A Rehabilitation of Say’s Law

XI THE HIATUS—A DIFFERENT INTERPRETATION

In Clower’s and Leijonhufvud’s treatments, there is what I interpret as a quite different explanation suggested for “the hiatus”—an explanation which is independent of the demand for money issue, although neither economist recognizes this explicitly. Nevertheless, both are, I think, imagining here that entrepreneurs judge that, to sell enough of a product to make it profitable to employ all the potentially available labor for producing it, the output must be priced not below a certain value, with prospective labor costs not above a certain value, while the workers who constitute the additional “potentially available labor” for that activity find that, if they are to make their employment profitable for the entrepreneurs, and thereby acquire “purchasing power over output,” they must price their labor more cheaply than they are prepared (or permitted) to accept. That is, the point may simply be that the workers are not in fact prompted spontaneously (or allowed) to make the adjustments needed and actually supply their labor. The condition of downward wage-rate rigidity may certainly be envisaged in this way. It is indeed exactly the point that Cannan made in 1933 (see pp. 57-59). But the main point at issue is this: If workers generally are persuaded to price their labor in relation to current prospective yields from investment in it, is there any reason why the process must be self-frustrating?

The phrase “excess supply of labor” (in a particular occupation or in occupations generally) is, so interpreted, merely an indirect way of saying that some workers are “unemployable” at the wage-rates for which they are holding out. In other words, the pricing of labor is inconsistent with prospectively profitable investment in the inputs of all those whose services would otherwise be available. Hence what is usually called “unemployed labor” could be more realistically called “unsupplied labor”; and any labor which remains “unsupplied” represents, because it is over-priced, a withheld potential contribution to the source of demands for non-competing outputs.

Just as the goods labor helps to replace, or to add to, are “supplied” only when they are priced for movement into the next stage of production or into business or household inventories, so is labor “supplied” only when it is priced so that entrepreneurs expect to be able to sell its contribution to output without loss on any increment. If labor is so supplied, it is contributing to the source of demands for complementary productive services, as well as for the inputs and outputs of non-competing activities generally, and whether or not investment in the labor in question turns out to be as profitable to entrepreneurs as they had expected. To put this proposition in a slightly different way, potential labor supply and the potential supply of complementary services do not contribute to the source of demands for non-competing things. It is only as possible inputs are valued or priced to become profitable (and hence actual) inputs that they are “supplied” and so express demands.

I anticipate the objection that if the quantities and values of “supplies” are identical in every case with the quantities and values of “demands”, how can economists talk of demands exceeding supplies and vice versa? It is simply a conventional but loose use of words. When the supply of a particular input or output increases, in the sense that the supply schedule moves forward and the demand schedule remains where it is, we traditionally describe the position which exists while the process of revaluing (repricing) is occurring (i.e., during the transition to a new equilibrium) by the phrase “supply exceeds demand,” just as we say “the kettle boils” or the “candle is out” when we mean “the water boils” or “the flame is out.” But at each moment of time, over a revaluation period, although the price per unit is falling, the conditions of “Walras’ identity” are fulfilled, i.e., the amount and value of any thing “actually supplied’’ equals the amount and value “actually demanded.”

In the real world, the process of revaluation proceeds in continuity. Entrepreneurs who offer increased supplies may at times be “groping,” trying out the market, perhaps testing elasticities of demand for their product, gradually reducing the price demanded in order to discover the most profitable rate of production and/or of inventory clearance. They will often act in the expectation that potential customers will only gradually become aware of the availability of the product. Yet this does not imply that all “actual supplies” (values and quantities) will not always equal “actual demands” in both senses.

