A Rehabilitation of Say’s Law

I propose now to attempt a re-exposition of Say’s law, as I understand it, and then to deal briefly and broadly with the principal objections which were advanced against it prior to 1960. Following that, I shall discuss some more recent and more subtle arguments which may appear to question its validity or relevance.

Keynes’ own reference to the law was based upon a quotation, not from Say’s own enunciation, but from a rather unsatisfactory exposition of the idea in J. S. Mill’s Principles of Political Economy; and the passage Keynes quoted was torn from a context which throws essential light upon its implications.1 The young economists at Cambridge whose outlook Keynes found congenial and with whom he discussed his developing ideas, must surely have been unaware of Mill’s incomparably more satisfactory treatment of the same topic in his Unsettled Questions in Political Economy (pp. 69-73), or they could hardly have failed to draw his attention to it.2 I feel even more certain that they could not have been aware of James Mill’s astonishing Commerce Defended (1808) which is a better exposition of Say’s law than Say’s original enunciation of it. My own judgment is that neither Keynes himself, nor those of his colleagues who influenced him, had really grasped the “law of markets” to which Say’s name has become attached.

Let us consider what Say himself wrote.3 “One can only buy with what one has produced,”4 i.e., out of one’s savings or income. “The one product constitutes the means of purchasing another.”5 Here Say was quietly asserting that one buys with money’s worth, not with money, one’s stocks of which are normally subject merely to temporary depletion. He used the term “value” for what I have called “money’s worth,” and described it as “the sole substance with which one buys”.6 “A product created offers, from that instant, a market for other commodities to the full total of its value”7 [Say’s italics]. Particular commodities “exceed the aggregate need people have for them, either because they have been produced in undue quantities, or rather because other outputs are deficient. Some commodities are superabundant because the production of other commodities has come to be in short supply (sont venus à manquer).”8 “When the clearance of their products is slow . . . ,” entrepreneurs say that “money is scarce.”9 A merchant will say, “It is not other products that I am demanding in exchange for mine, it is money”10 [Say’s italics]. The answer to him is, “Sales are sluggish (la vente ne va pas), not because money is scarce but because other products are.”11, 12 I have wondered at times how Keynes could have continued with The General Theory if he had quoted passages like these for refutation instead of that unsatisfactory passage from J.S. Mill.

I remarked at the outset that Say’s law implies that all outputs constitute “power to demand,” in the sense of “power to supply by valuing inputs and outputs at money’s worth.” Now it may be objected that “power to demand” in this sense does not mean “willingness to demand.” I can refrain from selling (or exchanging for other assets or outputs) any part of the output produced by my labor or produced through the services of the assets I own. But in that case I am myself demanding what I produce. The fact that I do not pay money for it is irrelevant. A farmer is demanding that part of his produce which is destined to be consumed by himself or his family. And in a money economy the output he does not sell has a money value. If he consumes, say, one per cent of the potatoes he produces, that consumed part of his supply is demanded by him and must be valued at the market price realized by the 99 per cent. Hence all exercised “power to supply’ is exercised “power to demand.” There are no imaginable exceptions.13

This assertion will, I know, still prompt immediate and vehement objections. I shall be told that power to produce (and hence power to supply) is a question of will and the power may not be exercised. That is certainly possible, but it is an assertion of, not an objection to, Say’s law. All power to demand is derived from production and supply. Because the extermination of Value through consumption of services and assets is continuous, the failure to supply (i.e., the failure to produce, and price to induce the sale of sufficient goods and services to cover the full replacement of the value consumed) means the extermination of some part of the previous power to demand. Indeed, “consumption” in itself is the extermination of the power to demand, although the need or wish to consume motivates the will to produce, via reliance on the need or wish to replace. The process of supplying—i.e., the production and appropriate pricing of services or assets for replacement or growth—keeps the flow of demands flowing steadily or expanding. Hence, there is a meaning which can be attached to the phrase “willingness to demand”. It simply means “willingness to supply”! (I return to this point in Chapter V.)

I expect also the objection that I am ignoring the possibility of monopsonistic abuse, which by definition means the withholding of some part of the full power to demand—a failure to demand all that could be demanded; and that monopsonists who exploit14 in this manner are not (in that role) withholding “supplies”—the inputs and outputs their efforts and assets provide: they are simply curtailing their demands.

The answer is that they are supplying (in return for whatever they buy in the monopsonized field) a smaller “real value”, i.e., a smaller quantum of whatever goods and services those from whom they buy are destined to acquire with the money received. Such effects, which are depressive on the economy, illustrate Say’s law. Except for the case in which the suppliers are themselves the demanders, Say’s law directs attention to actual transactions—the values (prices) of services and assets which are necessarily demanded when they are actually supplied. The adverse effects of monopsonistic abuse, if and when it occurs,15 will be to reduce profitable supplies—inputs and outputs—in the field from which the monopsonists purchase, even if competition is effective among the suppliers so that there is no “withholding” on the latter’s part. When, however, the monopsonists are frustrated (partially or wholly) by rigidly priced supplies, or by retaliatory monopolistic action, the deleterious repercussions are likely to be aggravated (although theoretically amelioration is possible). It is through those contractions of supplies which have their origin in “exploitation,” however caused, that a general running down of the economy may be set in motion—through cumulative withholdings caused by rigidities elsewhere in the pricing system.

