This is a documentary that is long overdue, written from the perspective of the Austrian School. These are the economists of Business Cycle Theory — the theory that predicted our boom and bust. I invite you to watch this film and make up your own mind. Austrian School views were prevalent up to the 1930s, when politicians embraced the ideas of John Maynard Keynes. Tested to destruction, Keynesian policies were finally dropped by policymakers all over the globe, only to be replaced by an economic framework that used the same methodological tools. Stressing money as the Alpha and the Omega, Monetarism came to prominence in the 1980s. By the 90s it had faded into the void, replaced by politicised central bank interest rate manipulation and attempts at “demand management”. The failure of this latest form of economic central planning is what we observe today. The Austrian School, being the only school showing the errors of all of the approaches above, is slowly regaining its influence. This film will do its bit to spread our ideas. It is a crowd-funded documentary, so if you enjoy the film I urge you make a donation. [vimeo height=”340″ width=”620″]http://vimeo.com/45687897[/vimeo]
This is a documentary that is long overdue, written from the perspective of the Austrian School. These are the economists of Business Cycle Theory — the theory that predicted our boom and bust. [vimeo height=”360″ width=”620″]http://vimeo.com/45687897[/vimeo] I invite you to watch this film and make up your own mind. Austrian School views were prevalent up to the 1930s, when politicians embraced the ideas of John Maynard Keynes. Tested to destruction, Keynesian policies were finally dropped by policymakers all over the globe, only to be replaced by an economic framework that used the same methodological tools. Stressing money as the Alpha and the Omega, Monetarism came to prominence in the 1980s. By the 90s it had faded into the void, replaced by politicised central bank interest rate manipulation and attempts at “demand management”. The failure of this latest form of economic central planning is what we observe today. The Austrian School, being the only school showing the errors of all of the approaches above, is slowly regaining its influence. This film will do its bit to spread our ideas. It is a crowd-funded documentary, so if you enjoy the film I urge you make a donation.
DIGRESSION ON KEYNES by BENJAMIN M. ANDERSONA REFUTATION OF KEYNES’S ATTACK ON THE DOCTRINE THAT AGGREGATE SUPPLY CREATES AGGREGATE DEMAND The central theoretical issue involved in the problem of postwar economic readjustment, and in the problem of full employment in the postwar period, is the issue between the equilibrium doctrine and the purchasing power doctrine. Those who advocate vast governmental expenditures and deficit fianancing after the war as the only means of getting full employment, separate production and purchasing power sharply. Purchasing power must be kept above production if production is to expand, in their view. If purchasing power falls off, production will fall off. The prevailing view among economists, on the other hand, has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth century world consumes vastly more than the eighteenth century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, silks, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for silks, for automobiles and for other things that the shoe producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium. On the equilibrium theory occasional periods of readjustment are inevitable and are useful. An active boom almost inevitably generates disequilibria. The story in the present volume of the boom of 1919-1920 and the crisis of 1920-1921 gives a classical illustration. The period of readjustment may be relatively short and need not be severe, but a period of shakedown, a period in which overexpanded industries are contracted and opportunities made for under-developed industries to expand, a period in which prices and costs come into equilibrium, a period in which weak spots in the credit situation are cleaned up, a period in which excessive debts are liquidated— such periods we must have from time to time. The effort to prevent adjustment and liquidation by the pouring out of artificial purchasing power is, from the standpoint of the equilibrium doctrine, an utterly futile and wasteful and dangerous performance. Once a re-equilibration is accomplished, moreover, the equilibrium doctrine would regard pouring out new artificial purchasing power as wholly unnecessary and further as dangerous, since it would tend to create new disequilibria. The late Lord Keynes was the leading advocate of the purchasing power doctrine, and the leading opponent of the doctrine that supply creates its own demand. The present chapter is concerned with Keynes’s attack on the doctrine that supply creates its own demand. Keynes was a dangerously unsound thinker. His influence in the Roosevelt Administration was very great. His influence upon most of the economists in the employ of the Government is incredibly great. There has arisen a volume of theoretical literature regarding Keynes almost equal to that which has arisen around Karl Marx.  His followers are satisfied that he has destroyed the long accepted economic doctrine that aggregate supply and aggregate demand grow together. It seems necessary to analyze Keynes’s argument with respect to this point. Keynes Ignores the Essential Point in the Doctrine He Attacks. Keynes presents his argument in his The General Theory of Employment, Interest and Money, published in 1936. But he nowhere in the book takes account of the law of equilibrium among the industries, which has always been recognized as an essential part of the doctrine that supply creates its own demand. He takes as his target a seemingly crude statement from J. S. Mill’s Principles of Political Economy (Book III, chap. 14, par. 2) which follows:
What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions 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 every one would have twice as much to offer in exchange.
