In other words, it is possible for a significant part of people to significantly reduce their mutually beneficial exchange for a significant period of time? Because they are uncertain, what pattern of exchange will end up more beneficial, and hope that time will tell.
Well, I do not see how this is physically impossible, to be honest.
“Because they are uncertain, what pattern of exchange will end up more beneficial, and hope that time will tell.”
Andris,
I think that with this quote you have marginalized a very major possibility. Do you really think that it’s so hard to believe that savings would generally go up with mass layoffs? If I’m afraid of losing by job then do you think that it’s only possible that plain savings in general would rise and consumption in general would decrease?
For this reason I am not attacking Say’s Law explicitly, but rather what Say’s Law is usually employed to express: The idea I am attacking is the idea that there can never be a “general glut”, that demand for goods in general cannot be too low. I think the answer is that they obviously can be.
I have always understood the notion of “no general glut” to mean that excess supply in one part of the economy is balanced by excess demand in another. So, you are right that demand for goods can be “too low”, but Say’s Law would argue that this implies demand for something else must be “too high” (like money).
This is where a little math sometimes helps. Let’s say you have two markets: a market for goods (G) and a market for money (M). The notion of “no general glut” implies that the following equation must always hold:
(G^d - G^s) + (M^d - M^s) = 0
Where ^d indicates demand (e.g. G^d = demand for goods) and ^s indicates supply (e.g. G^s = supply of goods).
What this equation basically says is that the sum of excess demands (e.g. G^d - G^s) across all markets must always sum to zero. If this is true, this means that when excess demand is negative in one market (e.g. demand is “too low” in the goods market–G^d < G^s), excess demand must be positive in another market (e.g. demand is “too high” in the money market–M^d > M^s).
Why would we expect this equation to hold true? Because if consumers are not spending all their income on goods, they must be doing something with it (income doesn’t just disappear). In this case, they are hoarding cash under their matresses.
You can call this “Say’s Law”. In most textbooks, it is called “Walras Law”.
PS* Tyler Cowen has an excellent essay from 1982 called “Say’s Law and Keynesian Economics”. It has an excellent summary of what Say’s Law was about and how it has been interpreted historically. You can find it in this book:
I think that with this quote you have marginalized a very major possibility.
I do not see how my formalization is incompatible with your scenario. People save exactly because they believe this will facilitate more beneficial exchanges (in future).
I’m not questioning your scenario per se, I’m questioning what would seem to be your dismissal of the likelihood of this state of affairs.
There seems to be a misunderstanding.
I just acknowledged physical possibility. As to the likelyhood, I am mostly agnostic at the moment.
I think it depends on what you mean by “overproduction”. Overproduction is indeed impossible as such, but underconsumption is certainly possible.
The two are usually regarded as two ways of saying the same thing. Overproduction means more production than demand. Underconsumption means less demand than production. A>B is equivalent to B<A.
Central to his assumptions seems to be the assumption of no hoarding or decreases in aggregate demand.
Rothbard in History of Econimic Thought, Part 2, page 32:
Conceding that sometimes the savings might be hoarded, Say was for once
less than satisfactory. He pointed out correctly that eventually the hoard will
be spent, either on consumption or investment, since after all that is what
money is for. Yet he admitted that he too deplored hoarding. And yet, as
Turgot had hinted, hoarded cash balances that reduce spending will have the
same effect as ‘overproduction’ at too high a price: the lower demand will
reduce prices all round, real cash balances will rise, and all markets will
again be cleared. Unfortunately, Say did not grasp this point. I5
In other words, let’s not confuse the person with the idea. Say himself, the person, did not have the best understanding of hoarding. Other economists [Mises, Rothbard (above), Hazlitt] did, and filled in the missing piece of the puzzle. They took care of the hoarding objection to Say’s Law in several ways.
Such is the nature of scientific advancement. Newton the person believed in angels and demons. This does not affect the truth of Newton’s laws.
