----------------- HES POSTING ----------------- 
 
Steve Kate's excellent contribution to an understanding of why  
Say's Law could have been so successfully perverted by Keynes  
may be further enhanced with some additional insights, namely, (a)  
How Keynes made it very difficult for later readers to catch the  
fuzziness of his argument and (b) How many of his contemporary  
challengers unwittingly helped him along.    
 
First, Keynes changed the meaning of terms as previously had  
been understood.  For example, Ricardo could successfully defend  
Say's Law (the Law of Markets) even in the face of Say's  
concession that savings may not always be invested by noting that  
saving is "capital" accumulation -- the purchase of financial assets  
in modern terminology.  Increased saving thus must lead to a  
decrease in the rate of interest, which in turn would increase the  
quantity of "capital" demanded for investment. Only if the suppliers  
of financial assets (banks and potential investors) increased their  
hoards of money (cash) would the rate of interest fail to fall as  
suggested above.   
 
But in Keynes's changed language, "capital" refers to capital goods  
only, and saving may mean simply the hoarding of cash. Thus,  
savers do not contribute to "capital" formation in Keynes's new  
language.  Furthermore, in Keynes's reasoning, saving and  
investment demand do not determine the rate of interest.  Rather  
the supply and demand for money do.  Thus, in Keynes's  
language, increased savings do not reduce the rate of interest, and  
the adjustment process (changing relative prices and interest rates)  
described in Say's Law simply does not work, at least not always.   
 
Keynes's contemporaries, especially Pigou, Hawtrey, and  
Robertson did not pick on the terminological distortions by Keynes.  
 Instead they tried hard, but unsuccessfully, to contradict Keynes  
while employing his new definition of concepts.    
 
Hayek also appears to have been quite unhelpful where the Say's  
Law debate is concerned.  His touting of the Austrian Capital  
theory, following the work of Bohm-Bawerk, helped to suppress the  
classical "capital" supply and demand theory of interest in the  
debate, just as Keynes had done.  Without the link between  
savings, interest rates, and investment spending entailed in Say's  
Law (classical economics), Keynes appeared to his audience to  
have been correct in claiming that the economic process, as  
described by the classics, was incomplete.  One had to import a  
central bank's money supply role  in order to complete the picture,  
one of the fundamental claims Hayek also opposed as being  
unhelpful to an efficient economic management.  Any wonder that  
Hayek lost his following at LSE?   
 
Hayek also gave the impression that he had little use for aggregate  
analysis, although he also discussed business cycles -- an  
aggregate analysis, even if it traces sectoral adjustments.  Indeed,  
Say's Law is about aggregate analysis.  Thus those who followed  
Hayek in dismissing the usefulness of aggregate analysis and  
believed that Marshallian supply and demand analysis  
(microeconomics) legitimized the modern aggregate demand and  
supply framework in macroeconomics had little to contribute  
towards salvaging the logic of Say's Law as fundamental to sound  
macroeconomic analysis.  Unfortunately, there are still modern  
Austrian economists who hold this unhelpful view of  
macroeconomics.  I have heard some of them declare that there is  
no such useful thing called macroeconomics!   
 
James Ahiakpor 
 
------------ FOOTER TO HES POSTING ------------ 
For information, send the message "info HES" to [log in to unmask]