. Given that this is Liberty Classroom, where we explore the superiority of free-market economics over the fallacies of the mainstream, is it really all that hard to believe that a socialist doing “mathematical economics” might simply have been completely wrong?


    Edit to add: You don’t need to take my word for it on Walras’s Law. Sowell notes that it is based on James Mill’s behavioral theory, that people only produce in order to buy things with the income they receive. What he fails to realize is that this “behavioral theory”, if true, already suffices to show all that the Classical economists intended to show! So either it is false, in which case Walras’s Law is also false, or it is true, and Walras’s Law is superfluous.

    Just to be really clear about all this, let’s return to the two-good Smith-Jones economy above. J.S. Mill would have no problem handling the mutual overproduction case – in fact, this is exactly what he was responding to in the War Expenditure essay. He would say that the fact that Smith and Jones both went to the trouble of producing their respective goods (we’re assuming here that Smith and Jones never consume the goods that they themselves produce, and that they derive no inherent utility from the production process) proves that they intended to exchange with each other – therefore there must be some exchange rate that would satisfy each party, even if there is not necessarily one that satisfies both simultaneously.

    Lange could then say “Aha, so Walras’s Law is a legitimate starting point after all!” But the point is that this added piece of behavioral logic already shows that supply implies the willingness to purchase (at some exchange rate) and gives the supplier the power to purchase (at some exchange rate). Supply is therefore a sufficient condition for ex ante demand. The only question is whether the suppliers have correctly anticipated the exchange rate at which the other party will agree to transact – this determines whether or not their ex ante demand will be realized ex post. But this is a problem that is well handled by the standard microeconomic tools of pricing and profit/loss. Mill’s point – and the entire reason that we should care about Say’s Law at all – is that there is no mysterious extra dimension of economic analysis where we have to worry about ex ante demand (i.e. demand in general) being insufficient.

    Note also, in contrast to Lange’s approach, that this reasoning handles money without any problem. Perhaps Smith produces certain increments of Good A because he wants to add to his real cash balances. There is nothing special about this – either he has calculated correctly, in which case there is no problem, or he has not, in which case he suffers a loss, and either learns or goes out of business.

    So the entire money/barter dichotomy is just a byproduct of Lange’s fallacious approach. In my opinion, this whole episode is a testament to the power of verbal deductive logic in economics, and to the dangers of attempting to translate it to mathematics.


    OK, one final attempt at convincing you on Mill, and then I promise I am done bothering you on this topic. 🙂

    Here is a timeline of Mill’s writing on Say’s Law:

    1824: War Expenditure essay, in which he lays out his deductive proof for the impossibility of (ex ante) demand deficiency.

    1844: Unsettled Questions essay, in which he reasserts the impossibility of demand deficiency, then shows how there really can be too much of everything (except money) in times of commercial crisis.

    1848: Principles of Political Economy, his magnum opus. Chapter 14 of Book 3, titled Of Excess Of Supply, consists of four sections. The first three lay out essentially the same deductive proof as he gave in the War Expenditure essay, while the fourth has a discussion of commercial crisis, similar to the Unsettled Questions essay.

    The secondary literature in the 20th century has almost entirely ignored the War Expenditure essay and the first three sections of the Principles chapter. They have would have us believe that Mill’s view on Say’s Law is contained in his description of commercial crisis in the Unsettled Questions essay and the last section of Principles, where he acknowledges that there “really is” general overproduction. They thus retroactively draft him onto Team Say’s Identity, where Say’s Law is defined in a manner that only strictly holds for barter.

    There are several reasons why this is untenable:

    1) Even if you only consider the Unsettled Questions essay, the standard interpretation is not particularly satisfactory, given Mill’s flat assertions at both the beginning and the very end of the essay that general overproduction is impossible. Kates notes that one commentator referred to this essay as “schizophrenic”.

    2) In the context of Mill’s entire output, the Unsettled Questions essay is bookended by War Expenditure and Principles, in both of which he devotes considerable space to a deductive proof that general overproduction is impossible. The fact that it reappears in Principles rules out the possibility that it was merely a youthful digression, which he had abandoned by the 1840s. This reasoning needs to be accounted for as well in coming to terms with Mill’s position.

    3) The Principles chapter opens with unequivocal rhetoric: “Because this phenomenon of over-supply[…]may exist in the case of any one commodity whatever, many persons, including some distinguished political economists, have thought that it may exist with regard to all commodities[…] [This] doctrine appears to me to involve so much inconsistency in its very conception, that I feel considerable difficulty in giving any statement of it which shall be at once clear, and satisfactory to its supporters.

    After devoting sections 2 and 3 to proving that the ability to purchase and willingness to purchase, respectively, cannot be lacking, he concludes section 3 with equal force: “Thus, in whatever manner the question is looked at, even though we go to the extreme verge of possibility to invent a supposition favourable to it, the theory of general over-production implies an absurdity.”

    Then, in section 4, he starts talking about commercial crisis (as in Unsettled Questions), the apparent exception where there really is too much of everything except money. But he is 100% explicit that this is not a contradiction of the reasoning contained in the first 3 sections. He opens section 4 by saying “What then is it by which men who have reflected much on economical phenomena[…]have been led to embrace so irrational a doctrine? I conceive them to have been deceived by a mistaken interpretation of certain mercantile facts.”

    So there is really no justification for claiming that this discussion of commercial crisis, where there really is an overproduction of all things, is representative of his view on Say’s Law. He is very clear that this discussion is merely intended to show how it is that people continue to believe that general overproduction is possible, despite his logical proof to the contrary.

    This has confused the heck out of 20th century commentators, especially Thomas Sowell, whose discussion of Mill is by far the weakest part of his book. How can Mill be describing how general overproduction really does happen in commercial crisis, but then saying that this is merely is merely “deceiving” people, and that general overproduction is really impossible? The answer, surely, centers on the ex ante/ex post distinction. Say’s Law, for Mill, was a denial of ex ante overproduction – this is clearly what his deductive proofs were intended to show. The fact that there can be (and often is) ex post overproduction is not relevant to this question, though it has led many people to be confused on the issue of ex ante overproduction.

    So, yes, you found Mill describing how a commercial crisis (which is unique to a monetary economy) leads to ex post overproduction. But it does not follow that this represents Mill’s view on Say’s Law. In view of the considerations above, it clearly doesn’t. So I stand by my initial assessment. The claim that Mill interpreted Say as arguing purely in barter world is completely false.


    Thanks! You’ve written a lot, and I can’t responsibly respond to most of it without going and (re)reading the material. (And some of the stuff I’ve never read.)

    Let me congratulate you on giving me something to ponder, with your two-good case. You’re right, in plain English it seems possible that Jim could overproduce A while Mary overproduces B, even though that is impossible in Walras’ system. So I have to think through whether this is a deep problem, or just a quirk. Either way, you have definitely gotten me to think through this more deeply than I have before.


    Thanks – glad to hear that you found the discussion worthwhile. If I have managed to eclipse Smiling Dave in your estimation, that is good enough for me.

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