Critique of Say's Law

Economics Economics Questions
1

I’m an Austrian who just read “Debunking Economics” (the 2011 version) by Steve Keen (Keynesian). I think it’s a great book overall (its focus is on criticizing neoclassical economics).

In his book he critiques Say’s Law. I’m curious what y’all make of Keen’s critique and the “law” itself. He talks about “aggregate demand” throughout the book, so it’s difficult to take him too seriously. Here’s his critique (I’m paraphrasing/showing only snippets for the purposes of explaining his critique, as he references other stuff from earlier in the book throughout; it might not really be clear what he’s arguing without posting the whole thing verbatim, but I’m not sure whether or not that would violate copyright):

"It is appropriate to turn to the horse’s mouth for a definition:

‘Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conseal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is this that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchanidse for their merchandise.’

What would happen if demand for consumption goods fell, so that excess demand for consumption goods was negative (supply exceeded demand)? Say’s Law would argue that demand for investment goods would rise to compensate: notional excess demand for investment goods would be positive.

However, demand for investment goods is driven by expectations of profit, and these in turn depend heavily upon expected sales to consumers. A fall in consumer demand now could lead entrepreneurs to expect lower sales in the future. Dampened expectations would therefore lead entrepreneurs to reduce their demand for investment goods in response to a reduced demand for consumer goods. Thus a situation of negative excess demand for consumer goods could lead to a state of negative excess demand for investment goods as well.

Marx pointed out that Say’s Law asserted that no one in a market economy wished to accumulate wealth. Whereas Say’s Law asserts that people simply desire to consume commodities, an essential aspect of capitalism is the desire to accumulate wealth. The profits of the capitalist allows him to fulfill his desire to accumulate wealth, without robbing any other market partcipants, and without having to buy commodities below their value and sell them above it.

Say’s Law, however, begins from the abstraction of an exchange-only economy: an economy in which goods exist at the outset, but where no production takes place (production is shoehorned into the analysis at a later point). The market simply enables the exchange of pre-existing goods. If one agent desired to and did accumulate wealth, that would necessarily involve theft in the Say’s Law sense. However, this condition does not hold when we move from the fiction of an exchange-only economy to the reality of a production and exchange economy. With production, it is possible for agents to desire to accumulate wealth without therefore aspiring to be thieves.

Say’s Law is founded upon the hypothesized state of mind of each market participant at one instant in time, and since at any instant in time we can presume that a capitalist will desire to accumulate, then the very starting point of Say’s Law is invalid. In a capitalist economy, the sum of the intended excess demands at any one point in time will be negative, not zero.

The ‘time discount’ rejoinder (though some agents may appear to want to accumulate over time, if we discount future incomes to reflect the fact that the commodities that income will enable you to buy will be consumed in the future, then overall these agents are simply maintaining their level of satisfaction over time) has two problems: One, it’s hard to believe Warren Buffett would feel that his level of wealth in 2011 was equivalent to his wealth in 1970. Successful capitalists would feel that they have gained wealth over time and unsuccessful ones would know they have failed to gain/lost wealth. Two, this argument just moves the zero position when calculating whether someone is accumulating, staying the same, or losing. For example, if the rate of time discount is 2%, then anyone who is accumulating wealth at a higher rate is increasing their wealth–the sum of their time-discounted excess demands.

2

Short answer to all this nonsense: Get the free pdf or epub file, Rothbard’s History of Economic Thought, Volume 2. From page 27 on he talks about Say’s Law and all the absurd rebuttals proffered against it, including Keen’s.

3

I can’t find anyplace where Rothbard addresses this argument in that book.

I have Debunking Economic but haven’t read it yet. Keen’s argument seems pretty good though.

4

FOTH,

I’ve said before, your brain works differently than mine.

For example, in a recent thread you wrote that since Mises uses definintions that, although clearly stated and unambiguous, are different than what you are accustomed to, that therefore all his conclusions are wrong. My mind just cannot grasp such reasoning.

So I am not surprised that you think Keen’s arguments pretty good, and that you couldn’t find anything that refutes them in Rothbard’s work.

Good luck to you.

5

What is the significance of Say’s Law? Why must it be defended? And is investment considered a roundabout form of goods-acquisition?