For instance, when inventories are accumulating unprofitably and the owners of the unplanned inventories, on gradually becoming aware of the unprofitability, are groping to discover the price (necessarily reduced in most cases) which will maximize prospective net receipts from their liquidation (so as to minimize any loss), we commonly say “supply exceeds demand,” and we all understand what is meant. Similarly, when there is a “shortage” or rationing, we usually say that “demand exceeds supply,” although what we really mean is that, at the price asked, more would be demanded if more were supplied. Hence I cannot conceive of any situation in which (using words in their everyday meaning) the value and amount demanded in any market fails to equal the value and amount supplied, even when inventories which are destined to have been unprofitably accumulated happen to be piling up, or when “shortages” or rationing occur. The price of a thing limits the amount of it which can be sold and hence the amount that will be purchased. A price imposed above the equilibrium between supply and demand will limit demand and a price imposed below the equilibrium will limit supply. In both cases, the disequilibrium means that the actual amounts supplied and demanded are less than they would have been in equilibrium.1 And the same is true when normal inertias (lags in price adjustment) explain any disequilibrium. When an imposed price is below the equilibrium, and there are “shortages” (i.e., when many people who would be prepared to demand at the price asked if they could get the goods are prevented from demanding), the lucky individuals who do manage to demand obtain a value equal to the value of what is supplied. It might be useful to describe such values as “disequilibrium values.” But the existence of the situation does not affect the significance of Say’s law, which covers the case of non-price rationing as well as the kind of underpricing which exists when the right to purchase involves a special privilege, or the cost (inconvenience, discomfort, time spent) of standing in a queue, or good luck (the cost being borne by the unlucky and by the community generally).

It is possible, then, for the withholding of supplies (and hence of demands) to be accompanied by non-price rationing (obvious or in various disguises), as under different kinds of repressed inflation (imposed price rigidities upwards intended to restrain inflationary pressures). Such withholdings have exactly the same contractionist consequences as other withholdings, unless dictated prices happen to be selective, imposed more or less in the manner in which free market pressures induce cost and price adjustments. In the latter case the “controls” may crudely restrain the effects of duress-imposed costs and in some measure countervail contractionist pressures.

Unemployment of labor in any case can not be said to be due, therefore, to actual labor supply exceeding demand. Nor is wasteful idleness of plant and equipment due to the supply of the services of such assets exceeding the demand for them, although more may have been provided than has turned out to be profitable. It is always possible for a greater original value to have been invested in certain assets than would have occurred if future demands for their services (or future prices of complementary services) had been accurately foreseen. But the value of “actually supplied” services of unwisely provided assets remains equal to the value of the services actually demanded. In the extreme case, supposed assets may be valueless: i.e., as we have seen (p. 35), unintended consumption equal to the whole value of the investment may have occurred. There is then neither any “actual demand” for, nor “actual supply” of, the services of the assets.

At times, Clower’s and Leijonhufvud’s point seems to be that (again for some reason arising out of the use of money) labor’s offers to work at wage-rates which would have turned out to be profitable to entrepreneurs are, by reason of unjustified entrepreneurial pessimism, refused by them (the pessimism being due to the absence of correct or recognized market signals—a defect in communications). But unjustified pessimism at any moment about prospective yields, however caused, tends merely to reduce the wage-rates or other input prices, the acceptance of which can initiate the process of restoring or maximizing the wages-flow and thereby (one would think) express the required signals unmistakably, generate justified entrepreneurial optimism and dissolve unjustified entrepreneurial pessimism.2 Hence if the situation described as “excess supply of labor” is viewed as I have suggested it should be, namely, as a condition of the economy under which some labor has been priced into unemployment (or into inferior work), although it would be demanded for its former employment if it were “actually supplied,” then the reason for the unemployment is obvious—wage-rates maintained above the market-clearing levels; and in this case, the lower limits of market-clearing wage-rates are fixed by the next best employment activities open for each worker.

This brings me to the crucial point of my contribution. Market-clearing wage-rates may conceivably be well below the levels at which the idle labor would be profitably utilizable if other workers generally were not simultaneously holding out for wage-rates higher than the immediate market-clearing levels.3

I have been gradually forming the opinion of recent years that modern critics of Keynes and Keynesianism like Patinkin, Clower, Leijonhufvud and Yeager have been, without realizing it, approaching a perception that what they still call “effective demand” is nothing more than a view of demands in general as they would come to be if, in a condition of recession, and through the operation of Say’s law, supplies were permitted to expand either by reason of downward cost and price adjustments or through unanticipated inflation (or not fully anticipated inflation). In other words, the notion of “aggregate effective demand” refers to the magnitudes of demands as they could be if supplies were released from withholding (i.e., if all inputs and outputs were priced consistently with the continuous, uninterrupted flow of all productive services through all the stages of production and into consumption).

