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Say’s Law, as explicated by the great liberal political economist
Jean-Baptiste Say (1767-1832), is the principle that supply constitutes demand,
with the corollary that aggregate supply always equals aggregate demand.
There’s no more important principle in political economy to get perfectly
right – and assiduously avoid getting wrong – than Say’s Law.
Say’s Law is the most important first principle in economics, with
innumerable important corollaries and implications; its logic is irrefutable,
its empirics undeniable. Any economist who denies the Law is akin to a
physicist who denies the Law of Gravity; an economist opposed to Say’s Law
isn’t really an economist, any more than a gravity denier is a true
physicist. (Read Lord Keynes for this 'economist')
Among the many important implications of Say’s Law is that prosperity and
economic expansions are supply-side phenomena, a consequence of entrepreneurs,
the profit motive, saving, investment and capital accumulation. Put negatively,
“consumers” per se don’t drive economies (least of all,
today’s largest consumer: government).
Recessions, economic stagnation, unemployment, and crises occur not because of
“over-production” (or “under-consumption”) but because
public policies undermine property rights, manipulate prices, prevent markets
from clearing, impede trade, and punitively tax profits, income, and capital.
Tragically, Say’s Law has been denied by John Maynard Keynes (1883-1946)
and the Keynesians who dominated economics for at least four decades after
World War II (and to some extent still influence economics and policymaking
today). In his 1936 text, Keynes falsely attributed the Great Depression and
mass unemployment to a prior period of “over-production” (in the
1920s). “Say’s Law,” he wrote, the principle “that the
aggregate demand price of output as a whole is equal to its aggregate supply
price for all volumes of output, is equivalent to the proposition that there is
no obstacle to full employment.” (emphasis added) It was a preposterous
claim.
In fact, Say’s Law reveals that while certain markets (say, the labor
market) may be in disequilibrium, it’s not possible that all markets in
aggregate can be so – and if, as with unemployed labor, supply exceeds
demand, it’s due to policy barriers like minimum wage mandates,
regulations and taxes on would-be employers and employees alike. Although
Keynesian economics dominated academia and policymaking from 1945 to 1980,
beginning in the mid-1970s it was increasingly discredited as illogical in
theory and harmful in practice; its macroeconomics was inherently
contradictory, it had no foundation in microeconomics and it was harmful,
precisely to the extent practiced, to economies in Britain, America, and India.
Keynesian premises and policies ensured that the 1970s were marked by
“stagflation – the worst of both worlds. Thankfully, this dire period
was followed by New Classical Macroeconomics, “rational expectations”
insights, and supply-side policy cures, all of which affirmed and built on the
truth of Say’s Law and its corollaries. The world thereafter was made
better by Saysian economics displacing (at least partly) Keynesian economics.
But Keynesian economics persists today, partly because it satisfies unwarranted
suspicions that capitalism is inherently unstable or unsustainable, and partly
because it rationalizes government policy intervention and activism.
Many economists and policymakers, observing the financial-economic debacle of
2008-09, blithely assumed that Keynesian theory explained it while Keynesian
policy could cure it. Nothing was further from the truth. That debacle was
caused not by capitalism (or “deregulation”) but by its contravention
– by government subsidies, guarantees, and regulations in housing,
banking, and mortgages – and it was worsened and prolonged to the extent
Keynesian policies were adopted (e.g., massive new public spending and money
issuance, plus a deliberate policy of near-zero interest rates).
The latest issue of the Review of Keynesian Economics is devoted entirely to a
dozen Keynesian economists insisting strenuously that Keynesian economics is
alive and well. No counterviews are entertained, but it seems the acolytes doth
protest too much. Why the defensiveness? Because most Keynesian principles are
false – always were, always will be. Yet today’s defensive acolytes
can take comfort in the fact that Keynesian premises, no matter how wrong, will
always retain a sympathetic hearing to the extent people are suspicious of
capitalism, while Keynesian policies, no matter how wrong, will always win
ardent support from policymakers to the extent they seek to rationalize
interventionism and activism. Say’s Law and Saysian economics go hand in
hand with a political-economic-philosophical appreciation for capitalism –
for rationality, the pursuit of self-interest, entrepreneurialism,
profit-making, private property rights, the rule of law, and constitutionalism.
Say’s Law was largely unquestioned (but also not fully grasped) in the
century or so before Keynes tried to slay it in the 1930s; before then,
Malthus, Rodbertus, and Marx were its most prominent deniers. We should be
grateful that in recent years many scholars have kept Say’s political
economy, his treatise, and his Law alive, well, and pertinent to contemporary
debates – especially Steven Kates, James Ahiakpor, Alain Beraud, Richard
Ebeling, Evelyn Forget, Steve Hanke, Steven Horwitz, Gilles Jacoud, Petur
Jonsson, Guy Numa, Munir Quddus, Rashid Salim, Evert Schoorl, and Mark Skousen.