6

Here’s the problem right here:

A fall in the aggregate demand for final consumer goods would indeed mean a lower revenue stream for all industries across the board, but the reduction in revenue would not be proportionate among all the varying stages of production. Some industries would feel it more relative to others. At the same time, a higher savings rate (i.e., lower aggregate demand) would lower interest rates, expand the structure of production (look this phrase up) and cut marginal costs across the board. Thus, costs would fall faster than revenues (in most industries) and profit would remain or may even increase in the aggregate.

There is a solid critique of Say’s law, but this is not it.

[EDIT:]

This critique would be correct if there was a single phase of production representing investment.

7

There is a solid critique of Say’s law…

Link, please?

8

Dave,

I’ve never said that all of Mises conclusions are wrong. I used to think you were one of the most polite and articulate posters on this board. I’m not sure why you feel compelled to personally insult me.

From what I could find, it seemed that Rothbard failed to adequately represent Say’s critics. He seemed to be saying that underconsumption/overproduction (not sure these are actually the same thing) referred to a situation where people just didn’t want to consume. I can’t speak for all of Say’s critics, but this is certainly not how I look at it. The problem isn’t that the consumers don’t want to consume the overproduced goods, but rather that they don’t have the money to purchase them. What Say and Rothbard seem to overlook, is that producers don’t have to lower their prices when their goods start selling at a slower rate. More likely they’ll cut production and sell them at the same price. Laying off workers, however, will reduce the purchasing power of consumers further. I’ve gone into more detail on this in the Wealth Centralization thread.

9

What is the significance of Say’s Law?

It is of earth shaking significance, mainly because of the logical corrolaries of it.

Let’s let Say do the talking:

The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

That’s why Keynes worked so hard and lied so much to undermine Say’s Law.

Why must it be defended?

Because it’s true. Because the deniers of it are actively destroying the economy.

And is investment considered a roundabout form of goods-acquisition?

Not sure what you are asking. The ultimate goal of working is to enjoy the fruits of ones labor. When one underconsumes in order to invest, it is because one thinks one will get a return on the investment, meaning delaying of consumption now will mean increased consumption later.

After all, nobody invests money hoping to lose it all or break even, right?

10

how is this a “problem” in an objective sense? They must be producing tons of silver bars a year, but I the consumer do not have the money to purchase them! Oh no Say lied! If they were producing fewer goods, they would cost even more and even fewer consumers would be able to purchase them. Now how does any of this deal with Say’s law, which basically states that products must be purchased with products. Objectively, one cannot look at an exchange where one person ended up with an exchange medium (rather than a capital or consumer good) as an end point (in this context). They turn arond and use that money to buy SOMETHING and in a sense, the two transactions can be merged. Quoting Say

11

That’s why Keynes worked so hard and lied so much to undermine Say’s Law.

I think this is an important point to be made. The arguments against Say’s Law by Keynes (and the Keynesians of most stripes who followed him) offer it in a misconstrued version; I have my doubts that Sismondi and Malthus would have even recognized Keynes’s argument as being logical to their understanding, much less their criticism, of Say’s Law.

Thomas Sowell has arguably as good a reading as anybody on Say, particularly in the book that was his doctoral dissertation, Say’s Law, and in Classical Economics Reconsidered (which is somewhat rehash).

Another book from “inside the fold” that I’ve heard very good things about (but haven’t read) is Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way by Steven Kates.

12

FOTH,

I. Will turn up the politeness so we can continue comfortably. TY for the compliments.

II. Granted you did not say all of his conclusions are wrong. You merely said “This is helping me see why Austrian Economics is often so confused.”

Not wrong conclusions, but “confused” conclusions. Not always, but “often”.

And why? Because “the Austrian definition differs from the one used in the mainstream”. Indeed, “The problem is, to do proper economics we still need to be able to talk about the concepts according to their old definitions.”

Even this more precise version of what you said is beyond my comprehension. All my formal training in logic and mathematics tells me that the above quote is indefensible.

III. “Rothbard failed to adequately represent Say’s critics…The problem isn’t that the consumers don’t want to consume the overproduced goods, but rather that they don’t have the money to purchase them.”

Rothbard did not address this critique because Say showed it to be logically impossible, and all economists, right down to our day, agreed. Their only cavil was that, although the money is always there [for where did it go? Mars?], folks may decide to hoard it, which is what Rothbard talks about.

