Thursday, January 16, 2014

Say against Say: lower wages won't clear labor markets (It's the law!)

L'offre crée sa propre demande (supply creates its own demand) does not mean the same thing as un produit terminé offre, dès cet instant, un débouché à d’autres produits pour tout le montant de sa valeur (the finished product offers, from that moment, an outlet for other products for the entire amount of its value). For starters, la loi des débouchés is an argument about heterogeneity, not simply about quantity. It is also an argument about proportion, with "the entire amount of its value" qualifying the extent to which any given finished product constitutes a demand for other products.

La loi is thus more robust than "supply creates its own demand" but also more ambiguous. Critics of Say's Law have faltered on its robustness while proponents have ignored its ambiguity. In an 1821 letter to Malthus, Say supplied ammunition to those who would champion a doctrinaire reading of the law. With the proviso, "supposing even they immediately find capitals to set them to work at a fresh business," Say sought to refute Sismondi's objections to machinery as a cause of unemployment. Say's reasoning may seem circular here but I think the error is more substantial even than a mere affirming of the consequent: a rigorous application of Say's law of markets would conclude the opposite of what Say assumes in his letter to Malthus!

How so? In assuming displaced workers "immediately" are set to work in a "fresh business," Say at once treats labor as a commodity in two incompatible ways. On one hand, Say treats labor as a differentiated "finished product" that can be displaced by a machine which substitutes for its speciality. On the other hand, though, labor (power) is assumed to be an undifferentiated general capacity that can readily be adapted to a new trade. The elixir for this fantastic transformation from leaden particularity to golden generalization is, presumably, the wage. Given a wage of zero in their former occupation and a positive wage, however low, in the fresh business, displaced workers can be counted on to make the transition. The only fly in this alchemical ointment is the stubborn aversion of workers to low wages.

Of course not every redundant blacksmith can make the leap to concert pianist, even given a low enough starting wage. But people are adaptable, so the thinking goes. For finished products, though, Say's law offers no such reprieve. There can be no general glut of overproduction, only overproduction of some products co-existing with underproduction of others. The "fresh business" idea would come in handy here. If there are too many overshoes produced, it is simply a matter of re-labeling them as flower pots, of which there happens to be a shortage!

Sarcasm aside, Say's segue from workers being displaced by machinery to workers set to work in fresh business, from the particular to the general, raises the spectre of a general glut in the labor market, which -- because all labor is treated as homogeneous -- is not amenable to "redirection" by wage signals from localized gluts to localized shortages. Furthermore, in some industries the substitution of machines for labor power would be irreversible other than, hypothetically, at a negative wage because of the sunk costs in machinery.

With regard to labor markets, the phrase "supply creates its own demand" is not only not Say's Law; it violates Say's Law!

1 comment: said...

I note that Say never said anything like a French version of "supply creates its own demand." He called it "the law of markets."

Furthermore, while he did make many statements that support "his law," and generally was not sympathetic to arguments about technological unemployment, he did recognize that insufficiency of demand could occur under special circumstances that might lead people to hoard money, and during the recession following the Napoleonic Wars he sided with Malthus against Ricardo in supporting increased government spending on public works to reduce unemployment.