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[If successful, this will be the third book to emerge from HES posting over 
the past four years. Congratulations to our participants! - RBE] 
 
It has been suggested that the exchange of postings on Say\'s Law which 
occurred over the period from April 13 to April 22 has potentially provided 
an opportunity for those of us interested in these issues to contribute 
collectively to an edited work on the various points of view which emerged. 
If this were of interest to those who had provided postings at that time, 
as 
well as to others who also might wish to become involved, I would very much 
like to hear from you. My email address is [log in to unmask] 
 
As I see it, the book would begin with the individual postings of each of 
the participants in the original exchange. There would then be a further 
set 
of papers provided by each person in which more considered positions would 
be staked out.  
 
As a stimulus towards continuing this controversy, I am forwarding a more 
extended reply to the issues as they stood just before Easter when the 
exchange on Say\'s Law came to an end. It will also give me an opportunity 
to 
respond to a number of issues which were raised at that time which in my 
view were left hanging. As someone who has dwelt on these matters for quite 
some time, it is clear to me that the significance of Say\'s Law lies not 
just in the history of economics but is crucial to an understanding of 
economic theory in general. In essence, the major issues seem to be these: 
 
.       What does Say\'s Law mean? - Is it a set of propositions which were 
accepted to economists prior to the publication of the General Theory or is 
it instead a modern characterisation of the positions of classical 
economists which in fact describes views never actually held by anyone? 
That 
is, is what we call Say\'s Law different from the classical law of markets? 
 
.       What was the significance of the Keynesian Revolution in relation 
to 
Say\'s Law? - The General Theory is specific about having rejected Say\'s 
Law 
which Keynes said was at the heart of classical thought. How much should we 
take Keynes\'s words seriously or was it just a bit of polemical window 
dressing to get the General Theory rolling?  
 
.       What was revolutionary about the Keynesian Revolution? How 
different 
would economic theory be today were it not for the General Theory? Did 
Say\'s 
Law actually influence pre-Keynesian economic theory and policy and in 
which 
way? How has the removal of Say\'s Law from the conceptual framework of 
economists made a difference? 
 
.       Where does Austrian economic theory fit into the equation? Is 
Austrian theory the one remaining strand of pre-Keynesian theory which has 
survived the influence of the General Theory? Does someone from an Austrian 
perspective accept the classical law of markets, and if so, what does it 
mean in an Austrian context? 
 
These questions are still far from answered even now. What I am interested 
in doing is editing a collection of writings on all of these questions as 
well as any other issues which writers might think important. At this stage 
expressions of interest would be helpful in furthering discussions with a 
publisher.  
 
As a starter for continuing this debate, from my point of view this is 
where 
the controversy had gone when it came to an end. There is a summary of the 
position I had outlined at the time, followed by a number of reflections on 
specific issues. 
 
It was noted that both the general glut debate and the Keynesian Revolution 
were initiated by Malthus. In 1820, the publication of Malthus\'s 
Principles 
of Political Economy began a generation long debate over the possibility of 
effective demand failure as the cause of recession and unemployment.. This 
controversy ended with the complete rout of Malthus\'s position. In 1936, 
however, Keynes, having in late 1932 come across Malthus\'s correspondence 
with Ricardo over the law of markets, weighed in on behalf of Malthus and 
reversed the earlier judgement so that the conclusions that Malthus had 
tried to establish in the 1820s were finally accepted across the broad 
spectrum of the economics profession.  
 
To understand the Keynesian Revolution it is first necessary to understand 
Say\'s Law properly. Keynes understood with perfect clarity the conclusion 
that Malthus had been trying to establish: that an economy could go into 
recession because there was too little demand for its output. Production 
would be stopped for the straightforward reason that there was not enough 
demand for the output produced (demand deficiency), or to put it in the way 
which was more familiar in classical times, that recessions could occur 
because there was too much output relative to the demand (overproduction). 
And in spite of how different they may sound, they are formally the same 
phenomenon. 
 
The law of markets (Say\'s Law) was the proposition that stated demand 
deficiency/overproduction never occurred. It said nothing about any other 
types of problem that might arise in an economy nor did it suggest that an 
economy would never go into recession or that involuntary unemployment was 
an impossibility. These are, of course, the accusations Keynes made about 
virtually all of his contemporaries in the midst of the Great Depression. 
These were not side issues to the General Theory nor were they simply 
attempts to draw attention to his own theories. These were the specific 
beliefs Keynes held about any economist who had been educated in the 
classical tradition. And these accusations were in his hands potent weapons 
which totally routed the alternate theories of the cycle held by his own 
contemporaries. Within a decade of the publication of the General Theory no 
other theory of recession and the cycle but his own was left standing 
within 
the English speaking world.  
 
