Critique of Say's Law

Economics Economics Questions
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  1. I am unfamiliar with Marxś critique.

Keen thinks Marx’s criticism is clearer than Keynes’s. He cites this section of Theories of Surplus-Value:

It must never be forgotten, that in capitalist production what matters is not the immediate use-value but the exchange-value and, in particular, the expansion of surplus-value. This is the driving motive of capitalist production, and it is a pretty conception that—in order to reason away the contradictions of capitalist production—abstracts from its very basis and depicts it as a production aiming at the direct satisfaction of the consumption of the producers.

And this section of Capital Vol. 2:

The capitalist throws less value in the form of money into the circulation than he draws out of it, because he throws into it more value in the form of commodities than he withdrew from it in the form of commodities. Since he functions simply as a personification of capital, as an industrial capitalist, his supply of commodity-value is always greater than his demand for it. If his supply and demand in this respect covered each other it would mean that his capital had not produced any surplus-value, that it had not functioned as productive capital, that the productive capital had been converted into commodity-capital that had not been impregnated with surplus-value; that it had not drawn any surplus-value in commodity form out of labour-power during the process of production, had not functioned at all as capital. The capitalist must indeed “sell dearer than he has bought, ” but he succeeds in doing so only because the capitalist process of production enables him to transform the cheaper commodity he bought — cheaper because it contains less value — into a commodity of greater value, hence a dearer one. He sells dearer, not because he sells above the value of his commodity, but because his commodity contains value in excess of that contained in the ingredients of its production.

The rate at which the capitalist makes the value of his capital expand is the greater, the greater the difference between his supply and his demand, i.e., the greater the excess of the commodity-value he supplies over the commodity-value he demands. His aim is not to equalize his supply and demand, but to make the inequality between them, the excess of his supply over his demand, as great as possible.

It doesn’t seem that Marx actually cites Say in this regard. So he can’t be accused of misinterpreting him. Keen also attributes further critiques from Schumpeter and Minsky. He synthesizes these three into what he calls the “Marx-Schumpeter-Minsky model.”

  1. ¨But for me, it seems that either 1 or 4a is correct.¨ This is bad bad news. There is only one Sayś Law. Eithe Keynes summarized it correctly [before refuting it], or he didn´t. Your uncertainty whether 1 or 4 is right means you have not yet made up your mind as to what Sayś Law actually is. So that you have still not completed the very first task of understanding, summarizing the law in a manner an austrian would accept. And yet you are jumping ahead to the next step, having opinions about refutations. Meaning you think you have refuted something you admit you know nothing about.

Dont let me down here, FOTH. You can do better than that.

Let me put it this way: I understand Marx in the sections quoted. I know that Marx is right. Now the question is, does Marx’s critique actually apply to Say’s Law? This is what I am trying to figure out.

Now what aspects of Say’s Law do I have left to understand? You say I’ve gotten the part about excessive profits wrong. Let me take another crack. Is he saying that since products are traded for products, if one is being sold below its value then another must be being sold above its value? In essence, the artificially cheap product is being traded with an artificially expensive one?

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Now Keynesians may have a specialized technical definition of consumption, different from common usage, and thatś fine. We spoke about this before.

I doubt that any profound insight is hidden behind these two uses of the word consumption.

It is important for understanding the differences between the two camps. For example, Say argues: 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. We have to keep in mind here that it is not the Keynesians who this critique applies to. The Keynesians do not desire a brisk consumption in Say’s sense of the word.

As for the worker eating his spinach to be big and strong and so be able to work, that does not make his eating an act of investment.

Reisman lays it all out in his free book, Capitalism, on page 452. Too long to copy and paste, but a short one page read.

I agree with Reisman that there is something different about the two scenarios that warrants calling them by different terms. However, I don’t think I agree with his explanation of this difference. For example, I could buy a car for the sole purpose of getting to work, and yet most people would still call this consumption and not production.

Even when making this distinction. We have to consider the possibility that consumption might increase the productivity of the country more than investment in certain cases. If the population is starving, obviously that’s going to be a big blow to production, regardless of whether people eat for the sake of production or for the sake of their lives.

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Or is consumption, as the Keynesians purportedly claim, defined by the moment of purchase? Or has the Austrian definition of consumption been mischaracterized?

I don’t think that the Keynesian one can be true, because if an entrepeneur purchases a capital good but does not allow it to expire before he dies, did he ever consume it?

I think Marx’s distinction between value and use-value helps clear up some of the confusion about consumption. Once we see that commodities have a dual nature, we see that there are two forms of consumption. Consumption of use-value is the physical destruction of the product. Consumption of value is the destruction of the product’s value–that is, removal of the value from circulation. I think this is what Keynesians mean when they speak of consumption in relation to economic crises.