Similarly, Say himself did not understand hoarding. This does not affect the truth of his laws.
…demand is “too high” in the money market–M^d > M^s…
I wonder about this. “Glut” means products produced but unsold. So that X^d<X^s would mean more X produced than bought. That being the case, we can never have X^d>X^s, because you can never buy what does not exist. Thus X^d-X^s can never be positive non zero, and this is true for all X. And to sum to exactly zero, as the equation claims, since each term is of the same sign, we must have them all invidually equal to zero.
In other words, the equation does not state that when excess demand is negative in one market…excess demand must be positive in another market, because excess demand can never be positive.
Instead, it states that for any given market, excess demand is zero.
In a free market, this will be true, because prices will adjust until supply equals demand.
None of this has anything to do with Say’s Law.
Neodoxy I’m kind of confused what your position is. Are you saying under consumption causes depressions, but what causes the under consumption in the first place?
The passage from Say acknowledges that a fall in consumption happens “because people are making less profits”. You don’t seem to offer a remedy for the fall in consumption problem. In America today do you think we have an underconsumption problem (LOL!)
See this:
Student,
I think that Dave raised the main reasons why I don’t really think the provided equation answers my question. The part of Say’s Law I agree with is that supply does create the possibility of adequate demand, that the sum in all markets must come out to zero, but this does not itself preclude the possibility of the general glut, since if money were just hoarded in the equation then there would be too much labor supplied/demanded as well as produced goods to be sustainable at the current price level.
Andris,
I think I was misinterpreting you then. Sorry for the misunderstanding.
Gravy,
I don’t think you’re reading very well, especially because I answered many of your questions in our previous discussion. I’m mainly going to answer your questions by quoting myself in this thread.
You: “Neodoxy I’m kind of confused what your position is. Are you saying under consumption causes depressions, but what causes the under consumption in the first place?”
Me: “The problem of business cycles in modern macro is generally (not always) simplified to one of consumption. The problem in some (not all) Austrian explanations of the business cycle is entirely one of misallocated production. I believe the former leads to the ladder and that both are likely to be present in business cycles.”
In other words traditional ABCT leads to malinvestment and crash. This leads to hoarding and underconsumption.
You: "The passage from Say acknowledges that a fall in consumption happens “because people are making less profits”.
Okay, I have no objection to that, although It’s not necessarily true.
You: “You don’t seem to offer a remedy for the fall in consumption problem.”
Me: “My proposed solution to prevent underconsumption is to liberalize markets and prevent malinvestment.”
Just because there is a problem doesn’t mean there is a good solution. Fiscal and monetary policy are unsustainable and lead to their own problems, so the only solution is to try to wait until prices adjust.
"In America today do you think we have an underconsumption problem (LOL!) "
No. Both the state and just the stupidity of Johnny American have ensured that there is no spending problem, but at the expense of causing a whole host of other problems and without dealing with the more basic problems: malinvestment and bubbles.
I think that you’re making the mistake of assuming that because I agree with some of the problems the Keynesians do, that I don’t agree with many of the basic Austrian arguments, that because I agree disease X is deadly that witch doctoring will solve something.
Dave,
Thank you for the clarification. That’s part of why I don’t understand why people cite Say so much when referencing his law. It seems like modern descriptions of the matter are much more eloquent and necessary to what people are trying to justify.
“The two are usually regarded as two ways of saying the same thing. Overproduction means more production than demand. Underconsumption means less demand than production. A>B is equivalent to B<A.”
Dave,
So that X^d<X^s would mean more X produced than bought. That being the case, we can never have X^d>X^s, because you can never buy what does not exist. Thus X^d-X^s can never be positive non zero, and this is true for all X. And to sum to exactly zero, as the equation claims, since each term is of the same sign, we must have them all invidually equal to zero.
There is a difference between quantity demanded and quantity purchased. X^d > X^s does not mean people are purchasing imaginary products. It means that the quantity of a good demanded exceeds the quantity supplied. This is the definition of a shortage and is a concept straight out of simple supply and demand.
