A Rehabilitation of Say’s Law

IV FURTHER OBJECTIONS
TO SAY’S LAW

A common objection alleges that the “law of markets” tacitly assumes away changes in the demand for money and, in particular, overlooks those variations in that demand which are not correlated with real output. It is the latter charge which is most serious. There certainly are reasons why, aggregate real income being given, people’s preferences for the services of money, or their valuation of the productivity of money held may alter—seasonally, temporarily or permanently—including changes in custom, or habit, or business procedures. And there are certainly reasons for speculative variations: forecast changes in particular costs or prices; or forecast changes in the general price index; or forecast changes in the rate of interest.1 But none of these sources of variations in demand for monetary services, of which every monetary policy must take cognizance, affects the relevance of Say’s law. Yet economists of deserved eminence—not only the Keynesians—have read into the law, with no justification whatsoever, an assumption that the law implies “a marginal propensity to spend out of income equal to unity,” or that “transactors never plan to change the amount of money they hold,” or that the demand for money and the “money supply” vary in direct proportion to one another. The maintenance of this last relationship (i.e., what I have termed “monetary flexibility”) is wholly a matter of “monetary policy.” But it is to be part of my case that the issues involved in “monetary policy,” are comprehensible only if the relevance of those issues to Say’s law are perceived.

Say showed why, under the institutional setup of the era in which he was writing, the supply of money increased as the growth of trade led to an increased demand for the services of money,2 but he did not rely upon this very important source of monetary flexibility to justify his “law of markets.” Nor is that law invalidated (as Neisser contends3) because deflations (purposeful or inadvertent) can occur and, under downward price rigidity, result in depression and unemployment. On the contrary, the cumulative depressive effects of price rigidity in deflation (or in curbed inflation) are explained by it. Supplies (and hence demands) are withheld4 cumulatively, a point to which we must return.

We can perceive the relevance of money in relation to Say’s law only when we recognize that the law is concerned with the nature of the supplying and the demanding of all valuable services and assets, money and the services of money (“liquidity”) included. Investment in or disinvestment from inventories of money has no special significance. We invest in (or disinvest from) money—whether we want it as a producers’ good or as a consumers’ capital good—up to the point at which further increments promise a yield below prospective yields from any form of non-money. A perception that all increments of money possessed have been acquired in the expectation that they will yield income, just as with inventories of non-money (fixed or circulating assets), assists perception of the all-pervasiveness of Say’s law. People’s forecasts of the yields to money (in the light of current judgments of monetary policy) give rise to what we call “demand for money.”5

J. S. Mill, in one of his less rigorous moods, referred to what he thought was a significant fact, namely, that a seller need “not buy at the same time when he sells.” Of course a seller may invest in money when he is paid! Mill was clearly envisaging the case in which the individual—and, by implication, the community—happen temporarily to choose (from preference or entrepreneurial judgment) relatively more monetary services or money, and hence to choose relatively less of non-monetary services or non-money assets (at their initial prices). Whether or not the bidding up of the aggregate real value of money, which such a change of choice implies, means a bidding up also of the real value of the money unit (as it must, under monetary rigidity), it is difficult to see in what sense “both commodities and money may then be in excess supply,” as one Keynesian put it a few years ago. If the rise in the aggregate real value of money is due to expectations that monetary policy intends to raise the real value of the money unit and the expectations are correct, then speculative demands for money will assist the monetary aim. If the expectations are wrong, the speculators will be penalized. But in any case, I do not see how Say’s law will be affected.

Similarly, to take the opposite case, when the relative value of investment in inventories of non-money assets increases because people expect their money value to rise, no one would say that there is an “excess” of such goods. The capital embodied in them is productively employed in the creation of prospective “time utilities.” The only circumstances in which the word “excess” is really appropriate in this context is when it refers to the type of disequilibrium in which inventories are generally accumulating because (owing to entrepreneurial misjudgment or some non-market dictate) they are not being disposed of at prices sufficiently low to maximize the yield from the distribution of their sale over time. This is the “classical” notion of “excess.” And the prices asked for such goods, rather than their “supplies” (as rates of output or as inventories) are then “excessive.” It is of course common today to describe “disequilibrium” in respect of any particular input or output as “excess supply” or “excess demand.” But under either situation, as Walras perceived, the prices and quantities of actual supplies (what he called “effective supplies”) are equal to the prices and quantities of actual demands (“effective demands”). (See “Demands”, p. 15). Recognition of this truism does not prevent a perception that erroneous forecasting may lead to oversupplies of particular outputs with consequential undersupplies of other outputs.

Marx’s truism, “no one can sell unless someone else purchases,” which some Keynesians believe illustrates a vital defect in Say’s law, can be answered with the converse: “no one can purchase unless someone else sells.” For every act of selling and buying requires that the would-be seller price his product to permit the sale or that the would-be buyer offer a price which the seller accepts. Is not this price determination the root co-ordinative act which keeps a money economy in activity?