Hence whether a price for any commodity is imposed above the competitive equilibrium level by monopolistic power, or imposed below that level by monopsonistic power, the supply of the commodity—the amount that will be actually supplied and so actually demanded—will contract (unless extremely unrealistic assumptions are made. (See p. 48 and p. 81). That is, the depressive effects upon the economy are similar irrespective of whether the initiating distortion of the pricing system is due to monopolistic or monopsonistic abuse. In both cases, a reduction in supplies is caused, which, through a sort of chain reaction in the form of induced reductions in supplies of non-competing outputs, creates an impression of a drying-up of demands.

The most serious attempt at refutation of Say’s law in The General Theory is to be found in the unemployment equilibrium thesis, which I have examined else-where,16 and which has been riddled with devasting criticism—without effective rejoinder—by several economists of eminence.17 In the following chapter I shall examine certain other objections which have been advanced against Say’s law.

18See W. H. Hutt, Keynesianism, p. 389-391.

19At least three other economists (Emil Korner, B. M. Anderson, Patinkin) have drawn attention to Keynes’ surprising omission of the qualifying passage which followed, a passage which drew attention to some of the very issues he was ignoring.

20The first two quotations are from the first edition of Say’s Political Economy (Traité d’Economie Politique), 1803. The remainder are from the fourth edition, 1819. [The translations are mine.]

21James Mill’s statement of the principle in 1808 is worth quoting. “The production of commodities . . . is the one and universal cause which creates a market for the commodities produced.” “The collective means of payment of the whole nation . . . consist in its annual produce.” “A nation’s power of purchasing is exactly measured by its annual produce.”22 “The one part of (the annual produce) is employed in purchasing the other.”23

24To the extent to which I prefer leisure to the output of my labor (or to what I can realize from that output) I am demanding and consuming an immaterial but valuable thing—“valuable” because I must make a sacrifice of alternatives of money value in order to acquire it (just as I must buy an immaterial thing of money value when I purchase a house on a particularly beautiful or convenient site). Nevertheless, an increased demand for leisure by an individual does mean a reduced contribution from him to the source of demands as a whole, to the extent to which his supply of valuable output to others (priced to “clear the market”) is reduced. From the standpoint of the economy as a whole every increase in the consumption of leisure has the same depressive effects as all other forms of consumption that are not accompanied by replacement equal to the value exterminated.

25See definition of “exploitation,” p. 23.

26Actually, for reasons I have explained elsewhere, I believe monopsonistic abuse to be of little practical importance.27

28See p. 9.

29  J. B. Say, Political Economy, 1st Edition. Quoted from J. J. Spengler in “The Physiocrats and Say’s Law of Markets,” in Essays in Economic Thought, Eds. Spengler and Allen, p. 213.

30  Ibid.

31  Say, Political Economy, 4th Edition, Book I, p. 153.

32  Ibid., p. 153.

33  Ibid., p. 154.

34  Ibid., p. 148.

35  Ibid., p. 149.

36  Ibid., p. 151.

37  James Mill, Commerce Defended, p. 81.

38  Ibid., p. 84.

39  W. H. Hutt, The Strike-Threat System, Arlington House, 1973, Ch. VIII.

40  W. H. Hutt, Keynesianism, Ch. IX.

• 1*T. Sowell, Say’s Law, Oxford University Press, 1973.
• 2*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).
• 3*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).
• 4 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
• 5 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
• 6 J. M. Keynes, The General Theory (See note above), p. 19.
• 7 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
• 8 J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.
• 9 Ibid., p. 625.
• 10 James Mill, Commerce Defended (London, C. and R. Baldwin, 1808), p. 76.
• 11 Schumpeter, op. cit., p. 617.
• 12*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.
• 13*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.
• 14*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.
• 15*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.
• 16 Quoted in Ibid., p. 175.
• 17*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.”
• 18Since 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.”
• 19At 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.
• 20Controversy 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.*
• 21An 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.
• 22 Ibid.,p. 618.
• 23 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.
• 24“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).
• 25The 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.*
• 26Turgot, 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.*
• 27 Quoted in Ibid., p. 204.
• 28Of 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.
• 29While 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.
• 30I 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.
• 31In 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).
• 32*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).
• 33Controversy 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.*
• 34Controversy 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.*
• 35*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.
• 36Schumpeter 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.”
• 37Schumpeter 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.”
• 38The 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.*
• 39The 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.*
• 40The 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.*