Keynes versus Say

By Henry Hazlitt (An NYT columnist long before Paul Krugman)

Keynes's "greatest achievement," according to his admirers, was his famous "refutation" of Say's law of markets. All that it is necessary to say about this "refutation" has already been said by Benjamin M. Anderson, Jr.,[1] and Ludwig von Mises.[2] Keynes himself takes the matter so cavalierly that all he requires to "refute" Say's Law to his own satisfaction is less than four pages.

Yet some of his admirers regard this as alone securing his title to fame:

Historians fifty years from now may record that Keynes' greatest achievement was the liberation of Anglo-American economics from a tyrannical dogma, and they may even conclude that this was essentially a work of negation unmatched by comparable positive achievements. Even, however, if Keynes were to receive credit for nothing else … his title to fame would be secure … [Yet] the Keynesian attacks, though they appear to be directed against a variety of specific theories, all fall to the ground if the validity of Say's Law is assumed.[3]

It is important to realize, to begin with, as Mises[4] has pointed out, that what is called Say's law was not originally designed as an integral part of classical economics but as a preliminary — as a refutation of a fallacy that long preceded the development of economics as a recognized special branch of knowledge. Whenever business was bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in The Wealth of Nations,[5] exploded the first of these myths. Say devoted himself to a refutation of the second.

For a modern statement of Say's law, I turn to B. M. Anderson:

The central theoretical issue involved in the problem of postwar economic adjustment, and in the problem of full employment in the postwar period, is the issue between the equilibrium doctrine and the purchasing power doctrine.

Those who advocate vast governmental expenditures and deficit financing after the war as the only means of getting full employment, separate production and purchasing power sharply. Purchasing power must be kept above production if production is to expand, in their view. If purchasing power falls off, production will fall off.

The prevailing view among economists, on the other hand, has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, silks, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for silks, for automobiles, and for other things that the shoe producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.[6]

Keynes's "refutation" of Say's law consists in simply ignoring this qualification.

Read the rest here.