More Fake History of the Great Depression

I refer readers to this post by Robert P. Murphy:

Robert P. Murphy, “Does Anyone Deny That There Were Unprecedented Credit Stimulus Policies During Hoover Administration?,” 27 September.

Here is Murphy’s question to Keynesians:

“In my book on the Great Depression [Murphy 2009 – LK], I quote Lionel Robbins saying (I think in 1934) that central banks around the world had tried unprecedented measures to stimulate a recovery through cheap credit, and that this was a complete reversal of traditional central bank doctrine. ….

But I’m asking, do you [sc. Keynesians – LK] agree with Robbins, Hayek, and the random Joes writing letters to the NYT, who at the time were claiming that the central banks of the world were fighting the downturn differently from how things were handled in previous crises?

Note well, I’m speaking here in absolute terms, not in a Sumnerian view whereby the Fed–by definition–has been ‘tight’ the last few years because NGDP is below trend. Rather, I’m asking (for example) if it’s true that central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises?”

First the issue of Lionel Robbins.

Here is what Lionel Robbins said:

“Now in the pre-war [viz. pre-WWI – LK] business depression a very clear policy had been developed to deal with this situation. The maxim adopted by central banks for dealing with financial crises was to discount freely on good security, but to keep the rate of discount high.

Similarly in dealing with the wider dislocations of commodity prices and production no attempt was made to bring about artificially easy conditions. The results of this were simple. Firms whose position was fundamentally sound obtained what was necessary. Having confidence in the future, they were prepared to foot the bill. But the firms whose position was fundamentally unsound realised that the game was up and went into liquidation. After a short period of distress the stage was once more set for business recovery.

In the present depression we have changed all that. We eschew the sharp purge. We prefer the lingering disease. Everywhere, in the money market, in the commodity markets and in the broad field of company finance and public indebtedness, the efforts of Central Banks and Governments have been directed to propping up bad business positions.

We can see this most vividly in the sphere of Central Banking policy. The moment the boom broke in 1929, the Central Banks of the world, acting obviously in concert, set to work to create a condition of easy money, quite out of relation to the general conditions of the money market. This policy was backed up by vigorous purchases of securities in the open market in the United States of America. From October 1929 to December 1930 no less than $410 millions was pumped into the market in this way. The result was as might have been expected. The process of liquidation was arrested. New loans were floated.” (Robbins 1935: 72–73).

Robbins asserts that the pre-WWI central bank policy had been to keep discount rates high and only “discount freely on good security.”

He then asserts that in the 1929–1933 contraction “we have changed all that.” Yet Robbins is wrong, certainly with respect to the United States.

For the Federal Reserve banks had regularly lowered rates and engaged in substantial bond buying programs to fight the 1920s recessions before 1929. The Fed cut rates in 1921, 1924 and 1926–1927 to fight recessions, and cut rates and bought bonds in 1924 and 1926–1927.

Here is a list of 1920s recessions:

1920s Recessions
Recession | Duration Months
January 1920–July 1921 | 18
May 1923–July 1924 | 14
October 1926–November 1927 | 13.

http://www.nber.org/cycles.html

Let us look at the policy responses of the Fed to the 1920s recessions:

(1) 1920–1921 Recession

Here are the Fed cuts to the discount rate during the recession of 1920-1921:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1920
May | 6%
June | 7%
Dec. | 7%
1921
Jan. | 7%
Apr. | 7%
May. | 6.5%
Jun. | 6%
Jul. | 5.5%
Sep. | 5%
Nov. | 4.5%

1922
Jan. | 4.5%
Jun. | 4%.
http://fraser.stlouisfed.org/download-page/page.pdf?pid=38&id=1477

Although the rate was raised to 7% in June 1920, the rate was cut from 7% in 1921 to 5.5% by July, and a further cut to 5% in September as the recovery had begun, and then to 4.5% in November.

(2) 1923–1924 Recession

Let us start with bond purchases:

Bond Purchases
Date | Fed government security holdings
1923
Apr. | $229
July | $97
Oct. | $91

1924
Jan. | $118
Apr. | $274
Jul. | $467
Oct. | $585

1925
Jan. | $464.
(Wheelock 1992: 22).

By early 1924, the Federal reserve banks began a bond buying program. Federal Reserve holdings increased from $91 million in October 1923 to $585 million by October 1924. That was increase of $494 million over about a year. In other words, a six-fold increase in the course of a year.

By April 1924, the Fed bought $156 million in bonds in the period from January, and by July 1924 had bought about another $193 in bonds to fight the recession.

Next, the discount rate:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1923
Apr. | 4.5%
Jul. | 4.5%
Oct. | 4.5%
1924
Jan. | 4.5%
Apr. | 4.5%
Jul. | 3.5%
Oct. | 3.0%
1925
Jan. | 3.0%.
(Wheelock 1992: 22).

In 1924, the rate was brought down from 4.5% to 3% – a reasonable cut.

So here we have quite clear evidence that the Fed fought the 1923–1924 recession with both discount rate cuts and a bond buying program. The bond buying program, in particular, was large and comparable to that done by the Fed between late 1929 and 1930.

(3) 1926–1927 Recession

First, the bond purchases:

Bond Purchases
Date | Fed government security holdings
1926
Oct. | $306
1927
Jan. | $310
Apr. | $341
Jul. | $381
Oct. | $506
1928
Jan. | $512.
(Wheelock 1992: 22).

From October 1926 to October 1927, the Fed increased its government security holdings by $200 million.

Next, the discount rate:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1926
Oct. | 4.0%
1927
Jan. | 4.0%
Apr. | 4.0%
Jul. | 4.0%
Oct. | 3.5%
1928
Jan. | 3.5%.
(Wheelock 1992: 22).

Here the discount rate cut was not very large, but bond buying program was hardly insignificant.

Again, both rate cuts and asset purchasing were the norm.

When we come to 1929–1933, we can see that monetary policy actions were not “qualitatively different” (the expression Murphy uses here in this comment) from previous policy – they differed merely in quantity, not quality: lower rate cuts and some more bond purchases than previously.

Let us look at the bond buying program:

Bond Purchases
Date | Fed government security holdings
1929
Jul. | $147
Oct. | $154
1930
Jan. | $485
Apr. | $530
Jul. | $583
Oct. | $602
1931
Jan. | $647
Apr. | $600
Jul. | $674
Oct. | $733.
(Wheelock 1992: 22).

Far from being unprecedented, the similar program from 1923–1924 provides a good precedent.

From July 1929 to late 1931, Fed holdings of treasuries increased about fivefold, and this was in a period of over two years.

Yet in the year from 1923-1924, Federal Reserve holdings increased from $91 million in October 1923 to $585 million by October 1924. That was a six-fold increase over about a year, much more radical than the 1929-1931 program and in a shorter time too!

Next the discount rate:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1929
Jul. | 5.0%
Oct. | 6.0%
1930
Jan. | 4.5%
Apr. | 3.5%
Jul. | 2.5%
Oct. | 2.5%
1931
Jan. | 2.0%
Apr. | 2.0%
Jul. | 1.5%
Oct. | 3.5%. (Wheelock 1992: 22).

Here the discount rate was quite high in late 1929, but the cuts were certainly sharper than in previous recessions.

The rate came down to 1.5% by July 1931. This was a low rate, but we are dealing with quantity, not a qualitative difference, for the use of discount rate cuts had perfectly good precedents in 1924 and 1927.

We might also note that in 1931 the New York Fed raised the discount rate to 3.5% by October from 1.5%: right in the midst of the worst depression ever seen. Now, if anything, that was a “qualitatively different” policy measure from previous 1920s policy!

Conclusion
Murphy is dead wrong in thinking that the Fed policy in 1929–1933 “was a complete reversal of traditional central bank doctrine” – it was nothing but a development of already existing policy actions.

It is also utterly absurd to say that “central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises” – in the case of the Federal Reserve banks, they had done precisely these policy interventions from 1923–1924 and 1926–1927.

If it is any consolation to Murphy, I have now bought a copy of his book The Politically Incorrect Guide to the Great Depression and the New Deal...

BIBLIOGRAPHY

Murphy, Robert. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal. Regnery Publishing, Inc. Washington, DC.

Robbins, Lionel Charles Robbins. 1935. The Great Depression. Macmillan, London.

Wheelock, David C. 1992. “Monetary Policy in the Great Depression: What the Fed Did, and Why,” Federal Reserve Bank of St. Louis Review 2: 3–27.
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf

Another Austrian Fable

I refer to the last statement made by Robert P. Murphy at the end of this post:

Robert P. Murphy, “There’s Really Been a Lot of Real Shocks to the Economy,” 24 September, 2012.

Here is what he says:

“And–if I might be even bolder–maybe all of the crazy things FDR did under the New Deal explain the length of the Great Depression, as opposed to ‘tight money’ (even though the US went off gold in 1933, and we never had a depression as long under the gold standard as we did after we went off it).”

Notice how this statement depends on a loose definition of the word “depression” to include not just a period of real output collapse, but its aftermath. If we define “depression” as GDP contraction and its aftermath with high unemployment, then the 19th century had two serious “depressions”: the 1870s and 1890s, for example.

