There has been a lot of discussion recently on the econoblogosphere and the History of Economics list about Say's Law, much of it quite heated. I just want to add one relatively minor point: Jean-Baptiste Say did not believe in Say's Law. To be more precise, while he made many statements that look like it, and I would say that he believed in it in the long run and maybe even the medium run, he was fully aware that it may not hold in the short run. He provided numerous examples of exceptions to it from historical cases, situations where for one reason or another citizens would hoard cash and not spend it. So, he was very aware that in the short run supply may not lead to an equal demand. A general glut may be possible, at least for awhile.
BTW, while his law regularly is invoked by those who deny any efficacious role for fiscal policy in macroeconomic stabilization, during the post-Napoleonic War economic slowdown and high unemployment, he in fact sided with Malthus rather than Ricardo and supported public works spending to, yep, you guessed it, help to those who had become unemployed as a result in the reduced military spending with the end of the war. Say was in fact quite practical about public policy and not just someone constantly reciting his own law to deny reasonable policy. But one rarely hears of this.
Barkley Rosser
So can we rename Say's Law? Call it the Cochrane-Fama Fallacy.
ReplyDeleteDidn't Say actually change his mind about Say's Law? I think I remember Brad DeLong saying something like that.
ReplyDeleteIt shouldn't be surprising if he did change his mind. Some of us sometimes do, and sometimes for good reasons.
The real problem is that economists generally misuse the word "law".
ReplyDeleteSay’s law certainly seems to be defective. Yet the fact is that prior to the days when governments deliberately effected stimulus in recessions, economies recovered from recessions of their own accord, albeit rather slowly perhaps. So there is some sort of “law” at work there.
ReplyDeleteI’ve just got a feeling that either Say’s law has merits that no one has spotted, or else there is some other law at work which no one has spotted.
that's nice to hear but nevertheless the classicals did for the most part believe that in the macroeconomy you had first "save up" so you could have money to "invest"
ReplyDeletewhich only decreases production and income
I wrote a paper in grad school (1971, as I recall) for my HOT class arguing that "Say's Law" was really Say's explanation for there being no logical reason why economic growth could not proceed forever. That is, he was arguing against something like the "iron law of wages" or a proto-secular stagnation position. Of course, I no longer have the paper, and it never got published. So YMMV.
ReplyDeleteI think that the nay-Sayers should also contemplate the fact that it's Say's law that suggests that "immigrants do not steal our jobs" [as their (labor) supply creates its own demand].
ReplyDeleteBut whatever.
"...the fact is that prior to the days when governments deliberately effected stimulus in recessions, economies recovered from recessions of their own accord..."
ReplyDeleteI guess the tip off here is the opening "the fact is" claim. There is, of course, no such "fact."
In days of old, (when knights were bold) "the economy" was not yet an invention. Kings borrowed money to fight their wars and stimulus happened without the intention.
Nick,
ReplyDeleteI am not sure. Would need to go back to the library to dredge up the copy of Say's Treatise on Political Economy we have there, from which I read his caveats, and even that might not determine it. A quick google does not turn up anybody saying he changed his mind, but he might have. As it is, the first edition, which James Mill and others quote from , was published in 1803, while the second was 1817 or thereabouts, when he was supporting public works spending to deal with unemployment. Of course, this would involve increased production/supply, in contrast to just monetary expansion, which he clearly was not a fan of.
Two examples from that volume we have, whichever edition it is, include people in the Ottoman Empire hoarding money because they did not want to spend on their houses as this would increase their tax liabilities. Say did not like either high taxes or the Ottoman Empire, so this fit two of his longstanding pet peeves. Also, he noted that there might be failures of demand to result from supply if there are restraints on trade, such as customs barriers.
BTW, it is sort of odd that people who claimed to support Say's Law, such as John Stuart Mill would declare that the solution to an apparent general glut was "not to diminish supply," while somehow never recognizing that maybe one could increase demand, thereby dealing with the situation.