For Marx, the burning of coal in production constitutes a consumption of use-value. The value of the coal, however, has not been consumed. It simply passes into the product which it produces. The same goes for fixed capital, a factory building for example, that deteriorates only gradually. The value of the factory slowly seeps out of it during its lifespan and into its products. The use-value of the factory building, however, is not consumed until the factory is demolished. This value that passes between the coal and the factory and into the final commodities constitutes capital. When the commodities are sold, capital takes the form of money. A capitalist consumes his capital by spending this money on consumer goods–goods that cease to transfer their value to other commodities (besides labor-power). Thus, it is the worker who consumes the use-value of capital, but the capitalist who consumes the value. So to answer your last question, the capitalist does not consume the use-value of the capital good because capitalists do not consume the use-values of capital goods at all.

Marx maintains that the value of one’s labor-power is equal to the value that one consumes*. The laborer is paid a wage equal to his labor-power, but the value of his labor-power does not transfer into the products he produces. Rather, it is the capitalist’s consumption of the use-value of the worker’s labor-power that produces value in the first place. Thus, value and use-value are at last bridged.

*Well, under certain ideal free-market conditions. Other factors can cause that to diverge.

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I found this summary of Say’s Law and the debate with the Keynesians. I get the impression that this is the Keynesian interpretation of the law and Austrians disagree with it? For me, this seems like a reasonable interpretation of the law.

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That’s a very good summary.

He gives the real meaning of the law, and devotes only a few lines to what Keynes twisted it to mean, labelling it explicitly.

He does a good job summarizing the various silly attacks on Say’s Law [though I didn’t see him quoting Marx].

Unfortunately, he doesn’t write full replies to the attacks, but that’s what this site is for, right?

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Here also is an interesting summary of Say’s Law by supporters of someone (Jakob Fries) whose influence, they say, unknowingly spread as far as Jung and Hayek (although I’m certainly in no position to judge that claim):

Say’s Law and Supply Side Economics

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That’s a very good summary.

He gives the real meaning of the law, and devotes only a few lines to what Keynes twisted it to mean, labelling it explicitly.

I’m guessing that this is Keynes’s misinterpretation?

From a modern macroeconomic viewpoint Say’s Law is subject to dispute. John Maynard Keynes and many other critics of Say’s Law have paraphrased it as saying that “supply creates its own demand”. Under this definition, once a producer has created a supply of a product, consumers will inevitably start to demand it. This interpretation allowed for Keynes to introduce his alternative perspective that “demand creates its own supply” (up to, but not beyond, full employment). Some call this “Keynes’ law”.

As I understand Say, he doesn’t say that consumers will demand whatever is produced. If that were so, not only would there be no general gluts, but also no gluts for particular products–something which he acknowledges as a possibility. So to the extent that Keynes was refuting this position, he was refuting a strawman. However, it seems to me that Say was claiming that general gluts were not possible. Keynes also offered arguments to explain why they were possible. So it seems that Keynes was also trying to refute the correct interpretation of Say’s Law and not only the strawman.

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  1. Yep, that’s the Keynes misinterp.

So it seems that Keynes was also trying to refute the correct interpretation of Say’s Law and not only the strawman.

Very good point, and one that is not clear to me. Why bother to twist its meaning if you think you can refute the correct version?

  1. Can you tell me what Marx’s refutation is, in a few paragraphs?
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Very good point, and one that is not clear to me. Why bother to twist its meaning if you think you can refute the correct version?

I was just starting to read the link that myhumangetsme posted (haven’t finished it yet) and noticed this: “Why Say’s Law is correct is evident from one simple consideration: if inventory doesn’t sell, then prices will be cut until it does.” This seems to be the same thing as Keynes’s misinterpretation. If this were true, then not only would there be no general gluts but no gluts for particular products. So it seems that Keynes was interested in refuting the misinterpretation because other economists were holding to this interpretation. Further, one might make the case that Say contradicts the implications of his own argument when he says that gluts of particular products are possible. If one really does want to get rid of their products as fast as possible and can only buy products with that money, then it seems reasonable to conclude that prices will adjust and there would be no gluts of any kind.

  1. Can you tell me what Marx’s refutation is, in a few paragraphs?

I quoted above the parts where Keen thinks Marx refutes Say. But I don’t know that Marx refutes Say in one particular argument, so I will try to summarize how Marx’s theory in general contradicts Say’s assertions.

First off, I think Marx would disagree with Say here: “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.” According to the price-flexibility interpretation of Say, this sentence would be contradictory: a producer is willing to lower the price of his product because he doesn’t want to sell it at a lower price. Ruling out that interpretation, I think Marx would challenge the notion that the value of the product would necessarily diminish. For Marx, value consists of objectified social labor. The only thing that would decrease the value of the product is an increase in the productivity of labor–or in other words, a decrease in the costs to produce it. But to do this, capitalists would need to invest more money in producing the item. If the product isn’t selling, they won’t do that. So a business may decide to hold onto a product as a store of value if they expect it to be sellable in the future. Why did people “invest” in real estate if they expected the value to depreciate? According to Say, people don’t want to hold onto goods that they either aren’t consuming or using for production.

