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Published by EH.NET (November 2003)

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Steven Kates, editor, Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle . Cheltenham UK: Edward Elgar, 2003. x + 221 pp. $85 (hardcover), ISBN: 1-84064-866-X.

Reviewed for EH.NET by Ingrid H. Rima, Department of Economics, Temple University.

The year 2003 marks the two hundredth year anniversary of the generalization that has come to be known as Say’s Law. As with any other anniversary that has had a significant impact on the development of economics — specifically macroeconomics — this anniversary is deserving of commemoration. Steven Kates’ undertakes to do this in a volume whose subtitle is “Essays on Economic Theory’s Most Controversial Principle.”

Some historical background is useful for putting the eleven essays that comprise this collection into perspective. The editor’s thirty-two page introduction traces the origins of J. B. Say’s concept of demand deficiency in response to a pamphlet by William Spence written during the Napoleonic Wars between France and England arguing that the loss of trade did no great harm because agriculture was the chief source of the economy’s value added. This resurgence of Physiocratic doctrine in England about the centrality of landowner expenditure in maintaining the economy’s prosperity, provoked a response by James Mill in Commerce Defended. This essay substantially denied, on the basis of an earlier argument by J. B. Say against the French Physiocrats that a deficiency of aggregate demand is an impossibility. Subsequently known as the “law of markets,” the Say-Mill generalization maintained that the production of output simultaneously generates aggregate purchasing power of sufficient value to clear markets of the entire output, which renders the insufficiency of purchasing power an impossibility. It is this perspective that essentially became the pre-Keynesian theory of recession that maintained, quite simply, that excess supplies of some goods could arise because some outputs have been produced in inappropriate proportions, but that gluts in the sense of insufficient demand for output as a whole are an impossibility. The essence of Keynes’s argument in the General Theory (1936) and the 1937 Economic Journal article that followed asserted the fallacy of Say’s Law given the absence in received economic theory of “a theory of supply and demand for output as a whole.”

Some years afterward a 1942 paper by Oskar Lange entitled “Say’s Law: A Restatement and Criticism” shifted the ground of the argument from the functioning of commodity markets to that of the money market. His argument was that Say’s Law holds because, implicitly, additional cash is never wanted, so that the demand for goods is necessarily the equivalent of the supply of goods with the result that unemployment cannot occur. This logic (also that of Alfred Marshall) led to the perspective that the theory of monetary markets must begin with a consideration of Say’s Law. William Baumol entered into the argument noting that, while fluctuations in aggregate demand may be the source of recessions and depression, the appearance of demand deficiency may well be a symptom rather than a cause of recession. His paper “Say’s Law and More Recent Macro Literature: Some Afterthoughts” is an appropriate prelude to the eleven essays that follow, including his own (“Retrospectives: Say’s Law”) republished from the Journal of Economic Perspectives (1999). The essays in the volume thus proceed from what the editor and the volume’s contributors consider Baumol’s perceptive insights into “the next stage of the debate” (p. 6) about Say’s Law. He is particularly concerned to emphasize that Keynes was, in fact, using the generalization that has become known as “Say’s Identity” as a “strawman” to criticize “the classics,” notwithstanding the concern that Malthus, Ricardo and Say expressed about unemployment and depression.

Evelyn L. Forget sets the stage for the essays that follow with her intellectual biography of J. B. Say as a political economist and entrepreneur. He engaged in the real world of business decision making that was then, as today, “complete with less than optimal bureaucracies, less than omniscient entrepreneurs, and a good deal less than perfect foresight” (p.51). For Forget, Say’s own use of the law of markets, to which the role of the entrepreneur was central, is found to have been fundamentally different from the automatic adjustment mechanism that Keynes rejected and casually labeled “classical” in The General Theory.

