Keynes On Say's Law

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

Re. the following:

> [Tomasson]
> Say's Law is NOT an empirical proposition--never was for classical
> economists of first rank, and never will be for graduates of
> Epistemology 101.
>
> It was, is and will ever be what Keynes in 1922 termed "an apparatus
> of the mind, a technique of thinking that HELPS its possessor to draw
> correct conclusions" about real-world economic issues.
> ------------//

> As to Say's Law I am using it in the sense that Keynes did in *General
> Theory* that supply creates its own demand.  This sense demonstrably
> requires the condition of steady-state which most emphatically does
> not obtain in the real-world.

Here are two passages from the General Theory plus my comments.

(1)  "From the time of Say and Ricardo the classical economists have taught
that supply creates its own demand; - meaning by this in some significant,
but not clearly defined, sense that the whole of the costs of production
must necessarily be spent in the aggregate, directly or indirectly, on
purchasing the product.

"In J. S. Mill's Principles of Political Economy the doctrine is expressly
set forth:

'What constitutes the means of payments for commodities is simply
commodities.  Each person's means of paying for the production of other
people consist of those which he himself possesses.  All sellers are
inevitably, and by the meaning of the word, buyers.  Could we suddenly
double the productive powers of the country, we should double the supply of
commodities in every market; but we should, by the same stroke, double the
purchasing power.  Everybody would bring a double demand as well as supply;
everybody would be able to buy twice as much, because every one would have
twice as much to offer in exchange.'" (Ch. 2)

Comments:

In the first paragraph, Keynes (a) states the popular version of Say's Law
according to which "supply creates its own demand," and (b) acknowledges
what William Baumol later documented in his paper on Say's Law, namely, that
the MEANING thereof was "NOT CLEARLY DEFINED" in the literature.

Yet, the MEANING of Say's Law as "expressly set forth" by Mill - "What
constitutes the means of payments for commodities is simply commodities." -
is CLEARLY IDENTICAL to Adam Smith's earlier statement thereof:

"Money, therefore, the great wheel of circulation, the great instrument of
commerce, like all other instruments of trade, though it makes part and a
very valuable part of the capital, makes no part of the revenue of the
society to which it belongs; and though the metal pieces of which it is
composed, in the course of their annual circulation, DISTRIBUTE TO EVERY MAN
THE REVENUE WHICH PROPERLY BELONGS TO HIM, they make themselves no part of
that revenue."  ('Wealth of Nations', Book Two, Ch. 2)

(2) "It is, then, the assumption of equality between the demand price of
output as a whole and its supply price which is to be regarded as the
classical theory's "axiom of parallels".  Granted this, all the rest
follows - THE SOCIAL ADVANTAGES OF PRIVATE AND NATIONAL THRIFT, the
traditional attitude towards THE RATE OF INTEREST, the classical theory of
unemployment, the quantity theory of money, the unqualified advantage of
laissez-faire in respect of foreign trade and much else which we shall have
to question." (Loc. cit.)

Comments:

Unlike Mill's statement of Say's Law, the capitalized parts of Keynes'
statement DO NOT square with Adam Smith's "great-wheel-of-circulation" view
of Money.  This raises the question whether Keynes was confused with respect
to the ANALYTICAL meaning of Say's Law?

The following considerations suggest that Keynes was "buying into" the
confused neo-classical construction of Say's Law in order to (a) create a
straw-man, and (b) shoot it down.

First.  In the 'Treatise on Money', Say's Law served Keynes as implicit
point of departure in his demonstration of the social DISADVANTAGES of
private and national thrift in an imaginary "banana" economy.

Second.  The same is true with respect to the following passages from Ch.
16:

"It is much preferable to speak of capital as having a yield over the course
of its life in excess of its original cost, than as being productive.  For
the only reason why an asset offers a prospect of yielding during its life
services having an aggregate value greater than its initial supply price is
because it is scarce; and it is kept scarce because of the competition of
the rate of interest on money.  If capital becomes less scarce, the excess
yield will diminish, without its having become less productive - at least in
the physical sense.

"I sympathise, therefore, with the pre-classical doctrine that everything is
produced by labour, aided by what used to be called art and is now called
technique, by natural resources which are free or cost a rent according to
their scarcity or abundance, and by the results of past labour, embodied in
assets, which also command a price according to their scarcity or abundance.
It is preferable to regard labour, including, of course, the personal
services of the entrepreneur and his assistants, as the sole factor of
production, operating in a given environment of technique, natural
resources, capital equipment and effective demand.  This partly explains why
we have been able to take the unit of labour as the sole physical unit which
we require in our economic system, apart from units of money and of time."

Third.  Ditto with respect to the following passages from Ch. 24:

"Now, though this state of affairs would be quite compatible with some
measure of individualism, yet it would mean the euthanasia of the rentier,
and, consequently, the euthanasia of the cumulative oppressive power of the
capitalist to exploit the scarcity-value of capital.  INTEREST TO-DAY
REWARDS NO GENUINE SACRIFICE, any more than does the rent of land.  The
owner of capital can obtain interest because capital is scarce.  But whilst
there may be intrinsic reasons for the scarcity of land, there are no
intrinsic reasons for the scarcity of capital."

Earlier in Ch. 24, Keynes wrote:

"The justification for a moderately high rate of interest has been found
hitherto in the necessity of providing a sufficient inducement to save,"

In this respect, "Say's Law" as formulated by Smith, Say, and Mill offers NO
"justification" for "a moderately high rate of interest" on PRODUCTION
CREDIT.

Gunnar