oldfart
Older than dirt
Certain posters seem to have a fixation with Say's Law and some interpretations of it and frequently try to derail other discussions by bringing it up. I assume that this is not from any intention to disrupt, but from a deep desire to understand Say's Law and promote their version of it. Rather than reply in the other threads, I choose to discuss it in this thread. Feel free to join in!
Jean-Baptiste Say (1767–1832) was a French economist whose major work was
A Treatise on Political Economy (Traité d'économie politique) (1803) in which he stated:
Say's argument is either a tautology (and therefore always true by being a definition without rising to the status of a theory) or a generic general equilibrium model . If it is viewed as a tautology, it says nothing more than "In a barter market at the end of the day the total value of the quantity of products sold is equal to the value of the quantity of products bought."
Consider an example: Suppose we have a two product model without money, tomatoes and potatoes. Those who brought tomatoes to market exchange them for potatoes and vice versa. If 500 pounds of potatoes are exchanged for 200 pounds of tomatoes, there is an established "price" or exchange rate, in this case 5:2. If at that exchange rate the market does not clear, if there remain an unexchanged surplus of either commodity, the Classical economists would argue that the price must change making the surplus good cheaper and thus bringing the market into equilibrium. This is the essence of Adam Smith's formulation, that the price mechanism serves an informational function allowing buyers and sellers to adjust their prices so that the market clears. If you cannot sell the last ten pounds of tomatoes at your standard price, you dispose of them at a discounted "sale" price and the day nears the end.
In this sense Say's Law is mostly an observation that markets tend to clear in most circumstances (but not always), and that the quantity of any product sold must equal the quantity of the same product purchased (i.e. in every transaction there is a buyer and a seller).
Say further extended this argument to mean that a "general glut" cannot occur. If there is a surplus of one good, there must be unmet demand for another:
So in this version we can have failure of individual markets, but we cannot have every good in surplus at the same time.
Now the first objection to this is that market failures occur and that "general gluts" (i.e. lack of aggregate demand) in fact do occur. Followers of Say would reply that such a situation must be temporary and in the long run equilibrium will be fully restored by market actions alone. This opinion which opposes government intervention in markets is most famously the view of Andrew Mellon, U.S. Secretary of the Treasury from 1921 through 1932. This view recognized an ad hoc theory of booms and busts which nevertheless were self-correcting in the market if given enough time. Intervention, it was claimed, only made the situation worse. James Mill and David Ricardo both supported the law Say's Law in this sense, but Thomas Malthus and John Stuart Mill noted that general gluts did occur and questioned it.
Now we are out of the realm of treating Say's Law as a mere tautology and firmly into its formulation as a general equilibrium theory. We can see it works in a two commodity model without money, but what happens when we add money? Money began as a commodity (famously gold) and such money served three functions: a medium of exchange, a store of value, and a unit of measurement. One could use a gold coin in an exchange or put it in a sack under your bed. This creates a problem for Say's Law. When you use money strictly as a medium of exchange, Say's Law holds, but when you use money as a store of value (for use in the future introducing the issue of intertemporal equilibria) a person who sold their tomatoes for gold coin could decide to add it to that sack rather than spend it. If enough people do this for any reason, there can be an excess of savings and a deficient amount of aggregate demand. This was first described as the "Paradox of Thrift" where if everyone decides to save and not spend, a downward spiral sets up where my non-spending leads to others having lower income and not being able to spend as much, including what I intend to sell.
So my view is that Say's Law is true in a trivial sense applying to non-monetary economies only. The introduction of money and the ability to save money rather than spend it is the spike in the gun, an argument made by John Stuart Mill in 1844. (Essays on Some Unsettled Questions of Political Economy). I have intentionally left out mention Keynes analysis of Say's Law and of modern attempts to rehabilitate some version of Say's Law, which can be discussed another time.
Jean-Baptiste Say (1767–1832) was a French economist whose major work was
A Treatise on Political Economy (Traité d'économie politique) (1803) in which he stated:
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....As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.
Say's argument is either a tautology (and therefore always true by being a definition without rising to the status of a theory) or a generic general equilibrium model . If it is viewed as a tautology, it says nothing more than "In a barter market at the end of the day the total value of the quantity of products sold is equal to the value of the quantity of products bought."
Consider an example: Suppose we have a two product model without money, tomatoes and potatoes. Those who brought tomatoes to market exchange them for potatoes and vice versa. If 500 pounds of potatoes are exchanged for 200 pounds of tomatoes, there is an established "price" or exchange rate, in this case 5:2. If at that exchange rate the market does not clear, if there remain an unexchanged surplus of either commodity, the Classical economists would argue that the price must change making the surplus good cheaper and thus bringing the market into equilibrium. This is the essence of Adam Smith's formulation, that the price mechanism serves an informational function allowing buyers and sellers to adjust their prices so that the market clears. If you cannot sell the last ten pounds of tomatoes at your standard price, you dispose of them at a discounted "sale" price and the day nears the end.
In this sense Say's Law is mostly an observation that markets tend to clear in most circumstances (but not always), and that the quantity of any product sold must equal the quantity of the same product purchased (i.e. in every transaction there is a buyer and a seller).
Say further extended this argument to mean that a "general glut" cannot occur. If there is a surplus of one good, there must be unmet demand for another:
"If certain goods remain unsold, it is because other goods are not produced."
So in this version we can have failure of individual markets, but we cannot have every good in surplus at the same time.
Now the first objection to this is that market failures occur and that "general gluts" (i.e. lack of aggregate demand) in fact do occur. Followers of Say would reply that such a situation must be temporary and in the long run equilibrium will be fully restored by market actions alone. This opinion which opposes government intervention in markets is most famously the view of Andrew Mellon, U.S. Secretary of the Treasury from 1921 through 1932. This view recognized an ad hoc theory of booms and busts which nevertheless were self-correcting in the market if given enough time. Intervention, it was claimed, only made the situation worse. James Mill and David Ricardo both supported the law Say's Law in this sense, but Thomas Malthus and John Stuart Mill noted that general gluts did occur and questioned it.
Now we are out of the realm of treating Say's Law as a mere tautology and firmly into its formulation as a general equilibrium theory. We can see it works in a two commodity model without money, but what happens when we add money? Money began as a commodity (famously gold) and such money served three functions: a medium of exchange, a store of value, and a unit of measurement. One could use a gold coin in an exchange or put it in a sack under your bed. This creates a problem for Say's Law. When you use money strictly as a medium of exchange, Say's Law holds, but when you use money as a store of value (for use in the future introducing the issue of intertemporal equilibria) a person who sold their tomatoes for gold coin could decide to add it to that sack rather than spend it. If enough people do this for any reason, there can be an excess of savings and a deficient amount of aggregate demand. This was first described as the "Paradox of Thrift" where if everyone decides to save and not spend, a downward spiral sets up where my non-spending leads to others having lower income and not being able to spend as much, including what I intend to sell.
So my view is that Say's Law is true in a trivial sense applying to non-monetary economies only. The introduction of money and the ability to save money rather than spend it is the spike in the gun, an argument made by John Stuart Mill in 1844. (Essays on Some Unsettled Questions of Political Economy). I have intentionally left out mention Keynes analysis of Say's Law and of modern attempts to rehabilitate some version of Say's Law, which can be discussed another time.