"I*'m going to assume this is the passage you are claiming disproves Say’s law.*
You are making a false distinction between Say’s law in “macro” and “micro.” Say’s law says that aggregrate production equals aggregate demand, meaning it explicitly doesn’t apply to your Chia Pet scenario. One thing Say’s law doesnot say is that everything made will be sold."
JonBostwick–you get a prize for being the first person on this thread to even try and answer my post! Congradulations.
Now let me tell you that if Say’s Law does not apply to the ‘micro’ level–which was an easy one to see–and I agree with you that it does NOT. Can we now move to the harder issue of why Say’s Law (say the Austrians, no pun intended) does apply to the MACRO level?
Please read the Wikpedia link on Say’s Law ( http://en.wikipedia.org/wiki/Say’s_Law ). What makes you think that Say’s Law, in the short run, will apply at the Macro level? I think Keynes arguments on this point are compelling. They also tie into that other tenant of Keynesianism, namely, “sticky prices”.
Yes! I agree with you my guitar strumming friend. I adopt these definitions, in principle.
OK–let’s start with your definitions of KSLaw and SSLaw. Please define and we’ll take it from there. I am relying on http://en.wikipedia.org/wiki/Say’s_Law
feel free to examine post 2 of the thread, and see if you can sketch out the two meanings given the extensive research you have already done, and the fact that you acknowledge that there is a difference.. and i’ll help you iron out any discrepencies i might spot; once you’ve done the brief legwork.
Here are two other articles on Say’s Law, I might get some more later, hopefully one of these answers your questions-but I personally will not join this debate as I am just learning and would probably fall on my face :). http://mises.org/daily/1042http://mises.org/daily/1264 .
Now it is important to realize that what is called Say’s Law was in the first instance designed as a refutation of doctrines popularly held in the ages preceding the development of economics as a branch of human knowledge. It was not an integral part of the new science of economics as taught by the Classical economists. It was rather a preliminary—the exposure and removal of garbled and untenable ideas which dimmed people’s minds and were a serious obstacle to a reasonable analysis of conditions.
Whenever business turned bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in “The Wealth of Nations,” exploded the first of these myths. Say devoted himself predominantly to a thorough refutation of the second.
As long as a definite thing is still an economic good and not a “free good,” its supply is not, of course, absolutely abundant. There are still unsatisfied needs which a larger supply of the good concerned could satisfy. There are still people who would be glad to get more of this good than they are really getting. With regard to economic goods there can never be absolute overproduction. (And economics deals only with economic goods, not with free goods such as air which are no object of purposive human action, are therefore not produced, and with regard to which the employment of terms like underproduction and overproduction is simply nonsensical.)
With regard to economic goods there can be only relative overproduction. While the consumers are asking for definite quantities of shirts and of shoes, business has produced, say, a larger quantity of shoes and a smaller quantity of shirts. This is not general overproduction of all commodities. To the overproduction of shoes corresponds an underproduction of shirts. Consequently the result can not be a general depression of all branches of business. The outcome is a change in the exchange ratio between shoes and shirts. If, for instance, previously one pair of shoes could buy four shirts, it now buys only three shirts. While business is bad for the shoemakers, it is good for the shirtmakers. The attempts to explain the general depression of trade by referring to an allegedly general overproduction are therefore fallacious.
Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.
Every commodity produced is therefore a price, as it were, for other commodities produced. The situation of the producer of any commodity is improved by any increase in the production of other commodities. What may hurt the interests of the producer of a definite commodity is his failure to anticipate correctly the state of the market. He has overrated the public’s demand for his commodity and underrated its demand for other commodities. Consumers have no use for such a bungling entrepreneur; they buy his products only at prices which make him incur losses, and they force him, if he does not in time correct his mistakes, to go out of business. On the other hand, those entrepreneurs who have better succeeded in anticipating the public demand earn profits and are in a position to expand their business activities. This, says Say, is the truth behind the confused assertions of businessmen that the main difficulty is not in producing but in selling. It would be more appropriate to declare that the first and main problem of business is to produce in the best and cheapest way those commodities which will satisfy the most urgent of the not yet satisfied needs of the public."
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"
It was different with the “new economics” of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his “General Theory” was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced. He was not a “revolutionary,” as some of his adepts called him. The “Keynesian revolution” took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.
