What I find astonishing is that an extended discussion of what took place in 1936 in regard to laissez faire makes no mention of Say's Law. There have been, it is true, two oblique references. One was to the likelihood that Krugman was referring solely to macroeconomics. There was then a second in a posting by Michael Perlman in which he pointed out that the key passage in the General Theory, dealing with Ricardo and the "Holy Inquisition", referred to Keynes's introduction of effective demand into mainstream economic theory. 

Say's Law, as understood by classical economists, denied the relevance of aggregate demand as a determinant of the level of economic activity. Once this is appreciated, it can then be seen that Say's Law denied anything but the most minor role to public spending in limiting the length and depth of recessions. What a difference the General Theory has therefore made. 

Keynes defined Say's Law as "supply creates its own demand" by which he meant that "the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product" (GT p 18). Everything produced would be bought. Aggregate demand according to classical economists would, said Keynes, never fall short of supply. 

Let me therefore quote the passage already twice cited in these postings, but this time let me provide the passage in its entirety. Keynes is absolutely right in his depiction of what virtually the entire mainstream of the economic profession accepted on the day the General Theory was published. This is precisely what classical economists believed and which is unmistakeable throughout classical macroeconomic theory, then known as the theory of the cycle: 

"The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had opposed Ricardo's doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction, and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature." (GT p 32) 

To argue that aggregate demand might be deficient is specifically to argue that Say's Law is wrong. It is to argue that a general glut is possible. It therefore opens all of the immense possibilities for public expenditure which governments around the world have gratefully accepted. Prior to the publication of the General Theory economists had been, so far as the macroeconomy was concerned, laissez faire. Since then it has been almost entirely the other way round. Once theory opens the role for public spending as the crucial counterweight to the supposedly natural tendencies of economies to fall into recession, then any suggestion that economic theory represents a laissez faire perspective falls completely away. 

Anyone interested in looking further into these issues is invited to peruse my _Say's Law and the Keynesian Revolution_ published by Edward Elgar in 1998. 


Steven Kates