Who Were the Sea Peoples?

On my fourth round of teaching macroeconomics, I am really able to tie much of the course together around the theme of "upholders of Say's Law" versus "Keynesians" (with "Keynesians" acting as a synecdoche for "all general glut theorists"). For instance, I was just teaching the chapter of our text on unemployment. When we discussed structural unemployment, I told the class about how the general glut debate initially launched in the wake of the Napoleonic Wars. "The defenders of Say's Law were not idiots: they saw that there were idle resources. But their explanation was that after 20 years of fighting, the European economy was structured around war: it would take time to change factories for making cannons into factories for making sweaters." And then I explained how a similar structural explanation was offered for the recent housing-led downturn. And I noted that the Keynesians needn't deny that these structural imbala...

Preparing to teach macroeconomics today, I read the following: "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." -- J. B. Say Two things came to mind: 1) "affords a market for other products to the full extent of its own value." But the point that Malthus and Sismondi were making was that the producer might have been mistaken about what the "full extent" of the market value of his product would be, so that he could only sell at a loss... at which point he might decide to sit on the product and hope for a price increase. This can be translated as: Say's Law holds under conditio...

A number of people were scathing about my post on general gluts , saying something to the effect of, "Well, Callahan made it easy for himself, picking a one-good economy!" But the exact opposite is true: I picked a one-good economy with no money because that was the hardest case I could think of. The reason is that a general glut is an instance of an intertemporal coordination failure. The simplest case for intertemporal coordination is where I produce one good for myself. (I really should have left out the other two actors in my example to make it even more effective.) If a general glut is conceivable in that case, well, a fortiori it is conceivable in cases with more actors, more goods, and especially, with money. The other thing people became very worked up about is the relationship of this possibility to "Say's Law." Well, the first thing to note is there just is no single "Say's Law." In classical economics, there were at least seven or...

"The fact that there exists a potential barter bargain of goods for labor services that would be mutually agreeable to producers as a group and labor as a group is irrelevant to the motion of the system. The individual steel producer cannot pay a newly hired worker by handing over to him his physical product (nor will the worker try to feed his family on a ton-and-a-half of cold-rolled sheet a week)." -- Axel Leijonhufvud, Keynesian Economics and the Economics of Keynes , p. 90

In honor of Adam Smith, production in this economy will consist of beaver and deer, and, in an addition in honor of Silas, arrows (intended to pierce the heart of blog writers he dislikes). I produce beaver. Bob produces deer. Silas produces arrows. In period 1, I produce 10 beavers, intending to trade 5 of them with Bob for 10 deer, and 5 of them with Silas for 20 arrows. In period 1, Bob produces 16 deer, intending to trade 8 of them with me for 6 beavers, and 8 of them with Silas for 20 arrows. In period 1, Silas produces 30 arrows, intending to trade 15 of them to me for 6 beavers, and 15 of them to Bob for 10 deer. In period 2, I find Bob only offers 7, not 10, deer for 5 beavers. I find Silas only offers 13 arrows, not 20, for 5 beavers. In period 2, Bob finds I only offer 4 beavers, not 6, for 8 deer, and Silas only offers 10 arrows, not 20, for 8 deer. In period 2, Silas finds that I only 3 beavers, not 6, for 15 arrows, and Bob only offers 6 deer, not 10...

I begin to see how Say's Law is perhaps the most important concept in the subject. In saying that, I am not contending that Say's Law* always holds (nor am I claiming it doesn't!): I am suggesting that many (most?) macroeconomic disputes can be understood as disputes over its applicability. If we pay attention to the Keynesian model, we see that the "paradox of thrift" occurs when S (savings) > II (intended investment). The model contains no hysteresis, so it makes no difference how that condition came about: it could be a increase in savings not matched by an increase in intended investment, or it could be a drop in intended investment not matched by a drop in savings. The "right" way to deny that this paradox is of importance is not to say it implies savings is bad, because it doesn't, but to try to show that II shifts along with S, which Bob Murphy understands : "In contrast, a Rothbardian (say) is going to argue that when people save...

Say (when he was still fighting Sismondi), Ricardo, Mill and others often blamed gluts on "sectoral imbalances," denying there could be any such thing as a general glut: we could have too many guns and not enough butter, or vice versa, but never an overproduction of goods in general. The solution was always to produce more of the good relatively under-supplied, which could be used to buy up the glut of the one relatively over-supplied. The curious thing about this is that it seems to assume sticky prices: otherwise, the price ratio of the two goods could simply change until the market cleared, and there would be no need to produce more of the one under-supplied: it is only under-supplied at some price . But once we assume sticky prices, we seem to have posited the condition needed for a general glut: goods in general have been produced at costs that cannot be recovered, but rather than dropping their prices and accepting a loss, producers sit on inventory. I have to look...

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 mis...