According to the data from Davis’s (2004) industrial index, the US had a recession from 1873 to 1875 lasting less than 3 years, but then an aftermath of continued, rising unemployment right down until 1878. The 1890s saw a double dip recession and rising unemployment until 1898. In one important respect, both these decades were worse than the Great Depression, because in the 1870s and 1890s unemployment continued to rise even after a recovery began. By contrast, at least unemployment started falling in 1933 (and subsequent years) when the recovery from the Great Depression occurred.

In economic literature, however, one will find a useful definition of “depression” as a contraction of 10% or more in the value of real output (or real GDP/GNP). Even the Economist informs us that there are “two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years.”

By this definition, America had a depression from 1929–1933. The depression – that is to say, the real output contraction – ended in 1933, and what followed was its aftermath: a period of high, but falling, unemployment and recovery, where there was real output growth.

And, by the same definition, it is patently absurd to blame Roosevelt for what happened from 1929 to March 1933 (when the actual depression occurred), since he was not even inaugurated until the later month and year.

It also equally absurd to invoke the gold standard. The US abandoned the gold standard in June 1933, and after this experienced a period of recovery. The US had the worst depression in its history while it was on a gold exchange standard.

What happened after Roosevelt was inaugurated and in the years when he turned to moderately expansionary fiscal policy? Both real GDP and real per capita GDP grew and expanded at quite high rates historically, as we can see here:

Year | GDP* | Growth Rate
1929 | $977,000
1930 | $892,800 | -8.61%
1931 | $834,900 | -6.48%
1932 | $725,800 | -13.06%
1933 | $716,400 | -1.29%
1934 | $794,400 | 10.88%
1935 | $865,000 | 8.88%
1936 | $977,900 | 13.05%
1937 | $1,028,000 | 5.12%
1938 | $992,600 | -3.44%
1939 | $1,072,800 | 8.07%
1940 | $1,166,900 | 8.77%
* Millions of 2005 dollars
http://www.measuringworth.com/datasets/usgdp/result.php

Next, real per capita GDP:

Real US Per Capita GDP 1870–2001
(in 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate
1929 | 6899 | 5.02%
1930 | 6213 | -9.94%
1931 | 5691 | -8.40%
1932 | 4908 | -13.75%
1933 | 4777 | -2.66%
1934 | 5114 | 7.05%
1935 | 5467 | 6.90%
1936 | 6204 | 13.48%
1937 | 6430 | 3.64%
1938 | 6126 | -4.72%
1939 | 6561 | 7.10%
1940 | 7010 | 6.84%
(Maddison 2006: 88).

By 1936, real GDP had surpassed its 1929 level, and in 1937 real per capita GDP was close to reaching its 1929 level as well – until Roosevelt listened to advocates of fiscal austerity and the economy plunged back into recession.

And unemployment under Roosevelt fell consistently down to 1938. It is now well known that the official statistics do not include the employment provided by emergency and relief work in US federal government programs (Darby 1976). The reason for this was nothing but an ideological bias on the part of Lebergott, who compiled the figures.

When employment provided by relief work is included in the employment figures, unemployment under Roosevelt came down from 25% to just under 10% by 1937. This is a much better record on unemployment than the official statistics reveal.

One can see proper graphs of the falls in unemployment here:

Mitchell, B., “What causes mass unemployment?,” January 11th, 2010.

“(Very) short reading list: unemployment in the 1930s,” October 10, 2008.

The unemployment rate soared again when Roosevelt cut government spending in 1937, but the adjusted figures show it rising from under 10% to about 12.5% in 1938, and not to around 19% in the old figures

The Austrians just flunk history, time and again.


BIBLIOGRAPHY

Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790–1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800. McGraw-Hill, New York.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Rothbard on the US Economy in the 1870s: A Critique

Here is Rothbard on the US in the 1870s:

“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged ‘monetary contraction’ never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.” (Rothbard 2002: 154–155).

If one defines “depression” as a fall in real output of 10% or more, then it is likely that the 1873 to 1879 period was not an era of depression.

But, apart from this truth, virtually everything else Rothbard writes is a travesty of history, on the basis of the most recent real GDP, real per capita GDP, industrial output and unemployment data.

Let us refute Rothbard’s dubious assertions one by one:

(1) Rothbard proclaims:

“Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income?”

Yet the idea that 1873 to 1879 was an era of “large expansion of industry” seems highly doubtful.

Joseph H. Davis (2004, 2006) has provided a new list of recessions in the 19th century, on the basis of his annual dataset of US industrial production from 1796 to 1915. Davis uses 43 annual components of the manufacturing and mining industries in the US, which represented about 90% of manufacturing output in the 1800s (Davis 2006: 105).

Let us look at the relevant data for the 1870s from Davis’s US industrial index:

US Industrial Index, 1870–1880
Index base is 1849–1850 = 100
Year | Index
1870 | 242.97
1871 | 255.29
1872 | 275.74
1873 | 302.17
1874 | 300.7
1875 | 284.2
1876 | 294.0
1877 | 297.8
1878 | 314.0
1879 | 356.4
1880 | 400.9
(Davis 2004: 1189).

From 1873, industrial output fell, mildly in 1874, but sharply in 1875. Davis (2004: 1203) finds that the cumulative industrial index loss (-10.83) was the second worst of the late 19th century, and only surpassed by the double dip recession of the 1890s.

A mild recovery ensued in 1876, but it is remarkable how feeble the growth was in 1877: indeed one could justifiably speak of recession from 1873–1875, then stagnation in 1877.

Modest recovery came from 1878, which sharply expanded in 1880. Davis finds that the US had a recession from 1873 to 1875 lasting less than 3 years, since unemployment was rising in these years and continued rising until 1878.

On the basis of this recent data, the notion that US industry experienced a “large expansion” from 1873 to 1879 is utterly absurd. These were years of recession, stagnation or very modest growth.

(2) Rothbard asserts that

“the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product ... .”

But “money national product” normally means “nominal national product” (or nominal GDP/GNP), and nominal GDP figures are really not that interesting: what we need is real GDP.

(3) Rothbard asserts the following:

“from 1869 to 1879 saw … an outstanding real national product growth of 6.8 percent per year … .”

But where does this data come from? It appears to come from Milton Friedman and Anna Schwartz’s A Monetary History of the United States (Princeton, 1963).

Friedman and Schwartz were presumably using the standard estimates for pre-1914 real US GNP based on the work of Simon S. Kuznets (1938, 1941, 1946, 1961), whose work was developed by Gallman (1966) and Kendrick (1961). The resulting data is normally called the Kuznets-Kendrick series or Gallman-Kuznets-Kendrick series. Presumably Friedman and Schwartz were using that, or some version of it.

But this data has long been challenged as questionable.

In contrast, let us look at the estimates of Balke and Gordon (1989: 84; the annual growth rates are my own calculation):

Year | GNP* | Growth Rate
1869 | 78.2 |
1870 | 84.2 | 7.67%
1871 | 88.1 | 4.63%
1872 | 91.7 | 4.08%
1873 | 96.3 | 5.01%
1874 | 95.7 | -0.62%
1875 | 100.7 | 5.22%
1876 | 101.9 | 1.19%
1877 | 105.2 | 3.23%
1878 | 109.6 | 4.18%
1879 | 123.1 | 12.31%
* Billions of 1982 dollars
Average real GNP growth rate, 1870–1879: 4.69%.
(Balke and Gordon 1989: 84).

A average annual rate of 4.69% does look high, but falls far short of the 6.8% figure used by Rothbard.

Moreover, how can we reconcile these estimates with the data from Davis’s industrial index which shows industrial contraction from 1873–1875 and a growth so low in 1877 as to be little better than stagnation? And Davis finds actual recession in the overall US economy from 1873 to 1875, which seems to contradict Balke and Gordon’s estimates.

This should alert us to how questionable all GNP estimates for this era are.

What we can say is that, even if one were to accept Balke and Gordon’s estimates, the real GNP growth rates for this era were far lower than Rothbard’s. And Balke and Gordon’s figures themselves can be challenged by using Davis’s industrial index.

(4) Rothbard’s next claim:

“the decade from 1869 to 1879 saw … a phenomenal rise of 4.5 percent per year in real product per capita.”

Again, the per capita GDP data appears to be calculated from the Gallman-Kuznets-Kendrick series, but that series is largely rejected today as being reliable.

What of the most recent real per capita GDP estimates? (for what they are worth, of course).

We can turn to Angus Maddison’s data on real per capita GDP calculated from Balke and Gordon (1989):

Real US Per Capita GDP 1870–1880
(in 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate
1870 | 2445 |
1871 | 2489 | 1.79%
1872 | 2524 | 1.40%
1873 | 2562 | 1.50%
1874 | 2601 | 1.50%
1875 | 2643 | 1.61%
1876 | 2686 | 1.62%
1877 | 2732 | 1.71%
1878 | 2780 | 1.75%
1879 | 2829 | 1.76%
1880 | 2880 | 1.80%
(Maddison 2006: 87–89).

Average Decadal Real Per Capita Growth Rates
Average Growth Rate 1871–1880: 1.64%
Average Growth Rate 1873–1879: 1.64%.

I cannot calculate data for 1869 and 1870, but I would be surprised if they would make much difference.

The average real per capita GDP growth rate from 1871–1880 was 1.64%.

As I have just shown in the previous post, this was the third worst rate for a peacetime decade of all US decades from 1870 to 2000. Only those decades affected by the Great Depression (1920s and 1930s) were worse.

The Keynesian 1960s were a far more prosperous era than the 1870s, and even the roaring ’20s (1920–1929) had a higher average real per capita GDP growth rate (at 2.04%).