Second, is this quote: "Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable." The value of money does not necessarily decrease. Supposing we had deflation, it might make more sense to hold onto money. How is it possible that both the value of products and the value of money is always decreasing? I take “products are paid for with products” to mean that the value of one product is measured in other products. How is it then that all products can decrease in value when this value is relative to other products? According to Marx, capitalists don’t want to accumulate cash or products, but value. At some times, hoarding cash might be the best move to increase or preserve value, while at others it might be best to hoard commodities.

Third, “But the only way of getting rid of money is in the purchase of some product or other.” Marx considers labor-power to be a commodity, so this statement might not explicitly contradict his views. But if we assume that Say doesn’t consider the paying of wages to be a purchase, then we have a problem. When a capitalist sells a product, he doesn’t have to purchase a product with that money. Instead, he could “advance” the money to a laborer to create more products to sell. The capitalist could, for example, spend half of his profits on consumer goods each year and reinvest the other half. the reinvestment would cause the total value of his capital to grow each year. Even though he always consumes half of his profits, that half represents a greater mass (and value) of goods each year. If the capitalist decided to spend all of his profits on consumer goods one year, then this could do lasting damage to his business. Not only would his business fail to grow, but other capitalists who decided to reinvest half of their profits to improve productivity may start to steal some of his market share. So capitalists do not want to spend all of their money on products as soon as they get it.

What makes labor expenses different from other expenses is that its “purchase” entails the creation of a product of greater value than the wage paid. These wages plus the capitalists consumption funds make up the demand for consumer goods. If the value of consumer goods exceeds this, a general glut occurs. If businesses sell their products at lower prices, they attract less investment; if they sell at losses, they may see investors withdraw their money. What do these investors do with their money if they withdraw it? If they spend it on consumer goods this will help resolve the crisis, but then they have no money to invest after the economy recovers. Better to hoard the money and let someone else sacrifice their future wealth for yours. If they spend it to increase production of other goods, this just increases the number of commodities that can’t be bought at profitable rates. If they cut production or reduce wages, this decreases the demand for consumer goods. So Say is wrong in that capitalists do not want to purchase products immediately but desire long-term growth for their businesses.

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Further, one might make the case that Say contradicts the implications of his own argument when he says that gluts of particular products are possible. If one really does want to get rid of their products as fast as possible and can only buy products with that money, then it seems reasonable to conclude that prices will adjust and there would be no gluts of any kind.

Not quite. Prices will adjust, and gluts are therefore temporary phenomena.

“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.”

I don’t see how one can disagree with this. It is plain common sense. Buying land hoping it will go up is not production, but speculation.

He’s talking about things produced. They are produced to be sold, why else? And the sooner the better, ask any businessman.

"Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable."

Many have cavilled at this line. I’ve mentioned the three butresses used to support this particular sentence. [Rothbard, Hazlitt, Mill].

How is it possible that both the value of products and the value of money is always decreasing?

He means that the producer is afraid that whichever one he has, his own product or cash, that might be the one that loses value [=purchasing power, not related to the LTV. I assume even Marx will admit that the purchasing power of things can change and does change all the time].

“But the only way of getting rid of money is in the purchase of some product or other.”

Investing is also purchasing some product or other. What else does the investor do with the money he invests?

Advancing the money to a laborer just places the focus on what the laborer will do with the money. Of course he will spend it. Why else is he working?

These wages plus the capitalists consumption funds make up the demand for consumer goods. If the value of consumer goods exceeds this, a general glut occurs.

Should be: These wages plus whatever the capitalist gets as profit makes up the demand for consumer goods.

It’s a simple idea, really. Everything produced [but for those that the market doesn’t want] is worth, say, a trillion dollars. If so, those who made those things have created for themselves a trillion dollars of purchasing power. And how much is being placed on sale? Why, exactly a trillion bucks worth of stuff. So there is exactly enough purchasing power available to buy every last product. And that’s because purchasing power is created by those very products.

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No.

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Not quite. Prices will adjust, and gluts are therefore temporary phenomena.

If the fact that prices adjust doesn’t rule out particular gluts, then it also doesn’t rule out general gluts. I don’t think anyone is saying that general gluts are permanent.

I don’t see how one can disagree with this. It is plain common sense. Buying land hoping it will go up is not production, but speculation.

He’s talking about things produced. They are produced to be sold, why else? And the sooner the better, ask any businessman.

The sooner the better and the higher the price the better. What if the ability to sell soonest conflicts with the ability to sell at the highest possible price? There’s a used bookstore near my home that I visit often. I’ve seen the same books sitting on the shelves for months or even years. Surely, if they wanted to sell these faster they could lower the price to $1. I’d certainly buy a bunch. The same could probably be said of any seller. They could always sell faster by lowering the prices. Price setting is a form of speculation.

Many have cavilled at this line. I’ve mentioned the three butresses used to support this particular sentence. [Rothbard, Hazlitt, Mill].