The understanding of "Say's Law" being propounded here in a number of posts does not imply some particular view on good economic policy, as Silas and B-Murph have noted in the comments. One could admit that Say's Law, if viewed as an empirical rather than a tautological statement, has exceptions, and think: 1) So what? The government will just make things worse if it tries to intervene. 2) The government might be able to improve things, but the means it uses would be immoral, e.g., inflation or taxation (needed to pay back money for stimulus later). 3) The government can and should intervene to shorten or prevent downturns.

1) Say's Law was not, in the early 1800s, any specific idea. Say never gave us one sentence that states "his" law. The idea that there was a law here only coalesced slowly, and it did so around a cluster of ideas, not a single idea. (I believe Thomas Sowell counted nine different notions related to "Say's Law.") So anybody who tells you "Say's Law means X, and if you think otherwise you are ignorant"... is ignorant. 2) Given the above, there is nothing suspect about formulating Say's Law in this way or that way. Some ways of formulating it will hold no matter what. For instance, if, in this example , one could say, "As I formulate Say's Law, this conforms to it: Bob, Silas, and you overproduced fish, and underproduced leisure, so that's a sectoral imbalance!" Fair enough, but that isn't what Say meant, since when Malthus presented examples like this, Say at first rejected them. Economists at that time thought of ...

"Say's Law, or a crude version of it, rules out general overproduction: an excess supply of some things in relation to the demand for them necessarily constitutes an excess demand for some other things in relation to their supply... The catch is this: while an excess supply of some things necessarily mean an excess demand for others, those other things may, unhappily, be money. If so, depression in some industries no longer entails boom in others... "[T]he quantity of money people desire to hold does not always just equal the quantity they possess. Equality of the two is an equilibrium condition, not an identity. Only in... monetary equilibrium are they equal. Only then are the total value of goods and labor supplied and demanded equal, so that a deficient demand for some kinds entails and excess demand for others.  " Say's law overlooks monetary disequilibrium. If people on the whole are trying to add more money to their total cash balances than is being a...

In the midst of my macro class today, I came up with two ideal types to help the class picture one economy in which Say's Law holds, and one in which it does not. Let's look at each. First we imagine a class dance party. We stipulate that people are only allowed to enter the dance hall in pairs, and that they agree to dance with any available partner at any point they are in the hall, and then they all leave at the same time. In that situation, no general glut is possible. Every person by entering the room is simultaneously supplying and demanding a dance partner, surely the proper way to understand Keynes's formulation of Say's Law as "supply creates its own demand." So long as there is an even number of people in the room, no one can overproduce a supply of dance partners. Say's Law holds. The dance was such a success that we plan a class picnic. Everyone is going to make a small dish, the right size for a single meal, with the idea that everyone ...

One of the most remarkable things about the modern debate on the validity of "Say's Law" -- the key topic in macroeconomics, says me -- is that the defenders of the law never seem to address or even acknowledge the fact that, in the debate between Malthus and Say, Say acknowledged that Malthus was right . That is right , folks, by in the end, J.B. Say was no longer an advocate of Say's Law: "Yet Say changed his mind. By 1829, in his analysis of the British financial panic and recession of 1825-6, Jean-Baptiste Say was writing that there could indeed be such a thing as a general glut of commodities after all..." Even a conservative economist like Thomas Sowell points out that, per Say, Malthus won their debate. But then John Stuart Mill came along and wrote up the history of this argument as if sensible economists like his father, Ricardo, and Say had crushed the cranky argument of Malthus. Mill's towering reputation made this false history accep...

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 creat...

I've been going through Roger Garrison's absolutely wonderful Powerpoint presentations on Keynes versus Hayek (how the heck does he do all that stuff, anyway?!), and the process has brought to the fore something that has been in the back of my mind for a while now: Bob Murphy has referred to himself and me as "heretics" for concluding that a general glut is possible , contra some interpretations of Say's Law. But if we are, we are in good company, as Garrison's models allowing an economy to be "temporarily beyond the PPF" are exactly what Malthus and Sismondi were talking about back in the early nineteenth century -- it is possible for a person, or even the people making up an economy in general, to produce at "too high" a rate, in that the production will only be sold at a loss, and people later will regret having worked so much for the meagre benefits received. In fact, Roger and I, in our 2003 paper on the dot-com boom-and-bust, gave...

So, now that I think I understand what these folks were thinking about, thanks to Thomas Sowell's On Classical Economics , let me describe the sort of scenario I believe that they had in mind. Imagine Bob Murphy, Silas Barta and I are living on a desert island. First Bob and I set Silas adrift at sea on a small raft while he's sleeping. (Just kidding, Silas! We love you, man.) Then we set about catching fish from the island's lagoon with our rough-hewn spears. In three hours a day, we each catch about five or six fish, enough to feed us well. Then we spend the rest of the day discussing teleology. One day, Silas says, "Guys, we don't work that much. We could really increase our productivity if we worked six hours a day." Bob and I reluctantly go along. That day, we each catch a dozen fish, but are too tired to discuss teleology. We each eat six of the fish and feel decently full. We eat three more each, and now we're stuffed. We take our last three ...