Critique of Say's Law

Economics Economics Questions
21
  1. “Thus, it becomes difficult to talk about music when your terminology refers to two completely different things.”

But you were claiming much more than “difficulty to talk about something”. You were saying Austrian Economics is “confused”. Which to me is a patronizing way of saying “wrong”. And of course, as long as the words in an Austrian treatise are clearly defined and consistently used, despite the definitions being possibly different from what people are used to, they will not lead to wrong conclusions.

  1. Is spending money on wages considered consumption, hoarding, or something else?

consumption: taking a resource and consuming it, meaning making it cease to exist, for the sheer pleasure involved. Thus eating a sandwhich is consuming.

hoarding: taking cash and putting it under ones mattress.

investment: taking a resource and using it to increase production.

  1. “Accumalate cash” and “hoarding” are the same thing. See above definition. And Rothbard discusses hoarding.

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

This is not Say’s Law. Proof [as if it needs to be proven]: Say claims that a corrolary of his law is that govts that increase spending are destroying the economy, and those that increase production are saving it. But that does not follow at all from your statement.

So yes, if you are trying to disprove what you think is Say’s Law, you have done it. But you have not at all disproven what really is Say’s Law. Indeed, the whole paragraph about capitalists etc. has nothing to do with Say’s Law.

There is no point continuing until we are talking about the same thing. Time to hit the books and find out what Say’s Law actually is. Just to help you avoid a pitfall, I’ll point out that the Law has been mangled and misrepresented by Keynesians. Your best bet is go to right to the source, Say’s actual book, Chapter 15, right here.

22

let me guess, youre not a musician.

23
  1. “Thus, it becomes difficult to talk about music when your terminology refers to two completely different things.”

But you were claiming much more than “difficulty to talk about something”. You were saying Austrian Economics is “confused”. Which to me is a patronizing way of saying “wrong”. And of course, as long as the words in an Austrian treatise are clearly defined and consistently used, despite the definitions being possibly different from what people are used to, they will not lead to wrong conclusions.

Well, what I mainly meant was that people on this site are often confused when I try to talk about things according to their normal definitions. For example, if I said it were impossible for everyone to profit in an economy with a fixed money supply, people would tell me I’m wrong because it would still be possible for everyone to gain satisfaction. I also think using the same word for two different concepts can lead to wrong conclusions. But I want to actually finish Mises before I pass judgment on this.

  1. Is spending money on wages considered consumption, hoarding, or something else?

consumption: taking a resource and consuming it, meaning making it cease to exist, for the sheer pleasure involved. Thus eating a sandwhich is consuming.

hoarding: taking cash and putting it under ones mattress.

investment: taking a resource and using it to increase production.

In that case, I believe Keen’s argument is that underconsumption results from too much investment rather than too much hoarding. As far as I can tell, Rothbard talks about hoarding but not investment.

  1. “Accumalate cash” and “hoarding” are the same thing. See above definition. And Rothbard discusses hoarding.

Keen doesn’t talk about accumulating cash. He talks about accumulating wealth, which I don’t think is the same thing.

This is not Say’s Law. Proof [as if it needs to be proven]: Say claims that a corrolary of his law is that govts that increase spending are destroying the economy, and those that increase production are saving it. But that does not follow at all from your statement.

So yes, if you are trying to disprove what you think is Say’s Law, you have done it. But you have not at all disproven what really is Say’s Law. Indeed, the whole paragraph about capitalists etc. has nothing to do with Say’s Law.

I will admit that I may misunderstand Say’s Law. I’m glad you don’t think my error is one of logic. I’ve heard people say that Say’s Law is the same as Walras’s Law. Would you agree with that?

24

1 “…if I said it were impossible for everyone to profit in an economy with a fixed money supply,..”

How do you understand a barter economy? Is such an economy doomed to stagnation because there is no money?

