Don’t miss the latest developments in business and finance.

Sudhir Mulji: Say's laws re-visited

Say did not have to deal with the problems of modern government in the way Keynes had

Image
Sudhir Mulji New Delhi
Last Updated : Feb 06 2013 | 5:00 PM IST
One of the less attractive characteristics of economic controversy is that it often seems to deteriorate into simple mud slinging.
 
Thus, when Professor Lucas wrote in an article in 1980, "One cannot find good under-forty economists who identify themselves or their work as Keynesian. Indeed people even take offence if referred to as Keynesians. At research seminars people don't take Keynesian theorising seriously any more; the audience starts to whisper and giggle at one another."
 
In attacking Keynes thus Lucas brings to mind not a Nobel Laureate who wrote an original argument on the subject of rational expectations but rather a cheeky schoolboy sticking out his tongue at an old teacher.
 
The disagreements between Kaushik Das and myself in these columns on September 3, 15, and 30 have not descended to this level; although I am amazed at the ferocity of his dislike for Keynesian economics.
 
Happily, Das and I are agreed on the focal point of our disagreement, which is not the failure of Keynesian economics but the correct interpretation of Say's law of markets.
 
Das accuses Keynes of deliberately misconstruing Say "...by incorrectly stating the law of markets as 'supply creates its own demand'". Apparently, Keynes had carried out this distortion because he wanted to create space for his own concepts of demand management.
 
Thus, according to Das, the correct interpretation of Say's law of markets is: "The supply (or sale) of one product creates the demand for (purchase of) another product." (Das, Business Standard, September 30).
 
Now Das may see some startling difference between Keynes's interpretation of Say's law, namely "supply creates its own demand ", and his own statement that "the sale of one product creates the demand for another product."
 
However, I am unable to grasp what precisely that difference is. It seems that Keynes described Say's law in substance exactly as Das has done. I therefore find it difficult to conclude that Keynes's interpretation is incorrect and that Das has provided a correct one.
 
The real disagreement is not about how Say expressed his law but in the veracity of his proposition. In other words, Say's theory that the act of supplying goods will create demand for the purchase of other goods rests upon propositions that have not been explicitly stated. Say argued that the supplying of products creates a demand for products, but he did not explain why this should necessarily do so.
 
In order to understand the argument, it is necessary to quote from Jean Baptiste Say's own four Treatises. Say's basic proposition rests upon the question that he puts to the hypothetical tradesman:
 
"You say you only want money (for your products); I say you want other commodities and not money. For what in point of fact, do you want the money? Is it not for the purchase of raw materials or stock for your trade or victuals for your support? Wherefore is it products that you want and not money.
 
...For after all money is but the agent of the transfer of values ... So that you will have bought, and everybody must buy, the objects of want or desire, each with the value of his products transformed into money for the moment only" (Say, A Treatise on the Political Economy, republished 1832).
 
Say's argument was repeated by John Stuart Mill in his essay "Influence of Consumption on Production". Mill states it in the following words:
 
"To produce implies that the producer desires to consume; why else should he give himself useless labour? He may not wish to consume what he himself produces, but his motive for producing and selling is the desire to buy. Therefore, if the producers generally produce and sell more and more, they certainly also buy more and more. Each may not want more of what he himself produces, but each wants more of what some other person produces; and by producing what the other wants, hopes to obtain what the other produces" (Mill, "Reprint of economic classics," reproduced by Hazlitt in The Critics of Keynesian Economics).
 
It is fundamental to Say's argument, as elaborated by Mill, that a producer goes through all the business of expending his energy in making goods either for his own personal consumption or for selling goods to purchase other goods. That proposition seems irrefutable, as there could be no other reason for producing goods.
 
Say argued that the interim transfer of value into money is "for the moment only", that is although the purchase is not instantaneous as in barter deals, the delay is short enough not to have any serious consequence on overall effective demand.
 
Keynes argued that the entire system of classical economics fails if the length of that "moment" is at all substantial. For, if the supply of goods is not followed up by an effective demand for purchases of goods, the effect on producers in the economy can be devastating. They may suffer losses that may reduce production altogether.
 
Say implied that production would be transformed into effective demand for present or future goods; but to Keynes the demand for future goods depended not simply on the availability of surplus savings in the present but also upon psychological factors like overcoming doubts about future uncertainty. Investment was not an automatic concomitant of the process of production.
 
Say had obviously been aware that the intervention of money changed the simple principles of a barter economy. He recognised that money allowed exchange of product for product to be delayed from an instantaneous exchange; but the analogies he used do not suggest any serious challenge to his basic proposition that goods are produced and sold in order to purchase other goods.
 
Indeed, he compares the utility of holding money to the expediency of a conveyance service. Just as you catch a bus to take you from one point of origin to another point of destination, so you exchange into money to give you value from your sales which you retain only temporarily, that is up to the moment when you exchange money for purchases of other goods.
 
Neither Say nor Mill anticipated that there could ever be an impediment to the purchase of goods. There could of course be difficulties in finding a sufficient supply of goods to be purchased, but this was simply a matter of minor readjustments.
 
Once goods were produced that were in demand, there could be no overall excess supply. If resources were in surplus, they would be used to produce the goods that were needed. This required no government intervention but would be sorted out by the markets.
 
However, neither Say nor Mill was confronted with the demands of a modern government. Solutions to the problems presented by famines or poor income distribution or free public health and education are not guaranteed by markets.
 
Adam Smith outlined the fundamental duties of a government, which required the provision of infrastructure and free education to increase the productive capacity of a society. The merit of Keynes is not that he ignored Say's law but that he brought to the fore the occasions when a government could fulfil its obligations without damaging Say's principles.

sjmulji@aol.com

 
 

Also Read

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

First Published: Oct 20 2004 | 12:00 AM IST

Next Story