Gary Mongiovi wrote:
> Smith's assertion that all savings get channeled into spending (as 
> clear a statement of Say's Law ////avant/// la lettre/ as one can 
> find), is just that--an ungrounded assertion. He offers no persuasive 
> rationale for it. Somehow the savings magically get channeled into 
> spending. If memory serves, John Stuart Mill hints at interest rate 
> adjustments as a mechanism that might bring investment spending into 
> line with saving, but he recognized that in a money economy, where 
> decisions to sell can be separated from decisions to spend, 
> the mechanism could falter in ways that could produce considerable 
> economic distress for a while at least (see Mill's On Some Unsettled 
> Questions of Political Economy, 1844).
It would have been helpful to Gary Mongiovi to have read Smith's 
statement he called "an ungrounded assertion" in full in the /Wealth of 
Nations/ (Chicago, 1976, 1: 359) to appreciate its validity.  Define or 
recognize saving as the purchase of a financial asset for the reward of 
interest or dividend (share of profits) (Smith, /WN/, 1: 358), and also 
recognize that issuers of financial assets intend to spend the 
proceeds.  Smith's explanation becomes very clear.  I referred to J.S. 
Mill's repetition of Smith's explanation (/Works/, 2:70), but once 
again, Gary would rather shoot from the hip--"if memory serves" he 
says-- rather than to read the reference.  Mill writes: "The word saving 
does not imply that what is saved is not consumed, nor even necessarily 
that its consumption is deferred; but only that, if consumed 
immediately, it is not consumed by the person who saves it.  If merely 
laid by for future use, it is said to be hoarded; and while hoarded, is 
not consumed at all.  But if employed as capital, it all consumed; 
though not by the capitalist."

Now, if one defined "investment" as Keynes (/GT/, 62) does as only "the 
current addition to the value of the capital equipment which has 
resulted from the productive activity of the period," it may  become 
difficult to see how savings necessarily become "investment spending."  
But if one recognizes investment spending as the employment of savings 
or loanable funds in the sphere of production that includes the purchase 
of capital goods, using funds to pay workers before revenues flow in 
(the wages fund), and funds-on-hand to run an enterprise, that is, both 
fixed and circulating "capital," then the classical explanation is easy 
to understand.  One of Keynes's major problems with understanding the 
classical literature was the meaning of "capital" as loanable funds that 
derive from savings.  Apparently, his modern-day followers are still 
having the same problem with the classical language.
> So I doubt if Keynes could have learned anything useful about the 
> problems with which he was concerned by reading what Smith had to say 
> about saving & investment. And in so far as Mill recognized that 
> demand could fall short of aggregate output, at least temporarily, 
> there's a bit of common ground between him & Keynes. Keynes obviously 
> had read Marshall quite carefully, and outlined a critique 
> of the Marshallian position; we can debate whether that critique is 
> persuasive, but that's a different issue from the one on the table here.
I don't know how Gary judges Keynes to have read Marshall "quite 
carefully" when Keynes (/GT/, 19) couldn't make clear meaning of the 
Marshall quote:

"The whole of a man's income is expended in the purchase of services and 
of commodities.  It is indeed commonly said that a man spends some 
portion of his income and saves another.  But it is a familiar economic 
axiom that a man purchases labour and commodities with that portion of 
his income he saves just as much as he does with that he is said to 
spend.  He is said to spend when he seeks to obtain present enjoyment 
from the services and commodities which he purchases.  He is said to 
save when he causes the labour and the commodities which he purchases to 
be devoted to the production of wealth from which he expects to derive 
the means of enjoyment in the future."