  1. “…Keen’s argument is that underconsumption results from too much investment…”

"…Keen doesn’t talk about accumulating cash. He talks about accumulating wealth…"

Perhaps it would be wiser to actually know what Say’s Law is before asserting what anyones refutation is. i mean how can you understand possible refutations of, say, quantum mechanics, without knowing what quantum mechanics even says?

  1. “I’ve heard people say that Say’s Law is the same as Walras’s Law…”

Take a few days off, read Say carefully until you can summarize his case in a way that an Austrian will agree that you have summarized it correctly, and then we can continue. Until then, further discussion is futile.

25

OK, let me see if I have this straight. When goods go unsold, this means their potential buyers haven’t produced enough of what the sellers of those goods want. When capitalists are unable to sell goods to laborers, this means that the laborers haven’t produced enough to exchange for the capitalists’s goods. The laborers should produce what the capitalists want to buy. What do the capitalists want to buy? Labor power. In other words, the laborers aren’t working enough. So the government should stimulate the production of labor power (i.e. the willingness of people to supply labor). Assuming the capitalists price their goods above costs, goods go unsold again until workers supply even more labor. Thus, the working day continuously increases in length. If the supply of labor does not increase, this means “there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity” (e.g. a law limiting the working day). This seems to describe the conditions of the 1800’s pretty well. If this is the correct interpretation of the Law, then I guess I don’t really disagree with it after all.

26

You don’t have it straight.

27

How do you understand a barter economy? Is such an economy doomed to stagnation because there is no money?

I’m having trouble conceiving of a barter economy. But if we consider the amount of socially necessary labor objectified in the commodities, then it would also be impossible for everyone to profit in this sense.

(Note: I really don’t want to get into another LTV argument right now. Suffice to say, when most people speak of profit, they are talking about a scenario where one spends a quantity of money that results in the acquisition of a greater quantity of money or of something else expressible in monetary value.)

28

Do I have this sentence right at least? “When goods go unsold, this means their potential buyers haven’t produced enough of what the sellers of those goods want.”

Honestly, I found it kind of confusing. For example, in this paragraph…

It is observable, moreover, that precisely at the same time that one commodity makes a loss, another commodity is making excessive profit.*38 And, since such profits must operate as a powerful stimulus to the cultivation of that particular kind of products, there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity on the one hand, and consequent glut on the other. No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels, the replenishment of which restores activity to all the others. One kind of production would seldom outstrip every other, and its products be disproportionately cheapened, were production left entirely free.

…who is making excessive profits, the one selling the scarce good or the one selling the overabundant good?

29

Does Say consider labor-power to be a product/commodity (i.e. can someone who hires a wage worker be said to be purchasing a product)?

30

Here’s another part I found confusing:

When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other.

So my question is whether labor-power counts as a product or not. If it is a product, that means its producer is anxious to sell it immediately. How should we interpret that? When is labor-power finished? Does my mere ability to work right now entail that I must be anxious to sell my labor-power? Maybe it only a applies to the portion that I want to sell? That seems more likely. But does the value of my labor power really diminish in my hands?

What about the other possibility–that labor-power is not a product? I think we can safely rule out this possibility. Say says that the only way to get rid of money is in the purchase of another product. Clearly one could get rid of money by paying wages. Thus, labor-power must be a product or else Say is wrong.

31

I’m having trouble conceiving of a barter economy.

What exactly are you having trouble conceiving about a barter economy?

But if we consider the amount of socially necessary labor objectified in the commodities, then it would also be impossible for everyone to profit in this sense.

(Note: I really don’t want to get into another LTV argument right now. Suffice to say, when most people speak of profit, they are talking about a scenario where one spends a quantity of money that results in the acquisition of a greater quantity of money or of something else expressible in monetary value.)

It doesn’t matter to an economist how “most people speak of profit” any more than it matters to a scientist how “most people speak of theory”. You are either willing to accept that ‘profit’ has been given a specific meaning in this instance (and that discussion of ‘profit’ depends upon adherence to that meaning) or you’re not.

