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Say's Law in Context / Artikel mises.org

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Say's Law in Context
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by Peter Anderson

[Posted July 9, 2003]

<img alt="J.B. Say" src="http://www.mises.org/images2/say.gif" align="right" border="0">A
broader understanding of"Say's Law" would assist those who
continued to be puzzled by macroeconomic questions, but even better would be
to understand the context in which this Law was formulated. Say not only built
a case for the essential stability of a free market (in contrast to the
instability of the present mixed economy) but also made the case for the free
society against every alternative. 

It is an unfortunate facet of the history of
economic thought that Jean
Baptiste Say (1767-1832) has been largely discussed only for his law of
markets or Say's Law. The marginalization of Say's work as a whole is due
largely to the poor definition of his law of markets - supply creates its
own demand - which comprises chapter XV in Book I of A Treatise on
Political Economy [Treatise].

English Classical Economists James Mill and
David Ricardo who integrated the catchphrase"supply creates its own
demand" into classical theory contributed to the neglect of J.B. Say's
work as a whole.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn1" name="_ftnref1">[1]</a>  However,
the worst treatment of Say was by John Maynard Keynes in The General Theory.
Keynes attempted refutation of Say's Law relied upon formulations of the law
by J.S. Mill and Alfred Marshall.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn2" name="_ftnref2">[2]</a> Even
authors generally sympathetic to Say's writings have neglected to integrate
his law of markets into the whole of his Treatise.

 For example, Joseph Schumpeter attributes
the Keynesian attack on Say's law of markets as the reason for giving the law
more significance than it deserves.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn3" name="_ftnref3">[3]</a>  Even
Murray Rothbard - who considers Say as a proto-Austrian - states that
Say's law of markets is a"relatively minor facet of his thought."<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn4" name="_ftnref4">[4]</a>

The misunderstanding of the importance of Say's
Law is due to looking only at chapter XV of Book I without observing how it
fits into the complete Treatise. Say's Law is like a pane in a stained
glass window. When one removes the pane it loses its significance; only when
the pane is placed in the window as a whole can we accurately view the beauty
of the edifice. Such is Say's Law.

Jean Baptiste Say grasped the fundamental
problem of economics, in that we live in a world of scarce means, but have
unlimited desire or demands. Only such things as sunlight, air, or water are
freely afforded to man. Thus man uses nature to transform goods that give
utility to others.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn5" name="_ftnref5">[5]</a>  In
conjunction, Say recognized that all men were both producers and consumers.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn6" name="_ftnref6">[6]</a>  

From these two basic truisms arises Say's Law.
If individuals wish to procure a good they must give something in return that
is also desirable to individuals. Therefore in order for one to be a consumer
one must first be a producer of a good in which others find utility. Thus
individuals desire the commodity of money not as an end in itself,<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn7" name="_ftnref7">[7]</a> but
rather as a means to procure more desirable goods. However, in order to
acquire money one must first produce a good that will exchange for money.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn8" name="_ftnref8">[8]</a> 

The most important point in Say's formulation
is that the individual must produce something that is desirable to
others. It is from the erroneous statement"supply creates its own demand"
where the notion that as long as something is produced it will readily find a
market. This idea conjures connotations of Ricardo's labor theory of value in
which a product is endowed with value due to the exertion of labor in its
production. 

However, Say explicitly refutes Ricardo's labor
theory of value and aptly states that it is consumer demand that induces a
producer to undergo the costs of production.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn9" name="_ftnref9">[9]</a>  J.B.
Say consequently uses his law of markets and apt understanding of utility to
demonstrate why gluts of commodities will not be a long run phenomenon. 

Say admits that there can be short-term gluts
of a commodity. However, this can only happen if supply has outstripped demand
or others do not have goods to exchange in return. Say very precisely deals
with the first point by showing that the profit and loss mechanism in
production will drive producers away from unprofitable production to areas
that promise a greater return. The only thing preventing such a beneficial
change in production would be the interference of the government or a natural
disaster.

As to the second point Say uses the example of
a European backwater such as Poland. He says that it would not be advantageous
for a producer to take his goods to a poor country like Poland because they
are lacking in goods to exchange. Thus there would be no glut in a poor market
such as Poland, merely the inability to exchange goods. Also this would not
produce a long-term glut because the producer could take his goods to a
wealthier country such as England and quickly find a market - the idea of
the adventurer.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn10" name="_ftnref10">[10]</a> 

We have now seen in essence what has become
known as Say's Law. However, this law of markets does not have much importance
if it is excluded from the rest of the Treatise. For example, Say
devotes the last chapter of Book II to analyze the effects of political
economy on population. 

J.B. Say comes to a Malthusian understanding
that population is limited by means of subsistence. However, Say realizes this
does not have to perpetually continue. Greater production and cheaper goods
allow for population growth and whatever may inhibit production in turn
decreases population.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn11" name="_ftnref11">[11]</a> <a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn12" name="_ftnref12">[12]</a>
This acknowledgement combined with the most basic premise of his law - that
one good must be exchanged for another good - lead Say to rail against those
policies that would reduce the amount of goods exchanged and subsequently
diminish national wealth. Thus the crux of Say's advocacy for a laissez-faire
society is revealed.

