Steven Kates on Say's Law

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    I know that in terms of this discussion, I’m actually dragging it down, rather than contributing, but I want to learn more about this because it seems to have huge implications potentially.

    I’m wondering if Professor Murphy can provide a dumbed-down introduction for a beginner in economics to Say’s Law and its implications for me. I have been trying to understand it, but it seems like everyone has a different conception of what it is. I’d like to know the following:

    1 What was it that Say actually was trying to say?

    2. What is it that people thought he said?

    3. What is the Keynesian rebuttal of what he said? I think I understand it to be basically that if there was no demand for things, it wouldn’t matter whether they were produced because nobody would buy them, and that we have to stimulate demand by having the fed inflate to give people more money in order to increase spending in the economy , but I’d like it to be put in the concise and precise terms that you are so good at using, so I can be sure to understand it better.

    4. What is the Austrian critique of Keynesian attacks on Say’s Law?

    5. My micro course is using Krugman’s textbook(*perhaps there be a contra-krugman textbook haha). In the section on demand, it says that one of the things which has an impact on demand is income. What is wrong with saying that a decrease in income can cause a decrease in demand, and that therefore, when there are economy wide layoffs which decrease demand, that could lead to a recession?

    6. I get the sense that the “no such thing as a general glut” premise and the Rothbardian “cluster of errors” concept might have some relation in terms of proving that there’s no such thing as a shortage of economy wide demand which causes crises, but can’t quite put finger on it. Are they connected, and if so, how? Does ATBC have any implications on the debate over Say’s Law?

    7. Does Say’s Law have any relation to whether supply or demand is more influential in setting prices?

    Thank you


    (Sorry for the delay in answering John. Again, I didn’t realize this question was pending.)

    I will be brief on this first pass, but feel free to ask me for more specifics.

    1) Well, I devoted the whole lecture to this, right? 🙂 But if you’re asking for me to boil it down succinctly: I think Say was trying to refute the common explanation that recessions were caused either by a dearth of money, or by a glut of production. So to show why those were simplistic and ultimately unsatisfactory explanations, he demonstrated that when you demand something from a merchant, the ultimate source of your purchasing power is the goods you yourself supply to the market. Also, a world in which everyone produces more stuff is not one of misery, but is actually how material progress is possible. So once you see things that way, you realize it doesn’t work to say a recession is caused because people don’t have enough cash to demand the full output from all the merchants, or because all the merchants produced too much collectively to be sold.

    2) This is tricky. The crude version is, “Supply creates its own demand.” So I think a lot of Keynesians, including Keynes himself, took Say to mean something like, “By the very nature of exchange and accounting, everything brought to market must necessarily find a buyer.” I think some have a weaker version of what he meant, and think he was saying something like, “Prices are sufficiently flexible that markets quickly clear and you can’t have a general glut.”

    3) The sophisticated Keynesian rebuttal goes something like this: “Say argued that it was impossible for there to be an excess supply in *every* market. By logic, we realize that if there is an excess supply–a glut–on one side of a trade, then there must be excess demand–a shortage–on the other. For example, in a barter economy, if people are trading apples for bananas, then no matter what the price is, you can’t have a glut of both apples *and* bananas. Either you have a glut of apples and a shortage of bananas, or you have vice versa, or you have the market clear for both fruits. But,” the Keynesian continues, “Say made a critical mistake. He forgot that in the modern economy we use money on one side of every exchange. And so his tautology is still obeyed, if we assume there is a glut for every good and service *except* money, while there is a shortage for the money commodity. Then Say’s logic is satisfied, and yet this is what everybody means by a recession where there is a general glut and a deficiency in purchasing power or demand.”

    4) Austrians like Rothbard stress that there can’t be an overproduction in general; that’s a sign of opulence, not misery. However, there can be too much produced in some sectors if there is too little produced in others. So this isn’t an issue of a momentary shortage or surplus, but rather reflects the mistaken plans of the past (which don’t reflect consumer preferences etc.). Also, I think many Austrians think prices are flexible enough to make markets clear soon enough, so long as governments and unions don’t interfere.

    5) So long as prices and wages are flexible, it shouldn’t matter for very long. In the 19th century prices would collapse after a boom/bust, workers would get laid off, but then nominal wage rates would collapse too. So employers would hire workers once their wage rates fell back in line with the lower prices of the final product.

    6) I think my answer to 4) helps here?

    7) I don’t think so. And what you are talking about is really just a micro phenomenon for a particular market, having to do with elasticities, if I understand you. In general, supply and demand jointly “determine” prices. Also, from the Austrian perspective, even supply curves are really just the flip side of demand curves. Everything is ultimately drive by subjective preferences. (You can search the PDF of Rothbard’s ME&S for “reservation demand” if you don’t know what I’m talking about.)

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