32

You raise some interesting points. Congratulations on perseverance.

if I said it were impossible for everyone to profit in an economy with a fixed money supply, people would tell me I’m wrong because it would still be possible for everyone to gain satisfaction

I would say, it is possible to gain profit in an economy with a fixed money supply, and I mean profit in monetary sense. Profit is just a way to get your income, it says nothing about your expenses. Like with wages - getting positive wages does not automatically mean you hoard them. Therefore, I see no inconsistencies in all members of the economy with a fixed money supply gaining profit - but also getting rid of it in exchange for goods and services.

In that case, I believe Keen’s argument is that underconsumption results from too much investment rather than too much hoarding. As far as I can tell, Rothbard talks about hoarding but not investment.

Could you elaborate, how you got to this conclusion from Dave’s definitions? I would infer that paying wages is just an exchange of money for labor, and directing labor is just production - none of this are automatically consumption, hoarding or even investment. Do we call every act of production an investment? I guess we need to define investment a bit more precisely.

[edited suspicious instances of “spending” out]

33

Thus,… or else Say is wrong.

You have skipped a step. First you summarize what Say is claiming, in a way that any Austrian will agree with your summary, then you tell the world why Say is wrong.

This is the accepted procedure in any intellectual discussion. It has many benefits. We have seen one of them right in this thread, where someone “disproved” Say’s Law, only to later admit he had no clue what Say’s Law actually is. We could have all saved some time had that person followed standard operating prcedure.

34

It doesn’t matter to an economist how “most people speak of profit” any more than it matters to a scientist how “most people speak of theory”. You are either willing to accept that ‘profit’ has been given a specific meaning in this instance (and that discussion of ‘profit’ depends upon adherence to that meaning) or you’re not.

My problem is that they equivocate between both meanings. They don’t stop using it to refer to corporate profits.

35

You have skipped a step. First you summarize what Say is claiming, in a way that any Austrian will agree with your summary, then you tell the world why Say is wrong.

I was actually just trying to figure out what he means first. I was being charitable in that I was assuming he was right given two possible interpretations. But let me try to clarify Say’s Law.

Propositions inferred from Say:

  1. Products must be paid for with other products

1b. A seller of products must have other products to buy in order to sell his goods

  1. Production opens a demand for products.

2b. An increase in supply leads to an increase in demand.

  1. A producer wants to sell his product as soon as possible.

  2. There is not a class of people who are customers but not also producers.

  3. When a seller of commodities has unsold goods, this means he has likely made excessive “profits” (I understand this in a different way I normally use the word).

It is not the people with unsold goods who should produce more, but the people without unsold goods who should produce more. If the manufacturing industry has unsold goods, this could mean that there are not enough agricultural goods to trade them for. The decreased rate of agricultural production is likely due to “some extraordinary cause”–a bad crop, for example.

Questions for further understanding:

When someone pays a person a wage to create a product to sell on the market, does this act of payment constitute a purchase of a product? For example, when McDonald’s hires a fry cook, is the McDonald’s Corporation purchasing a product?

What is a producer? Does one have to sell the product they make (i.e. receive the money for it) in order to be considered a producer? Would a slave be considered a producer in this sense or the slave’s owner who sells the products (I am not making a moral point here; this just helps clarify what is meant by producer)? A slave is not a customer, so proposition 4 would not rule out the possibility of him not being a producer.

A priest goes to a shop to buy a gown or a surplice; he takes the value, that is to make the purchase, in the form of money. Whence had he that money? From some tax-gatherer who has taken it from a tax-payer. But whence did this latter derive it? From the value he has himself produced. This value, first produced by the tax-payer, and afterwards turned into money, and given to the priest for his salary, has enabled him to make the purchase. The priest stands in the place of the producer, who might himself have laid the value of his product on his own account, in the purchase, perhaps, not of a gown or surplice, but of some other more serviceable product. The consumption of the particular product, the gown or surplice, has but supplanted that of some other product. It is quite impossible that the purchase of one product can be affected, otherwise than by the value of another.

