Say’s law of course is defined in various ways, but the two main definitions are as follows:
(1) Say’s IdentityThe issue of how Jean-Baptiste Say (1767–1832) himself defined the law is complicated by the fact that Say produced various editions of his Treatise on Political Economy and different treatments of the law, as follows:
According to Baumol (1977: 146), this“is the assertion that no one ever wants to hold money for any significant amount of time, so that, as a result, every offer (supply) of a quantity of goods automatically constitutes a demand for a bundle of some other items of equal market value”; and(2) Say’s Equality
Again, according to Baumol (1977: 146), 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.”
(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;It seems widely accepted today that Say’s role in formulating the law is overrated. That is, both 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 himself.
(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).
So let us look at how Say’s law was formulated by the Classical economists, as defined by Thomas Sowell (1994: 39–41). Sowell defines it as 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].Why is Say’s law false?
(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).
One fatal flaw is the underlying assumption, which is clear in the work of Jean-Baptiste Say himself, 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.” (Say 1821a: 164–165).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). Therefore people can and do hold money for significant periods!
First, “Say’s Identity” simply ignores the reality of people holding money without purchasing goods and services because of uncertainty (Keynes’s precautionary motive), or what Keynes called idle money hoards. It also ignores the spending of money on secondary financial or real asset markets or holding of money idle for this reason (Keynes’s speculative motive).
In any real world economy, money from income streams from production, either to capitalists or workers, can become diverted to asset markets and may not be spent on goods. For this reason alone, Say’s law is a grossly unrealistic picture of market economies. Capitalists themselves have subjective expectations about the future and the future profitability of investment, and when their expectations are shattered, they will not necessarily invest out of retained earnings.
Secondly, “Say’s Equality” already admits the possibility of general gluts.
But a further serious problem with both versions of Say’s law is the assumption of universal or near universal flexprice markets, when vast numbers of industrial, service, retail and even capital goods markets are fixprice, and administered prices are the norm. In modern capitalist economies, supply and demand are equated by changes in employment and output, not by flexible prices. (And also the whole simplistic economic model of Say’s law does not have a place for endogenous money and banks that create credit money for investment.)
Lastly, as a matter of historical interest, eventually it appears that Jean-Baptiste Say actually repudiated the strong form of Say’s law we call “Say’s Identity” in his letters to Malthus.
More detailed discussion is here:
“The Myth of Say’s Law,” October 7, 2010.I also reproduce my extended bibliography on Say’s law below.
“F. H. Hahn in a Candid Moment on Neo-Walrasian Equilibrium ,” January 29, 2011.
“Say’s Law Presupposes Aggregate Demand as a Meaningful Concept,” May 28, 2011.
“Say Repudiated Say’s Law,” December 1, 2011.
“Jean Baptiste Say on Failures of Aggregate Demand,” December 1, 2011.
“Jean-Baptiste Say and “Say’s Law,” September 14, 2012.
“The Origin of Say’s Law in Adam Smith and James Mill,” September 14, 2012.
“Bibliography on Say’s Law,” September 16, 2012.
“A Note on Prices and Say’s Law,” December 11, 2012.
“World GDP versus Total Value of Financial Asset Market Exchanges,” February 21, 2013.
BIBLIOGRAPHY
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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.
Graziani, A. 2003. The Monetary Theory of Production. Cambridge University Press, Cambridge.
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.
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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.
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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.
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http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenNudgeNudgeWinkWinkSayNoMore.pdf
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Hello, could you write up a post about fixprice vs. flexprice markets? I can't find the terminology anywhere else and Google searches don't give any relevant results. I think it would be very informative for any future posts you make.
ReplyDeleteOr, (more likely) could you provide some links to where I could read about such things?
http://www.amazon.com/Stagnation-Economy-Raffaele-Mattioli-Lectures/dp/0521039851
DeleteLecture one. Also:
http://cas.umkc.edu/econ/economics/faculty/Forstater/506/506readings/irrelevance%20of%20equilibrium%20economics.pdf
Kaldor doesn't use the fix-price/flexi-price terminology. But the theory is laid out in these papers.
"...but in a bizarre argument invoking “present and future goods” and the notion that “leisure is a present consumption good.”"
ReplyDeleteThe distinction between present and future goods is not so strange. It seems to be somewhat similar to the idea that large consumption goods like cars are also counted as savings as they are used up over time. (My approach to this in my forthcoming theory of asset pricing counts purchases as investments rather than savings and thus all goods are always already assets; this, I think, is a far more interesting, coherent and fruitful approach. This will, of course, bring up the issue of holding what are generally thought to be consumer goods for reasons in line with the "speculative motive").
However, Murphy's idea of leisure as a consumption good is somewhat unusual. It is typically thought of as having positive utility, but that does not make it a consumption good because it does not require the expenditure of any income. Instead it is the shrugging off of income in order to gain utility. Indeed, in many textbooks leisure is seen as that which is gained by forgoing the consumption of goods and services.
Monetary accounting is connected with market economics. In a technocratic context, accounting in time is common. Classifying leisure as a consumption good is normal for institutionalists.
Delete"But a further serious problem with both versions of Say’s law is the assumption of universal or near universal flexprice markets, when vast numbers of industrial, service, retail and even capital goods markets are fixprice, and administered prices are the norm. In modern capitalist economies, supply and demand are equated by changes in employment and output, not by flexible prices."
ReplyDeleteAnd, of course, in not taking this into account Say doesn't recognise the disequilibria that can be injected into flexi-price markets by speculation. You can build very simple models to demonstrate that if investors engage in speculation prices rise and incomes become insufficient to absorb the output produced. Then, when the investors' capacity to hoard ceases, the markets are flooded, prices are driven down, balance sheets wiped out and unemployment results.
I was able to show this to an economist consistently using a pen and a napkin. It is absolutely shocking that the profession have failed to recognise this. (Kaldor, Kalecki, Minsky and a few others being notable exceptions). Even the fetishising of modelling does not explain this. You can build such a model in minutes on a scrap of paper.
In the classic Keynsian model I is determined by the MEC and the interest rate.
ReplyDeletefrom the level of I then C and Y are determined by the marginal propensity to consume.
Isn't there an assumption very similar to Say's law implicit in there somewhere ? The level of investment generates just enough income to ensure that all the product gets bought up as either consumption or investment goods.
No. That's not Keynes' model. It might well be the one you were taught in university though. In which case, yes, there is nonsense imbedded in it.
DeleteIt is the model described in the General Theory.
DeleteLord Keynes, are you familiar with this blog? http://debunkingeconomics.blogspot.no/ The author addresses many of your articles and claims they are nonsensical.
ReplyDeleteYes, I have seen it. He refutes nothing.
Delete