About Standards Pat Gunning asks: Who sets the standards that determine whether an idea in economics is broken of fixed? In a rhetorical way, anybody may propose a new or discontinued old approach and wait for others to react. The proposal becomes a standard if many others adopt it. But I suppose that mention of standard rings an alarm bell as if somebody is coming to dictate with a voice of authority. In contrast, may be we can identify some flaw within the limits of what we already accept as sound voice of reason. Let me illustrate this with a commentary on Says Law. For two centuries, it has remained essentially unintelligible, and hence a source of confusion and disagreement. [Kates 2003] The flaw? It overlooked critical pieces of information. What does supply create? First, if the supplier is the customer himself under autarky, then the act of supply is identical with demand. Indeed, the terms demand and supply should not be used for production and consumption under autarky at all, but should be reserved for use in exchange situations. Demand is the quantity which the buyer is able and willing to buy, and not the quantity the buyer is able and willing to produce himself. Now, autarky is the only case where supply does create demand for any given good by the one and the same act. This is of little interest to economics. Secondly, in the extremely unlikely event of barter, the supply of x creates the demand for y, or does it? Not really. The supply of x creates the potential income to buy y (and income is not identical with demand), but there is nothing to say if there is demand for x. That is, supply of x does not create the demand for x, but for y, and we do not know if there as anyone else out there who will buy x. Supposing that there is someone who produces y and wants to buy x, there is still nothing to say if the market will clear by making the demands and supplies equal for each of the goods. We know that the supplier of x earns a potential income of Px*Xs [where Px= price of x, and Xs=supply of x) to buy y. But he can buy only a certain quantity of y, whose value must be equal to the buyers budget Px*Xs. Supposing that the price of y is Py, there is a certain quantum Yd that will make the transaction balanced in value such that Px*Xs=Py*Yd. Here, we do not know how much y the other man supplies as Ys, that is whether Ys=Yd or not. Thus while we can say that the supply of x to the extent of Xs creates potential demand for y worth Py*Yd, we have no idea what amount of x someone is able and willing to buy, and what amount of y someone is able and willing to sell. Now, for the sake of argument, suppose that under barter, the creation of demand for y by the supply of x is reciprocated by the creation of demand for x by the supply of y. This is a big conjecture, and we must consider possibilities of mismatch in income and capacity. What if the producer of y is able and willing to produce more than what the consumer of y wants to buy? And what if the producer of y intends to buy much smaller quantum of x than the supplier intends to sell? What is there to bring the demand and supplies to equality, and further to lead to full employment output? So far as I see, there has never been a satisfactory exploration of the issue raised above. The intuition that the collective income of all goods supplied is adequate to buy back all goods is a meaningless statement. The essential problem is to see which one good pays for which other. There are two parts of payment: the quantity of payment (giving theory of price and output) and the kind of payment (giving theory of intermediation and payment, which covers money). [Gani 2003]. The issue of payment was never raised. Thirdly, consider the common case of indirect trade. Suppose that John produces x and wants to buy y from Paul, but Paul wants to buy z and not x, while Tim, the producer of z, wants to buy x. Disregard for the moment the question of price and full employment output, and focus only on the issue of payment. Suppose that each agent wants to buy and sell exactly one dollar worth of the goods. But no barter is possible here between John and Paul, Paul and Tim, and Tim and John. Each agent must sell to a second and buy from a third agent, not to and from the same other agent. John can sell x to Tim and not to Paul, but must buy y from Paul and not from Tim. Then how can John pay Paul for y? He cannot pay Paul with x, because Paul wants z, not x. He of course can receive z from Tim in payment for x, but he does not want z, but wants y. The same situation for the other agents too: each sells to a customer from whom he buys nothing real, and each buys from supplier to whom he sells nothing real. To settle payment, money must be used as a device to transfer claims from the customer to the supplier over the customers real output. Thus though John sells x to Tim, he does not take z from Tim, but transfers the claim on z to Paul to pay for y. In this case, John has turned z into commodity money. Another step in the process brings in fiat money, but I will not discuss it here. The issue should become clear now. Unless the claim on the customers real output is transferred to the supplier, indirect trade cannot occur. Money is a necessary device to permit indirect trade. If money is missing, no trade will occur despite equality of demand and supply, and the presence of equilibrium price for every good. This kills Says Law, or does it? Now, have I set any new standards? No. All I have done is point out things so far unnoticed. Says Law fails because it is unaware of the issue of payment whether in barter or in indirect trade. Even in barter, Says Law is simply false: the supply of x does not create the demand for x at all. In indirect trade, even when demand is equal to supply for every good, there is no trade, and permanent oversupply of everything, until money arrives to transfer the claims on the output of the customer to the suppliers supplier. I of course suppose that there are two kinds of people: the players and the spectators. The historians are spectators, not players. So I do not expect that anybodys nerve here will be tense after reading that equality of demand and supply does not clear the market despite being a necessary condition of clearing. So Dear Pat, just relax and watch. People who intend to make history are taking interest in my humble mention of overlooked things, but in playgrounds, not here in the spectator gallery. Our grandchildren will be able to read the history of what we did as players, and not as spectators. Mohammad Gani Ref: Gani, Mohammad (2003): Foundations of Economic Science. Dhaka: Scholars Kates, Steven (Editor) (2003): Two Hundred Years of Says Law: Essays on Economic Theorys Most Controversial Principle. Cheltenham, UK: Edward Elgar.