Allow me to follow up on Tom Humphrey’s allusion to Schumpeter’s point that according to Say’s law “there would be no sense in speaking of a demand schedule for all goods and services (or all consumers’ goods and services) taken together” unless it were “for a special purpose of doing something that is not covered by the ordinary theory of demand and are taking therefore a step beyond it.”
This is what Schumpeter’s predecessor at Harvard, Allyn Young, attempted in his seminal paper on “Increasing Returns and Economic Progress”, published in 1928 a few months before his untimely death. (Schumpeter [1950: 875] greatly admired this paper that, as "ex ungue lionem", it showed that a lion can be seen from its claw.)
His classical endogenous growth theory (to be sharply differentiated from modern neoclassical endogenous growth theory) was cast entirely in terms of real reciprocal supply and demand. Lauchlin Currie, one of Young's students, later dubbed this reciprocal demand as “Sayian” demand to distinguish it from Keynesian monetary demand. And he spoke of a real Youngian multiplier that differed from Keynes’s expenditure multiplier that was cast in monetary terms. But, like Young and Keynes, Currie acknowledged that the flow of monetary expenditures could be interrupted by central bank policy errors etc.
Ever conscious of the fallacy of composition, Young understood that aggregate Sayian supply and demand were more than the sum of individual Marshallian schedules, so economic growth could not be deduced from microeconomics.
In his LSE lectures, 1927-29, he noted that J.B.Say “pointed out that absolute overproduction was impossible; supply and demand are the same thing viewed from different angles. What is commonly called overproduction is merely ill-balanced production. But this involves (i) that the supply of money increases correspondingly with production for, otherwise, prices may fall, leading to decreased profits for producers. (Objection raised by J.S.Mill.) (ii) A view of the world as a whole. Taking each country by itself it may overproduce relative to the world demand for its products.”
In a posthumous entry in the Encyclopaedia Britannica (1929) on “Supply and Demand”, he stated that “making abstraction from the use of money as a medium of exchange, the supply of any one commodity is an expression of the demand of its producers for other commodities and services.” However, in a fuller Sayian vein, he continued:
“There is a sense in which supply and demand, seen in the aggregate, are merely different aspects of a single situation. It is for this reason that some of the older economists held that general overproduction is impossible – a theorem which, though not really erroneous, has proved to be misleading. The _effective_ demand of the producers of one commodity for other products depends not only upon how much they produce, but also on the relative demand of other producers for that particular commodity as compared with other products. Only so far as the demand for a particular commodity is elastic is it true in a significant sense that an increase in its supply is an effective increase in demand for other commodities. There may be and often are maladjustments of supply and demand. Furthermore, production in general may at one time outrun and at another time fail to keep pace with the expansion of money incomes.”
Presciently, one of Young’s last publications, January 1929, warned of the great dangers in a “Downward Price Trend Probable, Due to Hoarding of Gold by Central Banks” (New York Times Annalist).
Roger Sandilands
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From: Societies for the History of Economics [[log in to unmask]] on behalf of Thomas Humphrey [[log in to unmask]]
Sent: Thursday, February 06, 2014 5:08 AM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la demande
Mason,
You have it exactly right. When Wicksell uses the concept of aggregate demand for all goods, he is converting the idea of a partial equilibrium demand schedule for an individual good into an aggregate schedule for all goods in the economy.
Schumpeter makes this abundantly clear in the passage on page 1117 of his History of Economic Analysis that Steve Marglin refers to. And Schumpeter thinks Wicksell's conversion brings potential problems of its own. Schumpeter writes: "Once more, the point to grasp is this: demand schedules are defined for a single commodity. According to "classical" theory (Say's law), there would be no sense in speaking of a demand schedule for all goods and services (or all consumers' goods and services) taken together. If we do so, nevertheless, we are for a special purpose doing something that is not covered by the ordinary theory of demand and are taking therefore a step beyond it. This special purpose may or may not be meaningful. It may or may not be well served by the aggregate-demand technique. But in any case, it should be recognized as a thing sui generis that carries its own particular problems. Wicksell's adoption of it spelled renunciation of Say's law. He is, therefore, the patron saint of all those economists who renounce Say's law at present."
Tom Humphrey
On Feb 5, 2014, at 8:29 PM, mason gaffney wrote:
Re Steve Marglin’s question to Prof Humphrey, it seems to me that when Wicksell takes his “grape-juice model” as a metaphor for the whole economy he is implicitly converting partial equilibrium into general, and thus partial demand into aggregate. Am I missing something ?
Mason Gaffney
From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Marglin, Stephen
Sent: Wednesday, February 05, 2014 9:52 AM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] L'offre crée même la demande
Professor Humphrey, Can you (or anybody else) provide a more precise reference as to where and how Wicksell uses the concept of aggregate demand? I checked Schumpeter’s History of Economic Analysis, and the two places that seemed likely, including the quote that appears in your post (from p 1117n), shed no light on the matter, referring the reader to Myrdal’s Monetary Equilibrium. Thanks. Steve Marglin
From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Thomas Humphrey
Sent: Tuesday, February 04, 2014 7:42 PM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] L'offre crée même la demande
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
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