A Rehabilitation of Say’s Law

In his 1970 Richard Ely Lecture, Harry G. Johnson, without defending Keynesian doctrine, justifies Keynes’ assault of 1936 (in The General Theory) on the prevailing economic orthodoxy, on the grounds that its “principles and slogans” (which, by implication, are apparently assumed to have activated policy before 1936) “. . . could neither explain nor cope with” the great depression.

While Keynes was writing his famous work I was engaged on a book that appeared a month or two later than his. In my contribution I maintained that “every independent and serious economist . . . must, if his beliefs lie in the path of ‘orthodox’ or Classical tradition, be aware of a periodic recurrence of a sense of utter helplessness. . . . He recognizes that in spheres in which policy and action can be influenced, he is doomed to virtual dumbness today.”1, 2 Thus, where Johnson blames the prevailing orthodoxy of the 1930s, I blamed (in 1936) the ignoring of its basic teachings for the emergence and perpetuation of depression.

I can think of no economist who has shown greater intellectual courage than has Harry Johnson in abandoning previously held positions. Where he now stands in respect of the “law of markets,” I do not know. But I believe that “the classical economists” who “from Smith to Pigou” (in Keynes’ view and Mark Blaug’s words) “. . . fell victims to Say’s law”3 were better economists because they were so victimized. I believe also that with all their shortcomings the non-Keynesians of the inter-war period had a deeper insight into the origins of chronic unemployment and depression than the overwhelming majority of today’s professional economists. I shall try to substantiate this thesis after a restatement of Say’s “law of markets” and an examination of typical criticisms of that law. At the end of my essay, in Chapters XIV to XVII, I shall briefly discuss the British situation in 1936 as well as “classical” teachings and government policies in Britain between the first world war and 1936. The environment of that period was one which somehow inspired the most influential book in the history of economic thought, the book which engendered the so-called “new economics” or the “Keynesian revolution” and, at a crucial period, destroyed the authority of the economists whom Johnson still disparages but towards whose position he seems (to me at any rate) to have been veering. I shall finally submit my own brief diagnosis of the grave sickness which was plaguing the British economy during the 1930s; and I shall suggest, (a) that exactly the same fundamental problem is baffling British politicians and opinion makers today that was baffling them in the 1920s and 1930s; and (b) that the solution is to be found through a perception of the light which Say’s law throws upon the nature of co-operation in a free economy.

In defending the pre-Keynesian “classical economists,” and “Say’s law,” I shall insist that this law dominated the prevailing orthodoxy of the 1930s so naturally that it was seldom if ever stated explicitly and (prior to the “Keynesian revolution”) virtually never challenged. But it was ideas we associate with J. B. Say which constitute the vital insight of the “orthodoxy” that Keynes attacked. In one passage4 Keynes explicitly recognized that the teachings he was trying to refute involved reliance on Say’s law, although in that passage he referred not to Say himself but to J. S. Mill, from whom he quoted an excerpt out of a not very satisfactory exposition of the principle. (See p. 24).

I shall suggest that, fairly interpreted, “Say’s law of markets” survives as the most fundamental “economic law” in all economic theory. It enunciates the principle that “demands in general” are “supplies in general”—different aspects of one phenomenon.

Today’s textbooks usually express Say’s law most carelessly, using a description of the law which, I think, Keynes was the first to use. It asserts, they tell their readers (without mentioning Keynes) that “supply creates its own demand”.5 But the supply of plums does not create the demand for plums. And the word “creates” is injudicious. What the law really asserts is that the supply of plums constitutes demand for whatever the supplier is destined to acquire in exchange for the plums under barter, or with the money proceeds in a money economy. (The supplier may of course hold on to the money, i.e., demand it instead of other non-money).

Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .”6 Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached7; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.8

An occasional eccentricity of the erudite Schumpeter was reckless exaggeration. It was unjust of him to have written that Say “hardly understood his discovery himself.” Certainly Say did not fully understand “the law of markets” which, I think, he regarded as accepted doctrine and not as his discovery. That is, I suggest, why James Mill did not refer to Say’s chapter on markets in his Commerce Defended (a most impressive exposition of the “law”), while Say, in his second edition, did not mention James Mill’s contribution which had appeared in between.9 Both were explaining what they believed to be unchallengeable. Both attempted to convey to the business world, to governments and to students what the economists had learned from the Physiocrats, Hume and Adam Smith.

