“Say and other writers recognized that the zero value of the sum of excess demands, or supply creates its own demand (“Say’s identity”), may not hold in the short run. Say’s passage in his Letters to Malthus … even suggests an explanation – a desire to hoard or, as we would now put it, a temporary excess demand for money. But they thought the market would fairly quickly and automatically restore equilibrium” (Baumol 1999: 201).Thomas Sowell, who is usually regarded as the scholarly expert on Say’s law*, also states that Say “admitted to Malthus that Say’s Law was ‘subject to some restrictions’ and to Sismondi that the fifth edition of his Traite contained a ‘concession’ to the latter’s theory of equilibrium income” (Sowell 2006: 31).
We can see that eventually Say partly (though not fully) understood what Keynes himself believed: changes in liquidity preference can cause insufficient demand and involuntary unemployment. Both Say and J. S. Mill in some writings even appear to have allowed that failures in aggregate demand can cause recession (Hollander 2005: 383-284).
While Say’s recantation is of historical interest, it actually does not provide good grounds in itself for dismissing Say’s law. Why? The reason is that it is possible in principle for Say’s law to be true, even if the original inventor of it later rejected it. E.g., suppose Copernicus rejected the heliocentric theory of the solar system in later life: such a hypothetic repudiation in itself does not in fact provide good evidence for rejection of the heliocentric theory. What matter are arguments and evidence. The evidence for the heliocentric theory is overwhelming. The evidence against Say’s law is also overwhelming:
* N.B. I am not telling readers to believe this just because Sowell says so. So, to the various libertarian readers of my blog: don’t waste my time invoking the argument from authority fallacy; it’s irrelevant. Moreover, not all arguments from authority are necessarily fallacious at all.
Baumol, W. J. 1999. “Retrospectives: Say’s Law,” Journal of Economic Perspectives 13.1: 195–204.
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.
Sowell, T. 2006. On Classical Economics. Yale University Press, New Haven, Conn.