Given the disappearance of Say’s Law from contemporary discourse since The General Theory, the essays that follow undertake to evaluate, whether the profession has also become deprived of the valuable insights about the phenomenon of overproduction that were historically the subject matter of business cycle theory. Steven Kates’s “Economic Management and the Keynesian Revolution” addresses the question from the policy perspective of Keynes’s “solution” of offsetting aggregate demand deficiencies with increased public spending. Because “savings do not lie fallow but are channeled into investment,” Kates considers the policy to not be “economically sound.” The Keynesian case is thus threadbare, and “other explanations for recession and involuntary unemployment are required” (p.79). In short, Kates’ argument is that recessions are not caused by a failure of demand. This argument is the segue into papers by Steven Horowitz and Mark Skousen, which pursue “the case in favor of a modern rehabilitation of Say’s Law” from the perspective of F. A. Hayek and other supply side economists. Skousen’s paper is particularly interesting in its argument that, empirically, business investment is a more reliable predictor of the business cycle than the consumption data suggested by Keynes’s focus on the consumption expenditures of households. For Skousen these findings suggest the relevance of giving greater credence to supply side forces — specifically the role of entrepreneurs — as the source of dynamic change in an economy. The preceding arguments against Keynes-type demand management policies echo James Akiakpor in “Say’s Law: Keynes’s Success with Its Misrepresentation.” Together with Timothy Davis’s analogous paper “The Historical Context of the General Glut Controversy,” he offers a review of the events surrounding the so-called “glut controversy” that engaged Ricardo, Malthus and J. B. Say during the nineteenth century.

The remaining four papers examine what the editor’s introduction identifies as “the case for Say’s Law”; these reaffirm not only Keynes’s principle of aggregate demand, but also more contemporary theoretical developments. The first among these is Michael George’s paper “Savings, Hoarding and Say’s Law,” which focuses on the role of hoarding and the relationship between variations in the interest rate and speculation explored by Alfred Marshall and Frederick Lavington. This historical inquiry is interesting in its own right, yet it is hardly reflective of the contemporary post-Keynesian perspective of “money as an asset.” Modern monetary production economies are fundamentally different from those trading use values, e.g., iron for corn, which evolved historically once the era of economic self-sufficiency passed. Monetary production economies are not concerned with the production of use values, but are concerned with the production of commodities for sale in order to generate profit. The role of money in a C – M – C’ economy is its immediate use for the purchase of other products, whereas in an M – C – M+ economy (which is characteristic of capitalism) money is to facilitate the accumulation of money (i.e., wealth) for its own sake.

As is elaborated by Steve Keen in the concluding paper of the volume, it is Karl Marx who described the “circuits” of capitalism in which he contrasts the process of exchanging use values for money in order to command other use values vs. exchanging money to purchase the use value of labor power in order to generate surplus value. Thus, money is more than a “lubricant” for barter (as perceived by Say); it is the form in which wealth is accumulated. There is no guarantee that exchanges undertaken within the M – C – M+ circuit can achieve either a sectoral or aggregate balance in which expectations are realized so that the debts undertaken to finance production processes do (given the uncertainty which characterizes the system), in fact, finance the sale of output at a profit.

Although the origin of Kates’ collection of essays is attributed to a (student) query whether “supply creates its own demand” or the other way around, Keynes’s raison d’etre for asking the question is the inherent instability and proneness of capitalism to unemployment and unused capacity. Only Bruce Littleboy’s “Say’s Law” paper fully appreciates the critical link between Keynes’s representation of Say’s Law and the “classics,” and his central concern about the phenomenon of large scale job losses. While involuntary unemployment is noted in Kates’s editorial introduction (p.10), the seeming disinterest of other contributors to examine it further within the framework of the supply side analysis he favors, and with which it is not inherently incompatible, is somewhat surprising. It also compromises his argument that classical economics has greater analytical and policy relevance that the aggregate demand analysis to which The General Theory gave rise. The classicals, as Baumol clearly appreciates, were concerned about unemployment and depression. None the less, Kates’s collection of papers to revisit classical economics and Say’s Law offers contemporary economists (few of whom nowadays have had the benefit of formal training in the history of economics) at least some appreciation of the profound insights that the “old classicals” offer, in particular, in comparison to the body of ideas that are now termed “new classical.”

Ingrid Rima’s publications include Development of Economic Analysis, Routledge (sixth edition), 2000.