Historically speaking, Rothbard’s assertion that the 1870s saw some “phenomenal rise … in real product per capita” is utterly false and absurd, on the basis of the most recent estimates.

(5) Finally, let us look at unemployment in the 1870s, a variable that Rothbard does not even consider.

Here is US unemployment in the 1870s from J. R. Vernon (1994):

Year | Unemployment Rate
1869 | 3.97%
1870 | 3.52%
1871 | 3.66%
1872 | 4.00%
1873 | 3.99%
1874 | 5.53%
1875 | 5.83%
1876 | 7.00%
1877 | 7.77%
1878 | 8.25%
1879 | 6.59%
1880 | 4.48%
1881 | 4.12%

Far from having low unemployment, the period from 1874 to 1878 was an era of persistent rises in unemployment, which soared to 8.25% by 1878, and the fall in 1879 was only modest at best.

What sort of period of significant prosperity or real output growth had persistently rising unemployment?

In short, the unemployment figures confirm that something went badly wrong with the US economy from 1873 to 1879.

All in all, the Austrian idea, derived from Rothbard, that the 1870s were an uninterrupted era of “prosperity …[,] economic growth, and the spread of the increased living standard” is grossly exaggerated at best, and an outright historical travesty at worst. And, while apologists for Rothbard might claim that he did the best with the data he had at the time, that is no excuse for modern Austrians repeating his flawed analysis today.

While 1873 to 1879 might not have been a full blown depression, they were most probably an era of economic malaise: industrial recession or stagnation and rising unemployment. Real per capita GDP growth was not very high by historical standards: indeed it was some of the lowest growth seen in 130 years of modern US history.


BIBLIOGRAPHY

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790-1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Friedman, M. and A. J. Schwartz, 1963. A Monetary History of the United States, 1867–1960. Princeton University Press, Princeton.

Gallman, R. E. 1966. “Gross National Product in the United States, 1834–1909,” in Output, Employment, and Productivity in the United States after 1800 (Studies in Income and Wealth, vol. 30). Columbia University Press, New York.

Glasner, D. and T. F. Cooley (eds). 1997. Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York.

Kendrick, J. W. 1961. Productivity Trends in the United States. Princeton University Press, Princeton.

Kuznets, S. S. 1938. Commodity Flow and Capital Formation National Bureau of Economic Research, New York.

Kuznets, S. S. 1941. National Income and Its Composition, 1919–1938 (2 vols). National Bureau of Economic Research, New York.

Kuznets, S. S. 1946. National Product since 1869. National Bureau of Economic Research, New York.

Kuznets, S. S. 1961. Capital in the American Economy: Its Formation and Financing. Princeton University Press, Princeton, N.J.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

US Real Per Capita GDP from 1870–2001

The following is Angus Maddison’s data on real per capita GDP from 1870 to 2001, with my calculations of annual and decadal growth rates. The estimates for the 19th century come from Balke and Gordon (1989), and later data from standard sources:

Real US Per Capita GDP 1870–2001
(in 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate
1870 | 2445 |
1871 | 2489 | 1.79%
1872 | 2524 | 1.40%
1873 | 2562 | 1.50%
1874 | 2601 | 1.50%
1875 | 2643 | 1.61%
1876 | 2686 | 1.62%
1877 | 2732 | 1.71%
1878 | 2780 | 1.75%
1879 | 2829 | 1.76%
1880 | 2880 | 1.80%
1881 | 2921 | 1.42%
1882 | 2963 | 1.43%
1883 | 3008 | 1.51%
1884 | 3056 | 1.59%
1885 | 3106 | 1.63%
1886 | 3158 | 1.67%
1887 | 3213 | 1.74%
1888 | 3270 | 1.77%
1889 | 3330 | 1.83%
1890 | 3392 | 1.86%
1891 | 3467 | 2.21%
1892 | 3728 | 7.52%
1893 | 3478 | -6.70%
1894 | 3314 | -4.71%
1895 | 3644 | 9.95%
1896 | 3504 | -3.84%
1897 | 3769 | 7.56%
1898 | 3780 | 0.29%
1899 | 4051 | 7.16%
1900 | 4091 | 0.98%
1901 | 4464 | 9.11%
1902 | 4421 | -0.96%
1903 | 4551 | 2.94%
1904 | 4410 | -3.09%
1905 | 4642 | 5.26%
1906 | 5079 | 9.41%
1907 | 5065 | -0.27%
1908 | 4561 | -9.95%
1909 | 5017 | 9.99%
1910 | 4964 | -1.05%
1911 | 5046 | 1.65%
1912 | 5201 | 3.07%
1913 | 5301 | 1.92%
1914 | 4799 | -9.46%
1915 | 4864 | 1.35%
1916 | 5459 | 12.2%
1917 | 5248 | -3.86%
1918 | 5659 | 7.83%
1919 | 5680 | 0.37%
1920 | 5552 | -2.25%
1921 | 5323 | -4.12%
1922 | 5540 | 4.07%
1923 | 6164 | 11.26%
1924 | 6233 | 1.11%
1925 | 6282 | 0.78%
1926 | 6602 | 5.09%
1927 | 6576 | -0.39%
1928 | 6569 | -0.10%
1929 | 6899 | 5.02%
1930 | 6213 | -9.94%
1931 | 5691 | -8.40%
1932 | 4908 | -13.75%
1933 | 4777 | -2.66%
1934 | 5114 | 7.05%
1935 | 5467 | 6.90%
1936 | 6204 | 13.48%
1937 | 6430 | 3.64%
1938 | 6126 | -4.72%
1939 | 6561 | 7.10%
1940 | 7010 | 6.84%
1941 | 8206 | 17.06%
1942 | 9741 | 18.70%
1943 | 11518 | 18.24%
1944 | 12333 | 7.07%
1945 | 11709 | -5.05%
1946 | 9197 | -21.45%
1947 | 8886 | -3.38%
1948 | 9065 | 2.01%
1949 | 8944 | -1.33%
1950 | 9561 | 6.89%
1951 | 10116 | 5.80%
1952 | 10316 | 1.97%
1953 | 10613 | 2.87%
1954 | 10359 | -2.39%
1955 | 10897 | 5.19%
1956 | 10914 | 0.15%
1957 | 10920 | 0.05%
1958 | 10631 | -2.64%
1959 | 11230 | 5.63%
1960 | 11328 | 0.87%
1961 | 11402 | 0.65%
1962 | 11905 | 4.41%
1963 | 12242 | 2.83%
1964 | 12773 | 4.33%
1965 | 13419 | 5.05%
1966 | 14134 | 5.32%
1967 | 14330 | 1.38%
1968 | 14863 | 3.71%
1969 | 15179 | 2.12%
1970 | 15030 | -0.98%
1971 | 15304 | 1.82%
1972 | 15944 | 4.18%
1973 | 16689 | 4.67%
1974 | 16491 | -1.18%
1975 | 16284 | -1.25%
1976 | 16975 | 4.24%
1977 | 17567 | 3.48%
1978 | 18373 | 4.58%
1979 | 18789 | 2.26%
1980 | 18577 | -1.12%
1981 | 18856 | 1.50%
1982 | 18325 | -2.81%
1983 | 18920 | 3.24%
1984 | 20123 | 6.35%
1985 | 20717 | 2.95%
1986 | 21236 | 2.50%
1987 | 21788 | 2.59%
1988 | 22499 | 3.26%
1989 | 23059 | 2.48%
1990 | 23201 | 0.61%
1991 | 22785 | -1.79%
1992 | 23169 | 1.68%
1993 | 23477 | 1.32%
1994 | 24130 | 2.78%
1995 | 24484 | 1.46%
1996 | 25066 | 2.37%
1997 | 25819 | 3.00%
1998 | 26619 | 3.09%
1999 | 27395 | 2.91%
2000 | 28129 | 2.67%
2001 | 27948 | -0.64%
(Maddison 2006: 87–89).

Average Decadal Real Per Capita Growth Rates
Average Growth Rate 1871–1880: 1.64%
Average Growth Rate 1881–1890: 1.65%
Average Growth Rate 1891–1900: 2.04%
Average Growth Rate 1901–1910: 2.13%
Average Growth Rate 1911–1920: 1.28%
Average Growth Rate 1921–1930: 1.27%
Average Growth Rate 1931–1940: 1.54%
Average Growth Rate 1941–1950: 3.87%
Average Growth Rate 1951–1960: 1.75%
Average Growth Rate 1961–1970: 2.88%
Average Growth Rate 1971–1980: 2.16%
Average Growth Rate 1981–1990: 2.26%
Average Growth Rate 1991–2000: 1.94%

Special Averages
Average Growth Rate 1871–1900: 1.78%
Average Growth Rate 1871–1914: 1.63%
Average Growth Rate 1873–1879: 1.64%
Average Growth Rate 1879 to 1896: 1.36%
Roaring 20s, Average Growth Rate 1920–1929: 2.04%
Recovery from Depression 1934–1940: 5.75%
Average Growth Rate 1948–1973: 2.30%.