Given Say’s Law’s crucial importance to sound political economy and
public policy, I offer the following concise account of it, together with its
primary principles and propositions: · Say’s Law holds that supply
constitutes demand (not “supply creates its own demand”), with the
crucial corollary that aggregate supply always equals aggregate demand. There
can never be a deficiency (or excess) of aggregate demand relative to aggregate
supply; the two phenomena are the same thing (or “two sides of the same
coin”) viewed from different sides. · It’s misleading to define
Say’s Law as “supply creates its own demand” (or, so goes a
typical ridicule, that supplying bikinis will create a demand for bikinis, even
in Alaska). In truth, newly created bikinis entail a demand for things other
than bikinis. There can be a “glut” (surplus) of goods (or money) in
some markets (microeconomic), but no “general glut” in all markets
(macroeconomic), and to deny this is to commit the fallacy of composition
(“what’s true of the parts is true of the whole”). ·
- Production is the creation of wealth (utility) and spending is the exchange
of wealth while questions about who earns wealth (and how much – and why)
pertain to the distribution of wealth; the consumption of wealth is not
equivalent to demand but to the destruction of wealth (utility), the opposite
of creating it (production). Demand is not equivalent to consumption; it’s
a desire to purchase plus purchasing power (and the latter comes only from the
creation of supply, or from the income one is paid for doing so). One cannot
demand unless one first supplies (produces) something of value for offer to
others in exchange for their goods. Markets are made by producers, not by
consumers qua consumers (because consumption is the destruction of wealth, or
utility).
· Of course, we produce wealth, ultimately, to consume it, or save-invest
it, but this doesn’t mean consumption “causes” production
(destruction is the opposite of creation). Obviously, some wealth is consumed
in the process of creating wealth (see “cost of goods sold” in
profit-loss statements), but no (net) wealth is truly created unless
there’s valued-added (sales exceeding costs=profit). Profit isn’t a
“deduction” from (labor) income but net production.
· Sound economics focuses on the production, exchange and distribution of
wealth, not on its consumption; there is a “primacy of production”
– because supply is a necessary precondition for prosperity, wealth
creation, and demand. Given the importance and primacy of production in an
advancing, progressing civilization, we must be concerned above all with the
freedom, rights, incentives, and rewards of creative inventors, engineers, and
entrepreneurs.
· Says’ Law is as true in an advanced, monetary economy as it is in a
barter economy, and as true in the short term as it is over the long term; in
this way Say’s Law doesn’t differ from the law of gravity. These two
aspects of Say’s Law are often misunderstood even by adherents.
· When we produce things in exchange for money or income, we demand money
(and income), for purposes of spending or saving; but saving is not a
“leakage” from “the spending stream” (it is saved wealth
and invested, which means: spending on capital goods instead of spending on
consumer goods). If money is hoarded, no drop in total demand occurs; money
itself is a type of good, and if hoarded, is itself demanded (intensely so). A
“scarcity” of money by itself doesn’t impede output growth; it
merely entails a declining price level; but this should be welcomed as “a
declining cost of living” (which implies a rising standard of living).
Money hoarding isn’t a normal part of a free economy but occurs when
public policy is confiscatory and/or risk-promoting; to the extent a higher,
intense demand for money (hoarding) accompanies economic stagnation it’s
due to bad policy, not to relatively less total demand.
· Economic recessions reflect not insufficient nominal demand (an alleged
“money shortage”) but less real supply due to counter-productive
public policies (taxing, regulating, etc.) which seize or divert wealth and
impede-punish its creation; government spending doesn’t cure recessions by
promoting consumption but only delays recovery; public spending is financed by
taxes, borrowing, or money-printing, none of which is, per se, pro-production;
no magical “public spending multiplier” arises from some increased
“marginal propensity to consume.”
· Keynes’s claim that Say’s Law is “equivalent to the
proposition that there is no obstacle to full employment [of labor]” is
patently false; many (non-macro) factors impede full employment, including
above-market wage rates (whether imposed by coercive unions or public policies)
and the punitive taxation and/or regulations inflicted on would-be employers
and employees.
· Some Keynesians have acknowledged the importance of a debate about
foundations and first principles, conceding that if Say’s Law is true,
Keynesian economics necessarily cannot also be true (since the latter says a
differential can arise between aggregate demand and aggregate supply and that
government policy can do something to close the differential). By the logic and
reality of the matter, Say’s Law in fact is true and valid, so Keynesian
economics is not.
The great French liberal Frederic Bastiat (1801-1850) popularized much of
Say’s political economy and in his Economic Harmonies (1848) wrote of Say
and Say’s Law as follows: It is fortunate for society that men of genius
like Say have patiently and tirelessly applied themselves to observing,
classifying, and setting down methodically all the facts that constitute this
excellent science [of political economy]. Henceforth the human mind can move
forward from this firm base toward new horizons. . . You too might be able to
take this same torch from the hands of your predecessors and turn its light
upon some of the dark recesses of the social sciences, and particularly upon
those that have recently been plunged into darkness by the dissemination of mad
doctrines. It’s worth reiterating that there’s no more important
principle in political economy to get right – and avoid getting wrong
– than Say’s Law. As Bastiat knew, the Law is akin to a torch
illuminating and facilitating the spread of knowledge, based on reason and
reality. It also helps us avoid a deleterious dissent into the darkness of
“mad doctrines.”
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