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Monday, September 24, 2012

An Order: Read Sowell on Say's Law

I am re-reading Sowell's wonderful book, Say's Law: An Historical Analysis. If you want to read a fascinating history and understand the theoretical issues at play more clearly, do pick it up. In any case, a will, as usual, comment occasionally as I read, starting here.

The first thing of note is, come on, this is Thomas Sowell. He is a fairly market friendly, "right-wing" economist, and no "born again Keynesian," as I was recently accused of being. So if he says that Say came to agree with Malthus, well, perhaps he is wrong, but it's not because he wants to throw the decision to the opponents of Say's Law; he is just being honest.

And when he writes, in his very first sentence, "The idea that supply creates its own demand -- Says' Law..." he is not trying to back Keynes, he is letting us know that is a pretty darned good way to summarize Say's Law.

He also shows that the case made by the general glut theorists was often misinterpreted by defenders of Say's Law. For instance, he writes, "Despite the advances in mutual understanding finally achieved by some of the main participants in the general glut controversy, John Stuart Mill... in 1848 proceeded with precisely the same arguments -- and precisely the same misinterpretations of the general glut theories -- that the supporters of Say's Law had put forth... nearly three decades earlier." As Sowell describes the situation, Mill essentially granted the case of the general glut theorists without acknowledging as much, while also holding that Say, Mill's own father, and Ricardo had won a crushing victory in their intellectual debate against them.

Over a century later we can find Henry Hazlitt doing the same thing. He tries to show how "devastating" the response of the defenders of Say's Law was to the general glut theorists by claiming the general glut theorists forgot the following "qualifications" to Say's Law:

1) The can be a temporary period of "crisis of confidence" where everyone thinks prices will continue to drop and so won't buy goods at current prices, and inventories pile up;
2) There can a "sectoral imbalance" between money and all other goods for a temporary period, so that people prefer money to other goods until that imbalance works itself off; and
3) It may be the case that goods cannot be sold at prices that cover their costs of production.

Well, those three points simply are the case made by the general glut theorists! It is as if a defense attorney tried to defeat the prosecution by declaring, "Given we admit our client committed the murder, what is left of the prosecution's case?"

Hazlitt at least had the excuse that Sowell's book hadn't been written yet when he wrote the aforementioned passages. I don't know what excuse people have for taking these views today, except that they can't be bothered to0 actually read up on something before they call others "ignorant" on the topic!


10 comments:

  1. I like a lot of what you have been doing in these recent blog posts.

    I do think there are certain things in Keynes that Hazlitt was trying to get at in those passages that continues to be problematic. There is some sense among Samuelson and many modern Keynesians that there is some aspect of aggregate demand that isn't captured in whether or not there is sufficient M*V out there to buy up all the goods at the current vector of prices. Garrison gets into it a bit in Time and Money and I've seen people say that online. If Hazlitt can be presented as attacking that, some of what he said is somewhat defensible.

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  2. Good evening, Dr. C.

    Forget Say's Law. What do you think about the controvery surrounding the Packers/Seahawks game?

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  3. In the winter 2006 edition of the Quarterly Journal of Austrian Economics, David Gordon wrote a very favorable review of Thomas Sowell's "On Classical Economics." On page 71 and 72 of this review he does, however, criticize Sowell as having gone badly astray in two areas. One of these areas was his (Sowell's) belief that Malthus and Sismondi had raised valid objections to Say's Law. Have you, Dr. Callahan, read this review and if you have, what do you think of Dr. Gordon's belief that Dr. Sowell went astray in this area? I would provide the link, but I don't know what the rules are regarding that. Thank you.

    Senyor

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    1. Neither Gordon nor Rothbard is apparently aware that Say finally conceded! Sowell knows this history much, much better than either of them.