I might have to reread those now that I understand things better. I really don’t see how it is necessarily true. Kristjan had a good post on this earlier. Fractional reserve banking disguises the desire to hoard. In a world with 100% reserve banks, things would be different. You could no longer earn interest off of your money and yet withdraw it at will. And you would risk losing your money when you loan it. In fact, anyone who stores their money in a bank with 100% reserves would be hoarding their money.

He means that the producer is afraid that whichever one he has, his own product or cash, that might be the one that loses value [=purchasing power, not related to the LTV. I assume even Marx will admit that the purchasing power of things can change and does change all the time].

But he’s not afraid that the thing he buys will lose value? Yes, I’m sure Marx would admit that purchasing power changes, but not necessarily in the same direction. Is it really impossible for a gold miner to think that the value of his product might go up?

Investing is also purchasing some product or other. What else does the investor do with the money he invests?

Advancing the money to a laborer just places the focus on what the laborer will do with the money. Of course he will spend it. Why else is he working?

In that case, we might as well say that the only way to get rid of money is advancing it to a laborer since the money you use to purchase products will in turn be advanced by the business to a laborer.

Should be: These wages plus whatever the capitalist gets as profit makes up the demand for consumer goods.

No, the profits in my 401K don’t go to purchase consumer goods.

It’s a simple idea, really. Everything produced [but for those that the market doesn’t want] is worth, say, a trillion dollars. If so, those who made those things have created for themselves a trillion dollars of purchasing power. And how much is being placed on sale? Why, exactly a trillion bucks worth of stuff. So there is exactly enough purchasing power available to buy every last product. And that’s because purchasing power is created by those very products.

And what if all the people with a trillion dollars promised to “advance” this money at the end of two weeks to the labor force, and by the time this money is “advanced” to the labor force, the labor force has created new products totaling an additional $1.1 trillion? And then when they purchase a share of the products for $1 trillion, and when the money is then back in the hands of the capitalists, the capitalists decide once again to “advance” this money to the workers at the end of another two weeks. By the time they’ve received this money, they’ve now created an additional $1.1 trillion worth of products. So now there is $1 trillion of purchasing power but $2.2 trillion worth of products on the market.

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Quite a lot of back and forth. To avoid confusion, my added comments are in bold font.

I’m glad you write that you understand things better. Before we get to the post itself, allow me to ask a question.

Is there anything, anything at all, that could possible convince you that Marx and leftists in general have it all wrong? Is it possible for empirical evidence and/or logical reasoning to make you change your mind? Or are you a Marxist come what may, and “know” that there “must” be something wrong with any possible refutation?

Personally, I like to think that I’m not engaged or married to Austrian Economics. I just find that they present the best case. All the rebuttals I have seen are incredibly lame. If you search my blog for Bryan Caplan, who supposedly wrote the definitive refutation of AE, you will discover that I found laughable blunders in his thinking. I mean, why isn’t he covering his head in shame after reading my blog? [I know the answer].

Not quite. Prices will adjust, and gluts are therefore temporary phenomena.

If the fact that prices adjust doesn’t rule out particular gluts, then it also doesn’t rule out general gluts. I don’t think anyone is saying that general gluts are permanent.

Say argues that particular gluts are temporary. General gluts don’t exist at all. Keynes indeed argued that one could have a permanent glut of labor, unless the govt steps in and saves the day. He also argued that general gluts are inevitable, and there is nothing inherent in the free market to clear them. On the contrary, they will get worse and worse. [Your last paragraph, about workers producing an extra trillion every two weeks, also argues that there can be a general glut].

I don’t see how one can disagree with this. It is plain common sense. Buying land hoping it will go up is not production, but speculation.

He’s talking about things produced. They are produced to be sold, why else? And the sooner the better, ask any businessman.

The sooner the better and the higher the price the better. What if the ability to sell soonest conflicts with the ability to sell at the highest possible price?

A very good question. To answer it, we have to understand the context in which Say wrote what he wrote, and what he was driving at. The quote is:

It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. 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.

Say’s aim here is to refute the idea that there is a glut because, as people said in his day, “there is not enough money”. He is asking us to look at things the correct way and to realize that what counts is not money per se, but purchasing power. And where does purchasing power come from? From production. When Mr A produces something, he has thereby created purchasing power for himself. [Thats is what he is saying in the first sentence].

And lest we object that yes, he may have created purchasing power for himself, but who says he will use it? If he has it, but doesn’t use it, there might still not be enough purchasing power out there to buy all that has been produced. To this Say replies that the whole reason Mr A produced somethingin the first place was to get purchasing power. And he is afraid he might lose some of it if he doesn’t act fast, so he will get out and take steps to translate his newly created lemonade into money so he can go out and purchase. [That is what he is saying in the second sentence].

Now you may object, but what if he foolishly overprices his lemonade, like my local bookshop overpriced his used books? Say did not go into this detail. My guess is because most of the time it doesn’t happen. People quickly get a general idea of what their product is worth.