To a classical economist there was no such thing as aggregate demand 
separate from aggregate supply. To the classics, demand was constituted by 
supply, which was one of the forms in which the law of markets was stated. 
The following statement from one of the most widely used economics texts of 
its time, perfectly captures the classical notion of the non-existence of 
aggregate demand.  
 
\"It is only because our exchanges are made through money that we have any 
difficulty in perceiving that an increase in supply is (not \'causes\') an 
increase in demand.... Thus an increase in the supply of cloth is an 
increase in the demand for other things; and vice versa, an increase in the 
supply of anything else may constitute an increase in the demand for cloth. 
What is divided amongst the members of society is the goods and services 
produced to satisfy its wants; and the same goods and services are both the 
Supply and Demand.\" (Henry Clay, Economics for the General Reader, 1916, p 
242) 
 
Basically we have had two eras in the history of the business cycle and 
(more anachronistically) in the development of macroeconomic theory. There 
is the first era in which demand deficiency as a cause of recession was 
comprehensively rejected. And there is a second, which exists to this 
minute, in which demand deficiency is seen as a realistic possibility and a 
probable cause of recession. Nothing could be farther from the classical 
tradition than C+I+G+(X-M) or IS-LM or Aggregate Demand = Aggregate Supply. 
The belief that there is an aggregate demand side to an economy independent 
of aggregate supply is the grand fallacy of classical economic theory. 
 
For Keynes, Malthusian theories of demand deficiency were just what he had 
been looking for to justify the policy prescriptions that he had already 
put 
forward. Keynes had been an advocate of public works for many years. Even 
before the onset of the Great Depression, Keynes had written (on 1 March 
1929) the following statement on the utility of public works to reduce 
unemployment. The statement was to be used by Lloyd George in an election 
campaign. 
 
\"If the nation entrusts the Liberal Party at the next General Election 
with 
the responsibilities of government, we are ready with schemes of work which 
we can put immediately into operation... The work put in hand will reduce 
the terrible figures of the workless in the course of a single year to 
normal proportions, and will, when completed, enrich the nation and equip 
it 
for competing successfully with all its rivals in the business world. These 
plans will add not one penny to national or local taxation.\" (The 
Collected 
Writings of JMK, Volume XIX, p 804) 
 
This is the policy; the General Theory provided the theoretical support for 
what he wanted to do.  
 
With this as prelude, let me pick up a number of other themes which had 
been 
addressed during the earlier correspondence.  
 
J. Barkely Rosser provided the following statement from Say\'s Treatise, 
along with a number of others, to demonstrate that Say had often abandoned 
Say\'s Law by noting that not all capital would be put to work. For 
example, 
he quoted the following from Say: 
 
\"Values once produced may be devoted either to the satisfaction of wants 
of 
those who have acquired them, or to a further act of production. They may 
also be withdrawn both from unproductive consumption and from reproductive 
employment, and remain buried or concealed.\" 
 
Nothing Say ever wrote even remotely suggested that productive powers might 
outrun the willingness of the community to buy. On the other hand, there 
was 
nothing in Say that even remotely suggested that condition could never be 
such that producers were reluctant to lay their capitals on the line. 
Demand 
deficiency is reluctance to purchase. Commercial uncertainty is entirely 
different. Fear of confiscation by government was (and is) a primary reason 
for production not to occur, but to raise this as a problem does not raise 
the problem that Malthus had dealt with, which was that unproductive 
consumers were needed to buy what had already been produced. Failure to 
spend because of fear that the government will take most or all of the 
proceeds is not a genuine example of hoarding. The profligate waste of the 
Ottoman Empire would in fact be the kind of action that Malthus or Keynes 
might have supported as a means to keep an economy at full employment but 
would have been denounced by virtually every classical economist.  
 
Peter Stillman wrote: 
 
\"My question (I am a historian of political philosophy, not an economist!) 
is, why and how could they argue that overproduction was impossible? Or, 
perhaps to be more explicit about what is in my mind, both Hegel in the 
Philosophy of Right (1821), after citing Smith, Ricardo, and Say, and Marx 
from the Communist Manifesto onwards, thought it was clear that supply 
could 
and did outrun demand.  (I would also think it would be clear to any 
observer of economic recessions and depressions from the end of the 
Napoleonic Wars to the present that supply could outrun demand.)\" 
 
This perfectly captures the issues as they confronted those who engaged in 
the general glut debates following the Napoleonic Wars. All recognised the 
existence of depression. The question was not whether recessions occurred, 
or whether when they occurred that the problem did not have the appearance 
of overproduction. The issue was what were the actual reasons that goods 
remained unsold. One can if one likes argue that in 1820 there was such 
abundance in England that people had run out of demands, and if one does 
then one may justifiably reject the law of markets. But the unanimous view 
of the mainstream of the economics profession was that overproduction was 
not the problem. For an answer to this argument, the following passage from 
Alfred Marshall may provide some assistance in understanding the logic of 
pre-Keynesian economists.  
 