This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectual, the “government economists.” They had had a bad conscience. They were aware of the fact that they were carrying out policies which all economists condemned as contrary to purpose and disastrous. Now they felt relieved. The “new economics” reestablished their moral equilibrium. Today they are no longer ashamed of being the handymen of bad policies. They glorify themselves. They are the prophets of the new creed.
III
The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.
Neither did Keynes try to refute by discursive reasoning the teachings of modern economics. He chose to ignore them, that was all. He never found any word of serious criticism against the theorem that increasing the quantity of money cannot effect anything else than, on the one hand, to favor some groups at the expense of other groups, and, on the other hand, to foster capital malinvestment and capital decumulation. He was at a complete loss when it came to advancing any sound argument to demolish the monetary theory of the trade cycle. All he did was to revive the self-contradictory dogmas of the various sects of inflationism. He did not add anything to the empty presumptions of his predecessors, from the old Birmingham School of Little Shilling Men down to Silvio Gesell. He merely translated their sophisms—a hundred times refuted—into the questionable language of mathematical economics. He passed over in silence all the objections which such men as Jevons, Walras and Wicksell— to name only a few—opposed to the effusions of the inflationists."
"The marginalization of Say’s work as a whole is due largely to the poor definition of his law of markets – supply creates its own demand – which comprises chapter XV in Book I of A Treatise on Political Economy [Treatise].
English Classical Economists James Mill and David Ricardo who integrated the catchphrase “supply creates its own demand” into classical theory contributed to the neglect of J.B. Say’s work as a whole.[1] However, the worst treatment of Say was by John Maynard Keynes in The General Theory. Keynes’s attempted refutation of Say’s Law relied upon formulations of the law by J.S. Mill and Alfred Marshall.[2] Even authors generally sympathetic to Say’s writings have neglected to integrate his law of markets into the whole of his Treatise."
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"Jean Baptiste Say grasped the fundamental problem of economics, in that we live in a world of scarce means, but have unlimited desire or demands. Only such things as sunlight, air, or water are freely afforded to man. Thus man uses nature to transform goods that give utility to others.[5] In conjunction, Say recognized that all men were both producers and consumers.[6]
From these two basic truisms arises Say’s Law. If individuals wish to procure a good they must give something in return that is also desirable to individuals. Therefore in order for one to be a consumer one must first be a producer of a good in which others find utility. Thus individuals desire the commodity of money not as an end in itself,[7] but rather as a means to procure more desirable goods. However, in order to acquire money one must first produce a good that will exchange for money.[8]
The most important point in Say’s formulation is that the individual must produce something that is desirable to others. It is from the erroneous statement “supply creates its own demand” where the notion comes that as long as something is produced it will readily find a market. This idea conjures connotations of Ricardo’s labor theory of value in which a product is endowed with value due to the exertion of labor in its production.
However, Say explicitly refutes Ricardo’s labor theory of value and aptly states that it is consumer demand that induces a producer to undergo the costs of production.[9] J.B. Say consequently uses his law of markets and apt understanding of utility to demonstrate why gluts of commodities will not be a long run phenomenon.
Say admits that there can be short-term gluts of a commodity. However, this can only happen if supply has outstripped demand or others do not have goods to exchange in return. Say very precisely deals with the first point by showing that the profit and loss mechanism in production will drive producers away from unprofitable production to areas that promise a greater return. The only thing preventing such a beneficial change in production would be the interference of the government or a natural disaster.
As to the second point Say uses the example of a European backwater such as Poland. He says that it would not be advantageous for a producer to take his goods to a poor country like Poland because they are lacking in goods to exchange. Thus there would be no glut in a poor market such as Poland, merely the inability to exchange goods. Also this would not produce a long-term glut because the producer could take his goods to a wealthier country such as England and quickly find a market – the idea of the adventurer.[10]"
Well, I don’t know whether this thread is going nowhere. It seems that Ray is afraid to make a clear statement of what he thinks Say’s law is. I totally agree to Nirgraham in the SSL and KSL thing. That’s the point.