In my book Keynesianism,4 I referred to a passage from Lavington’s The Trade Cycle (1922) in which it is obvious that Lavington saw things (in 1922) exactly as I do, and as I think Leijonhufvud, Clower and Yeager now do, in respect of what I have called “the hiatus.” H. G. Browne’s 1931 contribution, Economic Science and the Common Welfare, quoted at some length on this issue by Leland Yeager,5 also contains a beautifully clear exposition of the point. “The inactivity of all,” said Lavington, “is the cause of the inactivity of each. No entrepreneur can fully expand his output until others expand their output.”6 And this implies that the path to recovery, whether or not inflation is avoided, will be the determination of all input and all output prices in the light of existing, not ultimate, entrepreneurial prospects, i.e., when prices compatible with market-clearing requirements are determined.7

The whole issue in Clower’s “dual-decision” hypothesis centers, then, on the relations between the potential profitability of production to satisfy what would be the workers’ demands if the wage-rates for which they are holding out were appropriately lowered, and what entrepreneurs would offer for labor’s inputs if they envisaged the profits which their acceptance of current terms would yield.

“ . . . The other side of involuntary unemployment,” says Clower, “would seem to be involuntary under-consumption,” presumably meaning by the latter that full consumption would be that enjoyed in the absence of restraints on free-market pricing or unjustified entrepreneurial pessimism. He suggests that Keynes either had this hypothesis at the back of his mind, “or most of the General Theory is theoretical nonsense.”8 But he seems to think also that this theory is “damaging to orthodoxy” because “no trace of the (dual-decision) hypothesis is anywhere to be found” in the contemporary general equilibrium theory.9 The fact is that the circumstances imagined were accepted as self-evident among the economists who tacitly recognized Say’s law, whereas it was Keynes and his disciples who were somehow quite blind to it. The General Theory was indeed, as Clower says, “theoretical nonsense” for this very reason.

In 1922, Cannan never thought of commenting on Lavington’s excellent exposition of the point, from which I have just quoted the crucial passage, when he reviewed the latter’s book. That was, I think, because Cannan regarded the passage as nothing more than an excellent popularization of what every economist took for granted. I myself quoted that passage in 1963 because Keynes and the Keynesians seemed unaware of the relationship. Clower, who is now very laboriously breaking out of the chains of the Keynesian orthodoxy in which, I feel, he early became entangled, simply cannot believe that Keynes and his young advisers did not understand what he (Clower) now perceives.

It is possible that a mere semantic factor may have been responsible for some conceptual confusion here. This phrase “excess supply” of labor is simply a way of describing a potential supply which exceeds current or actual supply because pricing for its absorption into outputs (including direct consumption of services) has not yet occurred. Hence the word “excess” here could more appropriately be “deficient” or “insufficient”! An “excess” potential supply means a “deficient” actual supply. More will be “supplied,” raising the source of demands for non-competing things, at wage-rates which raise prospective yields from investment in labor’s inputs.

If inventories of outputs of any kind are accumulating (otherwise than for the planned “creation of ‘time’ or ‘availability’ utilities”) it is one indication of “unduly high” prices causing or reflecting withheld “supplies” and hence withheld “demands” for other things. But any such unplanned stock-piling is a market signal to entrepreneurs to reduce the price and/or to transfer versatile resources (labor and assets) to the production of other things which have become relatively profitable. The extent of any required price reduction, in the actual world as well as in Walrasian theory, is in some measure a matter of “groping,” “trial and error,” “trying out,” followed by changes in prices or in particular uses of resources, (p. 46 ff.)

But Leijonhufvud holds that in his situation of “unemployment disequilibrium,” “. . . firms . . . are to some extent constrained by their inability to sell what they want at the prices of the moment.”10 My difficulty about this passage arises from the words “what they want.” Under competition, I can imagine no constraints at all. Firms will be able to fix prices calculated to maximize yields; and they will be able to adjust “quantities”—rates of production and rates of sales—accordingly. “Prices of the moment” will, through the process referred to in the paragraph before, become such as clear the market either (a) through sales or (b) through completion of one or more stages in the production process (with or without sale to intermediaries).11 [In case (b) the present discounted value of forecast ultimate sales will be the relevant price]. But any new curtailment of output imposed on a free market will have a depressive effect.

