A Rehabilitation of Say’s Law

Some critical readers may still be unhappy about the concept of “with-holding supplies.” Given my insistence that a producer’s decision to accumulate part of the output of his efforts and assets (or perhaps the whole of his output) is “actual demand” by him for that output, as well as its “actual supply,” how can such “actual supplies” be clearly distinguished from “withheld supplies”? If inventories may pile up without “withholding,” how can we recognize the circumstances in which “withholding” does occur?

To illustrate the issue, let us consider the case in which the entrepreneur is confronted with what he interprets as a temporary falling-off in demand for his products. If his interpretation is correct, market-clearing prices will have been compatible with his accumulating inventories. He will have made a profitable investment in the stockpile.

Suppose, however, that the entrepreneur’s forecast is unduly optimistic. He will have been inadvertently holding back supplies and asking prices which exceed the market-clearing level.

Or suppose that accumulating inventories are accompanied by reduced supplies of and higher prices for inputs; and that the explanation is not that the input suppliers have raised their demands because other, more profitable outlets for their activities have successfully competed for their services, but that, acting in collusion, they have simply agreed to price their inputs higher. In those circumstances also, what I have termed “withholding” must be occurring. The explanation can be, then, either that potential input suppliers are asking more than “market-clearing input prices” or that entrepreneurs are doing so for their residual claim—their contribution to the creation of value.

Again, when demand for one type of output shrinks because, at current prices, the public prefers other things, and the change of preference is forecast as more or less permanent, then ceteris paribus “market-clearing prices” both for the inputs and the outputs must decline, creating thereby the required inducements for co-ordinative adjustments in resource use; the more promptly and successfully such adjustments occur, the smaller will be the proportion by which market-clearing prices must fall; and this is a matter of (a) the versatility and mobility of men and assets and (b) in the actual world, of the ability to lower or circumvent man-made obstacles to versatility and mobility, including politically imposed barriers.

All contractions in any particular flow of productive services, including the “marketing” services provided by inventories, whether due to deliberate “withholding” or not, will, unless countervailed by expansions of input and output flows elsewhere in the economy, tend to be “depressive” on non-competing activities (in the sense that all unreplaced consumption is depressive). In the instance considered before, in which an entrepreneur confronted with a decline in the demand for a commodity at the unchanged prices he is maintaining, continues to invest in the inputs (labor, materials, etc.), and to accumulate inventories of final products, because he expects 44 demand to recover, it may, as I have said, turn out to have been an inadvertent “withholding” and hence “depressive.” It will prove to have been so if his expectations are not fulfilled; for in that case, market-clearing prices for the accumulating goods will have been unintendedly exceeded. But stockpiling of “end products,” due to such wrong (inefficient or unlucky) forecasting is highly unlikely ever to be important. Moreover, if it does occur, the errors can be rapidly rectified, while continued misjudgments will be penalized (through market sanctions).

But neither speculative investment in inventories (the production of “time utilities”) nor the provision of other marketing services (that is, the production of “availability” and “assembly” utilities) are “withholding.” Inventories of all kinds (including money) are normally active capital. Their provision is demanded by and remunerated by the community in their consumer role. Only in the case of deliberate scarcity contrivance or entrepreneurial error will “withholding” occur. As I put it in my Theory of Idle Resources, withheld capacity is “idle,” while stockpiles may be in “pseudo-idleness.”