Schumpeter was by no means anti-Say, in spite of the harshness with which he treated him. Properly formulated, he said, Say’s law is true, and “neither trivial nor unimportant.”10 But he thought that its main importance arose from its “negative” demonstration that general “restrictions of output” were no cure for crisis or depression. Such phenomena were “never to be causally explained solely by everybody’s having produced too much.”11 This is, of course, a significant implication of the “law.” But if the arguments I shall be developing in this book are valid, Schumpeter disclosed that, just like Say, he did not fully understand the “law of markets.”

I propose to enunciate the proposition that the “law” has a much more positive meaning than Schumpeter perceived; that a grasp of it is indispensable for an understanding of the true genesis of depression and of prosperity without inflation; that attempts at dynamic treatment of the economic system which ignore it are worthless; that new “withholdings of inputs or outputs,” mainly consequent upon the failure to price all such inputs and outputs for “market clearance” into consumption or stock accumulation, are the origin of depressed economies; that the path from that condition to non-inflationary prosperity is always via the dissolution of such “withholdings”; that this objective can be achieved only by institutional reforms aimed successfully at creating incentives for (and/or the removal of disincentives for) the pricing of all inputs and outputs for “market clearance”; and that such reforms facilitate the mechanism whereby (in the money economy) all inputs and outputs are (subject to inevitable human error) continually co-ordinated in the light of the current or expected value of the money unit.

As I understand it, and in my own words, the source of demand for any particular input or output produced is the flow of inputs and outputs of all the things which do not compete with it; for some part of that flow is destined to be exchanged for it.

“The source of demand” means “the power to demand.” In other words, the power to demand any part of the flow of productive services springs from the flow of non-competing productive services.12 Moreover, all producers of goods or services are always in a position to value or price their contribution so as to induce a demand from others for that portion of their inputs or outputs as they (the producers) do not demand (i.e., retain) for themselves, as investors or consumers (unless what they intended to be production turns out to be valueless and wasted—inadvertent consumption).

To most economists trained in the Keynesian or neo-Keynesian tradition, which today means the overwhelming majority of the younger economists in the United States and Britain, such a proposition may at first appear almost intuitively as preposterously wrong. They will feel that, in the actual world, where there is indirect exchange and the use of money, “effective demand” may be insufficient for reasons other than pricing. Only under hypothetical barter, they may protest, can Say’s law hold. I have written this essay to refute such a view.

The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,”13 and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.”14 And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.”15 But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.16

Turgot, however, discerned the confusion due to supposing that “saving and hoarding are synonymous,” and insisted that although “savings” are made “in the form of money,” the savers have no use for money “than to convert it immediately into different kinds of effects. . . . ”17 Turgot’s statement is, of course, an exaggeration because it tacitly assumes that the prospective productivity of money is not changing in relation to that of non-money. But his tacit assumption is reasonable enough for most circumstances and his criticism of his contemporaries on the point had, I suggest, validity. It was because of the Physiocrats’ misconceptions on the very issue Turgot had in mind that, in developing his “theory of markets,” Say strongly criticized the school of economists from whom his inspiration may have originated.18

What Say was really showing was that the crucial nexus between potential sellers and potential buyers (potential suppliers and potential demanders) which, when constrained, causes a slowing down of productive activity, is never constrained through the use of money or through monetary policy but through defects in pricing. Under the conditions of his day, no grounds existed for Say to add what it would have been appropriate to have added in the present era, namely, “even although deflation may magnify the consequences of defects in the pricing process and unanticipated inflation minimize those consequences” [my phrasing].

If Say’s law holds, then any unemployment of valuable (i.e., potentially demanded) factors of production must be due to the supply of their services being withheld. And if supplies of non-competing productive services, which in the aggregate form the source of demands for particular factors, such as (say) for those used to make footwear, are being withheld, then the incentive may be enhanced to withhold also from production some part of the labor and assets which produce footwear. Such withholdings, whether initiatory or induced, may occur (i) through the direct holding off of potentially demanded supplies from the market, or (ii) (the same thing in practice) through the price asked being (a) higher than potential purchasers of the product can afford out of uninflated capital and income, or (b) higher than they regard as profitable, or (c) (a special case of [b]) higher than is consistent with the cost and price expectations of the community as a whole or with their predictions of the future of the market rate of interest.