Now this passage by itself does not present the essentials of the doctrine. If we doubled the productive power of the country, we should not double the supply of commodities in every market, and if we did, we should not clear the markets of the double supply in every market. If we doubled the supply in the salt market, for example, we should have an appalling glut of salt. The great increases would come in the items where demand is elastic. We should change very radically the proportions in which we produced commodities. But it is unfair to Mill to take this brief passage out of its context and present it as if it represented the heart of the doctrine. If Keynes had quoted only the three sentences immediately following, he would have introduced us to the conception of balance and proportion and equilibrium which is the heart of the doctrine—a notion which Keynes nowhere considers in this book. Mill’s next few lines, immediately following the passage torn from its context, quoted above, are as follows:
It is probable, indeed, that there would now be a superfluity of certain things. Although the community would willingly double its aggregate consumption, it may already have as much as it desires of some commodities, and it may prefer to do more than double its consumption of others, or to exercise its increased purchasing power on some new thing. If so, the supply will adapt itself accordingly, and the values of things will continue to conform to their cost of production.
Keynes, furthermore, ignores entirely the rich, fine work done by such writers as J. B. Clark and the Austrian School, who elaborated the laws of proportionality and equilibrium. The doctrine that supply creates its own demand, as presented by John Stuart Mill, assumes a proper equilibrium among the different kinds of production, assumes proper terms of exchange (i.e., price relationships) among different kinds of products, assumes proper relations between prices and costs. And the doctrine expects competition and free markets to be the instrumentality by means of which these proportions and price relations will be brought about. The modern version of the doctrine  would make explicit certain additional factors. There must be a proper balance in the international balance sheet. If foreign debts are excessive in relation to the volume of foreign trade, grave disorders can come. Moreover, the money and capital markets must be in a state of balance. When there is an excess of bank credit used as a substitute for savings, when bank credit goes in undue amounts into capital uses and speculative uses, impairing the liquidity of bank assets, or when the total volume of money and credit is expanded far beyond the growth of production and trade, disequilibria arise, and, above all, the quality of credit is impaired. Confidence may be suddenly shaken and a countermovement may set in. With respect to all these points, automatic market forces tend to restore equilibrium in the absence of overwhelming governmental interference. Keynes has nothing to say in his attack upon the doctrine that supply creates its own demand, in the volume referred to, with respect to these matters. Indeed, far from considering the intricacies of the interrelations of markets, prices and different kinds of production, Keynes prefers to look at things in block. He says:
In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment. The first of these is strictly homogeneous, and the second can be made so. For, in so far as different grades and kinds of labor and salaried assistance enjoy a more or less fixed relative remuneration, the quantity of employment can be sufficiently defined for our purpose by taking an hour’s employment of ordinary labor as our unit and weighing an hour’s employment of special labor in proportion to its remuneration; i.e., an hour of special labor remunerated at double ordinary rates will count as two units. [Italics mine.]  . . . It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labor, when we are dealing with the behavior of the economic system as a whole … 
Procedure of this kind is empty and tells us nothing about economic life. How empty it is becomes apparent when we observe that these two supposedly independent units of quantity, namely, “quantities of money value” and “quantities of employment,” are both merely quantities of money value. If ten laborers working for $2 a day are dismissed and two laborers working for $10 a day are taken on, there is no change in the volume of employment, by Keynes’s method of reckoning, as is obvious from the italicized portion of the quotation above. His “quantity of employment” is not a quantity of employment. It is a quantity of money received by laborers who are employed.  Throughout Keynes’s analysis he is working with aggregate, block concepts. He has an aggregate supply function and an aggregate demand function.  But nowhere is there any discussion of the interrelationships of the elements in these vast aggregates, or of elements in one aggregate with elements in another. Nowhere is there a recognition that different elements in the aggregate supply give rise to the demand for other elements in the aggregate supply. In Keynes’s discussion, purchasing power and production are sharply sundered.
 Lord Keynes was a man of genius. He had great abilities and great personal charm.  I have not read much of this elaborate literature. Keynes himself I have studied with care. I think it probable that other critics have anticipated many of the points I make here, and I would gladly give them credit if I knew.  See the Chase Economic Bulletin, Vol. XI, No. 3, June 12, 1931.  The General Theory of Employment, Interest and Money, p. 41.  Ibid.,p. 43  See my criticism of the analogous procedure by Irving Fisher in his “Equation of Exchange,” in my Value of Money, New York, 1917 and 1936, pp. 158-162.  Ibid., p. 29.