Turning now from supply to demand, we can say that labor is demanded for any activity when a sufficient wage-rate is offered to acquire whatever supply is actually forthcoming. In a co-ordinated economy, the term “sufficient” will have sole reference to the net advantageousness of alternative employments available to the workers whose services are sought.12 But in all circumstances a wage-rate can be said to be “sufficient” when it is high enough to retain prospectively profitable workers in, or attract them into, that activity. We can, of course, following an inappropriate convention, say that the demand for labor in any occupation is “in excess” when more workers could be profitably employed in that occupation if they were available at ruling wage-rates. But then again the word “deficient” would be a better descriptive term. For it means that the wage-rate offered is insufficient to retain, or to attract (from other employments or from unemployment), all the labor which would be potentially profitably employable in that activity at the higher wage-rate. This is the clearest way of describing a situation in which there are frustrated incentives for potential supplies and potential demands to become actual supplies and actual demands. But every actual demand for labor always retains or attracts it. Otherwise it is not demanded!

One final point. While market constraints on input prices through collusive agreements or duress-imposed values can be recognized as causing the most usual initiating withholdings of supplies, induced cumulative withholdings in non-competing fields need not occur mainly in those activities in which the most obvious abuses of monopolistic power are tolerated. Small firms confronted with unfavorable transfers of demand may not always be sufficiently competitive among one another to be forced to cut prices in emergent depression, although wise policy would exhort them to do so; while large firms, even when they possess some monopoly power, may well be in a position to read the signals more accurately. But it is at the cost or input stage that the more serious withholdings (initiatory or induced) are encountered.

 

 

13Clower appears to think that “traditional” analysis did not perceive the position. As he describes the situation, “perhaps the simplest way to define such measures is to suppose that actual transactions in any given market are always dominated by the ‘short side’ of the market; that is to say, market transactions are equal to planned market supply if demand is greater than supply, to planned market demand if supply is equal to or greater than demand”.14 What puzzles me in this passage is the word “suppose.” Given downward sloping demand curves and upward sloping supply curves the ‘short side’ must always prevail. Clower refers to the situation as an “addendum to traditional theory.”15 Actually, I cannot remember any time since I read H. D. Henderson’s Supply and Demand in the middle 1920’s when I did not take it for granted.

16In any case, I can conceive of no reasons why the use of money should give rise to pessimistic forecasting (See pp. 30-34).

17The reader should notice that this is another way of saying, “higher than is compatible with the maximization of labor’s aggregate earnings at current prospective yields to investment.”

18In an appreciative critique, an anonymous reader, reporting to my publisher, comments on this issue:

“The theory of depression he has introduced is, in my opinion, original. He continuously maintains that it was the pre-Keynesian approach. Since I am not highly learned in the literature, I cannot say for certain this is untrue; but I can say I have never heard the theory before. Thus, although Hutt purports to be restating a traditional approach, it seems to me that he is introducing a new one.”

But in writing this essay I felt myself that I was restating and perhaps clarifying what Cannan, Lavington, and H. G. Browne had clearly stated and other economists had accepted.

19I.e., when investment in increased inventories for the production of “time utilities” is judged more productive than alternative uses of the capital involved.

20Individual workers will have different alternatives; but for simplicity I assume here that monopsonistic discrimination is ruled out. I have discussed this issue at length elsewhere. (The Strike-Threat System, Chapters 8, 9 and 12).

 

 

21  R. W. Clower, Monetary Theory, p. 281.

22  Ibid., p. 282.

23  Hutt, Keynesianism, p. 66.

24  Yeager, “The Keynesian Diversion”, pp. 159-162.

25  F. Lavington, The Trade Cycle, London, P. S. King, 1922, p. 23.

26  Clower, op. cit., p. 290.

27  Ibid., p. 291.

28  Leijonhufvud, On Keynesian Economics, p. 57.

• 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 J. M. Keynes, The General Theory (See note above), p. 19.
• 5 T. Sowell, Say’s Law (Princeton University Press, 1973), pp. 3, 4 (twice), 12, 19, 201.
• 6 J. A. Schumpeter, History of Economic Analysis (Oxford University Press, 1954), p. 625.
• 7*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.
• 8 Ibid., p. 625.
• 9 James Mill, Commerce Defended (London, C. and R. Baldwin, 1808), p. 76.
• 10 Schumpeter, op. cit., p. 617.
• 11*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.
• 12*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.
• 13Since 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.”
• 14 W. H. Hutt, Economists and the Public (London, Jonathan Cape, 1936), p. 34.
• 15 M. Blaug, Economic Theory in Retrospect (Homewood, Ill., Irwin, 1968), p. 154 n.
• 16At 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.
• 17Controversy 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.*
• 18An 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.
• 19“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).
• 20The 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.*
• 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.*
• 27*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.
• 28Schumpeter 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.”