In a situation in which widespread layoffs of men are occurring, and physical assets are being thrust into idleness, the withholding of supplies (directly or through pricing) appears as a sort of evaporation of demands, or as a sort of redundancy or excess of supplies, not as a withholding of supplies. Keynesian teaching accepts that appearance as reality. But I shall try to show that an understanding of Say’s law exposes as basically fallacious the thesis, both in its Keynesian and its neo-Keynesian enunciation, that the origin of depression is to be observed (a) in “excess” aggregate supply, or (b) in “deficient” aggregate demand, or (c) in aggregate demand somehow not being “effective.”

Over the period 1940-1960, it was generally (but not universally) accepted that Keynes and his disciples had refuted Say’s law through their establishment of the revolutionary “unemployment equilibrium” thesis. But for well over a decade now, through the friendly criticisms of eminent scholars like Haberler, McCord Wright, Modigliani and Patinkin, the “unemployment equilibrium” foundation of Keynes’ thesis has ceased to be defended (although this quiet counter-revolution has not yet, I think, led to all the required textbook revisions).

Of more recent years Harry G. Johnson, R. W. Clower, Axel Leijonhufvud and Leland Yeager have continued the process of challenging the very foundations of the Keynesian system, in the process indirectly, if unintendedly, re-asserting Say’s law. Yet paradoxically these eminent theorists, and other economists of repute who accept their criticisms of, or changing attitudes towards, the Keynesian system, still seem to leave the impression that, after all, Say’s law does not work—at least not in the manner in which the old general equilibrium analysis suggested it did; and they suggest that in some way the world must feel grateful to Keynes, not so much for his contributions to economic method as for the beneficial policy consequences of his General Theory up to some unspecified turning-point some years ago.19 There are healthy opinion differences among these economists; yet they all agree that there were basic defects in the economics that Keynes attacked, and their criticisms all imply dissatisfaction with Say’s law. Their objections to the notion that supplies constitute the source of demands are always traceable, directly or indirectly (as I suggested before) to the surviving notion that the use of money somehow frustrates the operation of the market-clearing process. Under theoretical barter, the implication (or explicit assertion) is, Say’s law would apply. In a money economy it does not.

One critic of a draft of this essay holds that Keynes regarded Say’s law as a truism of no useful application. Certainly Keynes enunciated the law at one place—quite wrongly—as though it was an identity (“Walras’ identity,” see pp. 33-34). But early protagonists of the “Keynesian revolution” certainly did not take this line. They went to great trouble to refute Say; and I have felt it essential to devote Chap. IV and pp. 24-29, to evaluating some of their objections. Moreover, Keynes’ “unemployment equilibrium” thesis, which the original Keynesian disciples proclaimed as the great insight of their leader, was obviously intended to be a refutation. In one of the most famous of the early defenses of The General Theory, Sweezy triumphantly admitted that “all” the arguments of that book “fall to the ground if the validity of Say’s law is assumed.”20

Although Say’s law is no truism (indeed, I regard it as the most fundamental law in all economic theory) it is not difficult to grasp provided we are not confusing ourselves through defective notions. In my first reading of The General Theory, I was left with the impression that the crucial weakness of that book lay in its conceptual inadequacy. I developed this assertion in the Theory of Idle Resources, 1939,21 and I made it clear that my main purpose was to establish conceptual clarity in respect of the notion of “unemployment” of men and assets. I devoted a special section to the general question of definitions in economics.22 In the Preface of my Keynesianism, 1963, I referred to the feeling I acquired in verbal discussion with friends at the London School of Economics during 1949 and 1956, that I was “not talking the modern language.” I explained how I had perceived “that there are some kinds of language the habitual use of which hinders the perception of certain things as well as the saying of them”; and how I had come to see “that the weaknesses of the system which Keynes had built rest in its conceptual foundations”.23 And my quarrel today with the surviving Keynesian influences which inspire attempts to inhibit recognition of Say’s law is not with the manipulatory methods used but chiefly with the arbitrariness or sheer woolliness of the notions on which the critical models are constructed. In this essay therefore I shall at the outset carefully define certain very simple yet basic concepts as I shall be using them. This procedure alone may, I think, dissolve many predictable objections to my defense of the law of markets.

24I do not suggest that the “orthodox” economists could think of nothing to say! They felt frustrated by their perception that, owing to the absence of an understanding of the major issues among political leaders and electorates, their teachings would hardly have any chance of an influential hearing.

