About Standards  
  
  
   Pat Gunning asks: Who sets the standards that determine whether an idea in  
   economics is broken of fixed?  
  
  
   In a rhetorical way, anybody may propose a new or discontinued old approach  
   and wait for others to react. The proposal becomes a standard if many others  
   adopt it.  But I suppose that mention of standard rings an alarm bell as if  
   somebody is coming to dictate with a voice of authority. In contrast, may be  
   we can identify some flaw within the limits of what we already accept as  
   sound voice of reason.  
  
  
   Let me illustrate this with a commentary on Says Law. For two centuries, it  
   has remained essentially unintelligible, and hence a source of confusion and  
   disagreement.  [Kates 2003] The flaw? It overlooked critical pieces of  
   information.  
  
  
   What does supply create? First, if the supplier is the customer himself  
   under autarky, then the act of supply is identical with demand. Indeed, the  
   terms demand and supply should not be used for production and consumption  
   under autarky at all, but should be reserved for use in exchange situations.  
   Demand is the quantity which the buyer is able and willing to buy, and not  
   the quantity the buyer is able and willing to produce himself.  Now, autarky  
   is the only case where supply does create demand for any given good by the  
   one and the same act. This is of little interest to economics.  
  
  
   Secondly, in the extremely unlikely event of barter, the supply of x creates  
   the  demand for y, or does it? Not really. The supply of x creates the  
   potential income to buy y (and income is not identical with demand), but  
   there is nothing to say if there is demand for x. That is, supply of x does  
   not create the demand for x, but for y, and we do not know if there as  
   anyone else out there who will buy x. Supposing that there is someone who  
   produces y and wants to buy x, there is still nothing to say if the market  
   will clear by making the demands and supplies equal for each of the goods.  
   We know that the supplier of x earns a potential income of Px*Xs [where Px=  
   price of x, and Xs=supply of x) to buy y. But he can buy only a certain  
   quantity  of  y, whose value must be equal to the buyers budget Px*Xs.  
   Supposing that the price of y is Py, there is a certain quantum Yd that will  
   make the transaction balanced in value such that Px*Xs=Py*Yd. Here, we do  
   not know how much y the other man supplies as Ys, that is whether Ys=Yd or  
   not.  Thus while we can say that the supply of x to the extent of Xs creates  
   potential demand for y worth Py*Yd, we have no idea what amount of x someone  
   is able and willing to buy, and what amount of y someone is able and willing  
   to sell.  
  
  
   Now, for the sake of argument, suppose that under barter, the creation of  
   demand for y by the supply of x is reciprocated by the creation of demand  
   for x by the supply of y. This is a big conjecture, and we must consider  
   possibilities of mismatch in income and capacity. What if the producer of y  
   is able and willing to produce more than what the consumer of y wants to  
   buy? And what if the producer of y intends to buy much smaller quantum of x  
   than the supplier intends to sell? What is there to bring the demand and  
   supplies to equality, and further to lead to full employment output?  
  
  
   So far as I see, there has never been a satisfactory exploration of the  
   issue raised above.  The intuition that the collective income of all goods  
   supplied is adequate to buy back all goods is a meaningless statement. The  
   essential problem is to see which one good pays for which other. There are  
   two parts of payment: the quantity of payment (giving theory of price and  
   output)  and  the kind of payment (giving theory of intermediation and  
   payment, which covers money). [Gani 2003]. The issue of payment was never  
   raised.  
  
  
   Thirdly, consider the common case of indirect trade. Suppose that John  
   produces x and wants to buy y from Paul, but Paul wants to buy z and not x,  
   while Tim, the producer of z, wants to buy x.  Disregard for the moment the  
   question of price and full employment output, and focus only on the issue of  
   payment. Suppose that each agent wants to buy and sell exactly one dollar  
   worth of the goods. But no barter is possible here between John and Paul,  
   Paul and Tim, and Tim and John. Each agent must sell to a second and buy  
   from a third agent, not to and from the same other agent. John can sell x to  
   Tim and not to Paul, but must buy y from Paul and not from Tim. Then how can  
   John pay Paul for y? He cannot pay Paul with x, because Paul wants z, not x.  
   He of course can receive z from Tim in payment for x, but he does not want  
   z, but wants y.  The same situation for the other agents too: each sells to  
   a customer from whom he buys nothing real, and each buys from supplier to  
   whom he sells nothing real. To settle payment, money must be used as a  
   device  to  transfer claims from the customer to the supplier over the  
   customers real output. Thus though John sells x to Tim, he does not take z  
   from Tim, but transfers the claim on z to Paul to pay for y. In this case,  
   John has turned z into commodity money. Another step in the process brings  
   in fiat money, but I will not discuss it here.  
  
  
   The issue should become clear now. Unless the claim on the customers real  
   output is transferred to the supplier, indirect trade cannot occur. Money is  
   a necessary device to permit indirect trade. If money is missing, no trade  
   will  occur despite equality of demand and supply, and the presence of  
   equilibrium price for every good. This kills Says Law, or does it?  
  
  
   Now, have I set any new standards? No. All I have done is point out things  
   so far unnoticed.  
  
  
   Says Law fails because it is unaware of the issue of payment whether in  
   barter or in indirect trade.  Even in barter, Says Law is simply false: the  
   supply of x does not create the demand for x at all. In indirect trade, even  
   when  demand is equal to supply for every good, there is no trade, and  
   permanent oversupply of everything, until money arrives to transfer the  
   claims on the output of the customer to the suppliers supplier.  
  
  
   I of course suppose that there are two kinds of people: the players and the  
   spectators. The historians are spectators, not players. So I do not expect  
   that anybodys nerve here will be tense after reading that equality of demand  
   and supply does not clear the market despite being a necessary condition of  
   clearing.  
  
  
   So Dear Pat, just relax and watch.  People who intend to make history are  
   taking  interest  in  my  humble  mention of overlooked things, but in  
   playgrounds, not here in the spectator gallery. Our grandchildren will be  
   able to read the history of what we did as players, and not as spectators.  
  
  
   Mohammad Gani  
  
  
   Ref:  
  
   Gani, Mohammad (2003): Foundations of Economic Science. Dhaka: Scholars  
  
   Kates, Steven (Editor) (2003):  Two Hundred Years of Says Law: Essays on  
   Economic Theorys Most Controversial Principle. Cheltenham, UK: Edward Elgar.