Lord Keynes’s main contribution did not lie in the development of new ideas but “in escaping from the old ones,” as he himself declared at the end of the Preface to his “General Theory.” The Keynesians tell us that his immortal achievement consists in the entire refutation of what has come to be known as Say’s Law of Markets. The rejection of this law, they declare, is the gist of all Keynes’s teachings; all other propositions of his doctrine follow with logical necessity from this fundamental insight and must collapse if the futility of his attack on Say’s Law can be demonstrated. Now it is important to realize that what is called Say’s Law was in the first instance designed as a refutation of doctrines popularly held in the ages preceding the development of economics as a branch of human knowledge. It was not an integral part of the new science of economics as taught by the Classical economists. It was rather a preliminary—the exposure and removal of garbled and untenable ideas which dimmed people’s minds and were a serious obstacle to a reasonable analysis of conditions. Whenever business turned bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in “The Wealth of Nations,” exploded the first of these myths. Say devoted himself predominantly to a thorough refutation of the second. As long as a definite thing is still an economic good and not a “free good,” its supply is not, of course, absolutely abundant. There are still unsatisfied needs which a larger supply of the good concerned could satisfy. There are still people who would be glad to get more of this good than they are really getting. With regard to economic goods there can never be absolute overproduction. (And economics deals only with economic goods, not with free goods such as air which are no object of purposive human action, are therefore not produced, and with regard to which the employment of terms like underproduction and overproduction is simply nonsensical.) With regard to economic goods there can be only relative overproduction. While the consumers are asking for definite quantities of shirts and of shoes, business has produced, say, a larger quantity of shoes and a smaller quantity of shirts. This is not general overproduction of all commodities. To the overproduction of shoes corresponds an underproduction of shirts. Consequently the result can not be a general depression of all branches of business. The outcome is a change in the exchange ratio between shoes and shirts. If, for instance, previously one pair of shoes could buy four shirts, it now buys only three shirts. While business is bad for the shoemakers, it is good for the shirtmakers. The attempts to explain the general depression of trade by referring to an allegedly general overproduction are therefore fallacious. Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities. Every commodity produced is therefore a price, as it were, for other commodities produced. The situation of the producer of any commodity is improved by any increase in the production of other commodities. What may hurt the interests of the producer of a definite commodity is his failure to anticipate correctly the state of the market. He has overrated the public’s demand for his commodity and underrated its demand for other commodities. Consumers have no use for such a bungling entrepreneur; they buy his products only at prices which make him incur losses, and they force him, if he does not in time correct his mistakes, to go out of business. On the other hand, those entrepreneurs who have better succeeded in anticipating the public demand earn profits and are in a position to expand their business activities. This, says Say, is the truth behind the confused assertions of businessmen that the main difficulty is not in producing but in selling. It would be more appropriate to declare that the first and main problem of business is to produce in the best and cheapest way those commodities which will satisfy the most urgent of the not yet satisfied needs of the public. Thus Smith and Say demolished the oldest and most naive explanation of the trade cycle as provided by the popular effusions of inefficient traders. True, their achievement was merely negative. They exploded the belief that the recurrence of periods of bad business was caused by a scarcity of money and by a general overproduction. But they did not give us an elaborated theory of the trade cycle. The first explanation of this phenomenon was provided much later by the British Currency School. The important contributions of Smith and Say were not entirely new and original. The history of economic thought can trace back some essential points of their reasoning to older authors. This in no way detracts from the merits of Smith and Say. They were the first to deal with the issue in a systematic way and to apply their conclusions to the problem of economic depressions. They were therefore also the first against whom the supporters of the spurious popular doctrine directed their violent attacks. Sismondi and Malthus chose Say as the target of passionate volleys when they tried—in vain—to salvage the discredited popular prejudices.
