Further Thoughts on Say’s Law

After thinking on what I posted yesterday on Say’s law of markets, it seemed to me that the formulation of the law should be given some further thought. Certainly, Say himself was rather ambiguous on where the generated demand came from, whether it was demand from the producer himself for raw materials and labor, or from consumers who bought his good. I suspect that Say at times thought in terms of Keynes’ formulation that the production of a good creates its own demand.  

However, because Keynes’ formulation is self-evidently false, many have adopted the formulation I gave in yesterday’s post.

The production of an economic good or service increases aggregate demand by exactly the amount spent to buy raw materials and labor used to produce the product.

This particular formulation is self-evidently always correct. Given that interpretation for what is meant by the generated demand, the demand created by producers in the private sector is in no way inferior to demand created by a government stimulus program. Certainly, when one considers that total private demand is larger than total government demand, the private sector demand has more impact. Also, in the not improbable event that a producer’s good is bought by customers, the production and demand for what is produced are economically sustainable. In that case, the demand generated by a producer is vastly superior to the demand of a government stimulus program.

There  is however a third way of looking at Say’s law that is merely a change of semantics. This way of interpreting the law is particularly found among the followers of Ludwig von Mises, a member of the Austrian School of economics. What they claim is J.B. Say was referring  to economic goods. This by definition means that the goods produced were goods that were demanded by someone in the market. Since economic goods are by definition goods that have demand, Say’s law becomes a tautology. Its total content would then be that goods must be produced before they can be consumed. This is a worthy enough statement that all too many forget at times.

I suspect that a Keynesian would reply to all this in something like the following vein. Whatever you think that Say meant by his famous law, there are still recessions and depressions, during which economic demand is repressed. Then there will be slack in the labor market with a large number of unemployed. Also existing means of production will be underutilized, with much plant and equipment idle. All a Keynesian stimulus program from the government is supposed to do is to restart the economy by putting the means of production back to work again. Government demand will substitute temporarily for private sector demand.  After people, especially businessmen, regain their “animal spirits”, the government can stop their stimulus program with the economy restarted.

This is a serious point by the Keynesian, and requires a serious rebuttal. I will attempt to give such a rebuttal in future posts. This is too large a subject to attack in a single post and it will probably require many. A neoclassical economist would say the optimal way to get out of a depression would be to somehow encourage the private sector to restart production without having the government determining where assets are allocated. Can anyone say supply-side economics? At any rate, Say’s law assures us that if a company produces a good, it will stimulate demand just as well dollar-for-dollar as the the government stimulus. If it can actually sell the good, economic activity will  increase in a sustainable manner.

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