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Though neither an historian nor an economist, I'd like to venture a  
clarification on this discussion of "Say's Law."   
 
The confusion (equivocation?) I want to address is captured  
succinctly in Steve Kate's remark: "The classical statement on  
Say's Law was that there was no such thing as a general glut. The  
clear meaning was that it was impossible for supply to outrun  
demand. Whatever might be the cause of recession, it would never  
be too little demand for output (demand deficiency) or, to put the  
same thing the other way round, that there could never be more  
produced than there was demand (over-production)."   
 
But I do not think the two phrasings are synonymous. To claim that  
declines in demand can cause even chronic depressions is not  
necessarily to deny the general equality of supply and demand.  To  
see why, we need to separate two elements in Say's law:  the  
assumption that agents are rational optimizers, and the  
assumption that supply must equal demand (generally, in the long  
run, etc.).  Agents can irrationally lower their expectations of  
rewards for production or investment, or irrationally increase their  
"liquidity preference", and thus lower their demand in such a way  
that it causes the long term suppression of the economy.  But this  
need not (except in the short term) be attended by an oversupply of  
goods or an inability to sell what is produced.  Obviously, in  
depressions fewer goods are produced than previously in order to  
make production profitable given the lower level of demand.  To  
deny this core element of Say's law in the long term for the market  
as a whole indeed seems to make little sense.    
 
Thus, in a sense Say's law can be preserved, though we cannot  
derive from it the result that many classical, and nearly every  
neoclassical economist wanted: namely, that business cycles are  
never the result of irrational hoarding, etc., but rather result from  
unexpected shocks to the system (in modern RE-theory terms).  If  
that's right, was Keynes in error in targeting Say's law as the  
enemy?  Should he have targeted only the strong rationality  
assumptions that neoclassicals in particular built into Say's law?   
Is that what he in fact did?   
 
As a final note, it seems to me that Keynes (or a Keynesian) would  
be right (or at least, not obviously confused historically or  
theoretically) to claim that a kind of hysteresis can develop in  
which lowered demand results in an inability to sell at accustomed  
prices, which in turn leads to lowered production.  We would  
expect an economy in a state of recession of this kind to exhibit  
not overproduction relative to demand, but underproduction relative  
to possible rates of production (factories which had run at 90%  
capacity now run at 50%). Even if economic agents are treated as  
rational optimizers, demand-induced recession can occur in  
contexts like that mentioned by Say, in which subjects of the  
Ottoman empire did not dare put their wealth to work for fear it  
would be taken away.  But then, of course, we have to admit  
irrationality or noneconomic motives elsewhere.   
 
I hope I managed to make sense, and to clarify what Barkley,  
Steve, and others would recognize as at issue in their discussion.   
If not, I'm sure someone will inform me of my mistakes!   
 
Jonathan Halvorson 
Columbia University 
 
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