J.B. Say did not advocate private property out
of some desire to protect the bourgeoisie. Instead Say advocates private
property because he views it as the greatest encouragement to increase
national wealth. Only when one can enjoy the fruits of their labor will they
be inclined to produce for others.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn13" name="_ftnref13">[13]</a>

Say rails against taxation as well as
government debts because they too reduce the amount of wealth to be exchanged
in society. Say writes that taxes reduce the consumption of a good and
consequently make production of the good less profitable. This has the twofold
affect of hurting both the consumer and producer - especially those with
specific capital in the taxed area - as well as creating market distortions
because some areas of production will now be less profitable. Consequently
individuals will move to formerly less profitable areas of production.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn14" name="_ftnref14">[14]</a>

In the case of government debts they also have
a negative effect on exchange and wealth. Say rightly states that loans to the
government withdraw productive capital from society only to be wasted by the
government. The reduced capital available will mean a reduced quantity of
goods to be exchanged and a subsequent diminution of societal wealth. <a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn15" name="_ftnref15">[15]</a>

J.B. Say also uses his law of markets to
advocate the free exchange of foreign goods. It is unfortunate that Say views
exchange in terms of equal values. However, his argument for free trade does
not live and die on this point. Instead it should be realized that Say is
refuting the mercantilist notion that at least one party must lose from
foreign trade. Say uses his law of markets to state that in the case of
foreign exchange one needs to give up a good to gain a desired good. Whether
the cargo imported is specie or other goods is irrelevant. Goods that have the
highest rate of profitable return will be imported. Thus in global exchange
goods will flow from where they are less desired to locations in which they
are more desired.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn16" name="_ftnref16">[16]</a>  

Finally in regards to money, Say has been
accused of missing the point that money is dynamic.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn17" name="_ftnref17">[17]</a>  However,
this is not the case. Say is a strong advocate of a hard currency and decries
the state's manipulation - usually through debasement - of the value of
the currency. Quite astutely Say writes that the manipulation of the monetary
value confuses the pricing system thus making the adventurer/entrepreneur
hesitant to further invest in capital and production. In addition, grievous
price controls and taxation usually follow such debasement, which together all
greatly limit production and exchange.<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftn18" name="_ftnref18">[18]</a>

As stated earlier Say's Law cannot be
accurately understood in and of itself. Say's law of markets incorporates
catallactics, the impetus for production and the adventurer, subjective value,
and a framework for the refutation of violent government intervention that
decreases production and exchange. Thus Say's Law cannot be separated from the
Treatise as a whole and still be accurately understood.

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Peter Anderson, a summer fellow at the Mises
Institute, studies economics at Dordt College. Anderson@mises.org

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<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref1" name="_ftn1">[1]</a>
See J.R. McCulloch’s The Literature of Political Economy [originally
published 1845]. McCulloch writes that Say’s treaty is remarkable only for
its law of markets and its popularization of Adam Smith’s work - to which
Say purportedly added nothing - on the continent.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref2" name="_ftn2">[2]</a>
John Maynard Keynes, The General Theory of Employment Interest and Money (New
York: Harcourt, Brace & World, INC., 1962), 18-21.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref3" name="_ftn3">[3]</a>
Joseph Schumpeter, History of Economic Analysis (New York: Oxford
University Press, INC., 1954), 615. Schumpeter does understand that Say’s
law is vital to his arguments against the violent hampering of internal and
external trade.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref4" name="_ftn4">[4]</a>
Murray N. Rothbard, Classical Economics (Edward Elgar Publishing
Limited, 1996), 27.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref5" name="_ftn5">[5]</a>
Jean Baptiste Say, A Treatise on Political Economy (New York: Sentry
Press, 1964), 285-286.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref6" name="_ftn6">[6]</a>
Ibid., 471.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref7" name="_ftn7">[7]</a>
Here Say misses out on the desire of individuals to hold money for various
personal utilities and regards money only as a medium of exchange.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref8" name="_ftn8">[8]</a>
Ibid., 133.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref9" name="_ftn9">[9]</a>
Ibid., 225.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref10" name="_ftn10">[10]</a>
Ibid., 135-137.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref11" name="_ftn11">[11]</a>
Say, 374.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref12" name="_ftn12">[12]</a>
For a similar conclusion see Human
Action for Mises’ discussion of the Industrial Revolution.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref13" name="_ftn13">[13]</a>
Ibid., 127-132.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref14" name="_ftn14">[14]</a>
Ibid., 465-467.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref15" name="_ftn15">[15]</a>
Ibid., 479.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref16" name="_ftn16">[16]</a>
Ibid., 148-175.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref17" name="_ftn17">[17]</a>
Larry J. Sechrest, 15 Great Austrian Economists (Auburn: Ludwig von
Mises Institute, 1999), 52.

<a title href="http://www.mises.org/fullstory.asp?control=1264#_ftnref18" name="_ftn18">[18]</a>
Say, 234-240.