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J. Barkley Rosser has asked: 
 
'I remember somewhere in [Say's] book that he allowed for the  
possibility of what we would call "hoarding" of money. And, at that  
point, he allowed as how what you are calling the "law of markets"  
might not work. Certainly through much of the book he was a more or  
less advocate of "Say's Law." But, my remarks about his views were  
not that he was an ineffective advocate or one who had poorly thought  
out his arguments. Rather it was that he in fact, at least in one edition,  
admitted somewhere that the "law" might not always hold if persons  
hoarded money.'   
 
I suspect the passage that is being referred to is the following quite  
famous statement from Say's Letters to Mr Malthus which was written  
in immediate response to Malthus'' Principles of Political Economy.  
This is a strong and generally level headed defence of the law of  
markets and is an attack on Malthus's belief that demand deficiency is a  
cause of recession and that unproductive spending is a sensible cure.  
Yet what Say wrote would look to modern eyes as a contradiction to  
Say's Law since it seems that he is accepting that the circular flow of  
spending can be interrupted by what we might today refer to as  
liquidity preference. Say wrote as follows:   
 
'Mr. Ricardo insists that, notwithstanding taxes and other charges, there  
is always as much industry as capital employed; and that all capital  
saved is always employed, because the interest is not suffered to be  
lost. On the contrary, many savings are not invested, when it is difficult  
to find employment for them, and many which are employed are  
dissipated in ill-calculated undertakings. Besides, Mr. Ricardo is  
completely refuted, not only by what happened to us in 1813, when the  
errors of Government ruined all opportunities of employing it; but by  
our present circumstances when capitals are quietly sleeping in the  
coffers of their proprietors.' (Jean-Baptiste Say, Letters to Mr. Malthus,  
Letter III, p 49n)   
 
Note especially that this is precisely from the letters Say was writing to  
defend what we now call Say's Law. It was clear to him that not  
spending in the face of various uncertainties was entirely consistent  
with how he viewed the operation of his principle.   
 
To see that this was not just Say missing the point of his own law, the  
best possible place to see that liquidity preference was an entirely  
classical principle, and part of the logical apparatus underpinning the  
law of markets, is in looking at John Stuart Mill's 1844 essay 'Of the  
Influence of Consumption on Production'. Here, too, Mill is  
specifically defending the law of markets and as part of this defence he  
wrote this:   
 
'Interchange by the means of money is therefore, as has been often  
observed, ultimately nothing but barter. But there is this difference -  
that in the case of barter, the selling and the buying are simultaneously  
confounded in one operation; you sell what you have, and buy what  
you want, by one indivisible act, and you cannot do the one without the  
other. Now the effect of the employment of money, and even the utility  
of it, is, that it enables this one act of interchange to be divided into 
two  
separate acts or operations; one of which may be performed now, and  
the other a year hence, or whenever it shall be most convenient.  
Although he who sells, really sells only to buy, he needs not buy at the  
same moment when he sells; and he does not therefore necessarily add  
to the immediate demand for one commodity when he sells another.  
The buying and selling being now separated, it may very well occur,  
that there may be, at some given time, a very general inclination to sell  
with as little delays as possible, accompanied with an equally general  
inclination to defer all purchases as long as possible.... For when there  
is a general anxiety to sell, and a general disinclination to buy,  
commodities of all kinds remain for a long time unsold, and those  
which find an immediate market, do so at a very low price.' (Mill 1874:  
70 - bolding added.)   
 
This reasoning is fundamental to the classical theory of the cycle. If it  
looks like Keynes, what does it prove other than that Keynes made a  
great play of having discovered something everyone already knew. The  
idea that the flow of spending would remain at a constant rate  
irrespective of external circumstances is a possibility no classical  
economist had ever suggested.   
 
What is important to appreciate is that it is not contrary to the law of  
markets to recognise that during times of uncertainty there will be a  
greater reluctance to spend and the rate of turnover will slow down.  
The issue surrounding Say's Law was whether recessions are due to  
supply having outrun demand not whether investors would become  
more hesitant when economic conditions were unstable.   
 
Keynes's point about the consumption function and the marginal  
propensity to consume, for example, was to explain why consumer  
demand would simply not keep up with the rate of growth in output.  
Similarly, the marginal efficiency of capital and the pure monetary  
theory of interest rate determination were designed to explain why  
investment could not be relied upon to soak up all available savings.  
Keynes sought to prove to his own contemporaries what Malthus had  
failed to prove to his. It was the general glut debate run for a second  
time except with an entirely different outcome.   
 
To a classical economist the notion of aggregate demand was utterly  
fallacious. To most modern economists, thinking in terms of aggregate  
demand is second nature. The continued employment of aggregate  
demand means that Keynesian economics, rather than having been  
superseded, is entrenched in modern theory and policy formation. All  
modern theory, to the extent that it uses variations in aggregate demand  
to explain variations in the level of economic activity, is Keynesian, and  
therefore, according to the entire mainstream of the economics  
profession prior to 1936, is logically incoherent and fallacious.   
 
The Keynesian Revolution was seemingly fought across a hundred  
battle grounds yet was won from the very first moment when  
controversy failed to appear over the question whether aggregate  
demand had any role in macroeconomics and the business cycle.  
Because if Say's Law is true, then any macroeconomic model or theory  
of the cycle using aggregate demand is fundamentally wrong. Yet in all  
the years since the General Theory was written, this is the one issue  
which has almost never been raised even though, as James Mill said as  
part of his own defence of Say's Law, no proposition in political  
economy, if it be true, can be deemed of more importance.   
 
Steven Kates 
 
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