Say emerged victoriously from his polemics with Malthus and Sismondi. He proved his case, while his adversaries could not prove theirs. Henceforth, during the whole rest of the nineteenth century, the acknowledgment of the truth contained in Say’s Law was the distinctive mark of an economist. Those authors and politicians who made the alleged scarcity of money responsible for all ills and advocated inflation as the panacea were no longer considered economists but “monetary cranks.” The struggle between the champions of sound money and the inflationists went on for many decades. But it was no longer considered a controversy between various schools of economists. It was viewed as a conflict between economists and anti-economists, between reasonable men and ignorant zealots. When all civilized countries had adopted the gold standard or the gold-exchange standard, the cause of inflation seemed to be lost forever. Economics did not content itself with what Smith and Say had taught about the problems involved. It developed an integrated system of theorems which cogently demonstrated the absurdity of the inflationist sophisms. It depicted in detail the inevitable consequences of an increase in the quantity of money in circulation and of credit expansion. It elaborated the monetary or circulation credit theory of the business cycle which clearly showed how the recurrence of depressions of trade is caused by the repeated attempts to “stimulate” business through credit expansion. Thus it conclusively proved that the slump, whose appearance the inflationists attributed to an insufficiency of the supply of money, is on the contrary the necessary outcome of attempts to remove such an alleged scarcity of money through credit expansion. The economists did not contest the fact that a credit expansion in its initial stage makes business boom. But they pointed out how such a contrived boom must inevitably collapse after a while and produce a general depression. This demonstration could appeal to statesmen intent on promoting the enduring well-being of their nation. It could not influence demagogues who care for nothing but success in the impending election campaign and are not in the least troubled about what will happen the day after tomorrow. But it is precisely such people who have become supreme in the political life of this age of wars and revolutions. In defiance of all the teachings of the economists, inflation and credit expansion have been elevated to the dignity of the first principle of economic policy. Nearly all governments are now committed to reckless spending, and finance their deficits by issuing additional quantities of unredeemable paper money and by boundless credit expansion. The great economists were harbingers of new ideas. The economic policies they recommended were at variance with the policies practiced by contemporary governments and political parties. As a rule many years, even decades, passed before public opinion accepted the new ideas as propagated by the economists, and before the required corresponding changes in policies were effected. It was different with the “new economics” of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his “General Theory” was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced. He was not a “revolutionary,” as some of his adepts called him. The “Keynesian revolution” took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments. This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectual, the “government economists.” They had had a bad conscience. They were aware of the fact that they were carrying out policies which all economists condemned as contrary to purpose and disastrous. Now they felt relieved. The “new economics” reestablished their moral equilibrium. Today they are no longer ashamed of being the handymen of bad policies. They glorify themselves. They are the prophets of the new creed.
The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale. Neither did Keynes try to refute by discursive reasoning the teachings of modern economics. He chose to ignore them, that was all. He never found any word of serious criticism against the theorem that increasing the quantity of money cannot effect anything else than, on the one hand, to favor some groups at the expense of other groups, and, on the other hand, to foster capital malinvestment and capital decumulation. He was at a complete loss when it came to advancing any sound argument to demolish the monetary theory of the trade cycle. All he did was to revive the self-contradictory dogmas of the various sects of inflationism. He did not add anything to the empty presumptions of his predecessors, from the old Birmingham School of Little Shilling Men down to Silvio Gesell. He merely translated their sophisms—a hundred times refuted—into the questionable language of mathematical economics. He passed over in silence all the objections which such men as Jevons, Walras and Wicksell— to name only a few—opposed to the effusions of the inflationists. It is the same with his disciples. They think that calling “those who fail to be moved to admiration of Keynes’s genius” such names as “dullard” or “narrow-minded fanatic” is a substitute for sound economic reasoning. They believe that they have proved their case by dismissing their adversaries as “orthodox” or “neo-classical.” They reveal the utmost ignorance in thinking that their doctrine is correct because it is new. In fact, inflationism is the oldest of all fallacies. It was very popular long before the days of Smith, Say and Ricardo, against whose teachings the Keynesians cannot advance any other objection than that they are old.
The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the “deficit spending” policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations. Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They are and work and take care of themselves. Notwithstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the “orthodox” economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the “miracle … of turning a stone into bread,” but the not at all miraculous procedure of eating the seed corn.
KEYNES vs. SAY’S LAW
1. Keynes’s “Greatest Achievement”
We come now to Keynes’s famous ”refutation” of Say’s Law of Markets. All that it is necessary to say about this ”refutation” has already been said by Benjamin M. Anderson, Jr., and Ludwig von Mises. Keynes himself takes the matter so cavalierly that all he requires to “refute” Say’s Law to his own satisfaction is less than four pages. Yet some of his admirers regard this as alone securing his title to fame:
Historians fifty years from now may record that Keynes’ greatest achievement was the liberation of Anglo-American economics from a tyrannical dogma, and they may even conclude that this was essentially a work of negation unmatched by comparable positive achievements. Even, however, if Keynes were to receive credit for nothing else . . . his title to fame would be secure .. . [Yet] the Keynesian attacks, though they appear to be directed against a variety of specific theories, all fall to the ground if the validity of Say’s Law is assumed.
