- He writes that…
The doctrine that supply creates its own demand, in other words, is based on the assumption that a proper equilibrium exists among the different kinds of production, and among prices of different products and services. And it of course assumes proper relationships between prices and costs, between prices and wage-rates. It assumes the existence of competition and free and fluid markets by which these proportions, price relations, and other equilibria will be brought about.
The basic idea of Say’s Law is that the way I get the purchasing power to buy something is by first producing something useful to others, say a chair, which I can then trade for what I want, say a cheese sandwhich. My purchasing power [=demand] came about because I made something others need [=created supply].
Obviously, there are a lot of what ifs involved here. What if I insist on a million dollars in exchange for my primitive chair, which nobody is willing to pay? What if other people are making far superior chairs to mine, so that nobody wants mine? What if I make a million chairs, but only ten thousand people want chairs? What if the govt makes a law that anyone who buys my chairs gets a punch in the face? In all those cases, my creation of supply will not give me any purchasing power [=ability to demand] in return. In fact, in some cases I may glut the market with chairs, and/or I may have to stop making chairs [=unemployment].
The state of affairs which will actually give me purchasing power from the chair I created is what he calls equlibrium. He notes that even in a situation of disequilibrium, an unhampered free market will swiftly create equilibrium for me. If I insist on too high a price, I will quickly learn to lower it. If I make bad chairs that don’t sell, I will seek another line of work. If I made too many chairs, I will also look for something else to do. In a free market, there would be no laws about punches in the face, and/or I would be able pretty easily to get some other job. In short, there is a fast acting correction mechanism that will take care of me, mainly my desire to actually make money, and a free market that lets me do so.
Be that as it may, the essential insight of Say remains, that purchasing power comes from production. This insight is what Keynes hated, because it contradicts everything he writes in his book.
When he says later in Chapter 4 that equilibrium doesn’t really exist, what he means is that there is always somebody who goofs up to some extent, always someone who made too many chairs or charges too high a price for them. AE claims, for example, that high unemployment is a result of labor charging too high a price for its services, either from foolishness or because some law mandates it. But again, this does not contradict Say’s Law, which assumes a free market and the final state of affairs for our chairmaker, which is quickly reached in a free market.
- I think Hazlitt alludes to your objection when he writes that…
We cannot say that this use of these terms, or that these definitions, are wrong. ,,But while, to repeat, no usage or definition of words can be arbitrarily dismissed as “wrong,” we may properly ask some questions of it. Is it in accordance with common usage? Or does it depart so much from common usage as to cause confusion—in the mind of the reader, or of the user himself? Does it help, or hinder, study of the problems involved? Is it precise, or vague? And finally, is it used or applied consistently?
You are pointing out that the definiton causes cionfusion because it departs from common usage.
- His dismissal is that it’s Marxian, and that therefore Bohm-Bawerk’s rebuttal applies to Keynes exactly as it applied to Marx. He then quotes B-B’s rebuttal. What’s missing?
The core of his argument is that it is ridiculous to consider one hour of labor of a surgeon who makes $80 an hour to be 'the same thing" as 8 hours of labor of a burger flipper making ten bucks an hour. The money is the same, 80 dollars, but the labor is not. But Keynes, in some context Hazlitt doesn’t elaborate on, considers them the same.
- “He’s essentially saying that C2 won’t equal or exceed R2 - R1, correct?” Yes.
“As Hazlitt says, so what?” Keynes will argue that this is what causes recessions.
“And why the word psychology?” There are two answers to this. One is what Hazlitt wrote, that Keynes is subtly insulting the people who don’t spend every last increase in income, because he is a big believer in spending. Another is that he is saying that it is not an economic force that makes people not spend all their increased income, but an emotional force. As such, it is inevitable, because people are ruled by their emotions. And so the recession resulting from the lack of spending is also inevitable.
- I learned a lot about supply and demand curves from it, as well.