IV. “I can’t speak for all of Say’s critics, but this is certainly not how I look at it.”

My earlier post was a response to Steve Keen’s purported debunking of Say’s Law. Do you think he is saying what you are? My take is that he was repeating, albeit in a confused way, the very argument that Rothbard addresses, that people want to “accumalate wealth”, not spend it all. My impression was that his constant repitition of that phrase, especially taken in context, proves tthat.

And so, once again, I see that we think very differently. Let me summarize your position:

  1. Rothbard did not address the critique that people don’t have money to spend, which is my personal critique,

  2. Rothbard does discuss people just not wanting to consume.

  3. Keen’s argument seems pretty good [=people just not wanting to consume].

  4. I can’t find anyplace where Rothbard addresses this argument in that book.

The way I see it, you have contradicted yourself. [4 contradicts 2]. But you don’t see it that way.

V. As for your critique of Say’s Law, for me to take it seriously please summarize Say’s argument, [which claims your state of affairs is impossible], then show what the mistake is.

Just to get the ball rolling, here’s a line from Say Book 1, Chapter 15, of his classic work]:

It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices.

So, yeah, it’s not like there is some revolutionary new idea here that Say never heard of. In fact, the whole point of Say’s Law is to show the folly of such an assertion.

VI. “More likely they’ll cut production and sell them at the same price.”

How can they sell them at the same price if nobody is buying at that price? Did you not just claim that the problem is “people don’t have the money to purchase them” ?

Perhaps you mean that producers will wait things out, selling at a much slower pace, in the meantime curtailing production to keep in line with this slower pace. And you assert this is the “more likely” response. Can you please explain how you know this is more likely? Have you been given the gift of prophecy?

Perhaps you are thinking of the Chevy Volt. Indeed, GM announced they would be slowing down production. But let us remember, the Volt is an overpriced, unwanted dangerous piece of garbage which sets itself on fire every once in a while. Slowing down production of that monstrosity is exactly what is needed. Better yet, stop production totally.

But how do you know that most businessman, faced with the decision of lowering prices or cutting production, will choose the latter? What is the basis of such thinking?

VII. “Laying off workers, however, will reduce the purchasing power of consumers further.”

So you are saying that most producers will “most likely” make a decision that hurts their interests. They will deal with the problem of reduced purchasing power of consumers by reducing it even further.

They have no experience, no wisdom, and will “most likely” never learn. They somehow stumbled into their wealth and positions as captains of industry, and have no real understanding of the basics of economics as applied to their immediate welfare. This is the “most likely” scenario.

We just don’t think the same way, FOTH.

13

Lemme see if I got the thrust of Keen’s critique:

’ It’s possible for there to be a “general slump” if enough people decide to not buy what people are selling. In other words, if enough people decide to live like Luddites, then there will be a huge painful transition as many workers have to find other types of work. This transition takes time. In the interim, the economy is gonna suck. Of course, it will benefit some people (because the price of a lot of things will drop like a rock).

Say’s Law implies that the economy will transition in such a manner that the economy doesn’t experience a general slump because production will shift to whatever people want. The problem is people could literally want a lot less.

The transition would take the form of displaced workers making what people still want (like food). Eventually, each worker will only have to work a little bit (to produce the much smaller amount of goods/services). They might try to make other stuff, but if no one wants to buy it, it’s not gonna help 'em. ’

I definitely think Say’s Law has a general truth to it: If demand changes, the market will respond. When demand drops, stuff on the shelf will probably get sold (at lower prices). People can create things that people didn’t know existed (or didn’t want) until they’re made. All the various Keynesian arguments about aggregate demand and price-deflation is nonsense. However, a literal interpretation of Say’s Law implies that a huge portion of society becoming Luddites couldn’t lead to a temporary general slump.

This critique makes sense to me at the present time. Unfortunately, I haven’t researched this issue enough to feel sure.

14

http://marginalrevolution.com/marginalrevolution/2009/09/leland-yeager-on-says-law.html

15

http://marginalrevolution.com/marginalrevolution/2009/09/leland-yeager-on-says-law.html

So in other words, last year’s argument rehashed?

16

A lot was covered in that thread. Some of the topics were indeed related to the link I’ve provided above.

17

TY, Esuric, for the link.