Keynes thought that Say’s law asserted that the “aggregate demand price of output is equal to its aggregate supply price for all volumes of output.”6 But this is not Say’s law: it is “Walras’ identity,” which is a sophisticated statement of the obvious.7 Because the price of every sale equals the price of the purchase, aggregate sales must always equal aggregate purchases. Each transaction can be looked at from two angles!

The recognition of such a tautology brings out, indeed, the irrelevance of money to Say’s law. No matter how the purchasing power of the money unit may happen to be changing, the aggregate money value of sales and purchases (and hence the aggregate money value of such supplies and demands as are expressed through the use of money) must be identical. When I sell fruit grown in my garden, what I receive and what the purchaser pays me are the same! But what is equally true, and what illustrates Say’s law, is that I dispose of an identical value out of the money’s worth I receive from that sale whatever I am destined to acquire in return for it; and what I acquire will be of identical value. This remains true (a) whether I invest in additional money, by simply retaining an additional money balance equal to the value of the fruit I sell, or (b) whether my consumption of goods and services increases by the value of my proceeds from the sale (or by something less than that), or (c) whether I invest the value of my sale in the replacement of goods and services being currently consumed, or (d) whether I do more than maintain the value of my assets intact and invest in additional non-money assets.

Another disparagement of Say’s law attributes to it a tacit assumption that products must always realize prices corresponding to the expectations of those who have invested in their production. But there is no implication that every increment of an output or every output as a whole must always yield a value in excess of what the value of its inputs had been (interest being regarded as part of the value of inputs). Yet two of the most influential attacks on the law, those of Lange and Neisser,8 have alleged that this is a necessary implication. A thing which is worth less than it cost may still have a positive value, which means that there is a potential demand for it; and the fact that such things may exist, and normally they do exist, does not weaken the vital law for which Say has been given credit. It does not detract from the reality that, in the absence of net capital consumption, the sole source of demand for any valuable output is the flow of non-competing outputs. When costs have not been covered, a smaller aggregate real value has been contributed to the flow of outputs (the source of demands) than would have resulted under ideal resource allocation, that is all. What Say’s law does imply relevant to the issue is that products, however unprofitably or wastefully manufactured, need never themselves be wasted. If the output is valueless, it is not a product! Consumption will have occurred when resources were devoted to its manufacture—wasteful consumption. But all products (including services) can always be priced or valued for market clearance, i.e., to permit their consumption (or use in subsequent stages of production, or incorporation into other products), no matter how unprofitable their production may have been.

Sowell maintains that we can conceive of circumstances in which, because the value of aggregate output is less than its cost of production or its supply price, “there can be a general glut”9 and he italicizes those words. But as we have seen (assuming monetary flexibility as I have defined it) when so many outputs yield less than the rate of interest on the marginal increment invested in their respective inputs that the money value of the sum of all outputs falls short of the sum of what sales of inputs as a whole had been, there must have been inadvertent net consumption. Any such net extermination of value—unplanned dissavings—means that the source of future demands will have contracted. If that condition is to be described as “glut,” then we are conceiving of it as the consequence of over-consumption, not of under-consumption; and that is the diametric opposite of what Say’s critics have imagined.

Exactly the same considerations apply when “the aggregate value of output is less than . . . its supply price.” In Sowell’s sense, the “supply price” of any output means (in my terminology) the sum of the input values incorporated in it (including marketing services and interest plus profit or minus loss); and under the relationship stipulated, the implication is that inputs in general are priced above their market-clearing value. Some portions of the potential contributions to the “supplies” and hence to the source of demands are being withheld.

There is nothing in either situation imagined to prevent market-clearing prices from being re-established from that point on, whether the reason for the contraction in the source of demands has been (a) the over-pricing of inputs through the seeking of private or sectional gains via what I have termed the “withholding” process, or (b) widespread entrepreneurial errors (of prediction or otherwise) which adversely affect the composition of the stock of assets. Neither “unemployment equilibrium” nor “unemployment disequilibrium” is implied.

It seems sometimes to be suggested that Say’s law assumes that a changing scale of prices (rising or falling prices in general) must be neutral in its effects upon prices at different stages of production. But as we shall see, economists who would never have thought of challenging that law knew perfectly well that unanticipated inflation could have co-ordinative (“stimulative”) effects under conditions of cost rigidity. But in so far as the raising of prospective final prices relatively to prospective costs brings about recovery (through the community not realizing what is occurring), Say’s law explains why this happens. The release of withheld capacity in one industry contributes to the source of demands for products in non-competing industries and tends therefore to induce the release of capacity in them also.

