A Rehabilitation of Say’s Law

There is a sense in which the use of money appears to be partly responsible for the phenomenon which Clower has recently termed “the dual-decision” situation (although the appearance is, I shall suggest, illusory). In my own terminology, Clower is concerned with a condition of the economy in which potential decisions to consume and potential decisions to produce do not connect, or under which potential decisions to work and potential decisions to employ do not connect. The rate of extermination of value and the rate of replacement of value both shrink, leaving a stable disequilibrium of idle or idling productive capacity. We should notice that the condition envisaged is one which was broadly perceived and thought about before the Keynesian era. The explanation of it is not, I shall maintain, that which Clower has in mind. Nor does it accord with the theories of Leijonhufvud and Patinkin about the responsibility of money for a hiatus between workers and intermediaries.

I can illustrate by Cannan’s treatment of the situation in 1933. Making the point that, in a co-operative world, people would not be able to sell their services or outputs if they asked “terms which the rest did not think good enough to be accepted . . .”, i.e., “if they persisted in asking more . . . than the consumers, potential and actual, of the product of that labor thought it was worth,”1 he stressed the practical difficulty of getting the implications of this simple truth understood. He said, to talk of “ . . . the workers of the world as having arranged terms on which to work for each other, certainly seems a little unreal . . . ”2 (although, he said, that was indeed what happened). In the actual world most persons “are employed by intermediaries”; hence, he said, “unemployment is likely to be somewhat greater. . . . When a person is offering services to an employer who resells to the consumers, it is much less obvious to him that in order to keep employment he must produce what the consumer wants at a price which the consumer will pay.”3 The worker is therefore naturally likely to give too little weight to the fact that the amounts which it will be profitable to produce and sell of the things into which his labor is embodied will diminish as costs rise. “General unemployment appears when asking too much is a general phenomenon. . . .” Moreover, “when nearly all bargains are made in terms of money, and incomes are universally reckoned in money, general illusion is easier and disillusionment is unlikely to come so quickly. When A and B, instead of exchanging their products directly, both sell them in the market and do not come face to face, their extravagant pretensions are not confronted with each other.”4

Although Cannan mentioned the significance of the intermediary, he did not envisage any hiatus between the worker and the intermediary, as in Glower’s and Leijonhufvud’s exposition, but that between worker and worker. Yet Cannan was drawing attention, I feel, to a vastly more important aspect of reality than the phenomenon of unjustified entrepreneurial pessimism which is, as we shall see, so important in Leijonhufvud’s and Clower’s discussion. What both of these economists regard as a failure of communications—a failure of market signals—is really between worker and worker, and entrepreneur and entrepreneur (or between entrepreneur plus workers in one field and entrepreneur plus workers in non-competing fields) rather than between the worker and the entrepreneur intermediary who risks investment in the worker’s labor.

I suggest, however, that it is not mainly through “the money illusion,” and the facts that “bargains are made in money” and “incomes universally reckoned in money” that the difficulties to be overcome originate, as Cannan suggested. The hiatus arises owing to that remoteness of wage-earner and wage-earner, and of entrepreneur and entrepreneur, which is an inevitable consequence of the highly efficient but highly complex system of division of labor that money and the pricing system make possible. Except in this sense, the use of money has nothing whatsoever to do with the problem. The remoteness of producer and consumer is relevant but less important in this context.5

Of course, inflation and purposeless deflation are relevant. But they are diseases of money not the use of money. And admittedly both monetary policy and pricing policy must take the “money illusion” into account. But the weakness to which Cannan was referring can be eradicated, not by monetary reform but by reform of the pricing system—mainly to protect the workers from what Cannan called their own “extravagant” and hence ruinous “pretensions.”

The use of money can be held only to facilitate, never frustrate, the process of asking market-clearing exchange values, i.e., values which permit a better (a fuller) utilization of productive capacity. But Leijonhufvud’s stress on the medium of exchange seems to reinforce his assumption that, under hypothetical barter, the problems created by the power to withhold productive capacity would be non-existent.

There seems to be no reason, however, why barter should release incentives for the asking of market-clearing values. Unless we assume perfect value flexibility in an imaginary barter economy of assumed equal complexity, all the phenomena encountered under imperfect price flexibility will have to be assumed to influence adversely the incentives to co-ordinated activity. Under such assumptions, there will be no mitigation of the remoteness between a worker in one industry and a worker in another, or between entrepreneurs in one industry and those in others.

Surely the use of money not only solves the difficulties due to the absence of “double coincidence of wants” but enormously eases the process of adjusting the values (prices) demanded for things offered or the values (prices) offered for things demanded (in response to changes in preference or changes in supply conditions). The use of money tends to minimize the likelihood of entrepreneurial error, and helps to ensure that input and output flows shall be continuous even under the complexities of the highly advanced division of labor which the monetary mechanism has rendered possible. This is indeed the justification for the ancient insight which described the task of money as that of a lubricant. But ease of adjustment does not necessarily mean will to adjust, particularly in a society which permits duress-imposed wage-rates, or other forms of scarcity contrivance.

6It is of the greatest importance in another context. See Chapter VI of my book, The Strike-Threat System, entitled “The Employer Stereotype”.

7  Cannan, Economic Scares, (London, P. S. King, 1933), p. 31.

8  Ibid., pp.31-2

9  Ibid., p. 35.

10  Ibid., p. 38.

• 1 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
• 2 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
• 3 J. M. Keynes, The General Theory (See note above), p. 19.
• 4 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
• 5*T. Sowell, Say’s Law, Oxford University Press, 1973.
• 6Since 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.”
• 7While 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.
• 8I 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.
• 9In 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).
• 10*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).