There’s a used bookstore near my home that I visit often. I’ve seen the same books sitting on the shelves for months or even years. Surely, if they wanted to sell these faster they could lower the price to $1. I’d certainly buy a bunch. The same could probably be said of any seller. They could always sell faster by lowering the prices. Price setting is a form of speculation.

Many have cavilled at this line. I’ve mentioned the three butresses used to support this particular sentence. [Rothbard, Hazlitt, Mill].

I might have to reread those now that I understand things better. I really don’t see how it is necessarily true. Kristjan had a good post on this earlier. Fractional reserve banking disguises the desire to hoard. In a world with 100% reserve banks, things would be different. You could no longer earn interest off of your money and yet withdraw it at will. And you would risk losing your money when you loan it. In fact, anyone who stores their money in a bank with 100% reserves would be hoarding their money.

But how many would do so? After all, the bank would have to charge them storage fees. More likely, they would lend it to the bank for some agreed upon length of time at some rate of interest, and the bank would lend it to businesses for that time at a higher rate of interest.

He means that the producer is afraid that whichever one he has, his own product or cash, that might be the one that loses value [=purchasing power, not related to the LTV. I assume even Marx will admit that the purchasing power of things can change and does change all the time].

But he’s not afraid that the thing he buys will lose value?

No, because he buys it to use it. The price is no longer relevant. When you put mustard on your sandwhich, the sandwhich tastes the same whether the mustard has gone up or down in price since you bought it.

Yes, I’m sure Marx would admit that purchasing power changes, but not necessarily in the same direction. Is it really impossible for a gold miner to think that the value of his product might go up?

Not impossible at all. But of the millions of products produced, almost all of them are not produced with intent of storing them in a warehouse for a few years to see what happens. Say did not mean there are no exceptions, but that what he writes is the general case 99% of the time.

Investing is also purchasing some product or other. What else does the investor do with the money he invests?

Advancing the money to a laborer just places the focus on what the laborer will do with the money. Of course he will spend it. Why else is he working?

In that case, we might as well say that the only way to get rid of money is advancing it to a laborer since the money you use to purchase products will in turn be advanced by the business to a laborer.

I don’t see your point. Say is explaining that when people make things, they thereby create purchasing power. And that purchasing power is going to be used in the market very quickly, whether by the producer himself to buy consumer goods or to buy producer goods for his businees, or by a business he lends his new money to [if he puts in a bank], or by the worker he pays. The idea is that the purchsing power, once created, is going to be used by someone or other to buy things. And the point of that observation is that therefore there will not be a lack of purchasing power in the market as a whole.

Should be: These wages plus whatever the capitalist gets as profit makes up the demand for consumer goods.

No, the profits in my 401K don’t go to purchase consumer goods.

You are right and wrong. It doesn’t go into consumer goods neccesarily, that’s right. But it is released into the market as purchasing power, to buy something or other that has been produced, be it consumer goods or other things. After all, you reinvest your profits, do you not?

So that Say’s idea remains correct, that any purchasing power created actually gets out there and purchases.

It’s a simple idea, really. Everything produced [but for those that the market doesn’t want] is worth, say, a trillion dollars. If so, those who made those things have created for themselves a trillion dollars of purchasing power. And how much is being placed on sale? Why, exactly a trillion bucks worth of stuff. So there is exactly enough purchasing power available to buy every last product. And that’s because purchasing power is created by those very products.

And what if all the people with a trillion dollars promised to “advance” this money at the end of two weeks to the labor force,

Then the labor force would buy up all the products. Rememeber, we are not discussing those things which were produced that nobody wants.

and by the time this money is “advanced” to the labor force, the labor force has created new products totaling an additional $1.1 trillion?

1. Key phrase here is “by the time”. Will workers work for free? I imagine you are discussing a case where they get paid after two weeks. [BTW, note that in that case, only the first day’s work is paid after two weeks, the next day’s work is a bit closer to payday, the next even closer, etc.] So that there is a delay between the workers’ production and their actual use of the purchasing power. Thus, there will be a general glut for two weeks. I think this is what you are arguing.

2. This is unrealistic. People have to eat and so forth. They cannot advance all their money to someone else. A quick search indicates that roughly half of GDP is paid in wages, give or take 5 percent.

3. Also, it is unrealistic to assume that an economy can double its output in two weeks.

4. In a large economy with millions of people, two weeks delay is no big deal. Also, note that not everyone gets paid on the same day, nor are all products put out for sale on the market on the same day. Some things take a long time to make, others a short time.

BTW, why do you put “advance” in quotes? Is it to mock the idea? Then you should explain why it is wrong. I was hoping we had gone beyond the unsupported mocking stage. In any case, even if the laborer is paid two weeks after he put in his labor, he is still being paid in advance, because he is being paid before the product is sold.

And then when they purchase a share of the products for $1 trillion, and when the money is then back in the hands of the capitalists, the capitalists decide once again to “advance” this money to the workers at the end of another two weeks. By the time they’ve received this money, they’ve now created an additional $1.1 trillion worth of products. So now there is $1 trillion of purchasing power but $2.2 trillion worth of products on the market.