We can now rank the various decadal averages from the lowest to highest:

(1) Average Growth Rate 1921–1930: 1.27%
(2) Average Growth Rate 1911–1920: 1.28%
(3) Average Growth Rate 1931–1940: 1.54%
(4) Average Growth Rate 1871–1880: 1.64%
(5) Average Growth Rate 1881–1890: 1.65%
(6) Average Growth Rate 1951–1960: 1.75%
(7) Average Growth Rate 1991–2000: 1.94%
(8) Average Growth Rate 1891–1900: 2.04%
(9) Average Growth Rate 1901–1910: 2.13%
(10) Average Growth Rate 1971–1980: 2.16%
(11) Average Growth Rate 1981–1990: 2.26%
(12) Average Growth Rate 1961–1970: 2.88%
(13) Average Growth Rate 1941–1950: 3.87%.

If we remove those decades where the average decadal real per capita GDP growth rates were distorted by wars (1910s and 1940s), we obtain this list:

(1) Average Growth Rate 1921–1930: 1.27%
(2) Average Growth Rate 1931–1940: 1.54%
(3) Average Growth Rate 1871–1880: 1.64%
(4) Average Growth Rate 1881–1890: 1.65%
(5) Average Growth Rate 1951–1960: 1.75%
(6) Average Growth Rate 1991–2000: 1.94%
(7) Average Growth Rate 1891–1900: 2.04%
(8) Average Growth Rate 1901–1910: 2.13%
(9) Average Growth Rate 1971–1980: 2.16%
(10) Average Growth Rate 1981–1990: 2.26%
(11) Average Growth Rate 1961–1970: 2.88%.

Some observations:

(1) the 1870s stands out as the third worst peacetime decade of all time. Only those decades affected by the Great Depression (1920s and 1930s) were worse.

(2) The 1960s, the era when Keynesian macroeconomic management of the US economy was at its height, stands out as the best decade.

(3) The 1980s was the second best decade. But then Reagan’s economic policy was merely Keynesian after 1982, so this is not that big a surprise.

(4) Even the 1970s – the era of the oil shocks and stagflation crisis – had a respectable real per capita GDP growth rate of 2.16%, and was the third highest rate.

(5) If one defines the roaring ’20s as the 1920–1929, its average growth rate was 2.04%

(6) The average real per capita GDP growth rate from 1871–1914 during the gold standard era was 1.63%. The era of classic US Keynesianism (1948–1973) had a rate of 2.30%. The latter period emerges as the clear winner.

BIBLIOGRAPHY
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Michael Hudson and L. Randall Wray on Historical Evolution of Money and Debt

Two very interesting talks here by Michael Hudson and L. Randall Wray (both from the University of Missouri-Kansas City) on the nature of modern money and the history of money.

These talks were held at an interdisciplinary seminar series at Columbia Law School called “Modern Money and Public Purpose 1: The Historical Evolution of Money and Debt” (September 11, 2012). The moderator is William V. Harris (Professor of history and director, Center for the Ancient Mediterranean, Columbia University), who has a fine publication record on ancient Greek and Roman monetary history (see Harris 2008, 2011).





BIBLIOGRAPHY

Harris, W. V. 2008. “The Nature of Roman Money,” in W. V. Harris (ed.), The Monetary Systems of the Greeks and Romans. Oxford University Press, Oxford. 174–207.

Harris, W. V. 2011. Rome’s Imperial Economy. Twelve Essays. Oxford University Press, Oxford.

Steve Keen at the American Monetary Institute Conference

This is Steve Keen’s presentation to the American Monetary Institute Conference (Chicago, September 21 2012). Keen talks about endogenous money, loanable funds, Schumpeter, and Minsky.

The sound is not the best!

James K. Galbraith on Inequality and Instability

James K. Galbraith gives an interesting talk here on his new book Inequality and Instability: A Study of the World Economy Just Before the Great Crisis, given in August 2012.

Fractional Reserve Banking Debate in the Blogosphere

The blogosphere is ablaze with some debate on fractional reserve banking, sparked off by remarks from Ron Paul, whose comments were then subjected to criticism by Paul Krugman. Interestingly, George Selgin, commenting as a “former Austrian” on Krugman’s blog, argues that “the anti-fractional reserve crowd among self-styled Austrians, taking its lead from Murray Rothbard, is but a small contingent with which the rest vehemently disagree.”

Jonathan Finegold also declares that anti-fractional reserve banking Austrians are “increasingly in the minority.” He even groups Roger Garrison amongst the pro-fractional reserve group. I have yet to see other Austrian responses.

All I can say is: this is good news. The anti-fractional reserve banking Austrians are easily the worst and most ignorant subgroup of the whole Austrian school. They take their views from the work of Murray Rothbard, Hans-Hermann Hoppe, and Jesús Huerta de Soto.

But the next question the pro-fractional reserve banking Austrians must answer is this: if fractional reserve banking is acceptable, then why doesn’t its creation of credit money/fiduciary media not artificially lower interest rates and cause endless Austrian trade cycles? If they admit that Austrian trade cycles would result, then they have admitted (on the logic of their own theories) that capitalism is inherently unstable and leads to endogenous business cycles.

If they choose to deny that Austrian trade cycles would result, then all I can say is that they have some explaining to do.

This also seems to be the perfect time to update a set of links to my own posts on fractional reserve banking below. Without exaggeration, I think I can say that the most comprehensive debunking of the anti-fractional reserve banking Austrians can be found on my blog in the following posts:

“Bibliography on the Irregular Deposit (depositum irregulare) in Roman Law,” September 6, 2012.

“Huerta de Soto on Banking in Ancient Rome: A Critique,” September 2, 2012.

“Huerta de Soto on Justinian’s Digest 16.3.25.1,” September 1, 2012.

“Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique, August 31,” 2012.

“A Simple Question for Opponents of Fractional Reserve Banking,” August 17, 2012

“More on Goldsmiths’ Notes and the Act of 1704,” May 13, 2012.

“Funny Money: A Loaded Phrase,” May 12, 2012.

“Hayek’s Original View of Fractional Reserve Banking,” February 29, 2012.

“Fractional Reserve Banking, Option Clauses, and Government,” January 31, 2012.

“Are the Public Ignorant of the Nature of Fractional Reserve Banking?,” December 17, 2011.

“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.

“Callable Option Loans and Fractional Reserve Accounts,” December 16, 2011.

“Future Goods and Fractional Reserve Banking,” December 15, 2011.

“Rothbard on the Bill of Exchange,” December 11, 2011.

“Hoppe on Fractional Reserve Banking: A Critique,” December 11, 2011.

“The Monetary Production Economy and Fiduciary Media,” December 11, 2011

“Fractional Reserve Banking: An Evil?,” June 26, 2010.

“The Romans and Fractional Reserve Banking,” February 23, 2011.

“Gene Callahan on Fractional Reserve Banking,” February 18, 2011.

“Lawrence H. White refutes Huerta de Soto on Fractional Reserve Banking,” February 22, 2011.

“Selgin on Fractional Reserve Banking,” June 1, 2011.

“Schumpeter on Fractional Reserve Banking,” June 12, 2011.

“If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?,” September 29, 2011.

“The Mutuum Contract in Anglo-American Law,” September 30, 2011.

“Rothbard Mangles the Legal History of Fractional Reserve Banking,” October 1, 2011.

“More Historical Evidence on the Mutuum Contract,” October 1, 2011.

“What British Law Says about the Mutuum Contract,” October 2, 2011.

“If Fractional Reserve Banking is Voluntary, Where is the Fraud?,” October 3, 2011.

Steve Keen on Forecasting the Next Financial Crisis

Another Steve Keen interview here, but a short one from his recent time in New Zealand, on his prediction of the financial crisis.

Bibliography on Say’s Law

Below is a bibliography on the origin, history and nature of Say’s law.

Jean-Baptiste Say (1767–1832) produced different versions of the law, in these works:

(1) the first edition of Say’s Traité d’économie politique (1803; or the Treatise on Political Economy in English) has only a brief and not properly formulated version of the law;

(2) the second edition of Traité d’économie politique/Treatise on Political Economy (published in 1814) has the first proper formulation of Say’s law (Baumol 1977: 147).

(3) a summary of the law appears in Say’s Catechism of Political Economy (1816: 103–105).

(4) in the fourth edition of Traité d’économie politique/Treatise on Political Economy (1819) Say revised his remarks on the law in important ways (Heertje 2004: 41).

Moreover, Thweatt (1979: 92–93) and Baumol (2003: 46) conclude that Adam Smith was in fact the real father of what is recognisably Say’s law in Classical economics, with the major work in developing the idea conducted by James Mill (1808), not necessarily Jean-Baptiste Say.

The major work on the law is Steven Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle (Edward Elgar, Cheltenham, 2003).



BIBLIOGRAPHY

Anderson, William L. 2009. “Say’s Law and the Austrian Theory of the Business Cycle,” Quarterly Journal of Austrian Economics 12.2: 47–59.

Aspromourgos, Tony. 2009. The Science of Wealth: Adam Smith and the Framing of Political Economy. Routledge, London.

Balassa, Bela A. 1959. “John Stuart Mill and the Law of Markets,” Quarterly Journal of Economics 73.2: 263–274.

Baumol, William J. 1977. “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant,” Economica n.s. 44.174: 145–161.

Baumol, William J. 1999. “Retrospectives: Say’s Law,” Journal of Economic Perspectives 13.1: 195–204.

Baumol, William J. 2003. “Retrospectives: Say’s Law,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Edward Elgar Pub, Cheltenham and Northampton, Mass. 39–49.

Becker, Gary and William J. Baumol. 1952. “The Classical Economic Theory: The Outcome of the Discussion,” Economica 19: 355–376.

