10
JEAN-BAPTISTE SAY (1767–1832)
John Maynard Keynes’s straw man
David Ricardo did not think much of Jean-Baptiste Say. “M. Say came to me here from London at the request of Mr. Mill,” he wrote to Thomas Malthus in 1814. While he was an “agreeable man”, Ricardo noted that “in his book there are many points which I think are very far from being satisfactorily established… He does not appear to me to be ready in conversation on the subject on which he has very ably written.”
Today most people share Ricardo’s low opinion of Say. He is best known for what seems like an absurdly optimistic theory of how the economy works: “Say’s law”, or, in a snappier formation as written by John Maynard Keynes in 1936, “supply creates its own demand”. As we shall see, the theory appears to assume that the economy is always in perfect balance and that recessions are impossible. In fact, since Say’s law was formulated, all capitalist countries have seen plenty of recessions. Even evidence from when Say was alive contradicts the theory: France, his country of birth, was in the middle of a banking crisis for 15 years during the 19th century.1 Could there be more conclusive proof of the wrongheadedness of Say’s ideas?
The modern perception of Say is, in part, due to the writings of historians. The earliest reference to the phrase “Say’s law” that I could find occurred in 1909, decades after Say died. A look at what Say actually argued reveals a more complex and thought-provoking figure. Say wrote about economics in an engaging and accessible style–not something that can be said for many of the people in this book. As far as the theory that bears his name is concerned, his thinking is far subtler than his most strident critics, including Keynes, believed.
Almost within cannonballs’ reach
Say was born in Lyon in 1767 to a family of Huguenots.2 His father was a tradesman. Like many of the economists of the classical school, Say had different careers in different countries. He served briefly in the army. At the age of 32 he was appointed by Napoleon to a committee that oversaw legislation. In 1803 he published his Treatise on Political Economy. The book irritated Napoleon, perhaps not for the substance of its content but, as the introduction to its 1834 American edition argues, because Say “presum[ed] to have an independent opinion”. Say retired to a rural part of France where he edited a philosophical periodical. No publisher wanted to publish any of his own writings. Rejecting offers of another role in government, and believing that his career as an economist was over, Say considered emigrating to America–but did not in part because he could not countenance living in a country where slavery existed.
Eventually he went into business. Joseph Schumpeter sees this as a pivotal moment in Say’s life. Commerce taught him that theory had only so much value. Real-world experience mattered just as much. As Gwynne Lewis puts it, Say did not like “algebraic formulas”, and “sought to relate economic questions to real people rather than to abstract principles”. His studies came on, and in 1820–seemingly no longer out of favour–he was chosen as France’s first-ever professor of economics, at the Conservatory in Paris. He was equally delighted when England founded its equivalent a few years later. “Joseph Hume3 tells me that you are going to establish a Chair of Political Economy in London. Bravo!” he wrote to Jeremy Bentham in 1824.4
Some of Say’s most interesting work focused on the English economy. Many people in 18th- and 19th-century France feared that their country was losing out economically to England (this was also a theme for the physiocrats, as we saw in Chapter 5). Worries over France’s economic performance were unfortunately well founded. In those 200 years the French government defaulted on its foreign debts six times compared with zero times in England.5 In 1600–1850, France’s GDP per person grew only two-thirds as fast as Britain’s. Its population grew far more slowly. The Battle of Trafalgar of 1805 resulted in a decisive British victory over France, which allowed Britain to establish itself as the primary naval power for the next century or so.
The long shadow of Colbert
In 1814 Say was commissioned to investigate why England was doing so much better than France. In today’s language he would be known as an “industrial spy”. Say’s task was to sneak in to factories and offices and learn the secrets of the English way of doing business.6 He was the perfect man for the job. He could speak English and had lived in Fulham, an area of London, for some of his early life. More importantly, however, in part because of his spell in business, he was an empiricist. As Say himself put it, “[h]aving no particular hypothesis to support, I have been simply desirous of unfolding the manner in which wealth is produced, distributed and consumed. A knowledge of these facts could only be acquired by observing them.”