A tenaciously held view is that Say’s law dogmatically assumes away the reality of “underconsumption.” But variations in saving-preference (i.e., in the propensity to consume) are irrelevant to the law. Changes in all preferences, unless responded to by changes in resource allocation (and that necessarily means changes in relative prices), result in the disco-ordination of the economy—a less fruitful utilization of productive capacity, including the emergence of wasteful and sometimes chronic idleness. When saving-preference (the propensity to save) rises, demands for directly consumed services or for productive services being embodied into goods of relatively short life (consumers’ goods) will fall in relation to demands for productive services being embodied into goods of relatively long life (producers’ goods). In addition the value of assets of long life will tend to be bid up in relation to inventories of goods of short life. A fall in saving-preference (a rise in the propensity to consume) will have the opposite effect. But both give rise to the same sort of adjustment problems. A general decline in the desire to provide for the future can create as many difficulties in pricing for market clearance as a general rise in that desire.

In my judgment, failures to adjust prices to changes in saving-preference have been of little importance as a causal factor in the phenomena of boom and depression. If this judgment is wrong, however, it does not invalidate my claim that Say’s law explains any running down of activity in the situation imagined. It occurs when there are new failures to price for market clearance. All the cumulative depressive effects experienced during emerging recession have their origin in a succession of withholdings of supplies which an initial failure to coordinate to a change in preference or supply has brought in its train. Depression is, indeed, the consequence of cumulatively-induced refusals to sell at prices consistent with the co-ordination of the economy. This is the truth which Say’s law ruthlessly exposes. Disco-ordination in one sector of the economy will, if there are price rigidities in other sectors, bring about these successively aggravating reactions, one decline in the flow of services inducing another.

The fallacious notion of general under-consumption is related of course to the equally fallacious notion of general over-production. There is, in fact, no inconsistency (as some Keynesians have alleged) in Say’s admission of the possibility of particular over-production or glut, while he denied the possibility of general over-production or glut. There can be “too much” of any commodity, but only in the sense that there is too little of another. Say could not have been more explicit on this point. Yet Keynesian and neo-Keynesian theories of over-production maintain that the whole flow of productive services can be too big in some sense. Say’s law suggests that notions of “excess over-all productive capacity” or of “excess aggregate supply” are meaningless because demands consist simply of the offer of one part of this flow for other parts. Each demand expressed and effected is a supply offered and accepted. Hence the failure to demand the full flow of valuable services (and I must repeat that services are always valuable or they are not to be classified as services, while being valuable means they are capable of being demanded) must be due to the pricing (or valuing) of part of the flow too high in relation to the rest of the flow.

If this is understood, it should be obvious that “over-all productive capacity” can no more be “in excess” than can “over-all purchasing power.” For the release of withheld (unutilized) productive capacity, through the pricing for market clearance of previously over-priced productive services (i.e., through the pricing of inputs and outputs consistently with the money valuation of income and price expectations) is, in itself, the release of withheld purchasing power (as distinct from money-spending power). In recession, a restoration of aggregate purchasing power need not be sought through an increase of money-spending power; although, under monetary flexibility, the flow of purchasing power and the flow of money-spending power will be correlated (through policy).

Chronic idleness of productive capacity in general is not due to its being “in excess.” Say’s law explains how a widespread laying-off of men, together with idleness or idling in the complementary assets with which they work, is temporarily inevitable as long as chronic disco-ordinations in the pricing system are tolerated; and if the disco-ordinations (price-cost ratios incompatible with full market clearance) are not rectified, the idleness will persist until the unutilized assets or the unemployed people find sub-optimal employments.10 For instance, if unions persuade their members to resist such downward wage-rate adjustments as are needed to increase their own numbers in employment, as well as to contribute to a rise in the wages-flow and the income-flow, they are transforming temporary idleness into long-term idleness or (under certain conditions) chronic idleness.

Say’s law does not, then, “assume full employment” or imply that full employment is achievable whatever pricing (valuing) policies are adopted. It does not imply that market pressures will always be allowed to bring about pricing for market-clearance. What it does imply is that market pressures could, if permitted, have this effect. It certainly does not assume, for instance, that the workers generally will behave in their own interest in such situations. In showing that the pricing of inputs and outputs for recovery and prosperity is possible, it relies on no assumptions at all about whether the coordination demanded is either practically achievable or politically conceivable. But it does explain why, no matter what monetary policy happens to be, inappropriate pricing can withhold supplies (thereby withholding demands), forcing valuable resources into temporary idleness or into less profitable activities, or causing loss of value; and inter alia how “inflationary recession” (“stagflation”) is possible.

If over-pricing is ruled out, then although misdirected production can occur (in the sense of particular overproductions which may cause some increments of assets replaced or accumulated—including inventories of final products—to be less profitable than had been predicted, or saleable only at less than they had cost, or even to be valueless), this is a defect in the composition of aggregate output, not evidence of its oversupply. Defects in the composition of real income reduce its “quantity”—its value magnitude in money units of unchanging “purchasing power.”