25I believe that Keynes (General Theory, p. 18) was the first to use this phrase. It has been repeated in these very words by virtually all other economists who have since referred to Say’s law. Even erudite and careful historians of economic thought repeat Keynes’ words, e.g., Schumpeter, Mark Blaug and Tom Sowell, the latter opening his essay with Keynes’ summary of the law and subsequently using the phrase several times.26 But I cannot trace its ever having been used before Keynes. Sowell refers to it as a “familiar assertion,” which he admits is not a “direct quotation” from Say or James Mill. Leijonhufvud uses it in quotation marks without attributing it to Keynes. (On Keynesian Economics and the Economics of Keynes, p. 280).

27Even so, Say’s early phrasings of the “law of markets,” some of which are quoted in Chapter III, are laudably clear and unequivocal: and his detractors during the earlier period can be not unfairly regarded as “amateurs” in economics, in comparison with those who, like Thornton, the Mills, Senior, Ricardo and McCulloch, were learned scholars in the subject. (Compare Sowell, Say’s Law, pp. 220,232).

28James Mill referred to Say as “a late French writer” and quoted an anecdote of Say’s to illustrate the absurdity of regarding consumption as the source of demand.29

30This statement holds without qualification in the absence of saving or dissaving. When saving is occurring, assets are being demanded through the offer of services (capital by the offer of income). When dissaving is occurring, services for consumption are being demanded through the offer of assets, or assets are themselves being consumed.

31I am here thinking of such things as the confusion of saving-preference with liquidity-preference, the confusion of spending with demanding, the confusion of spending with consumption, the fear of general overproduction, the notion that consumption is the source of demands.

32I use the word “may” because I think that, apart from Turgot, Say’s main inspiration came from Hume, Adam Smith and (possibly) James Mill, in whose works the confusion to which I have referred is absent. Of these, only James Mill stated the principle in general terms (in Commerce Defended, 1808), and his statement was better than Say’s had been in the first edition of the latter’s Political Economy.

33E.g., R. W. Clower thinks that “however beneficial” the Keynesian revolution “may have been in its practical effects on a nearly decadent science, it added nothing novel or worthwhile to the theoretical foundations of economic science.”34

35That section is one of the few parts of my 1939 book which I do not think I should amend today if I were thinking of republishing.

J. M. Keynes’ The General Theory of Employment, Interest and Money (Macmillan, London, 1936) will be referred to throughout as The General Theory, and A. Leijonhufvud’s On Keynesian Economics and the Economics of Keynes (New York, Oxford University Press, 1968) as On Keynesian Economics.

36  W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.

37  M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.

38  J. M. Keynes, The General Theory (See note above), p. 19.

39  T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.

40  J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.

41  Ibid., p. 625.

42  James Mill, Commerce Defended (London, C. and R. Baldwin, 1808), p. 76.

43  Schumpeter, op. cit., p. 617.

44  Ibid.,p. 618.

45  J. J. Spengler, “The Physiocrats and Say’s Law of Markets,” in J. J. Spengler and W. R. Allen, Essays in Economic Thought (Chicago, McNally, 1960), p. 170.