But in general this is a problem of current economic knowledge at all levels. We are fighting catchy phrases, such as “supply creates its own demand” that doesn’t reflect the real thing. Theories rarely can be summarized in one sentence. That sentence becomes part of ‘conventional wisdom’ and finally there is no way to make them understand that they are simplifying economy to a point that become useless.
Ray, you cannot understand Say’s Law if you don’t understand money -among other things-, but even though, you have to understand first what Say’s law says.
Of course if I produce thousands of t-shirts with the name of my wife and a picture of both of us, my supply will not create any demand. But read what Say have to tell you about that:
A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it. Now, of what do these means consist? Of other values of other products, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.
Sales cannot be said to be dull because money is scarce, but because other products are so.
… 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.
Of course, it doesn’t mean that I agree -especially with the last sentence- but this is an extract of what Say wrote, not just an interpretation.
And by the way, it is interesting how Say closed this chapter:
Such are the concomitants of declining production, which are only to be remedied by frugality, intelligence, activity, and freedom.
I’m sorry to be so abrupt, but this so called “refutation of Say’s Law” is nothing of the sort. Clearly this is due to your erroneous characterization of Say’s Law as being neatly summed up in “supply creates its own demand”, which you’ve mistakenly taken literally to mean that for Say’s Law to hold, every product ever made must find a ready buyer. Your Chia Pet example describes merely the course of normal business activity. For, as a surprise to absolutely no one, products like Chia Pet are brought to market every day at prices for which no demand exists, and every day entrepreneurs go out of business as a result. I rather doubt that Jean Baptiste Say and company argued that supply creates its own demand in the literal fashion you describe. Indeed, others have addressed this very well above. But perhaps I miss your point.
As to a reading of the Say’s Law Wikipedia entry that you use as your main reference:
(1) First of all, in terms of Austrians vs. Keynesians on this question of Say’s Law, determining which school is correct CANNOT be determined by looking at events in the real world. This is due to the fact that Say’s Law is predicated on a purely free market economy, and our economy is nowhere near this. And, for the record, neither was the economy of the Great Depression.
(2) To my reading, the Keynesian critique of Say’s Law found above consists in two main tenets: (a) The sudden and generalized loss of employment following on the heels of a sudden and generalized loss of aggregate demand, initiated by a sudden and generalized “hoarding of money”. (b) Sticky prices, especially interest rates.
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(a)The sudden and generalized loss of employment following on the heels of a sudden and generalized loss of aggregate demand, initiated by a sudden and generalized “hoarding of money”.
According to Austrian theory, the following analysis holds on an individual as well as collective basis:
Money is allocated among three uses: 1. cash balances 2. investment 3. consumption. With the volume of money in circulation held constant, if cash balances increase then money must be shifted from investment, or from consumption, or from both.
Let us suppose, for present purposes, that demand for money suddenly increases (i.e. “hoarding” begins), and that individuals reduce their consumption spending in order to increase their cash balances. According to Austrian theory, the new and relatively lower level of demand causes entrepreneurs to decrease prices in order to sell the volume of goods they have produced. As prices fall, the purchasing power of each monetary unit in circulation necessarily increases commensurately. At some point, the increased demand for cash balances therefore will be satisfied, for the desire to hold a specific volume of cash balances is tantamount to a desire to hold a specific volume of purchasing power.
One may perhaps at this point incorrectly surmise that falling prices force entrepreneurs to begin laying off employees, thus causing a dreaded "vicious circle" of downward spiraling aggregate demand and employment to ensue. But this is not the case in a truly free market. In a truly free market, ALL prices will adjust - whether under conditions of a general “hoarding of money” with all of its cataclysmic connotations, or simply under conditions of a general increase in the demand for holding cash balances . This means that the entrepreneur’s prices for inputs - materials AND labor - will decrease. Though the selling prices of the entrepreneur’s products fall, so too do his input prices. Therefore, business profits remain unchanged in real terms. It follows that employment levels will remain unchanged as well. And just as lower selling prices do no harm to the business owner, lower wages will do no harm to employees: Because of the lower price level throughout the economy, purchasing power has increased so that real incomes and living standards remain unchanged, for both business owners and employees.
Therefore, as to the notion that a “hoarding of money” will cause a self-reinforcing spiral of unemployment and falling demand, free market/Austrian theory refutes it. Neither school of thought is in the clear at this point, however, for the introduction into free market theory of the possibility of “sticky prices” poses a credible challenge.