To understand Say’s approach properly, it may be best to contrast it with Ricardo’s. Ricardo loved theories; his works contain few facts and are highly abstract. Ricardo relies heavily on deductive reasoning: if X is true and Y is true, then Z must be true. This is not at all the case for Say, who relies more on inductive reasoning: if all the Xs have so far been Ys, the next X is probably a Y. Another difference is that Say did not want to get bogged down in jargon. As his biographer, R. R. Palmer, argues, Say “wrote in non-technical language for a thoughtful but unspecialised audience”.
According to his best biographer, Evert Schoorl, on his spying mission to Britain Say travelled all over, visiting Birmingham, Manchester and Liverpool. He also went to Glasgow where he had the great privilege of sitting down on Adam Smith’s chair.7 On his trip Say also returned to where he had once lived and was struck by London’s rapid economic growth. “A lovely meadow where I had often walked with delight”, he recounted, “had become a street filled with shops.” Say marvelled at the capitalist spirit of the country: “In England, you don’t see any professional idlers,” he gushed, “everybody is running, in total concentration upon their affairs.” He gawped at the enormous ports filled with goods coming in and out of the country. It was also on this trip that Say met and failed to impress Ricardo. Whether he made a better impression on Jeremy Bentham and Thomas Malthus, whom he also met, is not known. Quite how Say was so well connected is also hard to establish. It seems that many of the British political economists had heard of Say’s Treatise on Political Economy (published in 1803, though an English translation did not appear until 1821) and wanted to meet the man behind it. (John Stuart Mill stayed with the Says in Paris in 1820.)
Say did not think that England had got everything right, however. Far from it. He noticed grinding poverty all around him. By his estimate one-third of the British population depended on assistance. He worried that ordinary people were reading less because books had become too expensive, and noted that shopkeepers, desperate to make higher profits, diluted their wine.8 The search for profit had corrupted the sense of community.
Say’s report from his trip has been lost. But it is possible to guess what he might have recommended. Schoorl speculates that his French commissioners would have been interested in Say’s views on the sort of factory techniques that were being used in England. He probably would have warned against building up too large a public debt.
Say it ain’t so
The great irony about Jean-Baptiste Say is that, despite his avowed preference for analysis grounded in the real world, today he is best remembered for his abstract thinking. He did enjoy this from time to time. For instance, he vigorously attacked Smith’s discussion of value. As Evelyn Forget argues, Say’s reading of Smith’s argument is “extreme and unsympathetic”–yet it remains illuminating.
Recall that Smith was largely in favour of the “labour theory of value”–a notion which, in effect, argues that the amount of human work going into a product determines what it is worth. Say vigorously disagrees with this idea. His fury with Smith derives from the fact that Smith appears to treat all labour as homogeneous. As Forget puts it, Say accuses Smith of ignoring the fact that “different types of labour are paid differently depending upon the utility of the product they produce”. In this argument Say is prioritising the notion of the utility of commodities–ie, how desirable they are–as a determinant of value. In that sense Say anticipates the arguments about value that were to emerge, in particular with William Stanley Jevons, at the end of the 19th century (see Chapter 17).
Above all, however, Say is known for his infamous “law”–the most abstract of abstract propositions, which Keynes criticised so heavily. The law is misunderstood by almost everyone who has ever talked about it. This is partly a problem of Say’s own making. He is not brilliantly precise with his language. As William Baumol wrote, “[c]ommentators from Ricardo to Schumpeter have remarked on his unclear discussion.”
The simplest mistake is to read the notion “supply creates its own demand” as an argument that anyone producing a good will be guaranteed a buyer. Clearly that argument is complete nonsense. If someone starts a business that produces pans that melt when they get hot, no one will buy them. The business will fail. But Say does not even get close to making this sort of argument. A more tempting interpretation is that businesses, by innovating and creating new products and services, are able to make people realise for the first time that they want something. Before the iPhone came along, few people longed to watch cat videos while sitting on the train. In that sense, supply can create its own demand, sort of. But Say does not have this idea in mind either.
