O Say can you see?

Posted: 10 February 2013 in Uncategorized
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Paul Krugman is right: it’s extraordinary that, in this day and age—in the midst of the Second Great Depression—there are still many economists who invoke something akin to Say’s Law to describe what is going on in the economy.

To those not familiar with the term, the idea, attributed to Jean-Baptiste Say, is that there can never be overproduction or a general glut of commodities—and therefore a crisis of capitalism—because supply creates its own demand. That is, the presumption goes, no one produces except with the intention of either consuming what they produce or purchasing what other people produce. And, as long as free markets are allowed to operate, the result will be full employment.

Anyone who has studied even a bit of Keynesian economics knows such a view makes no sense.

But anyone who has studied even a bit of the history of economic thought knows that Marx criticized Say’s Law long before Keynes wrote the General Theory. It’s right there, in volume 1 of Capital—and, even before that, in Part 2 of Theories of Surplus-Value. In fact, Marx chides David Ricardo for relying on the “childish babble of a Say,” which he considered not “worthy of Ricardo.”

Marx develops his critique of Say’s Law almost at the very beginning, even before introducing capitalist production per se. All he needs is commodity production and the “metamorphosis” of the commodity into money. It’s precisely the introduction of money that, in Marx’s view, both expands and destabilizes exchange, because it is now possible to sell without purchasing (and thus to hold onto the money until the time is right to turn around and make another purchase).

Therefore, the only world in which Say’s Law might hold is nonmonetary or barter exchange: when, in fact, a sale (on the part of one producer) is also necessarily a purchase (by someone else).* Once money is introduced, Say’s Law no longer holds—and the possibility of crises exists.

What this means is that anyone who, today, holds to Say’s Law must be presuming a world of barter, and thus an economy without money. It’s no wonder, then, that neoclassical economics, based on the “childish babble of a Say,” has nothing to offer in terms of either imagining the possibility of economic crises or suggesting policies that might get us out of the current mess.

 

* And even then Say’s Law might not hold, if someone goes to market with the goods they’ve produced and doesn’t find someone who has what they want and wants what they have.

Comments
  1. I think the most important problem with Says Law (apart from the fact it doesn’t hold in the real world) is that it excludes the possibility of accumulation, in other words no one gets rich. People simply continuously trade, there is no hoarding, holding or accumulation.

  2. […] corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Law or “supply creates its own demand”—aggregate demand does not determine the level of […]

  3. […] corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Law or “supply creates its own demand”—aggregate demand does not determine the level of output; […]

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