----------------- HES POSTING ----------------- In his help to Peter Stillman, Tom Walker writes: > Because they were arguing that overproduction *in general* was > impossible. At a high enough level of abstraction, the logic is quite > unassailable. If one accepts that an economy is a logical structure rather > than a human cultural and social artifact, overproduction IS impossible. > Of course, the road leading up to that high a level of abstraction is full > of potholes and unbridgable chasms. But once there, the view is > breathtaking. > Surely, Say's Law is about the real economy, not merely some logical structure. At its simplest, the argument is that production is the source from which we earn income to spend. Our incomes are titles to the goods and services produced, hence we cannot produce more than there is demand in the aggregate. If income is not directly consumed, it may be saved -- loaned out -- and the borrowers spending instead of the income earners. To quote J.S. Mill's statement of the point (from Keynes's GT, p. 18): What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the production of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because everybody would have twice as much to offer in exchange. Of course, Say's Law admits the over-production of some specific commodities -- which would lead to their prices falling in order to clear their supplies. However, should their sellers refuse to let those prices fall, they may have to resort to borrowing other people's money (savings) in order to maintain their own desired consumption or purchases. The latter action would cause interest rates to rise. David Ricardo makes the point thus: "Too much of a particular commodity may be produced, of which there may be such a glut in the market, as not to pay the capital expended on it; but this cannot be the case with respect of all commodities ..." [Note that "capital" here means funds, not capital goods, as has become the practise in economics.] Thus, a glut in one market shows up as an excess demand in another. One of Keynes's paths to his misunderstanding of the law of markets was to have reasoned that consumption and investment spending are the only sources of aggregate demand (in a closed economy), while saving is a withdrawal from the expenditure stream. Worse, saving is not the source of business "capital" or finance -- the banks take care of that without first taking deposits from the public. And when Keynes reasons that saving may be all hoarding (against the classical explanation that saving is NOT hoarding), he felt quite justified in believing that there could be more prodution than sufficient aggregate demand to absorb the output. Hence Keynes's crusade to promote aggregate demand in order to promote employment and income growth. Much of modern macroeconomics follows that line of reasoning. In the classical argument, if there is an excess demand for money (cash), there must be an excess supply of all goods and services. The price level must fall, with the result that there will be some unemployment (as average real wages rise) until nominal wages fall to restore that rate of employment -- the opposite of the forced- saving mechanism. Thus, viewed correctly as the classics stated it, the law of markets is not that much of a theoretical abstraction. But stated as "supply creates its own demand," and that the proponents of the argument also asserted that "there is always full employment" as Keynes did, it is easy to wonder how anyone could have believed such mythology. James Ahiakpor California State University, Hayward. ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]