Blaug, M. 1996. Economic Theory in Retrospect (5th edn). Cambridge University Press, Cambridge.

Blaug, Mark. 1997. “Say’s Law of Markets: What did it mean and Why should We Care?,” Eastern Economic Journal 23.2: 231–235.

Clower, Robert W. and Leijonhufvud, Axel. 1973. “Say’s Principle, What It Means and Doesn’t Mean,” Intermountain Economic Review 4: 1–16.

Clower, Robert W. and Leijonhufvud, Axel. 1984. “Say’s Principle, What it Means and Doesn’t Mean,” in Donald A. Walker (ed.), Money and Markets: Essays by Robert W. Clower. Cambridge University Press, Cambridge. 145–165.

Cottrell, Allin. 1998. “Keynes, Ricardo, Malthus and Say’s Law,” in James C.W. Ahiakpor (ed.), Keynes and the Classics Reconsidered. Kluwer Academic, Boston, Mass. and London. 63–75.

“Debunking Economics, Part VIII: Macroeconomics, or Applied Microeconomics?,” Unlearning Economics, 26 August, 2012.
http://unlearningeconomics.wordpress.com/2012/08/26/debunking-economics-part-viii-macroeconomics-or-applied-microeconomics/

Gootzeit, M. 2003. “Savings, Hoarding and Say’s Law,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle. Edward Elgar, Cheltenham and Northampton, Mass. 168–186.

Gordon, B. J. 1965. “Say’s Law, Effective Demand, and the Contemporary British Periodicals, 1820–1850,” Economica 32: 438–446.

Groenewegen, P. D. 1977. The Economics of A. R. J. Turgot. Martinus Nijhoff, The Hague.

Heertje, A. 2004. “On Say’s Law,” in Tony Aspromourgos and John Lodewijks (eds.), History and Political Economy. Essays in Honour of P.D. Groenewegen. Routledge, London. 44–56.

Hollander, S. 2005. “Review of Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle,” History of Political Economy 37.2: 382–385.

Horwitz, Steven. 2003. “Say’s Law of Markets: An Austrian Appreciation,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle. Elgar, Cheltenham, UK and Northampton, Mass. 82–98.

Hutt, William Harold. 1974. A Rehabilitation of Say’s Law. Ohio U.P., Athens, Ohio.

Johnson, Ivan C. 2001. “A Reappraisal of the Say’s Law Controversy,” Quarterly Journal of Austrian Economics 4.4: 25–53.

Jonsson, Petur O. 1995. “On the Economics of Say and Keynes’ Interpretation of Says’s Law,” Eastern Economic Journal 21.2: 147–155.

Jonsson, Petur O. 1997. “On Gluts, Effective Demand, and the True Meaning of Say’s Law,” Eastern Economic Journal 23.2: 203–218.

Jonsson, Petur O. 1998. “Keynes, Ricardo, Malthus and Say’s Law: Comment,” in James C.W. Ahiakpor (ed.), Keynes and the Classics Reconsidered. Kluwer Academic, Boston, Mass. and London.75–84.

Kates, Steven. 1994. “The Malthusian Origins of the General Theory or How Keynes came to write a Book about Say’s Law and Effective Demand,” History of Economics Review 21: 10–20.

Kates, Steven. 1995. “Crucial Influences on Keynes’s Understanding of Say’s Law,” History of Economics Review 23: 74–82.

Kates, Steven. 1996. “Keynes, Say’s Law and the Theory of the Business Cycle,” History of Economics Review 25: 119–126.

Kates, Steven. 1997. “A Discussion of Say’s Law: The Outcome of the Symposium,”Eastern Economic Journal 23.2: 237–239.

Kates, Steven. 1997. “On the True Meaning of Say’s Law,” Eastern Economic Journal 23.2: 191–202.

Kates, Steven. 2002. “Economic Management and the Keynesian Revolution: The Policy Consequences of the Disappearance of Say’s Law,” International Journal of Applied Economics and Econometrics 10.3: 463–479.

Kates, Steven (ed.). 2003. Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Edward Elgar Pub, Cheltenham; Northampton, Mass.

Kates, Steven. 2005. “‘Supply Creates Its Own Demand’: A Discussion of the Origins of the Phrase and of its Adequacy as an Interpretation of Say’s Law of Markets,” History of Economics Review 41: 49–60.

Kates, Steven. 2007. “Mill, McCracken and the Modern Interpretation of Say’s Law,” History of Economics Review 46: 32–38.

Kates, Steven. 2008. “A Letter from Keynes to Harlan McCracken dated 31st August 1933: Why the Standard Story on the Origins of the General Theory needs to be Rewritten,” History of Economics Review 47: 39–53.

Kates, Steven. 2010. “Why Your Grandfather’s Economics was better than yours: On the Catastrophic Disappearance of Say’s Law,” Quarterly Journal of Austrian Economics 13.4: 3–28.

Keen, S. 2003. “Nudge Nudge, Wink Wink, Say No More,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle. Elgar, Cheltenham, UK and Northampton, Mass. 199–209.
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenNudgeNudgeWinkWinkSayNoMore.pdf

Kent, Richard J. 2005. “Keynes and Say’s Law,” History of Economics Review 41: 61–76.

Lange, O. 1942. “Say’s Law: A Restatement and Criticism,” in O. Lange, F. McIntyre and T. O. Matema (eds), Studies in Mathematical Economics and Econometrics: In Memory of Henry Schultz. University of Chicago Press, Chicago. 49–68.

Lange, Oskar. 1994. “Say’s Law: A Restatement and Criticism,” in Tadeusz Kowalik (ed.), Economic Theory and Market Socialism: Selected Essays of Oskar Lange. Elgar, Aldershot, U.K. 213–232.

Mill, James. 1808. Commerce Defended. An Answer to the Arguments by which Mr. Spence, Mr. Cobbett, and Others, have Attempted to Prove that Commerce is not a Source of National Wealth. C. and R. Baldwin, London.

Mises, L. 2005 [1950], “Lord Keynes and Say’s Law,” Mises Daily, April 25, 2005, http://mises.org/daily/1803

Say, Jean Baptiste. 1803. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (1st edn.). De Chapelet, Paris.

Say, Jean Baptiste. 1814. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (2nd edn.). Antoine-Augustin Renouard, Paris.

Say, Jean Baptiste. 1817. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (3rd edn.). Chez Deterville, Paris.

Say, Jean Baptiste. 1819. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (4th edn.). Deterville, Paris.

Say, Jean Baptiste. 1821. A Treatise on Political Economy, or, The Production, Distribution, and Consumption of Wealth (trans. from 4th edn by C.R. Prinsep with notes by the translator, with a translation of the introduction and additional notes by C. C. Biddle). Wells and Lilly, Boston.

Say, J. B. 1816. Catechism of Political Economy, or, Familiar Conversations on the Manner in which Wealth is Produced, Distributed, and Consumed in Society (trans. J. Richter). Sherwood, Neely, and Jones, London.

Say, J. B. 1821. Letters to Mr. Malthus: On Several Subjects of Political Economy, and on the Cause of the General Stagnation of Commerce. To Which is added A Catechism of Political Economy, Sherwood, Neely, and Jones, London.

Say, Jean Baptiste. 1826. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (5th edn.). Rapilly, Paris.

Shoul, B. 1957. “Karl Marx and Say’s Law,” Quarterly Journal of Economics 71.4: 611–629.

Skinner, A. S. 1967. “Say’s Law: Origins and Content,” Economica 34: 153–166.

Silva, Antonio Carlos Macedo e. 2004. “From Say’s Law to Keynes, from Keynes to Walras’s Law: Some Ironies in the History of Economic Thought,” in L. Randall Wray and Mathew Forstater (eds.). Contemporary Post Keynesian Analysis. Edward Elgar, Cheltenham, UK and Northampton, Mass. 310–332.

Skinner, A. S. 1969. “Of Malthus, Lauderdale and Say’s Law, Lauderdale and Say’s Law,” Scottish Journal of Political Economy 16.2: 177–195.

Smith, A. 1811. An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; vol. 1), Oliver D. Cooke, Hartford.

Sowell, T. 1972. Say’s Law: An Historical Analysis. Princeton University Press, Princeton, N.J.

Sowell, T. 1974. Classical Economics Reconsidered. Princeton University Press, Princeton, N.J. and London.

Sowell, T. 1994. Classical Economics Reconsidered (2nd ed.). Princeton University Press, Princeton, N.J.

Spengler, Joseph J. 1945. “The Physiocrats and Say’s Law of Markets,” Journal of Political Economy 53: 193–211, 317-347.

Thweatt, W. O. 1979. “Early Formulators of Say’s Law,” Quarterly Review of Economics and Business 19: 79–96.

Thweatt, W. O. 1980. “Baumol and James Mill on ‘Say’s’ Law of Markets,” Economica n.s. 47.188: 467–469.

Steve Keen Interview with Bernard Hickey

A quick interview here done during Steve Keen’s visit to New Zealand.

The Origin of Say’s Law in Adam Smith and James Mill

Consider these passages from Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; 1811):

“In all countries where there is tolerable security, every man of common understanding will endeavour to employ whatever stock he can command, in procuring either present enjoyment or future profit. If it is employed in procuring present enjoyment, it is a stock reserved for immediate consumption. If it is employed in procuring future profit, it must procure this profit, either by staying with him, or by going from him. In the one case it is a fixed, in the other it is a circulating capital. A man must be perfectly crazy who, where there is tolerable security, does not employ all the stock which he commands, whether it be his own, or borrowed of other people, in some one or other of those three ways.” (Smith 1811: 198).