I think I am justified, therefore, in devoting a special chapter to the subject. It is important to realize, to begin with, as Mises  has pointed out, that what is called Say’s Law was not originally designed as an integral part of classical economics but as a preliminary—as a refutation of a fallacy that long preceded the development of economics as a recognized special branch of knowledge. Whenever business was bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in The Wealth of Nations  exploded the first of these myths. Say devoted himself to a refutation of the second. For a modern statement of Say’s Law, I turn to B. M. Anderson:
“The central theoretical issue involved in the problem of postwar economic adjustment, and in the problem of full employment in the postwar period, is the issue between the equilibrium doctrine and the purchasing power doctrine. Those who advocate vast governmental expenditures and deficit financing after the war as the only means of getting full employment, separate production and purchasing power sharply. Purchasing power must be kept above production if production is to expand, in their view. If purchasing power falls off, production will fall off. The prevailing view among economists, on the other hand, has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, silks, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for silks, for automobiles, and for other things that the shoe producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.” 
Keynes’s “refutation” of Say’s Law consists in simply ignoring this qualification. He takes as his first target a passage from John Stuart Mill:
“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 every one would have twice as much to offer in exchange.” 
By itself, this passage from Mill, as B. M. Anderson  has pointed out, does not present the essentials of the modern version of Say’s Law:
“If we doubled the productive power of the country, we should not double the supply of commodities in every market, and if we did, we should not clear the markets of the double supply in every market. If we doubled the supply in the salt market, for example, we should have an appalling glut of salt. The great increases would come in the items where demand is elastic. We should change very radically the proportions in which we produced commodities.”
But as Anderson goes on to point out, it is unfair to Mill to take this brief passage out of its context and present it as if it were the heart of Say’s Law. If Keynes had quoted only the three sentences immediately following, he would have introduced us to the conception of balance and proportion and equilibrium which is the heart of the doctrine—a conception which Keynes nowhere considers in his General Theory. Mill’s next few lines, immediately following the passage torn from its context, quoted above, are as follows:
“It is probable, indeed, that there would now be a superfluity of certain things. Although the community would willingly double its aggregate consumption, it may already have as much as it desires of some commodities, and it may prefer to do more than double its consumption of others, or to exercise its increased purchasing power on some new thing. If so, the supply will adapt itself accordingly, and the values of things will continue to conform to their cost of production.”
The doctrine that supply creates its own demand, in other words, is based on the assumption that a proper equilibrium exists among the different kinds of production, and among prices of different products and services. And it of course assumes proper relationships between prices and costs, between prices and wage-rates. It assumes the existence of competition and free and fluid markets by which these proportions, price relations, and other equilibria will be brought about. No important economist, to my knowledge, ever made the absurd assumption (of which Keynes by implication accuses the whole classical school) that thanks to Say’s Law depressions and unemployment were impossible, and that everything produced would automatically find a ready market at a profitable price. Say’s Law, to repeat, was, contrary to the assertions of the Keynesians, not the cornerstone on which the great edifice of the positive doctrines of the classical economists was based. It was itself merely a refutation of an absurd belief prevailing prior to its formulation. To resume the quotation from Mill:
“At any rate, it is a sheer absurdity that all things should fall in value, and that all producers should, in consequence, be insufficiently remunerated. If values remain the same, what becomes of prices is immaterial, since the remuneration of producers does not depend on how much money, but on how much of consumable articles, they obtain for their goods. Besides, money is a commodity; and if all commodities are supposed to be doubled in quantity, we must suppose money to be doubled too, and then prices would no more fall than values would.”
In sum, Say’s Law was merely the denial of the possibility of a general overproduction of all goods and services. If you had presented the classical economists with “the Keynesian case”—if you had asked them, in other words, what they thought would happen in the event of a fall in the price of commodities, if money wage-rates, as a result of union monopoly protected and insured by law, remained rigid or rising—they would have undoubtedly replied that sufficient markets could not be found for goods produced at such economically unjustified costs of production and that great and prolonged unemployment would result. Certainly this is what any modern subjective-value theorist would reply.
