I Furiously Backpedal on Say’s Law

I made a post with an exposition of Say’s Law a few months ago. I stated:

Say’s Law states that the demand for a good is made up of the production of other goods. This can be clearly demonstrated by an imaginary barter economy. Suppose there are only two goods, fish and potatoes. If an individual wants to buy a fish, he must exchange a potato for the fish. He could not buy the fish without first producing the potato. Thus, the production of the potato is what constitutes the demand for the fish. And vice versa. The production of the fish is what constitutes the demand for the potato. Now, if the individual who wanted the fish did not produce a potato to use in exchange first, there would be no economic demand. All he would have is desire. But desire is only one part of demand, the other being the ability to actually buy the product. And this ability only comes with production.

If Say’s Law is true, there cannot be a general overproduction (the flip side of underconsumption) of goods on the free market. However, there can be overproduction in one area and underproduction in another, a misallocation of goods. This insight will help us understand what really causes business cycles, which will be explained in a future post.

Keynesian theory relies on the rejection of Say’s Law. If Say’s Law is valid, it cannot be, and vice versa.

However, Dr. Gene Callahan recently directed me toward a Murphy post that generalizes the case against Say’s Law. There I found a link to an analogy Callahan had made previously.

Imagine Bob Murphy, Silas Barta and I are living on a desert island. First Bob and I set Silas adrift at sea on a small raft while he’s sleeping. (Just kidding, Silas! We love you, man.) Then we set about catching fish from the island’s lagoon with our rough-hewn spears. In three hours a day, we each catch about five or six fish, enough to feed us well. Then we spend the rest of the day discussing teleology.

One day, Silas says, “Guys, we don’t work that much. We could really increase our productivity if we worked six hours a day.” Bob and I reluctantly go along. That day, we each catch a dozen fish, but are too tired to discuss teleology.

We each eat six of the fish and feel decently full. We eat three more each, and now we’re stuffed. We take our last three and bury them in the sand, thinking perhaps they’ll make the soil more fertile. Then we talk about the increased work load, and all decide, “Man, that just wasn’t worth it! It was better when we had more leisure time to discuss teleology.”

Here is a situation where fish are overproduced. Something has to be underproduced as well for Say’s Law to hold. What is underproduced in this situation is leisure. However, we don’t normally think of leisure being “produced,” we just think of it as an activity separate from “normal” types of consumption that have to be produced beforehand.

So we can say Say’s Law is held if we consider leisure as a good that is produced, but Say himself certainly did not think of it this way. I’d argue that regardless of how we formulate Say’s Law, we should acknowledge in a particular sense, there can be a general overproduction rather than a relative overproduction. And cases of this general production occur when leisure, money, and inventories are involved.

It’s important to note that even upon rejection of Say’s Law (assuming we formulate it as Say did himself), there are no necessary policy implications. Perhaps the market can handle these general overproductions better or perhaps the government can handle them better. What’s vital, however, is that we argue from and for the truth regardless of our respective ideologies, and this involves a rejection of the original version of Say’s Law

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Posted on September 26, 2012, in Economics and tagged , , , , , , , . Bookmark the permalink. Leave a comment.

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