The macroeconomy
Jean-Baptiste Say (1767–1832)
1820 British economist Thomas Malthus argues that underemployment and overproduction can occur.
1936 John Maynard Keynes states that supply does not create its own demand—it is possible for a lack of demand to cause production to slow, creating unemployment.
1950 Austrian economist Ludwig von Mises argues that Keynes’ denial is at the basis of Keynesian fallacies about economics.
2010 Australian economist Steven Kates defends Say’s law and calls Keynesian economics a “conceptual disease.”
In 1776, when Adam Smith wrote The Wealth of Nations, he noted that merchants around him commonly felt there were two reasons why business failed: a scarcity of money or overproduction. He debunked the first of these myths by explaining the role of money in an economy, but it was left to a later French economist, Jean-Baptiste Say, to dismiss the second. His 1803 work, A Treatise on Political Economy, is devoted to explaining the impossibility of overproduction. Say claimed that as soon as a product is made, it creates a market for other products “to the full extent of its own value.” This means, for example, that the money a tailor receives when he makes and sells a shirt is then used to buy bread from the baker and beer from the brewer. Say believed that people had no desire to hoard money, and therefore the total value of commodities supplied would equal the total value of goods demanded. The common expression of what is known as Say’s law has become “supply creates its own demand.” In fact, Say never used this phrase; it was probably coined in 1921 by the US economist Fred Taylor in his Principles of Economics.
The idea was important to Say because if supply creates an equal value of demand, there can never be overproduction, or “gluts,” in the economy as a whole. Of course, firms could mistake the level of demand for a commodity and overproduce, but as the Austrian-born US economist Ludwig von Mises later said, “the bungling entrepreneur” would soon be driven from that market by losses, and the unemployed resources would be reallocated to more profitable areas of the economy. In fact, it is impossible to overproduce overall, because human wants are far greater than our ability to produce commodities.
Say’s law has become a forum for conflict between the classical and the Keynesian economists. The former, such as Say, believe that production, or the supply side of the economy, is the most important factor in growing an economy. Keynesians argue that growth comes only with increased demand.
In his 1936 masterpiece The General Theory of Employment, John Maynard Keynes attacked Say’s law, focusing on the role of money within the economy. Say had suggested that all money earned is spent on purchasing other commodities. In other words the economy works as if it were based on a system of barter. Keynes, however, suggested that people might sometimes hold money for reasons other than for buying goods. They might, for instance, want to save some of their income. If these savings were not borrowed by others (such as through a bank) and invested in the economy (as capital for running a business, perhaps), the money would no longer be circulating. As people hold on to their money, demand for goods eventually becomes lower than the value of the goods produced. This state of “negative demand” is known as “demand deficiency,” and Keynes said it would lead to pervasive unemployment.
Given the dire state of the world economy during the Great Depression of the early 1930s, Keynes’s argument seemed a powerful one, especially when contrasted with a world based on Say’s law, which said that unemployment would only occur in some industries for a short time.
Say believed that supply and demand operate through a type of barter. We swap the money we earn for goods we want. In this image meat is bartered for vegetables in an Incan marketplace.
The son of a French Protestant textile merchant, Jean-Baptiste Say was born in Lyons, France, in 1767. At the age of 18 he moved to England, where he spent two years apprenticed to a merchant before returning to Paris to work at an insurance company. He welcomed the French Revolution of 1789, both for its ending of the religious persecution of the protestant Hugenots, and for its removal of an essentially feudal economy, opening up more prospects for commerce.
In 1794, Say became editor of a political magazine in which he promoted the ideas of Adam Smith. In 1799, he was invited to join the French government, but Napoleon rejected some of his views, and Say’s work was censored until 1814. During this time he made a fortune by setting up a cotton factory. In his later years he lectured on economics in Paris. He died after a series of strokes in 1832, aged 66.
1803 A Treatise on Political Economy
1815 England and the English
1828 Complete Course of Practical Political Economy