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(b) Sticky prices, especially interest rates.
But what if free markets FAIL to adjust to sudden and generalized decreases in (aggregate) demand? The Keynesian argument that sticky prices are to blame, whether correct or not, is at least a not-implausible supposition. However, I know very little about what Keynesians have to say on this subject and can address their argument only indirectly.
First, to repeat, no truly free markets exist in which to test free market theory, and therefore whether free markets are susceptible to sticky prices. Second, I would argue, however, that the Austrian theory of business cycles is more encompassing than is a Keynesian “sticky price” theory, for Keynesians take no account whatsoever of the possibility that fractional reserve banking is the root cause, as the Austrians do. What’s more, Austrians have cogently identified several logical fallacies which play a central role in Keynes’ theory. I don’t know of any work which has persuasively attacked the logic of the Austrian business cycle theory. I would also argue, therefore, that any Keynesian explanation of business cycles needs to explain how the potential phenomenon of sticky prices is superior to the Austrian theory. To be sure, the Austrians themselves should explain either why “sticky prices” are impossible in free markets, or if they are possible, why they play no significant causal role in business cycles. I imagine they have, and that argument emphasizes the inherent flexibility of free markets.
Say admits that there can be short-term gluts of a commodity. However, this can only happen if supply has outstripped demand or others do not have goods to exchange in return. Say very precisely deals with the first point by showing that the profit and loss mechanism in production will drive producers away from unprofitable production to areas that promise a greater return. The only thing preventing such a beneficial change in production would be the interference of the government or a natural disaster.
OK, part of the problem with this forum is that their text editor is very crude…hard to reply to people. But the poster that made this point (underlined language above) is admiting that there is a TEMPORAL aspect to Say’s Law. This is as Keynes would admit–he admits that Say’s Law FAILS in the short term. This failure is why Keynes thought of as a liquidity trap that needs to be addressed by money illusion (create demand by dropping fiat money from helicopters), because of ‘sticky prices’ (economies do not adjust well to deflation especially money wages).
Both of these principles–unlike the Austrian claims–have been demonstrated in both the lab and in the real economy. Money illusion is found to work in university experiments involving students and real money (as well as in stock splits), and, sticky prices/wages are also observed (not least of which contracts typically have an inflation clause but seldom a deflation clause).
Further, I will answer another poster here since it’s hard to navigate on this site: the poster that said supply shifts down rather than demand is simply playing semantics it seems to me. Whether Aggregate Supply stays the same or shifts, it seems that the point is that AS and AD lines no longer are at the former equilibrium point, Q. Say’s Law would argue you have to go back to Q somehow–and this can be done by shifting Aggregave Supply, AS (upward sloping line).
To make it clearer: imagine two lines–sorry I can’t draw here–and line AS0 slopes upward and line AD0 slopes downward, intersecting at Q0. If A. Demand (due to panic, what have you), shifts down, so you have a new AD1 line (and assumed with the same slope, as always in these simplified analysis), you have, given the same supply line, AS0, a new equilibrium point Q1 that is of lower output (and lower prices, but the main thing is lower output). Now how to get the same output as before? Say’s Law would argue that you can shift supply downwards (and parallel to the original AS line), so a new AS, AS1, intersects AD1 at the same point Q0 (your classic parallelogram–I trust you’ve seen this in Econ 101–see http://en.wikipedia.org/wiki/AD-AS_model or, at a micro level, http://en.wikipedia.org/wiki/Supply_and_demand). As an aside, note the quantity produced for the country is the same as before, Q0, but prices are even lower now–but prices are an aside. The main point is that you have the same output, Q0, even with less demand.
What was Keynes contribution? Keynes showed that you can achieve this same “Q0” by going the other way–increasing demand by shifting the AD curve upwards. If you look at this chart: http://en.wikipedia.org/wiki/Supply_and_demand (which is a micro chart, so the lines are a bit more flexible than at a macro level, but you’ll see my point), Keynes “helicopter drop” (money illusion) will shift AD from D1 to D2, which will give, in our example a new Q2 that is the same as the old Q0. Disaster is averted.