2. Ricardo’s Statement
We might rest the case here. But such a hullabaloo has been raised about Keynes’s alleged “refutation” of Say’s Law that it seems desirable to pursue the subject further. One writer  has distinguished “the four essential meanings of Say’s Law, as developed by Say and, more fully, by [James] Mill and Ricardo.” It may be profitable to take her formulation as a basis of discussion. The four meanings as she phrases them are: (1) Supply creates its own demand; hence, aggregate overproduction or a ”general glut” is impossible. (2) Since goods exchange against goods, money is but a “veil” and plays no independent role. (3) In the case of partial overproduction, which necessarily implies a balancing underproduction elsewhere, equilibrium is restored by competition, that is, by the price mechanism and the mobility of capital. (4) Because aggregate demand and supply are necessarily equal, and because of the equilibrating mechanism, output can be increased indefinitely and the accumulation of capital proceed without limit. I shall contend that of these four versions, 1, 3 and 4 are correct, properly interpreted and understood; that only version 2 is false as stated, and that even this is capable of being stated in a form that is correct. Now Ricardo clearly stated the doctrine in versions 1, 3, and 4; and though he implied it also in version 2, his statement even of this can be interpreted in a sense that would be correct:
“M. Say has . . . most satisfactorily shown that there is no amount of capital which may not be employed in a country, because a demand is only limited by production. No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person. It is not to be supposed that he should, for any length of time, be ill-informed of the commodities which he can most advantageously produce, to attain the object which he has in view, namely, the possession of other goods; and, therefore, it is not probable that he will continually produce a commodity for which there is no demand. There cannot, then, be accumulated in a country any amount of capital which cannot be employed productively until wages rise so high in consequence of the rise of necessaries, and so little consequently remains for the profits of stock, that the motive for accumulation ceases. While the profits of stock are high, men will have a motive to accumulate. Whilst a man has any wished-for gratification unsupplied, he will have a demand for more commodities; and it will be an effectual demand while he has any new value to offer in exchange for them. . . . Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market as not to repay the capital expended on it; but this cannot be the case with respect to all commodities.” 
The italics above are my own, intended to bring out the fact that Ricardo by no means denied the possibility of gluts, but merely of their indefinite prolongation. In his Notes on Malthus, in fact, Ricardo wrote:
“Mistakes may be made, and commodities not suited to the demand may be produced—of these there may be a glut; they may not sell at their usual price; but then this is owing to the mistake, and not to the want of demand for productions.” 
The whole of Ricardo’s comment on this phase of Malthus’s thought will repay study. “I have been thus particular in examining this question [Say’s Law]/’ wrote Ricardo, “as it forms by far the most important topic of discussion in Mr. Malthus’ work.”  i.e., Malthus’s Principles of Political Economy. It was Malthus who, in 1820, more than a century before Keynes, set himself to “refuting” Say’s Law. Ricardo’s answer (most of which was not discovered or available until recent years) is devastating. If it had been earlier available in full, it would have buried Malthus’s fallacious “refutation” forever. Even as it was, it prevented its exhumation until Keynes’s time. Ricardo’s answer was, it is true, weak or incomplete at certain points. Thus he did not address himself to the problem of what happens in a crisis of confidence, when for a time even the commodities that are relatively underproduced may not sell at existing price levels, because consumers, even though they have the purchasing power and the desire to buy those commodities, do not trust existing prices and expect them to go still lower. But the basic truth of Say’s Law (and Say’s Law was only intended as a basic or ultimate truth) is not invalidated but merely concealed by a temporary abnormal situation of this kind. This situation is possible only in those periods when a substantial number of consumers and businessmen remain unconvinced that “bottom” has been reached in wages and prices, or feel that their job or solvency may still be in danger. And this is likely to happen precisely when wage-rates are artificially forced or held above the equilibrium level of marginal labor productivity. Again, it is true that Ricardo declares at one point (already quoted) that “Money is only the medium by which the exchange is effected.” If this is interpreted to mean, as Bernice Shoul interprets it, that money “plays no independent role,” then of course it is not true. But if it is interpreted to mean: “If we, for the moment, abstract from money, we can see that in the ultimate analysis goods exchange against goods,” then it is both true and methodologically valid. Having recognized this truth, of course, we must in the solution of any dynamic problem put money back into our equation or “model” and recognize that in the modern world the exchange of goods is practically always through the medium of money, and that the interrelationship of goods and money-prices must be right for Say’s Law to be valid. But this is merely to return to the qualification of correct price relationships and equilibrium that has always been implicit in the statement of Say’s Law by the leading classical economists.
