Speaking of Say’s Law

I am now away on a 40,000 kilometre round trip to present a paper that will last but a single hour. The nature of this trip can be understood in the context of the invitation I received: 

On behalf of the Mises Institute, I am pleased to invite you to present the Ludwig von Mises Lecture at the Austrian Scholar’s Conference to be held at the Mises Institute in Auburn Alabama March 11-13, 2010. The topic would be of your own choosing and could cover any aspect of your research that is in the spirit of Mises’s efforts to refine and advance economic theory. Your work on Say’s Law in modern macroeconomics is a fine example of this and is also very timely, but if you prefer to speak on another topic please feel free to do so.  

I have now put together a presentation I have titled, “Why Your Grandfather’s Economics was Better than Yours: On the Catastrophic Disappearance of Say’s Law”. It rounds up in three quarters of an hour the origins of modern macroeconomics in Keynes’s discovery of Malthus in 1932, his taking up Malthus’s themes of demand deficiency as the cause of recessions, and his consequent rejection of what we now call Say’s Law, a rejection accepted to this day across virtually the entire world of economics. 

I, however, think Say’s Law is true. And to show how very far off the beaten track this is, for those unfamiliar with economics I will put it this way. To accept that Say’s Law is valid is the equivalent amongst economists to the denial of global warming amongst those who believe climate change is taking place. 

What Say’s Law argues, to put it briefly, is that you can never give an economy momentum from the demand side. You can never spend your way to recovery. Deficits and public spending as a means to hasten growth will never succeed. Buying things does not create value. All expenditure must be backed by value adding production. 

Mises was himself one of the greatest economists of all time. I have read much of what he has written and while it is austere to an incredible extent – nothing warm and fuzzy about his writings – his economics is clarity itself, accessible to anyone who wants to take the time. And while he wrote on Say’s Law, he did so on only a single occasion that I know of, restricting himself I think because of his deep contempt for Keynes and Keynesian theory. Here is part of what he wrote: 

The Keynesians tell us that his immortal achievement consists in the entire refutation of what has come to be known as Say’s Law of Markets. The rejection of this law, they declare, is the gist of all Keynes’s teachings; all other propositions of his doctrine follow with logical necessity from this fundamental insight and must collapse if the futility of his attack on Say’s Law can be demonstrated.  

To which he added: 

The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale. 

The rot that Keynes commenced within the mainstream continues. Massive public spending programs in times of recession are now automatically taken by governments. Large deficits are routine. Here in Australia, the demand by the Chinese for Australian resources has disguised the damage that Keynesian expenditure policies have caused. They have not been disguised anywhere else, such as in the US and UK, but we have had the good fortune to be the source of so much of China’s raw material needs. 

There is also one other piece of good fortune we have had. Through circumstances beyond the Government’s control, the stunningly incompetent home insulation program has now collapsed. Oddly, while this may lower the measured level of GDP, the disappearance of this unbelievably wasteful expenditure will actually help strengthen the economy. Such is the pass to which economic theory has come. 

As it happens, the National Accounts came out on Thursday. GDP has risen quite strongly which only shows how the statistic can be manipulated through targeted expenditure by those who understand how the numbers are put together. 

But amongst the numbers that cannot be foxed, a very different and more sobering story is told. Since the September quarter 2008, National Net Saving has fallen by an incredible two-thirds. And beyond this, hours worked have fallen by 1.5%, and in the market sector, hours worked have fallen by 2.8%. Things do look to be turning around, but we are not on a short track to rising prosperity. 

We live in an exchange economy. The only thing that will create demand is the production of goods and services that people not only want but are willing and able to pay for in full. It is these sorts of things that I will be talking to the Mises Institute about.

Steven Kates’ new book is Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Financial Crisis (Edward Elgar Publishing, 2010)


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