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    2. Thank you very much for your reply! I will try to see if Dr. Gordon has any response to what you said. Over on Dr. Murphy's blog I asked him about your criticism of Rothbard's MES critique of Keynes on the multiplier. He didn't comment on my question. I know he is busy, so I will try to ask him the same question again later. I have said on this site before that I wish people would try to deal with concrete points when they are made. Thank you for responding to my concrete point! I am NOT trying to start fights, I am just trying to learn what is the truth on whatever subject is in question. Is this reasoning, trying to settle a point before moving on, what is called scholastic reasoning?

      Senyor

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    3. Thank you very much for your reply! I will try to see if Dr. Gordon has any response to what you said. Over on Dr. Murphy's blog I asked him about your criticism of Rothbard's MES critique of Keynes on the multiplier. He didn't comment on my question. I know he is busy, so I will try to ask him the same question again later. I have said on this site before that I wish people would try to deal with concrete points when they are made. Thank you for responding to my concrete point! I am NOT trying to start fights, I am just trying to learn what is the truth on whatever subject is in question. Is this reasoning, trying to settle a point before moving on, what is called scholastic reasoning?

      Senyor

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  4. The problem with your post is that there are two distinct issues under discussion when Say's Law is debated (actually more, but two that are relevant for our purposes):

    1) whether "general overproduction" is possible

    2) whether it is necessary for their to be unproductive consumption in order to maintain "effective demand".

    Though the former was the primary point of contention during the 19th-century debates, it is only the latter that underlies the fundamental challenge to modern macroeconomics posed by Say's Law, and in this context, the fact that Say and Mill eventually conceded elements of the general glut case is utterly irrelevant.

    Now, I seem to remember this point being made by another writer on this topic....who was it....oh, that's right, Thomas Sowell! On page 8, he laments that the modernization of Say's Law "has led to grotesque distortions of history where the general glut controversy that reached its peak in the 1820's is treated as a debate over Say's Law in its modern sense"...

    ...and also reminds us that "those who opposed Say's Law in the early or classical period...had no [Keynesian] conclusions in mind."

    It seems you might need to heed your own advice a little more carefully.

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    1. But... but... but... I did not bring up point 2 at all! Nothing in my post says anything about point two one way or the other. So what in the world is your comment telling me I got point two all wrong about?

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    2. Oh I see - so your discussion here is in no way intended to function as a defense of modern macroeconomics? You are "ordering" us to read Sowell on Say's Law because these 200-year-old economic debates are just so inherently fascinating? And you bring up Sowell's free-market credentials, because....[I can't even think of a sarcastic reason here, help me out why don't you].

      I'm fully aware that you didn't bring up Point 2 - that is exactly the problem with all of your posts on this topic! You go on and on trying to show us that a "general glut" really is possible, apparently unaware that a) this is irrelevant to the issue that people are actually interested in debating, and b) this approach was deemed a "grotesque distortion of history" by the very author whose book you can't stop praising.

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    3. "Oh I see - so your discussion here is in no way intended to function as a defense of modern macroeconomics?"

      Nope, it is not. It is intended to get history correct.

      "You are "ordering" us to read Sowell on Say's Law because these 200-year-old economic debates are just so inherently fascinating?"

      Yes, to me, they are. Furthermore, when someone like Rothbard claims that the defenders of Say's Law crushed its opponents, it is interesting to realize he is BSing us.

      "And you bring up Sowell's free-market credentials, because..."

      Even someone so market-supporting realizes that Rothbard's history of thought is crap.

      "You go on and on trying to show us that a "general glut" really is possible, apparently unaware that a) this is irrelevant to the issue that people are actually interested in debating"

      Yes, except intellectually dishonest swindlers like Rothbard and his followers keep trying to claim that it was proved that a general glut was not possible!

      "b) this approach was deemed a 'grotesque distortion of history' by the very author whose book you can't stop praising."

      Are you even able to think through a simple syllogism or math problem? What Sowell said was a 'grotesque distortion of history' was to treat the question "Is a general glut possible" as equivalent to "Is Keynesian stimulus necessary?"

      And when I DON'T do this, but cleanly separate the issues, you say that this is the "approach" Sowell was criticizing?!

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