In a free market, this will be true, because prices will adjust until supply equals demand.
In equilibrium this will be true. But gluts are disequilibrium phenomena.
None of this has anything to do with Say’s Law.
Steve Horowitz would disagree.
If you check out his excellent essay on the topic, he argues that an implication of Say’s Law (and the way Say’s Law feeds into the “general glut” discussion) is exactly what I descrbed above. Specifically, he says that Say recognized that “if money is in short supply, some producers will be unable to demand, as they will be unable to sell their goods for money, given that it is relatively unavailable. The result will be a glut, as goods and labour sit unsold.” This sounds very familiar to me.
But it is a free country, so feel free to redefine Say’s Law however you like.
The part of Say’s Law I agree with is that supply does create the possibility of adequate demand, that the sum in all markets must come out to zero, but this does not itself preclude the possibility of the general glut, since if money were just hoarded in the equation then there would be too much labor supplied/demanded as well as produced goods to be sustainable at the current price level
If you believe that (X^d-X^s) = 0 for all markets as Smiling Dave said, then there is no possible way you can believe in general gluts. Because this says that quantity demanded always equals quantity supplied for all markets. Full stop.
What I am saying (and what Horowitz argues that Say himself recognized) is exactly what you say in the last sentence. If people hoard money (M^d > M^s), then there will be too much labor supplied and too much goods produced to sustaintable at the current price level. In other words, we will have “gluts” or “surpluses” in the labor and goods markets (G^d < G^s).
Of course, I wouldn’t call that a “general” glut, but maybe we are just using different terminology. I would call these “relative” gluts instead of “general” gluts because the surplus in the goods market is offset by a shortage in the money market. But that is really a minor terminology difference. If this is the point you were driving at all along, then I think you have nailed it.
Student,
I’ll take a gander at the cited essay. I’m just confused that you seem to be integrating Say’s law into a theory of general gluts that doesn’t have to do with the production of unwanted goods, which is what I’ve always seen it used to justify. This is to say that I’ve only seen it used to say that there either cannot be a general glut, only unwise investment, or that there will be no net hoarding.
This is what I’ve been recently objecting to, since I agree with most modern economists that both the idea of highly rapid price flexibility and of the impossibility of hoarding are both utterly false.
If all Say was trying to argue was that prices need to adjust under certain levels of spending, then I don’t understand the big fuss or why Keynes even needed to refute it (correctly or incorrectly) in the General Theory. The issue would come down to the question of whether or not prices adjust quickly, not whether or not there can be too little spending.
“I would call these “relative” gluts instead of “general” gluts because the surplus in the goods market is offset by a shortage in the money market. But that is really a minor terminology difference. If this is the point you were driving at all along, then I think you have nailed it.”
Yea, I really think that we’re just talking about the same thing in two different ways. If by a shortage in the money market you just mean that not enough money is offered relative to goods due to hoarding, then I wholly agree and I don’t understand how one could really disagree with this at least in theory.
If all Say was trying to argue was that prices need to adjust under certain levels of spending, then I don’t understand the big fuss or why Keynes even needed to refute it (correctly or incorrectly) in the General Theory. The issue would come down to the question of whether or not prices adjust quickly, not whether or not there can be too little spending.
Well, I think the point that is often made is that Keynes misinterpreted Say’s Law to mean that the money market would always be in equilibrium (no hoarding) and that no glut in the goods market could occur. Of course, Keynes was not the only one to make this mistake. If I remember correctly, Cowen says that Mills made the same mistake.
Yea, I really think that we’re just talking about the same thing in two different ways. If by a shortage in the money market you just mean that not enough money is offered relative to goods due to hoarding, then I wholly agree and I don’t understand how one could really disagree with this at least in theory.
I totally agree.
Steve Horowitz [sic] would disagree…it is a free country, so feel free to redefine Say’s Law however you like.
