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Tuesday, January 17, 2012

Economics History Article

Say's Law is the principle that supply constitutes demand. Or, in the words of economist Jean Baptiste Say, "...a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." (A TREATISE ON POLITICAL ECONOMY, Chapter 15).

J.B.Say (1767-1832) is the French economist who coined the word entrepreneur to describe an economic agent independent from the landlord, worker or even capitalist (since the entrepreneur may secure financing from others). Say wrote his TREATISE to counter the Mercantilist doctrine that money is the source of wealth. According to Say, goods buy goods, and money mediates the transaction: "It is not the abundance of money but the abundance of other products in general that facilitates sales." James Mill expanded on Say's argument in his book COMMERCE DEFENDED to counter the belief that underconsumption is the cause of economic recession — and to counter the belief that increased consumption is the remedy for recession. Say incorporated Mill's ideas in subsequent editions of his TREATISE. Say was emphatic that consumption destroys wealth and that only production creates wealth.

Thomas Malthus was the foremost classical economist who promoted the idea that underconsumption causes recession. Malthus blamed the wealthy for saving rather than spending. David Ricardo, in answering Malthus, invoked J.B.Say to write: "The shoemaker when he exchanges his shoes for bread has an effective demand for bread." Ricardo attributed post-war depression & unemployment to a mismatch of supply & demand, rather than to underconsumption.

Classical economics incorporated the ideas of Say, Mill and Ricardo rather than Malthus in its body of wisdom. These ideas were augmented by John Stewart Mill who emphasized the role of savings rather than consumption in wealth-creation when he said: "...to consume less than is produced, is saving; and that is the process by which capital is increased."

The beliefs of Malthus were revived during the Great Depression of the 1930s by John Maynard Keynes in his book THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY (1936). It may not be much of an exaggeration to state that the GENERAL THEORY is little more than a protracted attack on Say's Law — a reversion to Malthus in claiming that underconsumption (low "aggregate demand") causes recession & unemployment — and the claim that government spending (financed by deficits, taxes or inflation) and subsidized consumer spending can compensate for "demand deficiencies". In his preface to the French edition of THE GENERAL THEORY Keynes refers to Say's Law as a "fallacy" and describes his own book as "a final break-away from the doctrines of J.-B. Say".

In the first section of Ch...

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