“What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people. That portion of his revenue which a rich man annually spends is, in most cases consumed by idle guests, and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as for the sake of the profit it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people, by labourers, manufacturers, and artificers, who re-produce with a profit the value of their annual consumption. His revenue, we shall suppose, is paid him in money. Had he spent the whole, the food, clothing, and lodging, which the whole could have purchased, would have been distributed among the former set of people. By saving a part of it, as that part is for the sake of the profit immediately employed as a capital either by himself or by some other person, the food, clothing, and lodging, which may be purchased with it, are necessarily reserved for the latter. The consumption is the same, but the consumers are different” (Smith 1811: 240).

Here we have the clear idea that money saved is spent again on capital goods investment and consumed by a different set of people: those to whom the invested money has now become income.

According to Smith, savings are “immediately employed as a capital” and thus consumed. That is to say, money not spent on consumption will be invested in capital goods projects and done so relatively quickly.

This we have here a version of Say’s law, at least as it was formulated by some of the later Classical economists.

Let us look at how Say’s law was formulated by the Classical economists, as defined by Thomas Sowell (1994: 39–41):

“(1) The total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output [an idea in James Mill].

(2) There is no loss of purchasing power anywhere in the economy. People save only to the extent of their desire to invest and do not hold money beyond their transactions need during the current period [James Mill and Adam Smith].

(3) Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector [John Stuart Mill].

(4) In real terms, supply equals demand ex ante [= “before the event”], since each individual produces only because of, and to the extent of, his demand for other goods. (Sometimes this doctrine was supported by demonstrating that supply equals demand ex post.) [James Mill.]

(5) A higher rate of savings will cause a higher rate of subsequent growth in aggregate output [James Mill and Adam Smith].

(6) Disequilibrium in the economy can exist only because the internal proportions of output differ from consumer’s preferred mix—not because output is excessive in the aggregate” [Say, Ricardo, Torrens, James Mill] (Sowell 1994: 39–41).

Proposition 6 – that individual markets can be in disequilibrium, but the overall demand, including demand for commodities not fulfilled, is balanced with the value of aggregate supply – does not explicitly appear in Adam Smith, as far as I am aware.

Yet both propositions (2) and (3) appear to be quite clearly in Adam Smith already.

James Mill in his treatise Commerce Defended (1807) developed the ideas in Adam Smith and those he found in the first edition of Say’s Traité d’économie politique (1803). We can quote from Mill’s Commerce Defended:

“No proposition in political [economy] seems to be more certain than this which I am going to announce, how paradoxical soever it may at first sight appear; 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. Let us but consider what is meant by a market.

Is any thing else understood by it than that something is ready to be exchanged for the commodity which we would dispose of? 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? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation. 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; so that a nation can never be naturally overstocked either with capital or with commodities; as the very operation of capital makes a vent for its produce.

Thus to recur to the example which we have already analyzed; fresh goods to the amount of £5,500 were prepared for the market in consequence of the application of the £5000 saved by the landholder. But what then? have we not seen that the annual produce of the country was increased; that is, the market of the country widened, to the extent of £5,500, by the very same operations? Mr. Spence in one place advises his reader to consider the circumstances of a country in which all exchange should be in the way of barter, as the idea of money frequently tends to perplex. If he will follow his own advice on this occasion, he will easily perceive how necessarily production creates a market for produce. When money is laid out of the question, is it not in reality the different commodities of the country, that is to say, the different articles of the annual produce, which are annually exchanged against one another? Whether these commodities are in great quantities or in small, that is to say, whether the country is rich or poor, will not one half of them always balance the other? and is it not the barter of one half of them with the other which actually constitutes the annual purchases and sales of the country? Is it not the one half of the goods of a country which universally forms the market for the other half, and vice versa? And is this a market that can ever be overstocked? Or can it produce the least disorder in this market whether the goods are in great or in small quantity? All that here can ever be requisite is that the goods should be adapted to one another; that is to say, that every man who has goods to dispose of should always find all those different sorts of goods with which he wishes to supply himself in return.

What is the difference when the goods are in great quantity and when they are in small? Only this, that in the one case the people are liberally supplied with goods, in the other that they are scantily; in the one case that the country is rich, in the other that it is poor: but in the one case, as well as in the other, the whole of the goods will be exchanged, the one half against the other; and the market will always be equal to the supply. Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate. Every particle of the annual produce of a country falls as revenue to somebody. But every individual in the nation uniformly makes purchases, or does what is equivalent to making purchases, with every farthing’s worth which accrues to him. All that part which is destined for mere consumption is evidently employed in purchases. That too which is employed as capital is not less so. It is either paid as wages to labourers, who immediately buy with it food and other necessaries, or it is employed in the purchase of raw materials. The whole annual produce of the country, therefore, is employed in making purchases. But as it is the whole annual produce too which is offered to sale, it is visible that the one part of it is employed in purchasing the other; that how great soever that annual produce may be it always creates a market to itself; and that how great soever that portion of the annual produce which is destined to administer to reproduction, that is, how great soever the portion employed as capital, its effects always are to render the country richer, and its inhabitants more opulent, but never to confuse or to overload the national market. I own that nothing appears to me more completely demonstrative than this reasoning.

It may be necessary, however, to remark, that a nation may easily have more than enough of any one commodity, though she can never have more than enough of commodities in general. The quantity of any one commodity may easily be carried beyond its due proportion; but by that very circumstance is implied that some other commodity is not provided in sufficient proportion. What indeed is meant by a commodity's exceeding the market? Is it not that there is a portion of it for which there is nothing that can be had in exchange. But of those other things then the proportion is too small. A part of the means of production which had been applied to the preparation of this superabundant commodity, should have been applied to the preparation of those other commodities till the balance between them had been established. Whenever this balance is properly preserved, there can be no superfluity of commodities, none for which a market will not be ready. This balance too the natural order of things has so powerful a tendency to produce, that it will always be very exactly preserved where the injudicious tampering of government does not prevent, or those disorders in the intercourse of the world, produced by the wars into which the inoffending part of mankind are plunged, by the folly much more frequently than by the wisdom of their rulers.

This important, and as it appears demonstrative doctrine, affords a view of commerce which ought to be very consolatory to Mr. Spence. It shews that a nation always has within itself a market equal to all the commodities of which it can possibly have to dispose; that its power of purchasing is always equivalent to its power of producing, or at least to its actual produce; and that as it never can be greater, so it never can be less. Foreign commerce, therefore, is in all cases a matter of expediency rather than of necessity. The intention of it is not to furnish a vent for the produce of the industry of the country, because that industry always furnishes a vent for itself. The intention of it is to exchange a part of our own commodities for a part of the commodities which we prefer to our own of some other nation; to exchange a set of commodities which it peculiarly suits our country to produce for a set of commodities which it peculiarly suits that other country to produce. Its use and advantage is to promote a better distribution, division and application of the labour of the country than would otherwise take place, and by consequence to render it more productive. It affords us a better, a more convenient and more opulent supply of commodities than could have been obtained by the application of our labour within ourselves, exactly in the same manner as by the free interchange of commodities from province to province within the same country, its labour is better divided and rendered more productive.” (Mill 1808 [1807]).

Both Thweatt (1979: 92–93) and Baumol (2003: 46) conclude that Adam Smith was in fact the father of what is recognisably Say’s law in Classical economics, with the major work in developing the idea conducted by James Mill, not necessarily Jean-Baptiste Say.


BIBLIOGRAPHY

Baumol, W. J. 1977. “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant,” Economica n.s. 44.174: 145–161.

Baumol, W. J. 1999. “Retrospectives: Say’s Law,” Journal of Economic Perspectives 13.1: 195–204.

Baumol, W. J. 2003. “Retrospectives: Say’s Law,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Edward Elgar Pub, Cheltenham; Northampton, Mass. 39–49.

Mill, James. 1808 [1807]. Commerce Defended. An Answer to the Arguments by which Mr. Spence, Mr. Cobbett, and Others, have Attempted to Prove that Commerce is not a Source of National Wealth. C. and R. Baldwin, London.

Smith, A. 1811. An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; vol. 1), Oliver D. Cooke, Hartford.

Sowell, T. 1994. Classical Economics Reconsidered, Princeton University Press, Princeton, N.J.

Thweatt, W. O. 1979. “Early Formulators of Say’s Law,” Quarterly Review of Economics and Business 19: 79–96.

Jean-Baptiste Say and “Say’s Law”

I take my cue from this interesting post by Gene Callahan (“Did Keynes Mischaracterize Say’s Law?,” September 12, 2012).

So how did Jean-Baptiste Say (1767–1832) actually define his “law of markets” (or “loi des débouchés,” in French)?

Note that I am not talking about how later Classical economists defined or formulated Say’s Law, and it is possible to argue that they did so better than Say himself ever did. Thomas Sowell (1994: 39–41) argues that, in Classical economics, Say’s law can be expressed by these propositions:

“(1) The total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output [an idea in James Mill].

(2) There is no loss of purchasing power anywhere in the economy. People save only to the extent of their desire to invest and do not hold money beyond their transactions need during the current period [James Mill and Adam Smith].