46  Quoted in Ibid., p. 204.

47  Quoted in Ibid., p. 175.

48  Quoted in Ibid., pp. 205-6.

49  R. W. Clower, Monetary Theory (London, Penguin, 1969), p. 20.

50  P. Sweezy, “Keynes the Economist,” in Science and Society, 1946, p. 300.

51  W. H. Hutt, Theory of Idle Resources (London, Jonathan Cape, 1939).

52  W. H. Hutt, Keynesianism—Retrospect and Prospect (Chicago, Regnery, 1963), p. ix.

• 1 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
• 2*T. Sowell, Say’s Law, Oxford University Press, 1973.
• 3 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
• 4 J. M. Keynes, The General Theory (See note above), p. 19.
• 5*R. Clower and A. Leijonhufvud, Say’s Principle, What It Means and What It Does Not Mean (Intermountain Economic Review, Vol. IV, No. 2, Fall, 1973).
• 6 J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.
• 7 Ibid., p. 625.
• 8*Even so, Say’s early phrasings of the “law of markets,” some of which are quoted in Chapter III, are laudably clear and unequivocal: and his detractors during the earlier period can be not unfairly regarded as “amateurs” in economics, in comparison with those who, like Thornton, the Mills, Senior, Ricardo and McCulloch, were learned scholars in the subject. (Compare Sowell, Say’s Law, pp. 220,232).
• 9*James Mill referred to Say as “a late French writer” and quoted an anecdote of Say’s to illustrate the absurdity of regarding consumption as the source of demand.
• 10 Schumpeter, op. cit., p. 617.
• 11 Ibid.,p. 618.
• 12*This statement holds without qualification in the absence of saving or dissaving. When saving is occurring, assets are being demanded through the offer of services (capital by the offer of income). When dissaving is occurring, services for consumption are being demanded through the offer of assets, or assets are themselves being consumed.
• 13 J. J. Spengler, “The Physiocrats and Say’s Law of Markets,” in J. J. Spengler and W. R. Allen, Essays in Economic Thought (Chicago, McNally, 1960), p. 170.
• 14 Quoted in Ibid., p. 204.
• 15 Quoted in Ibid., p. 175.
• 16*I am here thinking of such things as the confusion of saving-preference with liquidity-preference, the confusion of spending with demanding, the confusion of spending with consumption, the fear of general overproduction, the notion that consumption is the source of demands.
• 17 Quoted in Ibid., pp. 205-6.
• 18*I use the word “may” because I think that, apart from Turgot, Say’s main inspiration came from Hume, Adam Smith and (possibly) James Mill, in whose works the confusion to which I have referred is absent. Of these, only James Mill stated the principle in general terms (in Commerce Defended, 1808), and his statement was better than Say’s had been in the first edition of the latter’s Political Economy.
• 19*E.g., R. W. Clower thinks that “however beneficial” the Keynesian revolution “may have been in its practical effects on a nearly decadent science, it added nothing novel or worthwhile to the theoretical foundations of economic science.”
• 20 P. Sweezy, “Keynes the Economist,” in Science and Society, 1946, p. 300.
• 21 W. H. Hutt, Theory of Idle Resources (London, Jonathan Cape, 1939).
• 22*That section is one of the few parts of my 1939 book which I do not think I should amend today if I were thinking of republishing.
• 23 W. H. Hutt, Keynesianism—Retrospect and Prospect (Chicago, Regnery, 1963), p. ix.
• 24Since this essay was submitted to the publisher, a major work on an important aspect of the same subject has appeared: Say’s Law by Tom Sowell.* This is a work of distinction. Its scholarly treatment of the controversies which Say’s ideas provoked during the first half of the nineteenth century is, I judge, an important contribution to the history of economic thought. But Sowell’s aim and mine are not quite the same. I shall be trying to rehabilitate the “law of markets” by showing “what Say really meant” or “what Say ought to have meant.”
• 25At the galley proof stage, I became aware of yet another relevant contribution, which may turn out to be of path-breaking importance. It is a recent article entitled “Say’s Principle”, by R. Clower and A. Leijonhufvud*. It is essential to draw attention to it. Previous works by these authors suggested that they were hesitant about the importance of Say’s law. I discuss their earlier views at some length. But their treatment of “Say’s principle” (which, as now explained, refers to a vital implication of Say’s law rather than to the law itself) seems to me to record a significant development. The position of these economists is now much nearer to mine than appeared from their previous writings. The student is urged to read their latest treatment as corrective or supplementary to the argument I submit. Holding that “there is hardly a single problem in macro theory (or for that matter, micro theory) that can be consistently analyzed without . . .” a recognition of “Say’s principle,” they maintain that “the extensive literature since Keynes . . . has got bogged down in a mire of conceptual and semantic confusion.” Their words here explain my incentive and why I devote the whole of Chapter II to definitions. I am trying to clear up the confusion.
• 26 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
• 27Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .” Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.*
• 28An occasional eccentricity of the erudite Schumpeter was reckless exaggeration. It was unjust of him to have written that Say “hardly understood his discovery himself.” Certainly Say did not fully understand “the law of markets” which, I think, he regarded as accepted doctrine and not as his discovery. That is, I suggest, why James Mill did not refer to Say’s chapter on markets in his Commerce Defended (a most impressive exposition of the “law”), while Say, in his second edition, did not mention James Mill’s contribution which had appeared in between.* Both were explaining what they believed to be unchallengeable. Both attempted to convey to the business world, to governments and to students what the economists had learned from the Physiocrats, Hume and Adam Smith.
