Did Keynes Mischaracterize Say's Law?
We've all seen statements like this floating around:
"Say's law did not posit that (as per the Keynesian formulation of Say's law) 'supply creates its own demand.'" -- Wikipedia
Now consider this quote from Say:
"It is worthwhile to remark that 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. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products." -- J.B. Say, A treatise on political economy
OK, break it down: "It is worthwhile to remark that a product is no sooner created than it..." -- SUPPLY
"from that instant [it] affords..." -- CREATES
"a market for other products to the full extent of its own value." -- ITS OWN DEMAND. (It is these other products that represent the effective demand for the first product.)
I'd say that is about as good a summary of what Say thought as one could coin in five words or less.
If Keynes somewhere wrote, "Just as the sky is blue..." you can be pretty sure that somewhere on the Internet, someone has written, "Despite having lived in England, Keynes was too dull to know the sky is often grey."
"Say's law did not posit that (as per the Keynesian formulation of Say's law) 'supply creates its own demand.'" -- Wikipedia
Now consider this quote from Say:
"It is worthwhile to remark that 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. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products." -- J.B. Say, A treatise on political economy
OK, break it down: "It is worthwhile to remark that a product is no sooner created than it..." -- SUPPLY
"from that instant [it] affords..." -- CREATES
"a market for other products to the full extent of its own value." -- ITS OWN DEMAND. (It is these other products that represent the effective demand for the first product.)
I'd say that is about as good a summary of what Say thought as one could coin in five words or less.
If Keynes somewhere wrote, "Just as the sky is blue..." you can be pretty sure that somewhere on the Internet, someone has written, "Despite having lived in England, Keynes was too dull to know the sky is often grey."
The problem with "supply creates its own demand" as a shorthand is that it sounds like just because you've made something people will want to buy it. That wasn't what Say was saying. His point is that supply and demand are just different sides of the same coin, since we pay for one thing by exchanging it for another.
ReplyDelete"it sounds like just because you've made something people will want to buy it."
DeleteWell, Keynes is not responsible for that misapprehension! All we need to do to explain what is wrong with it is to "measure" supply in dollars (as is standard). "Supplying" something that no one wants is supplying $0 of goods, i.e., it is supplying nothing. And it creates no demand!
"His point is that supply and demand are just different sides of the same coin, since we pay for one thing by exchanging it for another."
Well, "Say's Law" is actually a series of interrelated propositions (Sowell counts seven of them, I think) and no simple single principle at all. But I think Keynes captured the essence of what Say wrote above pretty well.
Hmm I'm still pouting over you putting words into my mouth on the anarchy post title, but I'll give you this one. I used to think what Blackadder said, but you're right Gene, Keynes himself didn't characterize Say's Law that way, and then knock down the strawman. I.e. Keynes is attacking what even Say's defenders would possibly say is an accurate version of "Say's Law."
Delete"Hmm I'm still pouting over you putting words into my mouth..."
DeleteWell, I assume all the regulars here know the title was a tease.
I guess my problem with the phrase "Supply creates its own demand" is that it seems to imply that increasing the production of a good or service will necessarily increase the demand for it. That much is obviously not true.
ReplyDeleteIt could just be that I misunderstood everyone who ever referred to Say's Law, or totally over-thought it.
" is that it seems to imply that increasing the production of a good or service will necessarily increase the demand for it."
DeleteWell, I can see how some people could misunderstand what Keynes wrote in that way. But clearly that is not what he meant!
Good evening, Dr. Callahan.
ReplyDeleteI understand Say's Law to say something like this: I combine Product A with Product B to create Product C. Upon the sale of Product C, I purchase more of Products A and B, but I also purchase Prodcut D.
So, the creation of Product C leads to the objective demand of A and B, and the subjective demand of D.
Say's law does not say anything about "objective demand" or "subjective demand," so I think you are confused.
DeleteA few points here:
ReplyDelete1) You are absolutely correct that Hazlitt, Hutt, and Kates all blatantly misread Keynes when they accuse him of the naive caricature "supply of X creates demand for X". The key point is that Keynes explicitly defines aggregate demand price in an ex ante sense - "the proceeds which entrepreneurs expect to receive", not the proceeds that they actually do receive.
2) Having said that, I do not think that "supply creates its own demand" is the proper field of battle here. This phrase was accepted without reservation by arch-Misesians like Benjamin Anderson, Hazlitt, and Hunter Lewis - while on the other hand, self-described "loyal Keynesian" William Baumol called it "a very bad caricature". I think he has a point - surely you can agree that "its own" has unfortunate reflexive connotations (again, keeping in mind that Keynes himself did not mean anything stupid by it).
3) IMO, the ex ante conception of demand is really the key to understanding Say's Law in the Classical sense - it is abundantly clear that this is what Say/Ricardo/Mill had in mind. Keynes got it right - almost every major economist since then has gotten it wrong. Becker and Baumol are Exhibit A here, with their spectacularly vacuous Say's Identity/Say's Equality formulation. And it is the fact that Sowell so often reasons along these same lines that prevents me from sharing your enthusiasm for his book. Why am I wrong here? Where is there any value in attempting to relate supply to an ex post conception of aggregate demand?
4) I maintain that Keynes DID still misunderstand Say's Law, but in a much more subtle manner. It is clear, again from his definition of aggregate demand price, that he does not envisage a scenario where production literally runs ahead of aggregate demand. Rather, the hypothetical divergence between the aggregate supply and aggregate demand functions at certain levels of output means that these levels will not be realized in the first place. But recall Ricardo's comment on Malthus, as quoted in Sowell (p.125 of my edition):
“…for what are all his attacks on Say and on me, surely not because we have said that in all cases there would be motives sufficient to push production to its utmost extent, but because we have said, that, when produced, commodities would always find a market.”
Surely he would have the same response to Keynes. So ultimately, perhaps the fairest conclusion here is that there is simply not as much logical engagement between Mr. Keynes and the Classics as is commonly believed.