Note this is only true short term, IMO, and I agree that long term people will figure out money illusion and eventually any helicopter drop has no effect on AD, but only raises prices. But at least with the Keynesian solution, as evidenced in today’s economy, disaster is averted.
Your ostensible self-verification of the post above is unsettling, as its simply flat out wrong.
Seems nefarious and manipulative.
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I made the italicized point above.
How can you claim Say’s law fails if what happens in the short term is what Say’s law predicts?
Again, Keynes simply advanced a silly strawman argument that Say’s law = “supply creates its own demand.”
You adopt the same silly strawman in suggesting Say’s law fails in the short run.
Say’s law says there can and will be short term gluts in goods.
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There was no failure of Say’s law, only a failure of your silly strawman formulation of Say’s law.
Say’s law is a refutation of the commonly repeated myth of a “glut of overproduction.” As Mises’ explains, Say devoted himself predominantly to a thorough refutation of this idea.
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The solution is not some silly monetary pumping of fiscal stimulation, the solution is to sell the goods at the market price. The problem is the entrepreneur made a bad prognostication and consumers did not want his good. The problem is not too many goods, the problem is too many unwanted goods.
Again, you just ignored the article. You posted a quote which you then misrepresented into a nonsensical support of keynesianism. Your deception and sophistry is troubling.
Particularly:
-J.B. Say consequently uses his law of markets and apt understanding of utility to demonstrate why gluts of commodities will not be a long run phenomenon.
-Say very precisely deals with the first point by showing that the profit and loss mechanism in production will drive producers away from unprofitable production to areas that promise a greater return. The only thing preventing such a beneficial change in production would be the interference of the government or a natural disaster.
Take careful note of this statement: “Say admits that there can be short-term gluts of a commodity.”
This statement refers to a glut in a particular market, not a glut in the entire economy. The conceptual difference between the two could not be greater in terms of implications for business cycles, and therefore in terms of the Keynes’ supposed need to criticize Say’s Law.
Sticky prices/wages observed in what context, to what extent, and caused by what?
Wage contracts drawn by whom and for what purpose?
Simply because sticky prices and wages are observed doesn’t tell us anything about their origin, necessity, or degree of use, and therefore precious little about their causal role in the business cycle. If you happen to have more information on these matters, I’d be interested to learn more.
Say’s Law would NOT imply anything about aggregate supply shifting to match a new lower level of aggregate demand. You are missing the entire point of Say’s Law - namely, that the business cycle cannot be caused by endogenous demand shocks. In his analysis, no general glut of “aggregate supply” can exist due to a shortage of “aggregate demand”. Indeed, no general glut can occur. Period. You are not dealing with the logic of Say’s Law and attempting to answer the central question as to what causes a general disruption to demand in an economy. Say has an answer: only government intervention can cause such a massive disruption. You are bypassing this argument and accepting Keynes’ assumptions that this can’t possibly be the case.
The CENTRAL QUESTION in all of this, as far as I’m concerned, is the validity of the question of sticky prices and wages: If free market wages and prices are sticky, and to a degree sufficient to cause the business cycle, then you have your answer: Say’s Law is refuted. If not, then the answer is that Say’s Law holds.
Austroglide -[is your handle a play on words involving something that is a force fit and requires lubrication?] - thanks for your Austrian interpretation of Say’s Law. Believe it or not, I really was trying to understand the Austrian position on Say’s Law–and I think I finally got it. It’s absurd, just like I suspected, but I’m glad it’s finally made explicit.
You say:
Take careful note of this statement: “Say admits that there can be short-term gluts of a commodity.”
This statement refers to a glut in a particular market, not a glut in the entire economy. The conceptual difference between the two could not be greater in terms of implications for business cycles, and therefore in terms of the Keynes’ supposed need to criticize Say’s Law.Say’s Law would NOT imply anything about aggregate supply shifting to match a new lower level of aggregate demand. You are missing the entire point of Say’s Law - namely, that the business cycle cannot be caused by endogenous demand shocks.