• 29 James Mill, Commerce Defended (London, C. and R. Baldwin, 1808), p. 76.
• 30“The source of demand” means “the power to demand.” In other words, the power to demand any part of the flow of productive services springs from the flow of non-competing productive services.* Moreover, all producers of goods or services are always in a position to value or price their contribution so as to induce a demand from others for that portion of their inputs or outputs as they (the producers) do not demand (i.e., retain) for themselves, as investors or consumers (unless what they intended to be production turns out to be valueless and wasted—inadvertent consumption).
• 31The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,” and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.” And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.” But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.*
• 32Turgot, however, discerned the confusion due to supposing that “saving and hoarding are synonymous,” and insisted that although “savings” are made “in the form of money,” the savers have no use for money “than to convert it immediately into different kinds of effects. . . . ” Turgot’s statement is, of course, an exaggeration because it tacitly assumes that the prospective productivity of money is not changing in relation to that of non-money. But his tacit assumption is reasonable enough for most circumstances and his criticism of his contemporaries on the point had, I suggest, validity. It was because of the Physiocrats’ misconceptions on the very issue Turgot had in mind that, in developing his “theory of markets,” Say strongly criticized the school of economists from whom his inspiration may have originated.*
• 33Of more recent years Harry G. Johnson, R. W. Clower, Axel Leijonhufvud and Leland Yeager have continued the process of challenging the very foundations of the Keynesian system, in the process indirectly, if unintendedly, re-asserting Say’s law. Yet paradoxically these eminent theorists, and other economists of repute who accept their criticisms of, or changing attitudes towards, the Keynesian system, still seem to leave the impression that, after all, Say’s law does not work—at least not in the manner in which the old general equilibrium analysis suggested it did; and they suggest that in some way the world must feel grateful to Keynes, not so much for his contributions to economic method as for the beneficial policy consequences of his General Theory up to some unspecified turning-point some years ago.* There are healthy opinion differences among these economists; yet they all agree that there were basic defects in the economics that Keynes attacked, and their criticisms all imply dissatisfaction with Say’s law. Their objections to the notion that supplies constitute the source of demands are always traceable, directly or indirectly (as I suggested before) to the surviving notion that the use of money somehow frustrates the operation of the market-clearing process. Under theoretical barter, the implication (or explicit assertion) is, Say’s law would apply. In a money economy it does not.
• 34 R. W. Clower, Monetary Theory (London, Penguin, 1969), p. 20.
• 35Although Say’s law is no truism (indeed, I regard it as the most fundamental law in all economic theory) it is not difficult to grasp provided we are not confusing ourselves through defective notions. In my first reading of The General Theory, I was left with the impression that the crucial weakness of that book lay in its conceptual inadequacy. I developed this assertion in the Theory of Idle Resources, 1939, and I made it clear that my main purpose was to establish conceptual clarity in respect of the notion of “unemployment” of men and assets. I devoted a special section to the general question of definitions in economics.* In the Preface of my Keynesianism, 1963, I referred to the feeling I acquired in verbal discussion with friends at the London School of Economics during 1949 and 1956, that I was “not talking the modern language.” I explained how I had perceived “that there are some kinds of language the habitual use of which hinders the perception of certain things as well as the saying of them”; and how I had come to see “that the weaknesses of the system which Keynes had built rest in its conceptual foundations”. And my quarrel today with the surviving Keynesian influences which inspire attempts to inhibit recognition of Say’s law is not with the manipulatory methods used but chiefly with the arbitrariness or sheer woolliness of the notions on which the critical models are constructed. In this essay therefore I shall at the outset carefully define certain very simple yet basic concepts as I shall be using them. This procedure alone may, I think, dissolve many predictable objections to my defense of the law of markets.
• 36While Keynes was writing his famous work I was engaged on a book that appeared a month or two later than his. In my contribution I maintained that “every independent and serious economist . . . must, if his beliefs lie in the path of ‘orthodox’ or Classical tradition, be aware of a periodic recurrence of a sense of utter helplessness. . . . He recognizes that in spheres in which policy and action can be influenced, he is doomed to virtual dumbness today.”* Thus, where Johnson blames the prevailing orthodoxy of the 1930s, I blamed (in 1936) the ignoring of its basic teachings for the emergence and perpetuation of depression.