What, then, did Say actually argue? He writes: “It is production which opens a demand for products… Thus the mere circumstance of the creation of one product immediately opens a vent for other products.” When a business produces a good, the value of that good should be at least equal to the value of wages embodied in the product, the cost of the raw materials, as well as some profits. In other words, it’s only through production (adding to supply) that we can earn income (and therefore add to demand).9 In the course of producing something, businesses put money into the hands of people. And people can spend that money. In other words, the production process “generates the income necessary for the demand for these products”, as William Thweatt puts it.
Perhaps the best way to think of Say’s law is to think of the economy as a subsistence farmer. Each year, what the farmer produces, the farmer consumes. Think of a sophisticated economy the same way. “What it purchases and distributes among its members are the self-same goods and services those members have jointly produced,” as The Economist puts it. “What it produces, what it earns, and what it buys is all the same, a ‘harvest’ of goods and services, better known as gross domestic product.”
You don’t understand farming
Say’s argument appears to run up against those put forward by Malthus, Mandeville and the mercantilists, who worried about “underconsumption”. Their concern was that rich people accumulated lots of profit but then failed to spend it. The lack of spending by the rich caused unemployment among the working classes to increase and their wages to fall. As we saw in Chapter 1 on Jean-Baptiste Colbert and the mercantilists, the solution was for the rich to spend freely.
Say, however, did not worry about such things. Since production helped to create income, demand and supply were always in balance. Any money that was squirrelled away by the rich would simply result in it becoming cheaper for others to borrow money (interest rates would fall, since there would be more loanable money about). That would boost spending.10 Likewise, if unemployment should rise for whatever reason, wages would fall until employers were able and willing to employ people again. There would be no empty shops in town centres: if a business went bust, the rent for the shop that it had been occupying would immediately drop to the level at which some other business was willing to assume the tenancy. The economy, as if by following a natural law, would be brought back into balance, with no “excess capacity”. The law of markets, in Baumol’s words, states “that there cannot be general failure of demand”. As Ricardo wrote to Malthus, commenting on Say’s law, “there is no deficiency in demand”.
What to make of these arguments? The first point about “Say’s law” is that it is not really Say’s law at all. Adam Smith appears to have made a similar argument in the Wealth of Nations. Smith posits that the production process creates value, which is then spent, either on consumption or investment goods: “What is annually saved, is as regularly consumed as what is annually spent, and nearly in the same time too,” he says. The thinking goes that it would be utterly irrational to simply hoard money, and not lend it out, because hoarding it would mean no interest earned. Patrick O’Brien refers to “the Smith–Say position that the acts of saving and investment were identical”. To confuse things further, Joseph Spengler refers to the “Say–Mill ‘Law of Markets’”.
Say’s law is elegant in its simplicity and may seem logically coherent. But it runs up against lived experience. During the 18th and 19th centuries, the economy was anything but stable, as Say’s own writings had suggested. We may moan (rightly) about the boom-and-bust tendencies of capitalism, but what we experience is nothing compared with what people living in the 18th and 19th centuries saw. In 1826 British GDP shrank by 5%, only to rise by 8% the following year. In 1891 GDP grew by 3%. The next year it was down by 3%. There was also little evidence that the economy was self-correcting. Around the time that Say was travelling around England, the most sophisticated capitalist country in the world, the unemployment rate rose as high as 10%. There appeared to be too much supply relative to demand; there were too many people wanting to work in relation to people willing to employ them. At first glance, it seems astonishing that anyone who saw this with their own eyes could have then sat down to formulate a “law” which held that the economy was naturally self-correcting.
Can the theory and the evidence be reconciled? Ricardo thought that economic downturns were caused by some external shock, such as “Sudden Changes in the Channels of Trade”. A war or a plague might throw an economy off balance, Ricardo thinks, but downturns are not in any way inherent to capitalism. Say, for his part, did not have a clearly worked out answer to the question of what caused recessions. But given his theory, he recognised that he had a lot of explaining to do. In a letter to Malthus in 1821 he said that his “attention is fixed by the inquiry, so important to the present interests of society: What is the cause of the general glut of all the markets in the world, to which merchandise is incessantly carried to be sold at a loss?”
