OPE-L Say's Law

From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Tue Mar 09 2004 - 13:03:12 EST

re: discussion of Shoul and Say's Law

Two Hundred Years of Say's Law: Essays on Economic Theory's Most
Controversial Principle
Kates, Steven (editor)

Published by EH.NET (November 2003)

Steven Kates, editor, Two Hundred Years of Say's Law: Essays on
Economic Theory's Most Controversial Principle . Cheltenham UK:
Edward Elgar, 2003. x + 221 pp. $85 (hardcover), ISBN: 1-84064-866-X.

Reviewed for EH.NET by Ingrid H. Rima, Department of Economics,
Temple University.

The year 2003 marks the two hundredth year anniversary of the
generalization that has come to be known as Say's Law. As with any
other anniversary that has had a significant impact on the
development of economics -- specifically macroeconomics -- this
anniversary is deserving of commemoration. Steven Kates' undertakes
to do this in a volume whose subtitle is "Essays on Economic Theory's
Most Controversial Principle."

Some historical background is useful for putting the eleven essays
that comprise this collection into perspective. The editor's
thirty-two page introduction traces the origins of J. B. Say's
concept of demand deficiency in response to a pamphlet by William
Spence written during the Napoleonic Wars between France and England
arguing that the loss of trade did no great harm because agriculture
was the chief source of the economy's value added. This resurgence of
Physiocratic doctrine in England about the centrality of landowner
expenditure in maintaining the economy's prosperity, provoked a
response by James Mill in Commerce Defended. This essay substantially
denied, on the basis of an earlier argument by J. B. Say against the
French Physiocrats that a deficiency of aggregate demand is an
impossibility. Subsequently known as the "law of markets," the
Say-Mill generalization maintained that the production of output
simultaneously generates aggregate purchasing power of sufficient
value to clear markets of the entire output, which renders the
insufficiency of purchasing power an impossibility. It is this
perspective that essentially became the pre-Keynesian theory of
recession that maintained, quite simply, that excess supplies of some
goods could arise because some outputs have been produced in
inappropriate proportions, but that gluts in the sense of
insufficient demand for output as a whole are an impossibility. The
essence of Keynes's argument in the General Theory (1936) and the
1937 Economic Journal article that followed asserted the fallacy of
Say's Law given the absence in received economic theory of "a theory
of supply and demand for output as a whole."

Some years afterward a 1942 paper by Oskar Lange entitled "Say's Law:
A Restatement and Criticism" shifted the ground of the argument from
the functioning of commodity markets to that of the money market. His
argument was that Say's Law holds because, implicitly, additional
cash is never wanted, so that the demand for goods is necessarily the
equivalent of the supply of goods with the result that unemployment
cannot occur. This logic (also that of Alfred Marshall) led to the
perspective that the theory of monetary markets must begin with a
consideration of Say's Law. William Baumol entered into the argument
noting that, while fluctuations in aggregate demand may be the source
of recessions and depression, the appearance of demand deficiency may
well be a symptom rather than a cause of recession. His paper "Say's
Law and More Recent Macro Literature: Some Afterthoughts" is an
appropriate prelude to the eleven essays that follow, including his
own ("Retrospectives: Say's Law") republished from the Journal of
Economic Perspectives (1999). The essays in the volume thus proceed
from what the editor and the volume's contributors consider Baumol's
perceptive insights into "the next stage of the debate" (p. 6) about
Say's Law. He is particularly concerned to emphasize that Keynes was,
in fact, using the generalization that has become known as "Say's
Identity" as a "strawman" to criticize "the classics,"
notwithstanding the concern that Malthus, Ricardo and Say expressed
about unemployment and depression.

Evelyn L. Forget sets the stage for the essays that follow with her
intellectual biography of J. B. Say as a political economist and
entrepreneur. He engaged in the real world of business decision
making that was then, as today, "complete with less than optimal
bureaucracies, less than omniscient entrepreneurs, and a good deal
less than perfect foresight" (p.51). For Forget, Say's own use of the
law of markets, to which the role of the entrepreneur was central, is
found to have been fundamentally different from the automatic
adjustment mechanism that Keynes rejected and casually labeled
"classical" in The General Theory.