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Found an excellent discussion of Say’s Law which cleared up a lot for me:

http://ryansafner.com/papers/The%20Duality%20of%20Say%27s%20Law.pdf

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Found two sources of what Marx had to say about Say.

http://qje.oxfordjournals.org/content/71/4/611.full.pdf This is Bunny Shoul reviewing how his disciples tried to make sense of Marx on Say.

http://delong.typepad.com/sdj/2010/03/karl-marx-on-says-law-theories-of-surplus-value-chapter-17.html. This is the rather unplesant original, quoting Marx himself.

Make of them what you will, I did not enjoy them.

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Is there anything, anything at all, that could possible convince you that Marx and leftists in general have it all wrong? Is it possible for empirical evidence and/or logical reasoning to make you change your mind? Or are you a Marxist come what may, and “know” that there “must” be something wrong with any possible refutation?

No, I’d like to think I’m always open to persuasion. You began the thread by asserting that Say’s Law was true and Keynes lied about it. Maybe I overreacted when I said I know Marx is right. It’s just the assumption that I’m starting with until proven to the contrary.

Say argues that particular gluts are temporary. General gluts don’t exist at all. Keynes indeed argued that one could have a permanent glut of labor, unless the govt steps in and saves the day. He also argued that general gluts are inevitable, and there is nothing inherent in the free market to clear them. On the contrary, they will get worse and worse. [Your last paragraph, about workers producing an extra trillion every two weeks, also argues that there can be a general glut].

I assume though that Say would acknowledge that general gluts do exist in the present (unfree) economy? I am not aware of Keynes’s argument about the possibility of a permanent glut of labor. I’d have to look at his reasoning on that. I do think that general gluts are inevitable in a capitalist economy (free or unfree) though.

Now you may object, but what if he foolishly overprices his lemonade, like my local bookshop overpriced his used books? Say did not go into this detail. My guess is because most of the time it doesn’t happen. People quickly get a general idea of what their product is worth.

I think I’ll create a separate post to go into more detail on this point. This discussion has given me some ideas about the relationship between price and the rate of sale that I hadn’t really thought of before.

But how many would do so? After all, the bank would have to charge them storage fees. More likely, they would lend it to the bank for some agreed upon length of time at some rate of interest, and the bank would lend it to businesses for that time at a higher rate of interest.

Exactly. This is why I find talk of “100% reserve banks” so puzzling. I think if such a thing ever did come to fruition, we would see an increase in the number of people storing their money “under the mattress” so to speak. We’d also see hoards form in areas where credit used to function. For example, a business would have to make sure it has enough cash on hand to pay its wages on a regular basis.

No, because he buys it to use it. The price is no longer relevant. When you put mustard on your sandwhich, the sandwhich tastes the same whether the mustard has gone up or down in price since you bought it.

How does one store value then?

Not impossible at all. But of the millions of products produced, almost all of them are not produced with intent of storing them in a warehouse for a few years to see what happens. Say did not mean there are no exceptions, but that what he writes is the general case 99% of the time.

But don’t a lot if Austrian Economists want to return to the gold standard? If gold is one of the things that people hoard, then wouldn’t this encourage people to hoard money?

Also, its interesting to note that Say’s Law is an empirical claim and yet AE is often characterized as being different from other schools because of its a priorism.

I don’t see your point. Say is explaining that when people make things, they thereby create purchasing power. And that purchasing power is going to be used in the market very quickly, whether by the producer himself to buy consumer goods or to buy producer goods for his businees, or by a business he lends his new money to [if he puts in a bank], or by the worker he pays. The idea is that the purchsing power, once created, is going to be used by someone or other to buy things. And the point of that observation is that therefore there will not be a lack of purchasing power in the market as a whole.

I agree that there is not a lack of purchasing power as a whole. Maybe my point will be more clear later in this post.

You are right and wrong. It doesn’t go into consumer goods neccesarily, that’s right. But it is released into the market as purchasing power, to buy something or other that has been produced, be it consumer goods or other things. After all, you reinvest your profits, do you not?

So that Say’s idea remains correct, that any purchasing power created actually gets out there and purchases.

To give a really extreme example, imagine if everyone invested 100% of their money in their 401Ks. Can’t you see that there are no consumer purchases in such a case? Now imagine that 50% of the people invest all of their money in their 401Ks and the other 50% receive that money in wages that they spend on consumer goods. However, the people with the 401Ks are supposed to end the year with more money in their accounts than they began with. In order to accomplish this, the total price of the goods produced must exceed the price of the wages paid to produce them. Anytime a worker buys a good, the money is reinvested in the 401K in order to produce more goods. Thus, a general glut occurs. Of course the people with 401Ks could pull their money out and purchase the unsold goods, but that would defeat the whole purpose of owning a 401K.

Then the labor force would buy up all the products. Rememeber, we are not discussing those things which were produced that nobody wants.