I’m glad you raised the issue of redefining Say’s Law however one likes, since it is a free country. It is Horwitz, not me, who has taken advantage of that freedom to redefine Say’s Law however he likes, in direct contradiction to Say himself.
I proved this in my humble article, J.B. Say Rises From the Grave to Refute Steve Horwitz.
To understand what is going on, one must realize that the economic world is divided into three groups.
One is the group Mises described as Money Cranks, those who think there is a way to make everyone better off by monetary means, meaning messing about with the money supply. Keynes falls into this category, as does the Chicago school, and all the mainstream we have today. The only ideas taught in universities nowadays are those of the Money Cranks, as I am sure you are aware of.
In the second group is everyone who thinks that what counts is production and free markets. Leading the charge here is J. B. Say, who wrote Chapter 15 of his book, [where he lays out his famous law], for the express purpose of refuting the Cranks. The very first paragraph of that chapter makes that crystal clear, as I have pointed out in the above article. Mises, too, was firmly in this group.
Finally we have what may be called the Wolf in Sheep’s Clothing group. These are people who are Money Cranks, but desire the prestige that goes with being labelled an Austrian. [Kind of like people who love war, but want the prestige of being non violent Christians or Buddhists]. Horwitz is in this camp, known as the Monetary Disequilibrium Theorists. They pretend that Say, and Austrian Economics in general, is on their side. Their mascot is Hayek, since he was wishy washy on this point until 1974 [when he got his Nobel Prize for being an Austrian, and ditched the Money Cranks for good].
First meaning.
In Say’s time, the concept of “general glut” meant that more is being produced of everything than people can afford to buy. This was also described as a “money shortage”, because some people thought that if only there was more money in existence then people could afford to buy everything that was being produced.
Say wrote his famous Chapter 15 to prove that people can afford to buy everything that is produced, always, because ability to buy stems from having previously produced. There cannot be too many apples and too many oranges, because the person growing apples can trade them to buy oranges, and vice versa. Thus a general glut is impossible. The only thing that might happen is that there will be too much produced of some particular product, say apples. The solution would be to stop growing so many apples and use the resources freed to grow something else. [Austrians then expanded on this idea to explain why too many apples were grown in the first place, with their analysis of malinvestments and what causes them].
Second Meaning;
Say pretty much destroyed once for all the idea that more can be produced than people can AFFORD to buy. Keynes came along and invented a new version of “general glut”, where more is produced of everything than people WANT to buy. He saw this as a problem of “hoarding”, where people will prefer to hang onto their money rather than invest it or spend it on consumption. His solution was to find various means to strip them of their money, either by taxation or inflation.
As I mentioned above, various Austrians have disproved the existence of Keynes’s problem, [as well as the futility of his solutions].
Thus “general glut” can be generalized to mean “too many products and too little money buying them”, whether the “too little money” is because not enough is in existence, or because people are hoarding too much of it. Say and the Austrians have shown that no matter what you claim the “too little money” stems from, you are wrong. There is no such thing as a general glut. There cannot be too many products.
Third Meaning:
Finally, we have Horwitz and his kind. They want to have their cake [=pretend to be Austrian] and eat it [=be Monetary Cranks], too. So they have to claim that Say was right and wrong at the same time. Apparently, they did this by redefining terms. A "general glut’ now means not a glut of products, but of products plus money. Thus they can claim that Say is correct that a general glut is impossible, and at the same time claim that a free market will have problems that need a govt to fix. Yes, there is no such thing as a general glut, they claim, but there can be too many products and too little money. Solution: print the money and everyone will be happy.
You see what they did here. If they have general glut mean what Say meant, too many products and not enough money, then if they agree with him, there will be no need to print more money, and that doesn’t sit well with them. If they have it mean what Keynes meant, then they will have to admit Keynes is right according to them, and they don’t want the label of Keynesians. That’s why they had to make up a new definition of general glut, one emptied of all meaning, so they could agree with it, and yet insist printing money is wonderful.
