Say’s Law on Campus!

If there were any justice in this world the treatment dished out to Say's law of markets since Keynes' malicious misrepresentation would have long ago been exposed as a vicious calumny. Unfortunately an overwhelming number of economists have never read Say and have no intention of ever doing so. Now Say never argued that supply creates its own demand. What he did was to show what every competent economist of the time knew, and that was that demand springs from production…
    “It follows that an economic policy that focused on consumption at the expense of investment would eventually lower purchasing power…”
        - Gerard Jackson, Brook’s News (2008)
It is important to realize that what is called Say's Law was in the first instance designed as a refutation of doctrines popularly held in the ages preceding the development of economics as a branch of human knowledge. It was not an integral part of the new science of economics as taught by the Classical economists. It was rather a preliminary—the exposure and removal of garbled and untenable ideas which dimmed people's minds and were a serious obstacle to a reasonable analysis of conditions...”
        - Ludwig Von Mises, ‘Lord Keynes and Say’s Law’ (1950)

Okay, put this event in your diary: This coming Thursday evening the Uni of Auckland Economics Group will present An Evening on Say’s Law: the most important economic idea that most economists have never read.  Says the Group convenor Fraser Hungerford:

     “Say's Law, or the Law of Markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say (1767–1832). ‘Say's Law is obviously true ... it is neither trivial nor unimportant,’ wrote Joseph Schumpeter. John Maynard Keynes claimed that he refuted Say's law. But did he? Or did he just ignore it?
    “We are thrilled to have Sean Kimpton lead the discussion this coming Thursday on why an understanding of Say's law is critical for any student of economics, or for any person interested in how market's function. Sean is a lecturer in economics at AUT and has studied Say's law for a number of years.

When: Thursday 3 June, 7pm
Where: University of Auckland Business School,
Room: TBC
PS:  Yep, it’s the same night as blogger’s drinks, but who says you can’t drink before or after.  So just add the whole night to your diary.

What They Said About Say's Law ...

Brooks News editor Gerard Jackson (2008):

    If there were any justice in this world the treatment dished out to Say's law of markets since Keynes' malicious misrepresentation would have long ago been exposed as a vicious calumny. Unfortunately an overwhelming number of economists have never read Say and have no intention of ever doing so. Now Say never argued that supply creates its own demand. What he did was to show what every competent economist of the time knew, and that was that demand springs from production.

Jean Baptiste Say in his Treatise on Political Economy (1803):

    A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it.  Now, of what do these means consist?  Of other values of other products... Which leads us to a conclusion ...that it is production which opens a demand for products...
    To say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause ... sales cannot be said to be dull because money is scarce, but because other products are ...
    The mere circumstance of creation of one product immediately opens a vent for other products... Products are paid for with products.... a glut can take place only when there are too many means of production applied to one kind of product and not enough to another. 
    The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption: and ... production alone furnishes those means.  Thus it is the aim of good government to stimulate production, of bad government to encourage consumption...

(Consumption of this kind [when production is stationary, or does not keep pace with consumption] gives no encouragement to future production, but devours products already in existence.  No additional demand can be created, until there be new products raised...)

James Mill in Commerce Defended (1808):

    No proposition however in political economy seems to be more certain than this...and if it be true, none undoubtedly can be deemed of more importance. The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced..
    When goods are carried to market what is wanted is somebody to buy. But to buy, one must have wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation that constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of its inhabitants? ...

   Whatever be the additional quantity of goods therefore which is at any time created in any country, an additional power of purchasing, exactly equivalent, is at the same instant created...

David Ricardo, in his Principles of Political Economy & Taxation (1817):

Whilst a man has any wished-for gratification unsupplied, he will have a demand for more commodities; and it will be an effectual demand while he has any new value to offer in exchange for them...
   Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected.  Too much of a particular commodity may be produced, of which there may be such a glut in the market as not to repay the capital expended on it; but this cannot be the case with respect to all commodities...

[The desire to consume] is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means but an increase in production.

John Stuart Mill, in ‘The Influence of Consumption on Production’ (1844):

Among the mistakes which were most pernicious in their direct consequences ... was the immense importance attached to consumption....
    In opposition to these palpable absurdities, it was triumphantly established by [the great British Classical] political economists that consumption never needs encouragement. All which is produced is already consumed, either for the purpose of reproduction or of enjoyment. The person who saves his income is no less a consumer than he who spends it: he consumes it in a different way; it supplies food and clothing to be consumed, tools and materials to be used, by productive labourers.
    Consumption, therefore, already takes place to the greatest extent which the amount of production admits of; but, of the two kinds of consumption, reproductive and unproductive, the former alone adds to the national wealth, the latter impairs it. What is consumed for mere enjoyment, is gone; what is consumed for reproduction leaves commodities of equal value, commonly with the addition of a profit...
    What a country wants to make it richer, is never consumption, but production. Where there is the latter, we may be sure that there is no want of the former...
    When we have thus seen accurately what really constitutes capital, it becomes obvious, that ... there is at all times a very large proportion lying idle. This perpetual non-employment of a large proportion of capital is the price we pay for the division of labour. The purchase is worth what it costs; but the price is considerable...
    It is obvious that periods of “brisk demand” are also the periods of greatest production... This, however, is no reason for desiring such times .... for, the calculations of producers and traders being of necessity imperfect, there are always some commodities which are more or less in excess, as there are always some which are in deficiency. If, therefore, the whole truth were known, there would always be some classes of producers contracting, not extending, their operations. If all are endeavouring to extend them, it is a certain proof that some general delusion is afloat.
    The commonest cause of such delusion is some general, or very extensive, rise of prices (whether caused by speculation or by the currency) which persuades all dealers that they are growing rich.... But when the delusion vanishes and the truth is disclosed, those whose commodities are relatively in excess must diminish their production or be ruined...