• 37I can think of no economist who has shown greater intellectual courage than has Harry Johnson in abandoning previously held positions. Where he now stands in respect of the “law of markets,” I do not know. But I believe that “the classical economists” who “from Smith to Pigou” (in Keynes’ view and Mark Blaug’s words) “. . . fell victims to Say’s law” were better economists because they were so victimized. I believe also that with all their shortcomings the non-Keynesians of the inter-war period had a deeper insight into the origins of chronic unemployment and depression than the overwhelming majority of today’s professional economists. I shall try to substantiate this thesis after a restatement of Say’s “law of markets” and an examination of typical criticisms of that law. At the end of my essay, in Chapters XIV to XVII, I shall briefly discuss the British situation in 1936 as well as “classical” teachings and government policies in Britain between the first world war and 1936. The environment of that period was one which somehow inspired the most influential book in the history of economic thought, the book which engendered the so-called “new economics” or the “Keynesian revolution” and, at a crucial period, destroyed the authority of the economists whom Johnson still disparages but towards whose position he seems (to me at any rate) to have been veering. I shall finally submit my own brief diagnosis of the grave sickness which was plaguing the British economy during the 1930s; and I shall suggest, (a) that exactly the same fundamental problem is baffling British politicians and opinion makers today that was baffling them in the 1920s and 1930s; and (b) that the solution is to be found through a perception of the light which Say’s law throws upon the nature of co-operation in a free economy.
• 38In defending the pre-Keynesian “classical economists,” and “Say’s law,” I shall insist that this law dominated the prevailing orthodoxy of the 1930s so naturally that it was seldom if ever stated explicitly and (prior to the “Keynesian revolution”) virtually never challenged. But it was ideas we associate with J. B. Say which constitute the vital insight of the “orthodoxy” that Keynes attacked. In one passage Keynes explicitly recognized that the teachings he was trying to refute involved reliance on Say’s law, although in that passage he referred not to Say himself but to J. S. Mill, from whom he quoted an excerpt out of a not very satisfactory exposition of the principle. (See p. 24).
• 39*I believe that Keynes (General Theory, p. 18) was the first to use this phrase. It has been repeated in these very words by virtually all other economists who have since referred to Say’s law. Even erudite and careful historians of economic thought repeat Keynes’ words, e.g., Schumpeter, Mark Blaug and Tom Sowell, the latter opening his essay with Keynes’ summary of the law and subsequently using the phrase several times. But I cannot trace its ever having been used before Keynes. Sowell refers to it as a “familiar assertion,” which he admits is not a “direct quotation” from Say or James Mill. Leijonhufvud uses it in quotation marks without attributing it to Keynes. (On Keynesian Economics and the Economics of Keynes, p. 280).
• 40Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .” Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.*
• 41Controversy about the validity of this law (which occurred mainly in two periods—from 1803-1850 and from 1936 until today) was described by the great Joseph Schumpeter as “a discussion which reflects little credit on all parties concerned.” It has “dragged on to this day,” he said, “with people armed with superior technique still chewing on the same old cud. . . .” Well, more than two decades after the posthumous appearance of Schumpeter’s monumental History of Economic Analysis, from which this scathing comment is quoted, I have been moved to keep the cud-chewing going. This is in spite of my agreement with Schumpeter (a) that Say did not fully understand the “law” to which his name has become attached; and (b) that in his defence of the “law” against acute but economically illiterate critics, Say was sometimes very “woolly,” slipping, at times, into serious fallacy.*
• 42*James Mill referred to Say as “a late French writer” and quoted an anecdote of Say’s to illustrate the absurdity of regarding consumption as the source of demand.
• 43Schumpeter was by no means anti-Say, in spite of the harshness with which he treated him. Properly formulated, he said, Say’s law is true, and “neither trivial nor unimportant.” But he thought that its main importance arose from its “negative” demonstration that general “restrictions of output” were no cure for crisis or depression. Such phenomena were “never to be causally explained solely by everybody’s having produced too much.” This is, of course, a significant implication of the “law.” But if the arguments I shall be developing in this book are valid, Schumpeter disclosed that, just like Say, he did not fully understand the “law of markets.”
• 44Schumpeter was by no means anti-Say, in spite of the harshness with which he treated him. Properly formulated, he said, Say’s law is true, and “neither trivial nor unimportant.” But he thought that its main importance arose from its “negative” demonstration that general “restrictions of output” were no cure for crisis or depression. Such phenomena were “never to be causally explained solely by everybody’s having produced too much.” This is, of course, a significant implication of the “law.” But if the arguments I shall be developing in this book are valid, Schumpeter disclosed that, just like Say, he did not fully understand the “law of markets.”
• 45The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,” and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.” And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.” But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.*
• 46The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,” and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.” And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.” But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.*