Then there would be no profits either. The capitalists would be selling the goods at cost.

1. Key phrase here is “by the time”. Will workers work for free? I imagine you are discussing a case where they get paid after two weeks. [BTW, note that in that case, only the first day’s work is paid after two weeks, the next day’s work is a bit closer to payday, the next even closer, etc.] So that there is a delay between the workers’ production and their actual use of the purchasing power. Thus, there will be a general glut for two weeks. I think this is what you are arguing.

Not really. The workers can’t buy back all of their product. The capitalists could buy the remainder, but choose not to. Instead, they pay more wages, since, on an individual level, that is what will help maximize their profits.

2. This is unrealistic. People have to eat and so forth. They cannot advance all their money to someone else. A quick search indicates that roughly half of GDP is paid in wages, give or take 5 percent.

Sure, but I think it is true as long as any portion of the profits are reinvested. The glut will just take a bit longer to develop. I have a half-finished mathematical model of the business cycle I could post if it helps clarify things.

3. Also, it is unrealistic to assume that an economy can double its output in two weeks.

I don’t think we ever established how long it took to produce the first trillion dollars. But right, I wasn’t really developing this example in the most careful way.

BTW, why do you put “advance” in quotes? Is it to mock the idea? Then you should explain why it is wrong. I was hoping we had gone beyond the unsupported mocking stage. In any case, even if the laborer is paid two weeks after he put in his labor, he is still being paid in advance, because he is being paid before the product is sold.

Sorry, I didn’t really mean it in a mocking way. I really don’t think of it as an advance though and wanted to make clear that the workers were being paid after they worked. I have two objections to this.

One, you admitted earlier that it was not the sale of the product that counts as purchasing power, but the mere creation of it: what counts is not money per se, but purchasing power. And where does purchasing power come from? From production. When Mr A produces something, he has thereby created purchasing power for himself. So the capitalist has purchasing power before the laborer.

Two, it is not necessarily true that a laborer is paid before her product is sold. What about the cashier at a grocery store? The product of the cashier’s labor is being sold right as she works and yet she is still paid after two weeks (or whenever). The same could be said of anyone in a service industry. The time-preference explanation of profits doesn’t sound very convincing to me, but perhaps that’s a topic better for another time.

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OK. Here is my theory on the relationship between the rate of sale and the price of goods.

Take a business that produces 50 goods in 2 weeks. It takes another 2 weeks to sell all of these goods–25 of them sell by the end of the first week and another 25 by the end of the second. Therefore, if the business produced more than 50 goods in the two week production period, it would be overproducing. If it produced 75 goods, they would take 3 weeks to sell.

Now suppose demand doubles and all 50 goods sellout in the first week. If the demand is expected to remain at this level, the business has two options: one, double the price of the goods, or two, double the output of the goods. Provided there are resources available, the best move would be to double the output to 100 goods every two weeks. Doubling the price would make the business unable to compete with the others that maintained the current price. If there are no resources available (e.g. the economy is at full employment) the better thing to do would be to double the price (though in reality we don’t know for sure that even half of the people will still buy the product at double the price).

What if the products sold at half the rate–that is, if it took 4 weeks to sell all 50 of them? If the business cut the price in half, it wouldn’t be able to operate over the long-run. So it would make more sense to halve the production. Now the business is selling 25 goods every two weeks. But it already overproduced for at least two weeks. What does it do with that surplus of 25 products? It could halt production for one period and then substitute those goods for the ones it would have produced during that two week period, but usually businesses have workers on salary. They can’t just stop paying them for two weeks. It could sell those 25 along with the new 25 goods at half the price for one two week period and then jack the price back up afterward. This is the implication I get from Say’s Law. But why would the business do that? It wouldn’t make anymore money than if it just sold its 25 at the normal cost and threw the other 25 away. In fact, if 25 extra goods were sold at half price one period, that might prevent those same people from buying at full price during the next period. So it seems like it might make sense to keep these 25 goods around for awhile in case demand jumps back up (of course they don’t have to be literarily the same 25 goods). Or perhaps the business could lower the price of its goods by 1/25 and sell 26 goods every 2 weeks, gradually eliminating their surplus. They could be selling at a lower price than their competitors for a whole year–rather than selling at a much lower price for only two weeks–making zero off of the surplus in either case.

Anyway, it doesn’t make much sense to say that producers try to sell their products immediately because they’re afraid the value might diminish. After all, they’re continuing to produce the same product. If they are really afraid that the value will diminish, they should get out of the business.

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I assume though that Say would acknowledge that general gluts do exist in the present (unfree) economy?

The link a bit earlier, Duality of Say’s Law,lays that out.

How does one store value then?

That’s the eternal question, isn’t it? Wish I knew the answer. AE seems to say there isn’t one, because all value is subjective, meaning subject to individual’s feelings of the moment. So anything could lose value, in theory. I’m not sure what you are driving at with this q.

