In the view of Professor Alvin Hansen, Say’s Law is almost of itself a full expression of a free exchange economy as seen by ‘classical’ economics.1 He in fact dates the branching-off of modern economics from the point at which ...
Keynes substitutes the consumption function for Say’s Law in Chapter 2 of the General Theory.2The premise commonly drawn from Jean Baptiste Say’s Traite’ d’Economie Politique of 1803 is most familiarly stated as ‘supply creates its own demand’. Professor Hansen finds Keynes informing us to the contrary:
Demand determines employment and employment determines the marginal product (i.e. the real wage), not the other way around.3A recent title says much about economics’ appetite for scholastic argument. Two Hundred Years of Say’s Law; Essays on Economic Theory’s Most Controversial Principal, edited by Steven Kates, organizes a dozen essays around extensive textural references and interpretations by twelve authors.
The very fact that Say’s simple assertion has withstood two centuries of excruciating mastication suggests some systematic bases for indigestibility:
Say’s neoclassical proponents are perhaps immovable because they see themselves as merely elaborating a definition. Supply creates its own demand in a free market economy because a free market is defined by market-clearing prices that presumably adjust as needed to induce demand for whatever is supplied to the market.
We also note that the causal patterns of ‘supply creating demand by lowering prices’ versus ‘demand creating supply by raising prices’ has much the philosophical flavor of chickens and eggs.In the final essay of Kates’ collection, Post Keynesian Steve Keen offers the welcome prospect of a break from the Libertarians’ tautologies as well as from the false dilemma of temporal precedence between supply and demand. He begins with an offer to move this discussion onto grounds that are likely to be more productive of genuinely arguable points:
As Marx showed far better than did Keynes, the conditions under which Say’s Law is correct are not those of a capitalist economy.4while surrendering the position upon which Libertarians have taken their stand:
Marx conceded that, if the sole motivation of exchange is consumption, then aggregate supply is aggregate demand 5Professor Keen characterizes capitalism by its twin circuits. In the elder twin, named C-M-C’, money M is only an intermediary between the sale one commodity C and the purchase of another C’. Were this all there is to capitalism, Say would be unassailable and money would exist only to ease the inconveniences of barter. In Professor Keen’s second circuit, money does not exist for the sake of consumption, but for the sake of accumulating more of itself — hence its label: M-C-M+. Here at last we have an adequate basis for discussion, whereupon Professor Keen proceeds to find Say incompatible with both the Marxian and Keynesian appreciations of the M-C-M+ circuit.
SFEcon engages this discussion at two points: 1) our program of completing the neoclassical project has us giving the strongest possible expression to what might be called Say's Law prices; and 2) our desire to understand capitalism requires a full trace of the M-C-M+ circuit. Following the Keynesian Talmud on Marx’ Torah should therefore mean SFEcon models do not function; or, at the very least, do not function as useful analogs to anything real. Is this so?
Having found virtue in neoclassicism as a normative system, we do not shrink from formulations by which markets are kept clear. Clear markets are generally good things, as well as generally in evidence. But clear markets become socially unacceptable when the market-clearing wage is below subsistence; thus we have taken the explication of how excesses of commodities or capital might cause dangerous excesses of labor as one of the more important objects of economic thought. And we presume such explications are most authoritatively based on a working embodiment of economic adjustment’s normative case.
Perfectly clear markets are of course impossible to represent in digital analogs to economic dynamics. Markets are explicit in the SFEcon system, and their levels in Model 0 are always many orders of magnitude below those of the physical quanta being transacted. Though tiny, market levels are nonetheless vital to Model 0’s stability because the system’s ultimate goal is their elimination.
At every point in modeled time, the rates of a commodity’s deterioration on the market combine with its output rate to determine the commodity’s current rate of supply. The commodity's price is computed in terms of the collective marginal value that its current supply has to all the sectors using it; and there then ensues a demand to match supply. Price and supply/demand are therefore properly regarded as different ways of expressing one and the same thing, viz.: the economy’s current sate.
Though supply and demand always equal one another, the magnitude at which they are equal changes from one modeled point in time to the next, and this magnitude only ceases changing as the entire model approaches its general optimum. The balance of supply with demand, being continual for every commodity through all a model’s disequilibrium states, is therefore a completely separate issue from the system’s overall physical equilibrium. (Disequilibria are adequately conveyed by differences between the marginal cost of producing a commodity and its marginal value, which are evidence of suboptimal capital placements that the model operates to remedy.) Thus Say’s Law is always in force, as if in evidence of consumption being sole motivation for exchange; as if capitalism’s C-M-C’ circuit was all of economic activity.
SFEcon’s C-M-C’ circuit is joined in a system of mutual control with a rather robust M-C-M+ circuit. Cash flows ensue continuously from physical transactions at current prices. Investment is what industrial sectors have spent but not yet earned; saving is what households have earned but not yet spent. Savings are continually augmented and investments decremented with interest payments dictated by a variable rate of interest. Savings are leveraged-out many times over and never equal investment, with the amount of leverage being controlled by a variable investment term. When operating out of equilibrium, no sector’s spending equals its income.
In other words, it seems that SFEcon’s M-C-M+ side must at some point instantiate most any of the financial disconnects that the authoritative texts have found overturning Say’s Law; and this should be irrespective of whose textural interpretation one accepts. But, in Model 0’s objective embodiments one finds Say functioning quite well, both in and out of equilibrium, in the emulation of circumstances that some would have us believe are fatally hostile to his law:
Getting to that realization [of Say’s being wrong] was an awesome intellectual achievement 6that is perhaps achievable only by the intellectual not moored to an objectively operating hypothesis.