The key line that supposedly refutes Say’s Law is this, I presume:

[T]the quantity of money people desire to hold does not always just equal the quantity they possess. Equality of the two is an equilibrium condition, not an identity. Only in… monetary equilibrium are they equal. Only then are the total value of goods and labor supplied and demanded equal, so that a deficient demand for some kinds entails and excess demand for others.

In other words, there might exist a situation where the goodies are out there, and people can afford to buy them, but for whatever reason, they just don’t want to. They would rather hoard their money than use it. Thus there can be a general glut on the shelves.

I’ve seen 3 different rebuttals of the above.

  1. First is Rothbard’s, in the book mentioned earlier, that any such hoarding will result in an increase in the purchasing power of the unhoarded money. This is a simple application of the laws of supply and demand applied to cash. Thus the means is there to buy everything on the shelves, even with hoarding.

…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.

  1. Second is Hazlitt, in economics in One Lesson, who points out that historically, very few people ever actually hid their money under a mattress in modern times. Instead they put it in a bank, [which then spends the money], of course:

“Saving,” in short, in the modern world, is only another form of spending. The
usual difference is that the money is turned over to someone else to
spend on means to increase production.

  1. Third is J. S. Mill, who admitted to the possibility of a general glut due to hoarding, but insisted it must perforce be of short duration.

Here is Mill describing the hoarding problem:

[T]hose who have… affirmed that there was an excess of all commodities, never pretended that money was one of these commodities… [P]ersons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable…

And here he is pointing out that the situation is temporary:

It is, however, of the utmost importance to observe that ex-
cess of all commodities, in the only sense in which it is possible,
means only a temporary fall in their value relatively to money.
To suppose that the markets for all commodities could, in any
other sense than this, be overstocked, involves the absurdity
that commodities may fall in value relatively to themselves; or
that, of two commodities, each can fall relatively to the other,
A becoming equivalent to B—x, and B to A—x, at the same
time. And it is, perhaps, a sufficient reason for not using phrases
of this description, that they suggest the idea of excessive pro-
duction. A want of market for one article may arise from ex-
cessive production of that article; but when commodities in
general become unsaleable, it is from a very different cause;
there cannot be excessive production of commodities in general.
The argument against the possibility of general over-produc-
tion is quite conclusive, so far as it applies to the doctrine that
a country may accumulate capital too fast; that produce in gen-
eral may, by increasing faster than the demand for it, reduce
all producers to distress.

And his explanation why it is temporary:

It is true that this state can be only temporary, and must even
be succeeded by a reaction of corresponding violence, since
those who have sold without buying will certainly buy at last,
and there will then be more buyers than sellers. But although
the general over-supply is of necessity only temporary, this is no
more than may be said of every partial over-supply. An over-
stocked state of the market is always temporary, and is generally
followed by a more than common briskness of demand.

All this is from Hazlitt’s reprint of Mill’s essay in The Critics of Keynesian Economics.

OK, why do you think any of those 3 are not valid?

18

Nice work, myhuman. Time to reread that thread.

When I look back on my past stuff, I am sometimes surprised at how much more I knew then than now, and sometimes surprised at the opposite.

19

II. Granted you did not say all of his conclusions are wrong. You merely said “This is helping me see why Austrian Economics is often so confused.”

Not wrong conclusions, but “confused” conclusions. Not always, but “often”.

And why? Because “the Austrian definition differs from the one used in the mainstream”. Indeed, “The problem is, to do proper economics we still need to be able to talk about the concepts according to their old definitions.”

Even this more precise version of what you said is beyond my comprehension. All my formal training in logic and mathematics tells me that the above quote is indefensible.

Let me see if I can give you an example of what I mean. In music we have a term called harmony. This is a technical term that refers to the relationship of pitches. We also have a colloquial use of harmony that means two or more things that go together well. A problem arises when we take this second meaning and apply it back to music. One could say, “those two drummers are playing in perfect harmony.” In the colloquial sense, this would be a meaningful sentence. However, this is incorrect in the technical sense because (most) drums don’t have an identifiable pitch and the concept of harmony doesn’t apply to them. Thus, it becomes difficult to talk about music when your terminology refers to two completely different things.

Rothbard did not address this critique because Say showed it to be logically impossible, and all economists, right down to our day, agreed. Their only cavil was that, although the money is always there [for where did it go? Mars?], folks may decide to hoard it, which is what Rothbard talks about.