But don’t a lot if Austrian Economists want to return to the gold standard? If gold is one of the things that people hoard, then wouldn’t this encourage people to hoard money?

You’ll remember I referred to the 3 answers I found to the hoarding problem. [Rothbard, Hazlitt, Mill]. I think I saw that Mises also wrote Rothbard’s answer. Austrians want a gold standard for reasons you can easily find on this site.

Also, its interesting to note that Say’s Law is an empirical claim and yet AE is often characterized as being different from other schools because of its a priorism.

Say preceded the Austrian school and so did not attempt to refrain from empirical claims. In any case, the key principles of Say’s Law are deducible from first principles using logic, no empirical claims needed.

…imagine if everyone invested 100% of their money in their 401Ks. Can’t you see that there are no consumer purchases in such a case?

What would they eat? In any case, I am not sure why you emphasize consumer goods. Say’s Law is talking about all goods produced, not just consumer goods.

I am not sure what you are getting at with your example. Money put into an investment of any kind doesn’t sit there and do nothing. How could there be profits from it if it did. It is invested, meaning it is used to buy stuff [or to pay workers who will buy stuff].

Then there would be no profits either. The capitalists would be selling the goods at cost.

Why?

The capitalists could buy the remainder, but choose not to. Instead, they pay more wages…

The money has to be somewhere, either in the pocket of a capitalist or a worker. And whoever has it will spend it. I don’t see what you are getting at.

One, you admitted earlier that it was not the sale of the product that counts as purchasing power, but the mere creation of it: what counts is not money per se, but purchasing power. And where does purchasing power come from? From production. When Mr A produces something, he has thereby created purchasing power for himself. So the capitalist has purchasing power before the laborer.

In a barter economy, he has his purchasing power when he produces. In a money economy, I suppose it would depend on your definition. But In any case, the worker gets money before the product is sold, the capitalist only after.

What about the cashier at a grocery store?

In her case, she only reaps the other advantage of being an employee, getting paid whether the business makes any money or not, in good times and bad. But in many cases, the worker gets his money first.

Concerning your post about the rate of sale and the price of goods. Say was not giving advice to businessmen how to run their business, nor predicting what they would do in a particular situation. He was giving a simplified description of an economy, pointing out the essential features in big picture fashion. Others critiqued his model by pointing out the existence of hoarding. Rothbard wrote that Say himself did not provide a satisfactory answer to that detail, but others did.

So that your post is interesting, but not relevant to Say’s Law one way or the other.

BTW, you write, “businesses have workers on salary. They can’t just stop paying them for two weeks.” Right there is the essence of why a worker deservedly gets less than what he would make if self employed. A self employed person would suffer for those two weeks; a worker gets paid come what may. For that perk, which is worth money, [in addition to being paid in advance in most cases] he pays by getting diminished salary.

I see this happening all the time in the small business I am familiar with intimately. The boss is short of cash for weeks at a time, the workers get theirs regularly.

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Let me start out by saying that I have not been following this conversation.

I think Dave is referring to Keynes’ “underemployment equilibrium” where inadequate effective demand for final consumer goods lowers the productivity of capital, output and ultimately leads to a steady-state condition of long-lasting unemployment which lacks a self-correcting mechanism. Keynes’ theory is, in a nut-shell, the theory of idle resources.

Also, Marx’s theory of crisis does not really revolve around the notion of general gluts, though it is undoubtedly there ( at least implicitly). The crux of his framework is truly rooted in his theory of accumulation which has more to do with the general need to engage in cost-cutting/capital accumulation (lowering the “organic composition of capital”) which diminishes the capitalist’s source of profit, namely exploitable labor.

I find this example very perplexing. It does not prove your case, nor is it consistent with either Marxian nor Keynesian analysis. Neither Marx nor Keynes deny that interest exists in a steady-state capitalist economy (what Marx calls “an economy of simple reproduction”); they just attribute it to different variables, and Marx believes that it is merely temporary. The problem for Keynes arises when there is an increase in the savings rate, and the effect this has on revenue for firms and therefore the demand for capital goods (acceleration principle). His theory in part focuses on various “leakages” which prevent the transformation of additional savings into income.

Either way, the analysis above seems to deny the very existence of profit, even in the short-run. This is, of course, absurd.

And finally, let me just say that an economist would accuse you (in your example) of confusing real variables with nominal variables. Prices don’t need to rise in perpetuity in order to increase the real returns to capital and/or labor (profit, of course, is the relation between prices with respect to costs; a proportionate fall in both would result in no net change in profit). It’s becoming increasingly evident to me that in order to resolve this issue we must first have a very lengthy discussion revolving around capital and value.

[EDIT]

The cashier is merely another chain in the temporal process that transforms future goods into current goods and delivers them to society. His/her role is further along the chain, but still part of the greater process. Additionally, in addition to time-preference, individuals tend to prefer set, periodic wages due to an aversion to risk (not a law of human action, but a proposition with torrential empirical support). This is also another variable that hasn’t been considered.