I am puzzled by this underscored language of yours–are you saying that AS is inflexible, and for the entire country as a whole, AS cannot change? I can see where this would be patently false: suppose an epidemic struck the whole country and everybody produced less. Further, your interpretation contradicts every mainstream economics textbook in the world. But even more troubling (and something that puts the Austrians plainly in the Keynesian camp), you expressly state that "the business cycle cannot be caused by endogenous demand shocks". This is absurd. Now you are not talking about AS but aggregate demand. Are you denying that a country as a whole can demand less than before? That people can stop consumption? Plainly this is false–just look at the events over the last 7 months. Are you really that blind?
As for money being some sort of evil, rather than a medium of exchange, well the Marxists made the same argument–they believed money in and of itself had no value, only labour had value, and that labour value was stored in money, but nothing more was stored in money. This flaw in their reasoning (which is another way of denying the time value of money) is why Das Capital famously has a flaw in the triangulation of prices that Marx was never able to reconcile. I guess the Austrians have something in common with the Marxists then, and given that Germany and Russia are but flip sides of the same coin, as Allan Bullock wrote in his book Parellel Lives, that’s perhaps understandable.
So, to make my argument easier, let’s assume there’s a barter economy. Two and only two goods are produced and consumed: food and clothing. No money changes hands–it’s a barter economy. Assume you need clothing since it gets cold in the winter. Farmers (F) trade with tailors and seamstresses, let’s call the second group haberdashers (H). Now imagine there is a rumor or panic that food will soon be scarce. F’s will start demanding more clothes from H’s. Fine. No problem yet. The ratio of food to clothing will change, with more clothing demanded for food, but the overall supply–within limits–should not change. Perhaps instead of 5 units of clothing for 5 units of food (1:1 ratio), we’ll have 7 units of clothing for 3 units of food (7:3 ratio). F’s will work less and H’s will work harder, but overall the AS is the same. But now let’s suppose that H’s hear a rumor that soon there will be a glut of food but very little clothing material, so H’s refuse to trade with F’s. What will happen? A sort of market failure–supply does not meet new demand. F’s will demand 7 units of clothing, while H’s will demand more than 5 units of food, say 8 units. But you assume AS is always constant–that’s not the case here, for the following reason. F’s will start trying to make their own clothes, while H’s will try and grow their own food. This will work to prevent F’s from farming naked, and H’s from having to eat their shoes, but it’s plainly not an optimal solution, as overall AS will be less than before (since it’s well known trade makes both parties more productive–unless you Austrians are prepared to question that?) and AD is less than before. The AS and AD curves will intersect, but at a different place. AS and AD have both changed.
Once you acknowledge that AS and AD can change, we can then discuss how Keynes helicopter drop of fiat money in such a barter economy (to transform it into a more sophisticated money economy) would work to shift the equilibrium point. But until you make that acknowledgement, I’m afraid further discourse is useless.
As for this quote of yours:
The CENTRAL QUESTION in all of this, as far as I’m concerned, is the validity of the question of sticky prices and wages: If free market wages and prices are sticky, and to a degree sufficient to cause the business cycle, then you have your answer: Say’s Law is refuted. If not, then the answer is that Say’s Law holds.
Plainly prices and wages are sticky, and if you had any real world experience you would note this. As I pointed out, contracts (wage contracts, goods contracts) typically have inflation adjustment clauses, but not deflation adjustment clauses. Perhaps under a gold standard such clauses would be irrelevant, but unfortunately we are not under a gold standard and we have to deal with society as we find it, not as we think it works in our mind’s eye, which seems to be the Austrian position.
Say mentions natural disasters and government policies (I assume epidemics would be seen as quite similar to natural disasters) as the only exceptions to his analysis. When I said Say recognizes no possibility for endogenous demand shocks, these were his only exceptions. Otherwise, no, what you are calling “aggregate demand” cannot decrease across the entire economy at once in a free market system. This argument is precisely what Say intended.
By the way, the same analysis holds for aggregate supply. You misinterpreted the meaning of my response if you think I said anything above about aggregate supply.
These are fundamental and rather simple distinctions. Keynes believes “animal spirits” cause endogenous demand shocks. Austrians, and Say, argue that endogenous demand shocks are impossible in a truly free market economy, with the exception of either government interventions or natural disasters and such.
You’re quite the scientist. If this is sufficient evidence for you to be persuaded by Keynes’ warped economics, then have at it.
