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Wednesday, September 12, 2012

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."

8 comments:

  1. 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.

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    1. "it sounds like just because you've made something people will want to buy it."

      Well, 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.

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    2. 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."

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    3. "Hmm I'm still pouting over you putting words into my mouth..."

      Well, I assume all the regulars here know the title was a tease.

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  2. 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.

    It could just be that I misunderstood everyone who ever referred to Say's Law, or totally over-thought it.

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    1. " is that it seems to imply that increasing the production of a good or service will necessarily increase the demand for it."

      Well, I can see how some people could misunderstand what Keynes wrote in that way. But clearly that is not what he meant!

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  3. Good evening, Dr. Callahan.

    I 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.

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    1. Say's law does not say anything about "objective demand" or "subjective demand," so I think you are confused.

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