Is the gown necessarily the same value (i.e price) as the product that the taxpayer sold? I assume this means that the priest doesn’t produce a product? Or is the product simply consumed immediately?

I also wanted to make a point about how I understand the Law relating to Keynesian economics, but I will make sure we are on the same page before posting it.

36

What is the special significance of product status? The employer is buying the product of 8 hours labor. It is impossible to actually possess 8 hours of labor in one’s hands, but one may possess the manifestation of such exertions. In such a sense, employment may be thought of as the purchase of a product, no?

Doesn’t Say’s Law presuppose a market economy? Does not a market economy preclude slave labor? Does this not then render your question irrelevant?

Isn’t this quote just a demonstration of the impossibility of an isolated economic act? Supposing the validity of an act of economic isolation, might one also say that the labor gone into a product is equal to its price?

37

A quick question for Say’s Law supporters: How does Say’s Law view a situation where a lot of people suddenly reduce what they want to buy by a great deal and only buy things they were buying before (don’t want to buy anything new), basically deciding to become a bunch of primitivist hippies? Would a temporary general economic slump necessarily ensue? If not (necessarily), why not? If so, how would Say’s Law be compatible with this development?

Or, here’s a starker example: What if a large part of the population simply vanished? How does Say’s Law view this?

38

Andris,

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.

This is kind of begging the question. Your justifying the fact that lower demand reduces prices by assuming that the inputs have decreased in price due to lower demand. Couldn’t it be possible that the suppliers of inputs cut back production when faced with lower demand as well?

I would say, it is possible to gain profit in an economy with a fixed money supply, and I mean profit in monetary sense. Profit is just a way to get your income, it says nothing about your expenses. Like with wages - getting positive wages does not automatically mean you hoard them. Therefore, I see no inconsistencies in all members of the economy with a fixed money supply gaining profit - but also getting rid of it in exchange for goods and services.

Hmm, so Austrian Economists really don’t realize that their opponents are using a different definition than they are? Profit says nothing about your expenses? (On second thought, I’m not sure everyone could profit even in an economy with a variable money supply).

Could you elaborate, how you got to this conclusion from Dave’s definitions? I would infer that paying wages is just an exchange of money for labor, and directing labor is just production - none of this are automatically consumption, hoarding or even investment. Do we call every act of production an investment? I guess we need to define investment a bit more precisely.

Oops, I shouldn’t have used the word underconsumption. I guess we should call it insufficient consumer spending or something. Dave never defined production. But he said that investment was using a resource to increase production. If his definition of production is anything like mine, then I can’t see how you could produce something without a resource.

39

What is the special significance of product status? The employer is buying the product of 8 hours labor. It is impossible to actually possess 8 hours of labor in one’s hands, but one may possess the manifestation of such exertions. In such a sense, employment may be thought of as the purchase of a product, no?

The status is of vital importance to evaluating Say’s Law. I had offered an interpretation of Say’s Law considering labor as a product. Dave said my interpretation was wrong. I am trying to figure out where I went wrong.

Doesn’t Say’s Law presuppose a market economy? Does not a market economy preclude slave labor? Does this not then render your question irrelevant?

A market economy doesn’t preclude slave labor. The Confederate plantation owners still bought and sold products.

Isn’t this quote just a demonstration of the impossibility of an isolated economic act? Supposing the validity of an act of economic isolation, might one also say that the labor gone into a product is equal to its price?

I don’t think so. What I gathered was that one receives money equal in value to the product one contributes to the economy. But whence did this latter derive it? From the value he has himself produced. This value, first produced by the tax-payer, and afterwards turned into money…

40

What exactly are you having trouble conceiving about a barter economy?

(Forgot to answer this)

For one, I’m having a hard time conceiving of what wages would be paid in. The product that the wage workers produce? A bunch of random products?