\"After every crisis, in every period of commercial depression, it is said 
that supply is in excess of demand. Of course there may easily be an 
excessive supply of some particular commodities; so much cloth and 
furniture 
and cutlery may have been made that they cannot be sold at a remunerative 
price. But something more than this is meant. For after a crisis the 
warehouses are overstocked with goods in almost every important trade; 
scarcely any trade can continue undiminished production so as to afford a 
good rate of profits to capital and a good rate of wages to labour. And it 
is thought that this state of things is one of general over-production. We 
shall however find that it really is nothing but a state of commercial 
disorganization; and that the remedy for it is a revival of confidence.\" 
(Marshall and Marshall 1879 Economics of Industry, p 154) 
 
Nor do I think of this as standing at a high level of abstraction as has 
been suggested. Whatever flaws there might be in Marshall\'s underlying 
logic, of which I think there are none, it was at the time a conclusion 
virtually never disputed amongst economists who are not a profession noted 
for their patient acceptance of statements with which they disagree.  
 
I also think Marshall\'s statement is a reply to Malcom Rutherford who 
quotes 
Mill Principles Book III, Chapter XIV to show that the law of markets was 
only an equilibrium condition. Marshall would in fact have been doing no 
more than paraphrasing Mill, particularly as he has the famous quote from 
Mill just following the passage above. Mill, like Marshall, is arguing that 
the problem of recession is not caused by excess supply but that other 
problems create recession and disequilibrium.  
 
Finally, a brief observation on Hayek and Say\'s Law. There seems no doubt 
that Hayek accepted the law of markets. As recently as 1931 he had written 
the following in its support. 
 
\"The assertion that saving renders the purchasing power of the consumer 
insufficient to take up the volume of current production, although made 
more 
often by members of the lay public than by professional economists, is 
almost as old as the science of political science itself. The question of 
the utility of \'unproductive\' expenditure was first raised by the 
Mercantilists, who were thinking chiefly of luxury expenditure. The idea 
recurs in those writings of Lauderdale and Malthus which gave rise to the 
celebrated Théorie des Débouchés of James Mill and J.B. Say, and, in spite 
of many attempts to refute it, it permeates the main doctrines of Socialist 
economics right up to T. Veblen and Mr J.A. Hobson.\" (F.A. von Hayek, 
\"The 
\'Paradox\' of Saving,\" Economica 1931 and reprinted in Profits, Interest 
and 
Investment, published in 1939, pp 199-263) 
 
It is clear enough that Hayek accepted the law of markets and moreover was 
prepared to write an article 64 pages in length to defend it against the 
writings of Foster and Catchings (who had written lengthy 
underconsumptionist tomes in the 1920s and 1930s). Yet, and this is the 
curious part, when Keynes published the General Theory in 1936, not only 
did 
Hayek not turn to an attack, but even when he did, he did not focus on 
issues related to the théorie des débouchés. Nor was Hayek the only one to 
fall into this camp. Dennis Robertson, also a trenchant critic of the 
General Theory, had written a long critical review in 1914 of Aftalian\'s 
1913 attack on the law of markets which arguments Robertson had repeated in 
his A Study of Industrial Fluctuation published in 1915. Yet in criticising 
the General Theory he, too, never referred to these issues.  
 
It is here that Keynes\'s genius as a polemicist can be seen. In nothing 
that 
he wrote did he ever use the words that would have altered his 
contemporaries to his intentions. Nowhere is found the phrase \"general 
glut\". He never uses the words \"law of markets\" or \"théorie des 
débouchés\". 
He instead referred to it using a form of words entirely unfamiliar in 
English theoretical discourse, \"Say\'s Law\", and characterised its 
meaning 
using a set of words which no one had ever previously used, \"supply 
creates 
its own demand\". That is why in all the furious argument that raged around 
the General Theory the question that Keynes had raised, the validity of the 
law of markets, never became central. Neither Robertson nor Hayek, nor any 
other critic of the General Theory, ever focused on this one, central issue 
and the theory of aggregate demand deficiency became, as it generally is to 
this day, the basis of our theory of recession and unemployment.   
 
 
Dr Steven Kates 
Chief Economist 
Australian Chamber of Commerce & Industry 
Phone (02) 62732311        ACN 008 391 795 
E-mail address - [log in to unmask] 
 
 
 
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