3. The Answer of Haberler
Before leaving this subject it may be important to address ourselves to some of the confusions about it, not of Keynes himself, but of the “post-Keynesians.” Prof. Gottfried Haberler has been by no means uncritical of Keynes , but his discussion of Keynes’s discussion of Say’s Law is peculiar. He presents part of the quotation I have already presented from Ricardo (on pp. 37-38) but does so in truncated form, and ends with the sentence: “Money is only the medium by which the exchange is effected.” He then declares: “The meaning of this original formulation of this law seems to me quite clear: It states that income received is always spent on consumption or investment; in other words, money is never hoarded. . . .”  Now the meaning of Ricardo’s formulation of Say’s Law is already quite clear, particularly when it is given in full. It does not require any exegesis by Haberler or anyone else, and certainly no paraphrase that quite changes its meaning. Not only did Ricardo never explicitly assert the proposition that Haberler attributes to him; there is every reason to suppose that he would have repudiated it. At several points he actually describes what we today might call money hoarding and its effects. At many points in his Notes on Malthus he writes, regarding some view that Malthus attributes to him: “Where did I ever say this?” . We may be confident that he would have written the same regarding this Haberler “interpretation.”
“Our conclusion, thus [Haberler goes on] is that there is no place and no need for Say’s Law in modern economic theory and that it has been completely abandoned by neo-classical economists in their actual theoretical and practical work on money and the business cycle. . . . Summing up, we may say that there was no need for Keynes to rid neo-classical economics of Say’s Law in the original, straightforward sense, for it had been completely abandoned long ago.” 
The short answer to this is that there is still need and place to assert Say’s Law whenever anybody is foolish enough to deny it. It is itself, to repeat, essentially a negative rather than a positive proposition. It is essentially a rejection of a fallacy. It states that a general overproduction of all commodities is not possible. And that is all, basically, that it is intended to assert. Haberler is right insofar as he denies the belief of Keynes (and such disciples as Sweezy) that Say’s Law “still underlies the whole classical theory, which would collapse without it” (General Theory, p. 19). It is true that Say’s Law is not explicitly needed in the solution of specific economic problems if its truth is tacitly taken for granted. Mathematicians seldom stop to assert that two and two do not make five. They do not explicitly build elaborate solutions of complicated problems upon this negative truth. But when someone asserts that two and two make five, or that an existing depression is the result of a general overproduction of everything, it is necessary to remind him of the error. There is still another line of attack on Say’s Law, which Haberler among others seems to adopt, and this is to assert that in the sense in which Say’s Law is true it is “mere tautology.” If it is tautological, it is so in the same sense in which basic logical and mathematical propositions are tautological: “Things that are equal to the same thing are equal to each other.” One does not need to say this as long as one does not forget it. To sum up, Keynes’s “refutation” of Say’s Law, even if it had been successful, would not have been original: it does not go an inch beyond Malthus’s attempted refutation more than a century before him. Keynes ”refuted” Say’s Law only in a sense in which no important economist ever held it.
4. To Save Is to Spend
Risking the accusation of beating a dead horse, I should like to address myself to one more effort by Keynes to disprove Say’s Law, or what he calls “a corollary of the same doctrine” (p. 19). “It has been supposed,” he writes, “that any individual act of abstaining from consumption necessarily leads to, and amounts to the same thing as, causing the labor and commodities thus released from supplying consumption to be invested in the production of capital wealth” (p. 19). And he quotes the following passage from Alfred Marshall’s Pure Theory of Domestic Values (p. 34) in illustration:
“The whole of a man’s income is expended in the purchase of services and of commodities. It is indeed commonly said that a man spends some portion of his income and saves another. But it is a familiar economic axiom that a man purchases labor and commodities with that portion of his income which he saves just as much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labor and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”
This doctrine, of course, goes much further back than Marshall. Keynes could have quoted his bête noir, Ricardo, to the same effect. “Mr. Malthus,” wrote Ricardo, “never appears to remember that to save is to spend, as surely as what he exclusively calls spending.”  Ricardo went much further than this, and in answering Malthus answered one of Keynes’s chief contentions in advance: “I deny that the wants of consumers generally are diminished by parsimony —they are transferred with the power to consume to another set of consumers.”  And on still another occasion Ricardo wrote directly to Malthus: “We agree too that effectual demand consists of two elements, the power and the will to purchase; but I think the will is very seldom wanting where the power exists, for the desire of accumulation [i.e., saving] will occasion demand just as effectually as a desire to consume; it will only change the objects on which the demand will exercise itself.”  For the present, however, it may be sufficient merely to note Keynes’s contention on this point rather than to try to analyze it in full. There will be plenty of opportunity for that later. As we shall see, Keynes himself alternates constantly between two mutually contradictory contentions: (1) that saving and investment are “necessarily equal,” and “merely different aspects of the same thing” (p. 74), and (2) that saving and investment are “two essentially different activities” without even a “nexus” (p. 21), so that saving not only can exceed investment but chronically tends to do so. The second is the view which he chooses to support at this point. We shall have occasion to analyze both views later. For the present it is sufficient merely to note the presence of this deep-seated contradiction in Keynes’s thought.
