The claim here would appear to be that if Wicksell, "one of the two 
greatest monetary theorists of the nineteenth century" rejected Say's 
Law, there surely must be something wrong with the law. Not so fast!

Who was Wicksell? Did he rank above Alfred Marshall in his appreciation 
of classical monetary theory? See Don Patinkin's (1965, 593) contrasting 
of Wicksell's monetary analysis with those of David Hume, David Ricardo, 
J.S. Mill, and Marshall. Wicksell doesn't score that well.

Wicksell is noted for the cumulative process argument whereby prices 
change depending upon the position of market interest rates relative to 
the natural rate. But he didn't invent that argument; he himself 
acknowledges his debt to Ricardo on that principle. The real origin of 
natural vs market rates (or values) goes to Adam Smith. Wicksell is also 
credited with having imagined a pure credit economy, that which never 
has existed anywhere on this earth, and in which the price level would 
be indeterminate. In that system, "capitalists" also are those who deal 
in consumption goods, and Wicksell relies heavily upon Bohm-Bawerk's 
conception of the process of interest rate determination in contrast 
with that of the classicals. Following Böhm-Bawerk, Wicksell reasons 
that the “natural” rate of interest is that determined as if the lending 
and borrowing of capital goods were conducted without the use of money: 
"[the] natural rate is roughly the same thing as the real interest of 
actual business. A more accurate, though rather abstract, criterion is 
obtained by thinking of it as the rate which would be determined by 
supply and demand if real capital were lent in kind without the 
intervention of money." (Wicksell 1898: xxv)

Also, in contradiction with the classicals, Wicksell argues:

"It is usually said that in modern communities capital (of the mobile 
kind) is /lent in the form of money/. But this is a metaphorical and 
inexact manner of speaking which can easily lead to error. Liquid 
capital, which is what we are considering, or in other words goods, are 
never lent – they are never given and taken by way of borrowing – they 
are simply /bought and sold/.... For the sake of simplicity it will be 
assumed that the present owners of the available consumption goods are 
capitalists ... They are in a position, if necessary, to postpone 
payment up to a period of, let say, one year.
It may be supposed in theory that the entrepreneur borrows these 
consumption goods from the capitalists in kind, and pays them out in 
kind in the shape of wages and rents." (Wicksell 1898: 102–3; italics 
original.)

How did Wicksell come by such unhelpful claims? By his trying to 
reconcile the classical theory of interest with the Bohm-Bawerkian 
alternative, but without recognizing that the Austrian critique arose 
from Bohm-Bawerk's failure to interpret "capital" in the theory of 
interest (as restated by Marshall) to mean loanable funds or savings. 
This is also why modern Austrians find some affinity or inspiration from 
Wicksell's monetary analysis. They have Bohm-Bawerk in parentage!

The same parentage applies to J.A. Schumpeter. He also had problems with 
interpreting "capital" and thus praised Keynes's money theory of 
interest. But to appreciate the logic of Say's Law, one has to recognize 
it as linking relative prices and interest rates from changes in the 
excess demands and supplies in the market for consumption goods and 
services, money (cash), and interest rates. Miss understanding of one of 
those explanations (theories) and trouble arises in one's appreciation 
of a monetary economy works, according to the law of markets.

Also, in siding with Keynes's difficulties with interpreting classical 
saving as transferred incomes that get spent by borrowers, Schumpeter 
considers some of Keynes’s distortions of classical arguments as merely 
his having emphasized points most economists already had accepted or 
should have known, e.g., “that the Turgot-Smith-J.S. Mill theory of the 
saving and investment mechanism was inadequate and that, in particular, 
saving and investment decisions were linked together too closely” (1951: 
285). Any wonder that Keynesianism swept Harvard, following Frank 
Taussig's departure from the Economics Department there?

If we look for the developers and faithful interpreters of the law of 
markets in the nineteenth century, they should include J.-B. Say, James 
Mill, David Ricardo, J.S. Mill, and Alfred Marshall. I certainly rank 
Marshall's monetary analysis above that of Wicksell's (for more 
documentation of Wicksell's weaknesses, see chapter 7 in /Classical 
Macroeconomics/, 2003). I am not at all surprised by the failures of 
Wicksell and Schumpeter fully to appreciate the meaning of the law.

James Ahiakpor

Thomas Humphrey wrote:
> Would like to point out that Schumpeter in his 1954 /History of 
> Economic Analysis/ notes that Keynes was hardly the first prestigious 
> modern economist to reject Say's Law. Preceding Keynes was Knut 
> Wicksell, who ranks with Henry Thornton as one of the two greatest 
> monetary theorists of the nineteenth century. Thus Schumpeter writes 
> that Wicksell's "adoption of it [namely the concept of an aggregate 
> demand schedule for goods in general separate and distinct from a 
> vertical aggregate supply schedule] spelled renunciation of Say's Law. 
> He is, therefore, the patron saint of all those who renounce Say's Law 
> at present." It is therefore interesting that Austrian critics of 
> Keynes, including Hayek and Mises, drew much of their monetary 
> analysis from Wicksell, who Schumpeter identifies as siding with 
> Keynes in rejecting Say's Law.
>
> ---Tom Humphrey
>
> On Feb 4, 2014, at 11:05 AM, Wells, Julian wrote:
>
>> I can't hope to equal the erudition of Steve Kates and Daniele 
>> Besomi, among others, so instead I point to the possibility of 
>> gaining insight into the developing use of the term "Say's Law" using 
>> Google's Ngram Viewer
>>
>> https://books.google.com/ngrams/
>>
>> Best wishes,
>>
>> Julian
>>
>> This email has been scanned for all viruses by the MessageLabs Email
>> Security System.
>


-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
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