Thursday, December 7, 2017

Say's Law and Say's Other Law

From Chapter II of the General Theory by Keynes:

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.

Supply creates its own demand.

From Book III of A Treatise on Political Economy
by J. B. Say:

production cannot be effected without consumption.

Demand creates its own supply.

1 comment:

The Arthurian said...

Tom Hickey understood my point exactly, saying: "Say understood that supply and demand are reciprocal and mutually reinforcing."

Today, in the 760-page PDF Economic Theory in Retrospect I find Mark Blaug quoting Adam Smith:

"the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business."

Apparently there was some tendency to think that supply creates its own demand.

But no. It is one thing to be certain that if I have any excess, I can trade it for other things I might want. It is something else entirely to say that no one would ever want to save any of his (or her) excess for a rainy day.

The certainty that I can exchange all my stuff for other stuff is not the same as the certainty that I will do so.

Supply does not create effective demand.