(3) Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector [John Stuart Mill].

(4) In real terms, supply equals demand ex ante [= “before the event”], since each individual produces only because of, and to the extent of, his demand for other goods. (Sometimes this doctrine was supported by demonstrating that supply equals demand ex post.) [James Mill.]

(5) A higher rate of savings will cause a higher rate of subsequent growth in aggregate output [James Mill and Adam Smith].

(6) Disequilibrium in the economy can exist only because the internal proportions of output differ from consumer’s preferred mix—not because output is excessive in the aggregate” [Say, Ricardo, Torrens, James Mill] (Sowell 1994: 39–41).

So this is Say’s law, according to the Classical economists.
But one will search in vain for anything as explicit and clear as these ideas in the writings of Say himself.

The question of how Say defined what was later called Say’s Law is complex, because Say produced different versions of the “law of markets” in different works, and even in different editions of the same work.

One can find the following versions of the law:

(1) in the first edition of Say’s Traité d’économie politique (1803; or the Treatise on Political Economy in English), where the “law of markets” is not completely or properly formulated;

(2) in the second edition of Traité d’économie politique/Treatise on Political Economy (published in 1814) where we have a revised version of Say’s law in its recognisable form (Baumol 1977: 147). It is unclear to me whether Say revised this even further in the 3rd edition (1817), 4th (1819), and 5th edition (1826) of the Treatise. The 6th edition, with Say’s final corrections, was edited by his son Horace Émile Say in 1846.

(3) a summary in Say’s Catechism of Political Economy (1816: 103–105).

So when anyone talks about how Jean-Baptiste Say defined Say’s law, one must ask: in what work and when?

For English speaking people, I suspect the most accessible version is the English translation of the 4th edition by C. R. Prinsep and C. C. Biddle called A Treatise on Political Economy, or, The Production, Distribution, and Consumption of Wealth (Wells and Lilly, Boston, 1821).

The relevant part of text is as follows (with yellow highlighting of important passages):

Chapter XV
Of the Vent or Demand for Products

It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices. But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so; that they treat doubtful points as matter of certainty, often pray for what is directly opposite to their interests, and importunately solicit from authority a protection of the most mischievous tendency.

To enable us to form clear and correct practical notions in regard to markets for the products of industry, we must carefully analyse the best established and most certain facts, and apply to them the inferences we have already deduced from a similar way of proceeding; and thus perhaps we may arrive at new and important truths, that may serve to enlighten the views of the agents of industry, and to give confidence to the measures of governments anxious to afford them encouragement.

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, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.

Should a tradesman say, “I do not want other products for my woollens, I want money,” there could be little difficulty in convincing him that his customers could not pay him in money, without having first procured it by the sale of some other commodities of their own. “Yonder farmer,” he may be told, “will buy your woollens, if his crops be good, and will buy more or less according to their abundance or scantiness; he can buy none at all, if his crops fail altogether. Neither can you buy his wool nor his corn yourself, unless you contrive to get woollens or some other article to buy withal. You say, you only want money; I say, you want other commodities, and not money. For what, in point of fact, do you want the money? Is it not for the purchase of raw materials or stock for your trade, or victuals for your support? Wherefore, it is products that you want, and not money. The silver coin you will have received on the sale of your own products, and given in the purchase of those of other people, will the next moment execute the same office between other contracting parties, and so from one to another to infinity; just as a public vehicle successively transports objects one after another. If you can not find a ready sale for your commodity, will you say, it is merely for want of a vehicle to transport it? For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others. So that you will have bought, and every body must buy, the objects of want or desire, each with the value of his respective products transformed into money for the moment only. Otherwise, how could it be possible that there should now be bought and sold in France five or six times as many commodities, as in the miserable reign of Charles VI? Is it not obvious, that five or six times as many commodities must have been produced, and that they must have served to purchase one or the other?”

Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce: and the commodity, which recurs so repeatedly in use, appears to vulgar apprehensions the most important of commodities, and the end and object of all transactions, whereas it is only the medium. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied, and is a strong indication of prosperity a proof that a great abundance of values has been created, which it is wished to exchange for other values. In such cases, merchants know well enough how to find substitutes for the product serving as the medium of exchange or money*; and money itself soon pours in, for this reason, that all produce naturally gravitates to that place where it is most in demand. It is a good sign when the business is too great for the money; just in the same way as it is a good sign when the goods are too plentiful for the warehouses.

* By bills at sight or after date, bank-notes, running credits, write-offs, &c. as at London and Amsterdam.

When a superabundant article can find no vent, the scarcity of money has so little to do with the obstruction of its sale, that the sellers would gladly receive its value in goods for their own consumption at the current price of the day: they would not ask for money, or have any occasion for that product, since the only use they could make of it would be to convert it forthwith into articles of their own consumption.

This observation is applicable to all cases, where there is a supply of commodities or of services in the market. They will universally find the most extensive demand in those places, where the most of values are produced; because in no other places are the sole means of purchase created, that is, values. Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.

It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.

For this reason, a good harvest is favourable, not only to the agriculturist, but likewise to the dealers in all commodities generally. The greater the crop, the larger are the purchases of the growers. A bad harvest, on the contrary, hurts the sale of commodities at large. And so it is also with the products of manufacture and commerce. The success of one branch of commerce supplies more ample means of purchase, and consequently opens a market for the products of all the other branches; on the other hand, the stagnation of one channel of manufacture, or of commerce, is felt in all the rest.

But it may be asked, if this be so, how does it happen, that there is at times so great a glut of commodities in the market, and so much difficulty in finding a vent for them? Why cannot one of these superabundant commodities be exchanged for another? I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.

It is because the production of some commodities has declined, that other commodities are superabundant. To use a more hackneyed phrase, people have bought less, because they have made less profit; and they have made less profit for one or two causes; either they have found difficulties in the employment of their productive means, or these means have themselves been deficient.

It is observable, moreover, that precisely at the same time that one commodity makes a loss, another commodity is making excessive profit. And, since such profits must operate as a powerful stimulus to the cultivation of that particular kind of products, there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity on the one hand, and consequent glut on the other. No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels, the replenishment of which restores activity to all the others. One kind of production would seldom outstrip every other, and its products be disproportionately cheapened, were production left entirely free.

Should a producer imagine, that many other classes, yielding no material products, are his customers and consumers equally with the classes that raise themselves a product of their own; as, for example, public functionaries, physicians, lawyers, churchmen, &c., and thence infer, that there is a class of demand other than that of the actual producers, he would but expose the shallowness and superficiality of his ideas. A priest goes to a shop to buy a gown or a surplice; he takes the value, that is to make the purchase, in the form of money. Whence had he that money? From some tax-gatherer who has taken it from a tax-payer. But whence did this latter derive it? From the value he has himself produced. This value, first produced by the tax-payer, and afterwards turned into money, and given to the priest for his salary, has enabled him to make the purchase. The priest stands in the place of the producer, who might himself have laid the value of his product on his own account, in the purchase, perhaps, not of a gown or surplice, but of some other more serviceable product. The consumption of the particular product, the gown or surplice, has but supplanted that of some other product. It is quite impossible that the purchase of one product can be affected, otherwise than by the value of another.

From this important truth may be deduced the following important conclusions: —

1. That, in every community the more numerous are the producers, and the more various their productions, the more prompt, numerous, and extensive are the markets for those productions; and, by a natural consequence, the more profitable are they to the producers; for price rises with the demand. But this advantage is to be derived from real production alone, and not from a forced circulation of products; for a value once created is not augmented in its passage from one hand to another, nor by being seized and expended by the government, instead of by an individual. The man, that lives upon the productions of other people, originates no demand for those productions; he merely puts himself in the place of the producer, to the great injury of production, as we shall presently see.

2. That each individual is interested in the general prosperity of all, and that the success of one branch of industry promotes that of all the others. In fact, whatever profession or line of business a man may devote himself to, he is the better paid and the more readily finds employment, in proportion as he sees others thriving equally around him. A man of talent, that scarcely vegetates in a retrograde state of society, would find a thousand ways of turning his faculties to account in a thriving community that could afford to employ and reward his ability. A merchant established in a rich and populous town, sells to a much larger amount than one who sets up in a poor district, with a population sunk in indolence and apathy.

What could an active manufacturer, or an intelligent merchant, do in a small deserted and semi-barbarous town in a remote corner of Poland or Westphalia? Though in no fear of a competitor, he could sell but little, because little was produced; whilst at Paris, Amsterdam, or London, in spite of the competition of a hundred dealers in his own line, he might do business on the largest scale. The reason is obvious: he is surrounded with people who produce largely in an infinity of ways, and who make purchases, each with his respective products, that is to say, with the money arising from the sale of what he may have produced.

This is the true source of the gains made by the towns’ people out of the country people, and again by the latter out of the former; both of them have wherewith to buy more largely, the more amply they themselves produce. A city, standing in the centre of a rich surrounding country, feels no want of rich and numerous customers’ and, on the other hand, the vicinity of an opulent city gives additional value to the produce of the country. The division of nations into agricultural, manufacturing, and commercial, is idle enough. For the success of a people in agriculture is a stimulus to its manufacturing and commercial prosperity; and the flourishing condition of its manufacture and commerce reflects a benefit upon its agriculture also.

