The Hoover Institution recently published a panel in honor of Thomas Sowell the economist. It is a well-deserved tribute. Sowell is one of the most lucid economic writers of the past half century. A good part of the conversation is devoted to his first major scholarly book, Say’s Law: An Historical Analysis (Princeton, 1972), the work that established him as a historian of economic thought.
Both John Cogan and Michael Boskin, when discussing what the book is about, sum up Say’s Law in five words: “supply creates its own demand.”
This is a panel of distinguished, market-friendly economists at one of the most prominent free-market think tanks in America. Ninety years after John Maynard Keynes put those five words into circulation, they still serve as the standard summary of a law Jean-Baptiste Say never formulated that way. The slogan is not a harmless shorthand. It is a caricature, and it was built to be knocked down.
A Slogan Made in Cambridge
The phrase comes from the second chapter of Keynes’s General Theory: “From the time of Say and Ricardo the classical economists have taught that supply creates its own demand.” Keynes added that this meant, “in some significant, but not clearly defined, sense,” that all costs of production must ultimately be spent on buying the product. A few pages later came the conclusion he needed: Say’s Law “is equivalent to the proposition that there is no obstacle to full employment.” Once Say’s Law had been redefined as a denial that unemployment is possible, the Great Depression refuted it, and Keynes could present himself as the man who freed economics from it.
H. Hutt could find no use of the phrase before Keynes. He noted with dismay that “it has been repeated in these very words by virtually all other economists who have since referred to Say’s law,” including careful historians of thought such as Schumpeter, Blaug and Sowell. Steven Kates suggests that Keynes may have trimmed the words from John Stuart Mill: “every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand” (Say’s Law and the Keynesian Revolution, 1998, p. 65). Remove the conditional clause, and the whole point disappears. Mill’s law is about the right proportions of production, not about the total.
Sowell knew the slogan was not Say’s. In his book he concedes that “the familiar assertion that ‘supply creates its own demand’ is not a direct quotation from any of them [the classical economists]” (p. 12). Yet the very first sentence of the book reads: “The idea that supply creates its own demand—Say’s Law—. . .” (p. 3). Kates, who otherwise credits Sowell with many important insights, draws the obvious conclusion: by opening this way, Sowell signals that he “does not intend to challenge the Keynesian explanation” (p. 4). Sowell, Kates writes, was “perfectly well aware that the modern meaning of Say’s Law is a caricature,” yet he spent many pages trying to reconcile it with classical economics (pp. 187–88). The Hoover panelists did not misrepresent Sowell’s book, then. They just repeated its weakest line.
What Say Actually Said
Say’s point was simple. Products are paid for with products (Traité, 1803). Money is only the intermediary. What a seller ultimately wants for his goods is other goods. A person’s ability to demand therefore comes from what he has produced and offers in exchange. It does not come from the printing press or from a government’s willingness to spend.
Hence Say’s conclusion about crises. A glut, he wrote in the first edition, “can take place only when there are too many means of production applied to one kind of product and not enough to another.” Unsold shoes mean that too few shirts were made. They do not mean that too much was made overall. Nor did Say think a shortage of money was the culprit: “to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause.” His policy lesson follows directly: “. . .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. . .”
Nothing here says that every product will find a buyer at a profitable price, or that full employment is guaranteed. Say knew perfectly well that producers misjudge markets and sometimes go bankrupt, and that whole economies stagnate because of the “blunders of the nation or its government.” Hutt put it best. The supply of plums does not create a demand for plums. It constitutes a demand for whatever the plum grower wants in exchange. Supply is the source of demand for other goods. It is not a guarantee that one’s own goods will sell.
Mises: What the Law Was For
The clearest statement of the law’s purpose remains Ludwig von Mises’s short essay “Lord Keynes and Say’s Law” (The Freeman, October 30, 1950; reprinted in Planning for Freedom). Mises saw that Say’s Law was never meant to be a theory of full employment. It was itself a refutation of other claims. Whenever business turned bad, he wrote, the average merchant had two explanations ready: “a scarcity of money and. . .general overproduction.” Adam Smith demolished the first myth, and, “Say devoted himself predominantly to a thorough refutation of the second.”
What goes wrong in a slump, according to Say, is not that there is too much of everything. It is that entrepreneurs misjudged “the state of the market.” They overestimated the demand for some goods and underestimated it for others. Say regarded this as the truth behind the businessman’s complaint that the difficulty lies not in producing but in selling. Mises added that Smith and Say’s achievement was “merely negative.” They did not provide a theory of the business cycle. That came later, through the Currency School and, finally, the Austrian theory of the business cycle, which argues that the bust is the necessary result of a boom artificially created by credit expansion.
Keynes, Mises concluded, “did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.” He did not need to. Once the law had been relabeled as the absurd claim that everything produced is always sold, there was nothing left to refute. What Keynes actually rehabilitated was the old idea Say had overturned: that weak demand and a lack of money cause depressions, and that spending is the cure. In Mises’s words, “inflationism is the oldest of all fallacies.”
The Price of a Caricature
The caricature did not just insult a dead Frenchman. It turned the history of economics upside down. As Kates shows, “Say’s Law, far from assuming full employment, was instead the basis for the classical theory of the cycle” (p. 4). Classical economists understood recessions as a mismatch between the structure of production and the structure of demand. That is precisely why they rejected the remedy of propping up total spending. Even Mark Blaug, no Austrian, felt compelled to remind readers that Say’s Law “never implied any denial that depressions would occur and that when they did, they might last for several years” (quoted in Kates, p. 3).
The slogan reverses this. Under the Keynesian definition, anyone who believes in Say’s Law must also believe that recessions cannot happen. Since recessions obviously do happen, the law looks refuted, and the Keynesian case for demand management stands. Hutt drew the opposite conclusion. Properly understood, Say’s Law “survives as the most fundamental ‘economic law’ in all economic theory”: each supply represents a demand for something else. Idle resources are not evidence of insufficient spending. They are evidence that productive capacity is being priced out of use or withheld.
This is why the words matter. A student who learns that Say’s Law means “supply creates its own demand” is already biased to become a Keynesian before hearing a single argument. We have to give it to Keynes: it was a powerful rhetorical trick.
A Strawman with Friends
That Keynesians repeat Keynes’s version of Say’s Law is no surprise. A few years ago, I criticized Peter Bofinger—one of Germany’s best-known Keynesian economists—for teaching students that Say held “that supply always creates its own demand.” Bofinger even confused Jean-Baptiste Say with his grandson Léon. The more telling case is when the slogan comes from market-friendly economists at Hoover. It shows how complete Keynes’s victory was. He did not win by refuting the classical economists, he merely knocked down a strawman. But, ninety years later, even the alleged heirs of the classical economists describe Say’s Law in Keynes’s words.
This is not a criticism of Thomas Sowell’s lifetime of work, which deserves every tribute it receives; it is a plea for intellectual hygiene. Anyone who wants to honor Sowell as a historian of thought could start by dropping the one phrase that the history of thought should have retired long ago. Say’s Law does not say that supply creates its own demand, it says that production is the source of all demand, and that you cannot cure a misallocation of resources by printing more money and spending it. That lesson is as relevant today as it was in 1803.