The interested reader can do a search and find several articles in my humble blog to refute Keynes, and several to refute the Money Dis crowd.
Thus a general glut is impossible. The only thing that might happen is that there will be too much produced of some particular product, say apples. The solution would be to stop growing so many apples and use the resources freed to grow something else.
Then that is kuhh-rrayy-zee. If people can hoard money, there is no reason that should be true (as I described above). But you are right that some Austrians seem to think people only hold money as a medium of exchange (Mises seems to be saying exactly that here: http://mises.org/daily/1803). Of course, why you would think that people could never hold cash as a store of value is beyond me.
I am not an intellectual historian, so I won’t try to argue about which version of Say’s Law more accurately reflects what Say…said. I will just say that if recognizing aggregate demand can be deficient makes me a CRANK, then I am fine with that. Me and all the “wishy-washy” impure Austrians like Hayek, and Horowitz gonna rock together. LIKE THE CEILING CAN’T HOOLDD USSS.
Where did Hayek say that insufficient aggregate demand was possible?
Student,
Reply to first paragraph:
I wonder at the depths modern education has sunk to, if you have never heard of these well known ideas [to Austrians, anyway] before.
Your"description above" is fallacious, because it ignores the laws of supply and demand.
You didn’t understand what I wrote, nor what Mises wrote. Of course people hold cash at times as a store of value. No one said otherwise. But that is irrelevant to the question at hand.
All your errors are refuted with crystal clarity in my humble article: https://smilingdavesblog.wordpress.com/2013/02/14/how-mises-dismissed-that-whole-keynesian-thing-with-a-decisive-one-liner/
Reply to secomd paragraph:
I’m glad you learned something about Say’s law, enough to make you doubt your previous stance. Progress.
As for you being a crank, nothing personal, [and not my description, but Mises’s]. I’m sure you help little old ladies cross the street, and do other good deeds. Just keep an open mind about economics until you learn more.
As for the ceiling not holding all the masses who are in error, yes, that’s true. And yes, some people feel a certain emotional security knowing they are in the majority. Others feel good when logic and deductive reasoning prove they are correct, however few agree with them. Training in advanced math and logic sometimes helps foster this preference for the true over the popular.
“Then that is kuhh-rrayy-zee. If people can hoard money, there is no reason that should be true (as I described above)”
Student, I think that Dave is arguing against the idea that people can buy back the full product which has been produced. I think that in “meaning 1” he was arguing against the idea that people “can’t afford” what is produced. This has nothing to do with hoarding. The product is always affordable, the question is whether or not citizens will demand it. This lack of demand could either be because they are hoarding and they indeed want to purchase the product, but not as much as increasing their cash balances, or that they just don’t demand what’s currently being produced compared to what could be being produced. In the second case what Dave is describing would be the case, but the first case is what you and I have been talking about.
If you are going to quote something that Dave writes which would appear to contradict this it would be his second meaning of “general glut”:
“Thus “general glut” can be generalized to mean “too many products and too little money buying them”, whether the “too little money” is because not enough is in existence, or because people are hoarding too much of it. Say and the Austrians have shown that no matter what you claim the “too little money” stems from, you are wrong. There is no such thing as a general glut. There cannot be too many products.”
Depending upon what exactly Dave means by this then he is either quite right or is being very foolish. There indeed can never be too much that is produced, but there can be too much produced at a specific price level, which can cause problems.
Gravy,
If investors and consumers suddenly hoard half of there money then would any problems result? If the answer is “yes” then what would you call this. If the answer is no then why not?
Where did Hayek say that insufficient aggregate demand was possible?
Hayek went through three phases. His first is the Hayek’s Overcoat phase. Then he became a turncoat, excuse the pun. Phase three was after he won the Nobel prize, and put his overcoat back on.
The Horwitz’s and Selgin’s of the world will provide you with the quotes from Hayek’s turncoat phase. Too tired to hunt them up now.