• 47The basic notion of Say’s law had been expressed several decades before Say’s effective enunciation of it. For instance, the Physiocrats generally, as J. J. Spengler has pointed out, had recognized that “commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services,” and that is a very broad yet apt statement of “the law of markets.” Josiah Tucker came near to stating the principle when he wrote, “the work of one man gives employment to another.” And Mercier de la Rivière, although accepting other ideas inconsistent with it, came even closer when he wrote, “no one can buy except by reason of what he sells.” But prior to Say, in spite of this recognition that one purchases things with money’s worth (and not with money, unless one’s money holdings are being depleted), certain mercantilist, Keynes-like fallacies, largely contradictory with this insight, seem to have prevented any clear perception of the full implications.*
• 48Turgot, however, discerned the confusion due to supposing that “saving and hoarding are synonymous,” and insisted that although “savings” are made “in the form of money,” the savers have no use for money “than to convert it immediately into different kinds of effects. . . . ” Turgot’s statement is, of course, an exaggeration because it tacitly assumes that the prospective productivity of money is not changing in relation to that of non-money. But his tacit assumption is reasonable enough for most circumstances and his criticism of his contemporaries on the point had, I suggest, validity. It was because of the Physiocrats’ misconceptions on the very issue Turgot had in mind that, in developing his “theory of markets,” Say strongly criticized the school of economists from whom his inspiration may have originated.*
• 49*E.g., R. W. Clower thinks that “however beneficial” the Keynesian revolution “may have been in its practical effects on a nearly decadent science, it added nothing novel or worthwhile to the theoretical foundations of economic science.”
• 50One critic of a draft of this essay holds that Keynes regarded Say’s law as a truism of no useful application. Certainly Keynes enunciated the law at one place—quite wrongly—as though it was an identity (“Walras’ identity,” see pp. 33-34). But early protagonists of the “Keynesian revolution” certainly did not take this line. They went to great trouble to refute Say; and I have felt it essential to devote Chap. IV and pp. 24-29, to evaluating some of their objections. Moreover, Keynes’ “unemployment equilibrium” thesis, which the original Keynesian disciples proclaimed as the great insight of their leader, was obviously intended to be a refutation. In one of the most famous of the early defenses of The General Theory, Sweezy triumphantly admitted that “all” the arguments of that book “fall to the ground if the validity of Say’s law is assumed.”
• 51Although Say’s law is no truism (indeed, I regard it as the most fundamental law in all economic theory) it is not difficult to grasp provided we are not confusing ourselves through defective notions. In my first reading of The General Theory, I was left with the impression that the crucial weakness of that book lay in its conceptual inadequacy. I developed this assertion in the Theory of Idle Resources, 1939, and I made it clear that my main purpose was to establish conceptual clarity in respect of the notion of “unemployment” of men and assets. I devoted a special section to the general question of definitions in economics.* In the Preface of my Keynesianism, 1963, I referred to the feeling I acquired in verbal discussion with friends at the London School of Economics during 1949 and 1956, that I was “not talking the modern language.” I explained how I had perceived “that there are some kinds of language the habitual use of which hinders the perception of certain things as well as the saying of them”; and how I had come to see “that the weaknesses of the system which Keynes had built rest in its conceptual foundations”. And my quarrel today with the surviving Keynesian influences which inspire attempts to inhibit recognition of Say’s law is not with the manipulatory methods used but chiefly with the arbitrariness or sheer woolliness of the notions on which the critical models are constructed. In this essay therefore I shall at the outset carefully define certain very simple yet basic concepts as I shall be using them. This procedure alone may, I think, dissolve many predictable objections to my defense of the law of markets.
• 52Although Say’s law is no truism (indeed, I regard it as the most fundamental law in all economic theory) it is not difficult to grasp provided we are not confusing ourselves through defective notions. In my first reading of The General Theory, I was left with the impression that the crucial weakness of that book lay in its conceptual inadequacy. I developed this assertion in the Theory of Idle Resources, 1939, and I made it clear that my main purpose was to establish conceptual clarity in respect of the notion of “unemployment” of men and assets. I devoted a special section to the general question of definitions in economics.* In the Preface of my Keynesianism, 1963, I referred to the feeling I acquired in verbal discussion with friends at the London School of Economics during 1949 and 1956, that I was “not talking the modern language.” I explained how I had perceived “that there are some kinds of language the habitual use of which hinders the perception of certain things as well as the saying of them”; and how I had come to see “that the weaknesses of the system which Keynes had built rest in its conceptual foundations”. And my quarrel today with the surviving Keynesian influences which inspire attempts to inhibit recognition of Say’s law is not with the manipulatory methods used but chiefly with the arbitrariness or sheer woolliness of the notions on which the critical models are constructed. In this essay therefore I shall at the outset carefully define certain very simple yet basic concepts as I shall be using them. This procedure alone may, I think, dissolve many predictable objections to my defense of the law of markets.