1 Economics and the Public Welfare, (New York: Van Nostrand, 1949), pp. 390-393. 2 Planning for Freedom. (South Holland, 111.: Libertarian Press, 1952), pp. 64-71. 3 Paul M. Sweezy in The New Economics, ed. by Seymour E. Harris, (New York: Alfred Knopf, 1947), p. 105. 4 Op. cit., pp. 64-65. 5 Vol. I, Book IV, Chap. I, (Edwin Cannon edition, 1904), p. 404 ff. 6 Economics and the Public Welfare, p. 390. 7 Principles of Political Economy, Book III, Chap. xiv. Sect. 2. 8 Op. cit., p. 392. 9 Bernice Shoul, “Karl Marx and Say’s Law,” The Quarterly Journal of Economics, Nov., 1957, p. 615. 10 David Ricardo, The Principles of Political Economy and Taxation, (Everyman ed., New York), pp. 193-194. 11 The phrase “effectual demand,” however, was italicized merely to bring out here the fact that Keynes did not invent this phrase. Ricardo even uses the phrase “effective demand” in his Notes on Malthus (Sraffa edition, Cambridge University Press, p. 234). The term “effectual demand” was actually introduced by Adam Smith in The Wealth of Nations (Book I, Chap. 7). John Stuart Mill explains. “Writers have . . . defined [demand as] the wish to possess, combined with the power of purchasing. To distinguish demand in this technical sense, from the demand which is synonymous with desire, they call the former effectual demand.” Principles of Political Economy, 1848, Book III, Chap. II, § 3. 12 Sraffa edition, Cambridge University Press, p. 305. 13 Op. cit.} pp. 306-307. 14 Haberler’s comments on the General Theory in Chap. 8 of the third edition of his Prosperity and Depression (Geneva: League of Nations, 1941) contain many penetrating observations. 15 The New Economics, ed. by Seymour E. Harris, p. 174. 16 See, e.g., Sraffa edition, p. 424. 17 Op. cit., pp. 175-176. 18 David Ricardo, Notes on Malthus (Sraffa edition), p. 449. 19 Ibid.,p.3O9. 20 Letters of Ricardo to Malthus, ed. by Bonar (1887). Letter of Sept. 16, 1814, p. 43. 21 Supplementing the present chapter, the reader is referred to the remarkable statement and defense of Say’s Law by John Stuart Mill, quoted at length on pp. 364-371.
A great letter to the editor of the FT from Terry Smith:
Sir, I refer to the debate being conducted in the pages of the Financial Times between those who propose further Keynesian measures, such as Martin Wolf (“Struggling with a great contraction”, August 31), and those who do not accept that they will work, such as Wolfgang Schäuble (“Austerity is the only cure for the eurozone”, September 6). Such so-called Keynesian measures as advocated by, among others, Ed Balls, Samuel Brittan, Paul Krugman, George Magnus and Barack Obama as well as Mr Wolf have not worked to date, and they will not work. Their advocates seem to assume that their repeated failure to solve our economic problems just means that the medicine must be repeated, which reminds me of Richard Nixon’s motto that “if two wrongs don’t make a right, try three”. I say “so-called” Keynesians because these advocates seem not to realise that Keynes’ theories did not rescue us from the Great Depression. They are also asymmetric in their application of his theories – calling for ever larger deficit spending, having overlooked the bit about running a surplus in a boom. But above all, they do not seem to realise that they cannot work in a period of debt deflation in which a recession is preceded by the collapse of the banking system, as their current failure is demonstrating. To the ordinary person in the street, the idea that we can rescue ourselves from a crisis caused by excessive borrowing by borrowing even more must seem mad. In this respect they are possessed of far more common sense than those who are currently advocating just such a course of action and purport to be our leaders. The first step in rectifying this situation should be to make a clear and unambiguous statement about the actual debt the UK is carrying. To give a lead to this, today we have circulated to every member of parliament a tin can emblazoned with the UK debt figure – £3,589bn including commitments for public sector pension commitments, private finance initiative and banking sector guarantees, so that they can see what it is they are metaphorically “kicking down the road” with their present policies. This, ahead of the party conference season, I hope might spur some considered and honest debate on this issue. It is time for those who wish to lead us out of this crisis to tell people how bad the current situation really is and the painful remedies which will be needed to remedy it. Terry Smith, Chief Executive, Tullett Prebon, London EC2, UK