I may be confused on terminology. Is spending money on wages considered consumption, hoarding, or something else?

IV. “I can’t speak for all of Say’s critics, but this is certainly not how I look at it.”

My earlier post was a response to Steve Keen’s purported debunking of Say’s Law. Do you think he is saying what you are? My take is that he was repeating, albeit in a confused way, the very argument that Rothbard addresses, that people want to “accumalate wealth”, not spend it all. My impression was that his constant repitition of that phrase, especially taken in context, proves tthat.

I just searched the Rothbard book for “accumulate” and didn’t find anything in the Say’s Law section. I also don’t recall reading anything there that sounded like Keen’s argument.

And so, once again, I see that we think very differently. Let me summarize your position:

  1. Rothbard did not address the critique that people don’t have money to spend, which is my personal critique,

  2. Rothbard does discuss people just not wanting to consume.

  3. Keen’s argument seems pretty good [=people just not wanting to consume].

  4. I can’t find anyplace where Rothbard addresses this argument in that book.

The way I see it, you have contradicted yourself. [4 contradicts 2]. But you don’t see it that way.

Oh, I see. I think I presented my point in a rather poor manner. People targeted as “consumers” don’t have money to spend. Of course, capitalists do have money they could spend on consumption goods. So in this sense, yes, the problem is due to some people not wanting to spend money on consumption goods. But this is not because, as Rothbard seems to imply, that they have no wants and are perfectly content–living in a “Garden of Eden.” Rather, they want to use their money to make more money. Goods can go unsold not only when capitalists are hoarding their money, but also when they are spending it on wages. So point 1, point 3, and point 4 are basically correct characterizations of my viewpoints. Point 2 is insufficient. He discusses people not wanting to spend at all. He doesn’t discuss capitalists spending on production vs. consumption.

V. As for your critique of Say’s Law, for me to take it seriously please summarize Say’s argument, [which claims your state of affairs is impossible], then show what the mistake is.

That the total price of consumer goods for sale equals the total amount of money directed towards consumer goods.

How can they sell them at the same price if nobody is buying at that price? Did you not just claim that the problem is “people don’t have the money to purchase them” ?

Why are you supposing that nobody is buying at that price? My understanding was the sales drop during a glut, but not usually to zero. I meant that people do not have the money to purchase all of them. Plus, they don’t need to sell them all at one instance. I think they would rather hold onto to them if they think they may be able to sell them at a profitable rate later.

Perhaps you mean that producers will wait things out, selling at a much slower pace, in the meantime curtailing production to keep in line with this slower pace. And you assert this is the “more likely” response. Can you please explain how you know this is more likely? Have you been given the gift of prophecy?

I work for a manufacturer. During recessions like this one, my company doesn’t lower the prices of its products. Instead, it cuts back on production. I realize this is anecdotal, but it also just makes more sense to me. If companies produced the same amount at a lower price, they may no longer be profitable.

But how do you know that most businessman, faced with the decision of lowering prices or cutting production, will choose the latter? What is the basis of such thinking?

Well, I’m certainly open to persuasion on this topic. Do you have evidence to the contrary? Are there businesses who when faced with decreased demand during this recession didn’t cut production?

So you are saying that most producers will “most likely” make a decision that hurts their interests. They will deal with the problem of reduced purchasing power of consumers by reducing it even further.

They have no experience, no wisdom, and will “most likely” never learn. They somehow stumbled into their wealth and positions as captains of industry, and have no real understanding of the basics of economics as applied to their immediate welfare. This is the “most likely” scenario.

Yes and no. You see, there is not a single business and a single worker/consumer. When an individual business lays off a worker, the decrease in the worker’s purchasing power does not necessary affect the demand for that company’s business. So it is nor irrational (from a certain perspective) to lay off the worker. However, laying off the worker may hurt the ability of other businesses to sell products. This leads to a situation very similar to the prisoner’s dilemma.

20

If companies produced the same amount at a lower price, they may no longer be profitable.

Presumably recession affects more than one company. If some companies decide to cut back on production, their inputs get lower demand and thus lower prices, making it possible for other (or even some of the same) companies to lower their prices because the costs lowered.

In other words, lowering the price can be as rational as lowering the volume.