The position of a nation, in respect of its neighbours, is analogous to the relation of one of its provinces to the others, or of the country to the town; it has an interest in their prosperity, being sure to profit by their opulence. The government of the United States, therefore, acted most wisely, in their attempt, about the year 1802, to civilize their savage neighbours, the Creek Indians. The design was to introduce habits of industry amongst them, and make them producers capable of carrying on a barter trade with the States of the Union; for there is nothing to be got by dealing with a people that have nothing to pay. It is useful and honourable to mankind, that one nation among so many should conduct itself uniformly upon liberal principles. The brilliant results of this enlightened policy will demonstrate, that the systems and theories really destructive and fallacious, are the exclusive and jealous maxims acted upon by the old European governments, and by them most impudently styled practical truths, for no other reason, as it would seem, than because they have the misfortune to put them in practice. The United States will have the honour of proving experimentally, that true policy goes hand in hand with moderation and humanity.

3. From this fruitful principle, we may draw this further conclusion, that it is no injury to the internal or national industry and production to buy and import commodities from abroad; for nothing can be bought from strangers, except with native products, which find a vent in this external traffic. Should it be objected, that this foreign produce may have been bought with specie, I answer, specie is not always a native product, but must have been bought itself with the products of native industry; so that, whether the foreign articles be paid for in specie or in home products, the vent for national industry is the same in both cases.

4. The same principle leads to the conclusion, that 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 we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

For the same reason that the creation of a new product is the opening of a new market for other products, the consumption or destruction of a product is the stoppage of a vent for them. This is no evil where the end of the product has been answered, by its destruction, which end is the satisfying of some human want, or the creation of some new product designed for such a satisfaction. Indeed, if the nation be in a thriving condition, the gross national re-production exceeds the gross consumption. The consumed products have fulfilled their office, as it is natural and fitting they should; the consumption, however, has opened no new market, but just the reverse.

Having once arrived at the clear conviction, that the general demand for products is brisk in proportion to the activity of production, we need not trouble ourselves much to inquire towards what channel of industry production may be most advantageously directed. The products created give rise to various degrees of demand, according to the wants, the manners, the comparative capital, industry, and natural resources of each country; the article most in request, owing to the competition of buyers, yields the best interest of money to the capitalist, the largest profits to the adventurer, and the best wages to the labourer; and the agency of their respective services is naturally attracted by these advantages towards those particular channels.

In a community, city, province, or nation, that produces abundantly, and adds every moment to the sum of its products, almost all the branches of commerce, manufacture, and generally of industry, yield handsome profits, because the demand is great, and because there is always a large quantity of products in the market, ready to bid for new productive services. And, vice versa, wherever, by reason of the blunders of the nation or its government, production is stationary, or does not keep pace with consumption, the demand gradually declines, the value of the product is less than the charges of its production; no productive exertion is properly rewarded; profits and wages decrease; the employment of capital becomes less advantageous and more hazardous; it is consumed piecemeal, not through extravagance, but through necessity, and because the sources of profit are dried up. The labouring classes experience a want of work; families before in tolerable circumstances, are more cramped and confined; and those before in difficulties are left altogether destitute. Depopulation, misery, and returning barbarism, occupy the place of abundance and happiness. Such are the concomitants of declining production, which are only to be remedied by frugality, intelligence, activity, and freedom. (Say 1821: 107–119).

We could sum up the fundamental principles of this chapter as follows:

(1) that the “origin of the means” of purchasing products is the value of other products: “production ... opens a demand for products.” The means to attain the money for purchasing products comes from “having first procured it by the sale of some other commodities.”

(2) that producers do not really want money, but other goods. Therefore Say analyses a capitalist economy in terms of barter transactions, by which the money is merely a “veil.”

(3) money is merely used to purchase more commodities:

“The silver coin you will have received on the sale of your own products, and given in the purchase of those of other people, will the next moment execute the same office between other contracting parties, and so from one to another to infinity.”

(4) that the production and sale of a product creates demand for other products:

“It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.”

It is particularly important to note the last sentence:

“Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.”

By “vent” we can understand “demand”: so Say here is expressing the idea that the mere production of a commodity opens demand for other products.

Thus the sentence “supply creates its own demand” appears to be a legitimate way of expressing this idea.

For Baumol (1977: 158–159), this passage also demonstrates that Say had formulated and expressed a version of “Say’s Equality,” one of the two versions of Say’s law. According to Baumol, Say’s equality:

“admits the possibility of (brief) periods of disequilibrium during which the total demand for goods may fall short of the total supply, but maintains that there exist reliable equilibrating forces that must soon bring the two together.” (Baumol 1977: 146).

So what is wrong with the ideas described above?

It is easy to see why and how Say was in error:

(1) Say’s analysis ignores the role of endogenous money and the way in which capitalist banking systems and businesses create new money by debt instruments: whether bills of exchange, promissory notes, cheques, or fractional reserve bank notes.

The origin of the “means of purchasing” many commodities is not production, but debt, or new money created by the credit/debt operations of fractional reserve banks, and even things as simple as negotiable bills of exchange and other negotiable debt instruments.

(2) There is a flaw in Say’s analysis: the diversion of money into purchasing of financial assets and real assets on secondary markets, for speculative purposes. That becomes a major kind of spending for those of extreme wealth.

The money used to buy such assets can then flow to other speculators, who buy new financial assets or hold money idle in the process of using it in further speculation on assets. Thus there is a “speculative demand” for money that can rise or fall.

Money can be (1) held idle, (2) used to buy commodities or (3) used to buy assets (whether real or financial) on secondary markets.

(3) Say subscribed to the view that money cannot provide direct utility:

“For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others.”

This is made clear to us by Say’s statement: “[sc. the] whole utility [sc. of money] has consisted in conveying to your hands the value of the commodities.” This is a world where nobody holds money for significant periods of time because money can have no utility, except in what it can purchase in terms of commodities.

But that is not the world we live in. We live in a world of uncertainty. In the face of uncertainty, money can yield direct utility (Graziani 2003: 11):

“In an uncertain world, the possession of money and other nonproducible liquid assets provides utility by protecting the holder from fear of being unable to meet future liabilities” (Davidson 2003: 236).

Possession of money gives direct satisfaction or utility in providing protection against uncertainty, and gives us the satisfaction or feeling of assurance that we will be able to discharge expected and unexpected future liabilities or obligations.

Appendix: The Law of Markets in Say’s Catechism of Political Economy

I reproduce below the relevant section of Say’s Catechism of Political Economy (1816) where he discusses the law of markets:

CHAPTER XX.
On Markets.

What do you mean by markets?

Before answering this question, I beg you to remark, that those who engage in production are seldom occupied with more than one product, or at most a small number of products. A tanner produces nothing but leather; a clothier, cloth; one merchant deals in wine, another imports foreign goods; one cultivator raises the vine, another corn, a third cattle.

What consequences do you draw from that?

That none of them can enjoy the greatest part of the various articles for which he has occasion, except by means of exchanging the greater part of his own productions for those which he desires to consume: so that the greater part of the consumptions of society take place only in consequence of an exchange.

But when we are able easily to exchange our own productions for those which we want, we are said to have found ready markets for our products.

On what does the ready sale of any particular article depend?

On the vivacity of the demand for it.

On what does the vivacity of the demand depend?

On two motives, which are—1st. The utility of the product, that is, the necessity the consumer has for it:—2d. The quantity of other products he is able to give in exchange.

I conceive the first motive. As to the second, it appears to me that it is the quantity of money that the buyer possesses, which induces him to buy or not.

That is also true: but the quantity of money which he has, depends on the quantity of product with which he has been able to buy this money.

Could he not obtain the money otherwise, than by having acquired it by products?

No.

If he had received the money from his tenants ... .?

His tenant had received it from the sale of part of the products to which the earth had contributed.

If he had received the interest of a capital lent — ?

The undertaker who employed that capital had received the money which he paid, on the sale of a part of the products to which his capital had concurred.

If the purchaser had obtained this money by gift or inheritance — ?

The giver, or he from whom the giver had obtained it, had it in exchange for some product.

In every case the money, with which any product is purchased, must have been produced by the sale of another product; and the purchase may be considered as an exchange in which the purchaser gives that which he has produced, (or that which another has produced for him), and in which he receives the thing bought.

What do you conclude from this?

That the more the purchasers produce, the more they have to purchase with, and that the productions of the one procure purchasers to the other.

It appears to me, that if the buyers only purchased by means of their products, they have generally more products than money to offer in payment.

Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise.

Then the more merchandise there is produced, the more animated is the demand for merchandise?

Without doubt. It is for this reason that countries, which are but little civilized, present few markets, and those for products but little varied; while in populous, industrious, and productive districts, the sales are repeated and considerable.

It is not necessary then, in order that markets should he extended and multiplied, to look for them in foreign countries?

No; it is sufficient that other products should be multiplied in our own country.

What is it that multiplies foreign markets?

The riches of neighbouring nations, and the activity of their production.

What consequence do you draw from that?

That each of them is interested in the prosperity of his neighbour, and every nation in the prosperity of all others: for it is only those who produce much that can readily give you any thing in exchange for your products: or which comes to the same thing, that can give you the value of them in money.

What other consequence follows from this?

That riches are not exclusive: that, so far from that which another man, or another people gains, being a loss to you, their gains are favourable to you; that it is only necessary for you to produce, not that which they produce easier than you, but that which they cannot fail to demand from you by means of their products; and that wars, entered into for commerce, will appear so much the more senseless as we become better informed. (Say 1816: 102–106).

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