The backtrack begins
Say appears to accept that his law may not hold in the short run. The question of consumer and business confidence is vitally important. Perhaps because they are worried the banks are going to go bust, rich people may decide to hoard their money. If the rich are not buying stuff themselves or lending their money to other buyers, they are not contributing demand to the economy. Say recalls what happened in 1813, when “capitals sleep at the bottom of the coffers of the capitalists” in response to “want for good opportunities” for investment. As Mark Blaug, an economic historian, argues in relation to Say, “there is no logical impossibility of general gluts: all that is needed is… an increase in the demand-for-money to hold” (in plain English, an increase in the number of people who stuff money under the mattress).
Say also thought it possible that in the short run, certain types of products could be overproduced (with, correspondingly, some goods underproduced). As Steven Kates puts it, errors could be made in the production process, such that “what producers had produced did not correspond to what buyers wished to buy”. If so, then goods would remain unsold, incomes would fall, employment would be reduced and the demand for other products would decline. “The consequences of partial glut in some parts of the economy”, Kates argues, “could thus reverberate through the economy as a whole and would often end in recession.”
Do these qualifications undermine the entire point of Say’s law? The argument appears to be that the economy is in balance, except when it is not. Which is not much of a theory. But in his theory Say is largely concerned with what happens in the long term: in his view the economy is, quite naturally, self-correcting. Any imbalance can only last for so long. For instance, if people want to hold more money, the prices of goods will fall, and eventually people will start to buy them again. Or the cost of making investments, relative to the potential profits that they can earn, will start to look a lot more favourable. As Blaug puts it, “a free-enterprise capitalist economy has an inherent tendency to return to full employment, which is indeed its normal state of economic activity”. The popular understanding of Say as a laissez-faire ideologue flows from this interpretation. If everything will be all right in the end, there is little need for the government to intervene.
But is this quite the right interpretation? In fact, there is plenty to suggest that Say did not think that capitalist societies were destined to reach full employment eventually. For instance, Say was clearly worried a great deal about what economists today would call “technological unemployment”. That could lead to a steady state, where supply equalled demand, but where a certain class of people were structurally excluded from the economy. The “equality between aggregate supply and demand”, argue Ernesto Screpanti and Stefano Zamagni, “can occur at any employment level”.
Say developed his theory of technological unemployment on his trip to England. As Schoorl notes, Say could not help but notice “the great distress of the class of just simply workmen”. As England industrialised rapidly, many old ways of doing things were no longer profitable: people working in certain trades were thrown into unemployment, and possessed few of the necessary skills to find work quickly once again. As Say wrote in 1821, “[w]henever a new machine… is substituted in the place of human labour previously in activity, part of the industrious human agents, whose service is thus ingeniously dispensed with, must needs be thrown out of employ.” Despite the use of the word “ingeniously”, there is no indication that Say thought this something to welcome. Say thought that economies were efficient; but he did not think that they always led to socially desirable outcomes.
All I know is that I am not a Sayist
Whether or not it is truly “Say’s” law, or whether or not Say himself actually believed it, many economists considered themselves his followers. Indeed, up until Keynes came along, most economists did assume that a lack of demand could not be a cause of recessions. As Kates says, “[r]ecessions and the associated high unemployment were never the consequence of demand failure. And it was to this proposition that every major economist, prior to [Keynes], assented.” Recessions could instead be caused by some unpredictable event, such as natural disasters, peacetime demobilisations, or sudden changes in tastes or technology. Say was, it turns out, quite wrong to assert that “general gluts” do not happen. “But he was right”, according to The Economist, “to suggest that they should not happen… There is instead something perverse about an economy impoverished by lack of spending. It is like a subsistence farmer leaving his field untilled and his belly unfilled, farming less than he’d like even as he eats less than he’d choose.” Economists eventually came to realise that to poke the farmer out of his hungry slumber, government spending might be needed.