Keynes couldn't even understand Marshall's explanation that interest is 
the reward for saving.  Instead his retort is that interest is the 
reward for "parting with liquidity" or not hoarding cash (e.g., /GT/, 
166-67).  Why, because he thought, incorrectly, that saving is the same 
thing as cash hoarding!
> I know that Say's Law is often claimed to be an element of 
> neoclassical economics, but I'm skeptical about that too. Say's Law 
> contends that ANY level of aggregate output can be sustained. In 
> neoclassical economics, the only equilibrium level of aggregate 
> output--the only level that can be sustained--is the full employment 
> level. If the system produces a level of output that falls short of 
> the full employment level, then wages, the interest rate and other 
> relative prices are presumed to adjust to move the system towards full 
> employment. I don't find that argument persuasive myself, but it's not 
> really Say's Law.
Keynes's false attribution of the full-employment assumption to 
classical economic analysis has been a hindrance to many of his 
followers to understand classical analysis.  Indeed, Say's law or the 
"Law of Markets" holds at any state of the economy, including periods of 
involuntary unemployment that may be generated by a commercial crisis or 
"shaken confidence" (well explained by Mill, /Works/, 3: 574) and 
Marshall, 1920, 591-92).  As Ricardo also explains, during a process of 
adjustment in the condition of business due to changes in "the taste and 
caprice" of consumers, "much fixed capital is unemployed, perhaps wholly 
lost, and labourers are without full employment.  The duration of this 
distress will be longer or shorter according to the strength of that 
disinclination, which most men feel to abandon that employment of their 
capital to which they have long been accustomed" (1: 265).  Had Gary 
bothered to re-read Mill on the subject, he also might have recognized 
Keynes's mischief in truncating Mill's otherwise careful statement 
regarding the necessity of producers to match their supplies with 
consumer's taste or demand in order to avoid excess supplies or 
demands: “"Nothing is more true than that it is produce which 
constitutes the market for produce, and that every increase of 
production, /if distributed without miscalculation/ among all kinds of 
produce in the proportion which private interest would dictate, creates, 
or rather constitutes, its own demand” (1874, 73; emphasis added).   But 
this is what Keynes distorted as "Supply creates its demand," a phrasing 
of the law that leaves many people puzzled.
> No one denies that production is the source of income, or that income 
> is a significan source of demand. The question is whether there is a 
> mechanism which ensures that every dollar of income translates into a 
> dollar of demand: this is not self-evident; if anything, it strikes me 
> as a highly dubious claim.
All markets are linked through the adjustment of relative prices and 
interest rates.  That is the mechanism.  No classical economist ever 
claimed that the adjustment process was instantaneous.  That view is 
another of Keynes's distortions of classical economics.

We can hardly make progress in our understanding of the classics and how 
badly Keynes misrepresented their arguments unless we take the trouble 
to read them carefully ourselves, especially with the meaning of words 
as they meant them rather than the definitions Keynes improperly 
assigned to them.  And in the debate over the efficacy of government 
spending as an aid to aggregate demand, all we need do is ask ourselves 
this simple question: "From where does the government get the money to 
spend?"  Unless, it is from a central bank's printing press or borrowing 
from abroad, why should that increase total spending?

In a letter to T.R. Malthus, J-.B. Say writes: "Since the time of Adam 
Smith, political economists have agreed that we do not in reality buy 
the objects we consume, with the money or circulating coin which we pay 
for them.  We must in the first place have bought this money itself by 
the sale of productions of our own.  To the proprietor of the mines 
whence this money is obtained, it is a production with which he 
purchases such commodities as he may have occasion for: to all those 
into whose hands this money afterwards passes, it is only the price of 
the productions which they have themselves created by means of their 
lands, capital, or industry. In selling these, they exchange first their 
productions for money; and they afterwards exchange this money for 
objects of consumption. It is then in strict reality with their 
productions that they make their purchases; it is impossible for them to 
buy any articles whatever to a greater amount than that which they have 
produced either by themselves, or by means of their capitals and lands" 
(Say 1821, 2).

The letter clarifies the meaning of the law of markets.  The law does 
not relate to a barter economy.  And should there develop an excess 
demand for money (through the demand to increase hoarding), prices would 
fall (excess supply of goods and services) unless the supply of money is 
immediately increased to satisfy that demand. Why the law's logic is 
still lost on some people remains a puzzle to me.  But I suppose no 
amount of quoting from the original sources will help those who choose 
not to understand.

James Ahiakpor

-- 
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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