As for engaging any further with your argument, I’m really not interested. Responders in this thread have patiently and adequately addressed your main concern and you do nothing but misinterpret the replies. You seem rather incapable of grasping the key features of this debate, and instead insist upon reformulating your thesis for people to continue to respond to. And your attitude sucks. There’s a wealth of material in this thread and on this website regarding Say’s Law. You should, without much trouble, be able to answer your own question if you are still unsatisfied.
EDIT: I misspoke - Demand shocks caused by government interferences and phenomena such as natural disasters and epidemics are exogenous demand shocks.
The last seven months have nothing to do with AD causing business cycles, and everything to do with the boom phase coming to an end, in which case, in response to the realisation that supposed wealth was illusory, demand will collapse, i.e. fall in AD is a symptom or phase or effect of a business cycle, not its cause. While you’re at it, answer these questions too:
You said: These are fundamental and rather simple distinctions. Keynes believes “animal spirits” cause endogenous demand shocks. Austrians, and Say, argue that endogenous demand shocks are impossible in a truly free market economy, with the exception of either government interventions or natural disasters and such.
EDIT: I misspoke - Demand shocks caused by government interferences and phenomena such as natural disasters and epidemics are exogenous demand shocks
I say: You also seem to have confused AS and AD. In any event, you made an important admission when you say: Austrians, and Say, argue that endogenous demand shocks are impossible in a truly free market economy, with the exception of either government interventions or natural disasters and such.
First, these three “exceptions” swallow the (absurd) rule. “and such”? Meaning? Second, you do not address the fundamental question: given that even the Austrians and Say admit there are “exceptions” to the rule, including “government interventions”, “natural disasters” and “and such” (which might include a human induced natural disaster, such as greed caused by hubris, aka the banking crisis?, but that’s another question that we need not address now), the central question is this: can Keynesianism over the short term move AD to get it “back to where it was”? Keynesians would argue yes, through the technique of the so-called Money Illusion (a term of art, I trust you know what that is). The Austrians, by your rule, are not clear as to how do so this, from what I could tell of their literature, except by hoping that by adopting a gold standard that magically things will either get back to normal (if your definition is accepted–I am surprised that you conceed AS will not change*), or, will never get out of normal (some of the literature that I’ve read, which implies the business cycle will be abolished if we adopt the gold standard–which contradicts your “government interventions”, “natural disasters” and “and such” as affecting the AD).
I will, if I don’t get censored by the ‘moderator’ (a Mises subscriber volunteer I’m sure), start a separate thread on Money Illusion.
“Thanks” for the conversation. I learned something about the Austrian school–they are more bizarre than the Jonestown devotees in some ways. How does that Kool-Aid taste, Austrian school?
RL
IMO you made a damaging admission by saying AS is inflexible. The revolution called “Supply Side” during the 1980s made a point that given incentives, the AS could be changed so that my previous reply would hold–given a change in AD, so that, say, society wants less of everything at a given price, that AS could adjust so that more is produced to give the same equilibrium point, Q. Graphically, simply draw two upward sloping parallel lines (AS, AS’) and two downward sloping, parallel, AD lines (AD, AD’). The parallelogram represents the area of interest. Note the top of the diamond is Q0 (horizontal axis, representing quantity), prior to a shock in AD. The bottom of the diamond, vertically, that is at the same Q, represents the new quantity that we want to get to; while the ‘left’/‘west’ vertice represents the point when there is a decrease in AD (AD shifts to the left, down). How do we get to that ‘bottom’ diamond point, to get the same quantity as before the change in AD? Just look at the curves–increase AS so now the new intersection point is not the left corner of the diamond, but the bottom. That’s essentially what the Supply Siders claimed. No need to fiddle with AD–incentivize people to change AS. But, I am not going to make your case for you. You (and the Austrians and Say) have conceeded AS does not change. You have made your bed now you must lie in it. And Keynes and the anti-Supply Siders do make a good point (that you have implicitly accepted) that AS cannot easily change. This goes to the question of how quickly people can “retool”. The Keynesians accept that retooling is expensive, futile and doesn’t really work–and there is some evidence to support it. Better, say the Keynesians, to fiddle with AD with techniques such as Money Illusion (aka “helicopter drop”). More on that in a separate thread.