Given the disappearance of Say's Law from contemporary discourse
since The General Theory, the essays that follow undertake to
evaluate, whether the profession has also become deprived of the
valuable insights about the phenomenon of overproduction that were
historically the subject matter of business cycle theory. Steven
Kates's "Economic Management and the Keynesian Revolution" addresses
the question from the policy perspective of Keynes's "solution" of
offsetting aggregate demand deficiencies with increased public
spending. Because "savings do not lie fallow but are channeled into
investment," Kates considers the policy to not be "economically
sound." The Keynesian case is thus threadbare, and "other
explanations for recession and involuntary unemployment are required"
(p.79). In short, Kates' argument is that recessions are not caused
by a failure of demand. This argument is the segue into papers by
Steven Horowitz and Mark Skousen, which pursue "the case in favor of
a modern rehabilitation of Say's Law" from the perspective of F. A.
Hayek and other supply side economists. Skousen's paper is
particularly interesting in its argument that, empirically, business
investment is a more reliable predictor of the business cycle than
the consumption data suggested by Keynes's focus on the consumption
expenditures of households. For Skousen these findings suggest the
relevance of giving greater credence to supply side forces --
specifically the role of entrepreneurs -- as the source of dynamic
change in an economy. The preceding arguments against Keynes-type
demand management policies echo James Akiakpor in "Say's Law:
Keynes's Success with Its Misrepresentation." Together with Timothy
Davis's analogous paper "The Historical Context of the General Glut
Controversy," he offers a review of the events surrounding the
so-called "glut controversy" that engaged Ricardo, Malthus and J. B.
Say during the nineteenth century.

The remaining four papers examine what the editor's introduction
identifies as "the case for Say's Law"; these reaffirm not only
Keynes's principle of aggregate demand, but also more contemporary
theoretical developments. The first among these is Michael George's
paper "Savings, Hoarding and Say's Law," which focuses on the role of
hoarding and the relationship between variations in the interest rate
and speculation explored by Alfred Marshall and Frederick Lavington.
This historical inquiry is interesting in its own right, yet it is
hardly reflective of the contemporary post-Keynesian perspective of
"money as an asset." Modern monetary production economies are
fundamentally different from those trading use values, e.g., iron for
corn, which evolved historically once the era of economic
self-sufficiency passed. Monetary production economies are not
concerned with the production of use values, but are concerned with
the production of commodities for sale in order to generate profit.
The role of money in a C - M - C' economy is its immediate use for
the purchase of other products, whereas in an M - C - M+ economy
(which is characteristic of capitalism) money is to facilitate the
accumulation of money (i.e., wealth) for its own sake.

As is elaborated by Steve Keen in the concluding paper of the volume,
it is Karl Marx who described the "circuits" of capitalism in which
he contrasts the process of exchanging use values for money in order
to command other use values vs. exchanging money to purchase the use
value of labor power in order to generate surplus value. Thus, money
is more than a "lubricant" for barter (as perceived by Say); it is
the form in which wealth is accumulated. There is no guarantee that
exchanges undertaken within the M - C - M+ circuit can achieve either
a sectoral or aggregate balance in which expectations are realized so
that the debts undertaken to finance production processes do (given
the uncertainty which characterizes the system), in fact, finance the
sale of output at a profit.

Although the origin of Kates' collection of essays is attributed to a
(student) query whether "supply creates its own demand" or the other
way around, Keynes's raison d'etre for asking the question is the
inherent instability and proneness of capitalism to unemployment and
unused capacity. Only Bruce Littleboy's "Say's Law" paper fully
appreciates the critical link between Keynes's representation of
Say's Law and the "classics," and his central concern about the
phenomenon of large scale job losses. While involuntary unemployment
is noted in Kates's editorial introduction (p.10), the seeming
disinterest of other contributors to examine it further within the
framework of the supply side analysis he favors, and with which it is
not inherently incompatible, is somewhat surprising. It also
compromises his argument that classical economics has greater
analytical and policy relevance that the aggregate demand analysis to
which The General Theory gave rise. The classicals, as Baumol clearly
appreciates, were concerned about unemployment and depression. None
the less, Kates's collection of papers to revisit classical economics
and Say's Law offers contemporary economists (few of whom nowadays
have had the benefit of formal training in the history of economics)
at least some appreciation of the profound insights that the "old
classicals" offer, in particular, in comparison to the body of ideas
that are now termed "new classical."

Ingrid Rima's publications include Development of Economic Analysis,
Routledge (sixth edition), 2000.

Subject : L
Geographic : 0
Time Period : 7, 8, 9

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Citation: Ingrid H. Rima, "Review of Steven Kates (editor) Two
Hundred Years of Say's Law: Essays on Economic Theory's Most
Controversial Principle" Economic History Services, Nov 18, 2003, URL
: http://www.eh.net/bookreviews/library/0706.shtml

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