    There can never ... 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.

Benjamin Anderson’s Economics & the Public Welfare (1949):

    Purchasing power grows out of production.  The great consuming countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply of wheat gives rise to the demand for automobiles, silks, shoes, cotton goods, and the other things the producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon as either supply of its own or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.

Ludwig von Mises, in ‘Lord Keynes and Say’s Law’ (1950):

    It is important to realize that what is called Say's Law was in the first instance designed as a refutation of doctrines popularly held in the ages preceding the development of economics as a branch of human knowledge. It was not an integral part of the new science of economics as taught by the Classical economists. It was rather a preliminary—the exposure and removal of garbled and untenable ideas which dimmed people's minds and were a serious obstacle to a reasonable analysis of conditions...
    With regard to economic goods there can be only relative overproduction. While the consumers are asking for definite quantities of shirts and of shoes, business has produced, say, a larger quantity of shoes and a smaller quantity of shirts. This is not general overproduction of all commodities. To the overproduction of shoes corresponds an underproduction of shirts. Consequently the result can not be a general depression of all branches of business...While business is bad for the shoemakers, it is good for the shirtmakers. The attempts to explain the general depression of trade by referring to an allegedly general overproduction are therefore fallacious.
    Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities...

It was different with the "new economics" of Lord Keynes... Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous... The "Keynesian revolution" [was really] an apology for the prevailing policies of governments.

    This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectual, the "government economists”...

    The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say's Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.

From Henry Hazlitt’s Failure of the New Economics (1959) :

    The doctrine that supply creates its own demand ... is based on the assumption that a proper equilibrium exists among the different kinds of production, and among prices of different products and services...

No important economist ever made the absurd assumption (of which Keynes by implication accuses the whole classical school) that depressions and unemployment were impossible, and that everything produced would automatically find a ready market at a profitable price.  Say’s Law was, contrary to the assertions of the Keynesians, not the cornerstone on which the great edifice of the classical economists was based.  It was itself merely a refutation of an absurd belief prevailing prior to its formulation...

Ayn Rand, in ‘Egalitarianism and Inflation’ (1974)

    Trained in college to believe that to look beyond the immediate moment—to look for causes or to foresee consequences—is impossible, modern men have developed context-dropping as their normal method of cognition. Observing a bad, small-town shopkeeper, the kind who is doomed to fail, they believe—as he does—that lack of customers is his only problem; and that the question of the goods he sells, or where these goods come from, has nothing to do with it. The goods, they believe, are here and will always be here. Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.

But, in fact, consumers qua consumers are not part of anyone’s market; qua consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production.

Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s “supply”; in the role of consumers, they represent a market’s “demand.” The law of supply and demand has an implicit subclause: that it involves the same people in both capacities.

When this subclause is forgotten, ignored or evaded—you get the economic situation of today...

Wealth represents goods that have been produced, but not consumed.... All the physical goods and services [an entrepreneur] needs for his project must actually exist and be available for trade—just as his payment for them must actually exist in the form of physical goods... An exchange of paper money (or even of gold coins) would not do any good to any of the parties involved, if the physical things they needed were not there and could not be obtained in exchange for the money...

Consumption is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. The worker who produces so little that he consumes everything he earns, carries his own weight economically, but contributes nothing to future production. The worker who has a modest savings account, and the millionaire who invests a fortune (and all the men in between), are those who finance the future. The man who consumes without producing is a parasite, whether he is a welfare recipient or a rich playboy.

John Ridpath, in ‘Integration and Human Life: Say’s Law’: (1995):

The broadest, most fundamental integration in economics is  Say's Law...

The defence of Say’s Law requires long-chain reasoning... The disintegration of epistemology mirrors the collapse of that defence.

George Reisman, in Capitalism: A Treatise on Economics (1996):

    Say’s Law shows that under the freedom of competition the process of production itself creates purchasing power equal to what is produced—that, in [what has become] the typical formulation of Say’s Law, “supply creates its own demand”...
    Real demand can be thought of ... as the classical economists frequently described demand, namely as the will combined with the power of purchasing... The will to purchase can be taken for granted.  All that is required to enlarge [real] demand is the power of purchasing.  And all that is required to enlarge the power of purchasing ... is an increase in production.

Gene Callahan, In ‘Bastiat’s Plow’ (2001):

    Real demand in the economy is precisely the supply of real goods and services viewed from the other side of every exchange. If I produce corn, this corn is my demand for tractors, seed, TV sets, cars, and so on. (This is truth at the heart of Say's Law: it is not that supply creates demand, but that it is demand.)

Ed Younkins, in ‘Jean-Baptiste Say's Law of Markets: A Fundamental, Conceptual Integration’ (2006)

Say never did write the phrase “supply creates its own demand.” That phrase can be attributed to John Maynard Keynes who misunderstood and misinterpreted Say’s Law of Markets. Keynes thought that Say meant that the supply of a particular good is the demand for that good. What Say stated was that the supply of a good constitutes demand for everything that is not that good...

    Say’s Law, a landmark achievement of integration in economic science, is an essential foundation for a reality-based macroeconomic theory... Production is both necessary and primary for man’s existence. Say thus recognized the fact that it is production that opens the demand for products. He saw that money is not the cause of prosperity, but rather is its effect. This fact is eloquently stated in Ayn Rand’s novel Atlas Shrugged: “Money is made possible only by the men who produce … When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others”...

Meanwhile, the Keynesian Paul Sweezy, in The New Economics (1947) admits:

    [Yet] the Keynesian attacks, though they appear to be directed against a variety of specific theories, all fall to the ground if the validity of Say’s Law is assumed...