Some have thought that Say’s law is valid only as a long-term theorem; that it would hold under “perfect price flexibility”; but that it is irrelevant to the price-rigid world of reality. It depends, so it is believed, upon the assumption that, although demands may be insufficient to clear markets at any moment, they may be relied upon to do so ultimately. Actually, the law simply makes clear that, in so far as inputs or outputs are actually supplied, by being priced for sale, they are at that moment—with no time lag—demanding non-competing things.11 This perception of the universal relevance of the law does not prevent recognition of the fact that pressures tending to bring about the pricing needed for market clearance cannot be expected to work instantaneously, especially after long periods in which policy has been designed to reduce or restrain the required pressures. But such sluggishness in the pricing process (as with all other inertias and “imperfections” in the operation of society’s co-ordinative institutions) merely reduces particular market-clearing prices at any point of time.

Moreover, the initial price cuts needed to set the recovery process going in any sector are, in each instance, raising the market-clearing levels of prices in non-competing activities. This is a vitally important point to which we must return (see Chap. XI, pp. 82-86). Say’s law explains how, even if, in an attempt to escape from depression, institutions were deliberately designed to facilitate the appropriate pricing, the path to full utilization of productive capacity would be likely to involve some passage of time (simply because people happen to be as we know them to be). The crucial point is, however, that market-clearing prices will always be possible for all valuable inputs and outputs; and if incentives can be created for such pricing, some inputs and outputs which have been merely potentially valuable will become presently valuable.

In practice this implies that “full” or even something nearer to “optimal” utilization of all valuable services (of men and assets) can be envisaged as attainable unless, for political reasons, private duress or collusion in the fixing of wage-rates and prices is permitted. Inevitable inertias alone will, subject to considerations raised in Chapter XIII, merely slow down such achievements.

It is, however, essential to stress once again that even if, in a drastic attempt to escape from the chronic dilemma of depression or inflation and yet avoid the determination of prices for the private profit of politicians engaged in vote acquisition (as under “incomes policies”), institutions were deliberately designed to bring private duress in the pricing process to an end (by releasing incentives for the determination of market-clearing prices) the automatic tendency to depression which Say’s law exposes could hardly be wholly eliminated. There would always be defects in the drafting of the required legislation, as well as error in enforcement by officials and judicial interpretations. It can be claimed, however, that the greater the success actually achieved in causing input and output prices to be fixed as closely as practicable to the prospective market-clearing level, the smaller will be the proportion of waste (unintended consumption), including that due to the idleness or idling of men and assets with their depressive consequences.

 

 

12Nearly all modern economists would include also the absolute level of the rate of interest as a factor influencing the demand for money. Although I am awed by the weight of authority against me on this issue, I have never been able to accept this.

13A passage in Say’s exposition in which this is clear is, curiously enough, quoted in one of the best known attacks on Say’s law, that by Neisser.14

15On the concept of “withholding”, see pp. 20-21 and Chapter V.

16Erroneous entrepreneurial predictions may of course bring about excess holdings of money or anything else. The productiveness of money is discussed fully in W. H. Hutt, “The Yield to Money Held,” in Freedom and Free Enterprise, Ed. Sennholz, Van Nostrand, 1956.

17Modern economists call it “Walras’ identity.” But Quesnay stated the truism, “every purchase is sale, and . . . every sale is purchase”.18

19See pp. 55-56, 103-108

20(See definitions, pp. 19-20) “Market-clearing prices” are, as we have seen, compatible with the accumulation of inventories when investment in this form is judged to be the most profitable form of replacement or net accumulation at any moment, provided there is no monopolistic abuse (i.e., no exclusion of potentially competing resources from any area, occupation or firm).

 

21  H. Neisser, “General Overproduction,” in Readings in Business Cycle Theory; p. 387.

22  Ibid., p.390.

23  Keynes, General Theory, p. 26.

24  F. Quesnay, “Dialogue sur le Commerce” in Les Physiocrates, Ed., M. Daire, Part I, p. 170.

25  H. Neisser, op. cit., p. 385; O. Lange, Studies in Mathematical Economics, pp. 57-61.

26  T. Sowell, Say’s Law, p. 60.

• 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 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
• 4*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).
• 5*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.
• 6 J. M. Keynes, The General Theory (See note above), p. 19.
• 7*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.
• 8 J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.
• 9 Ibid., p. 625.
• 10*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.
• 11*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.
• 12Since 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.”
• 13At 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.
• 14 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
• 15Controversy 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.*
• 16An 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.
• 17“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).
• 18 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
• 19The 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.*
• 20Turgot, 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.*
• 21While 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.
• 22I 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.
• 23In 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).
• 24*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).
• 25Controversy 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.*
• 26Controversy 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.*