Home » Uncategorized » Marx’s refutation of Say’s Law [Thank you, Steve Keen].

Marx’s refutation of Say’s Law [Thank you, Steve Keen].

Poor J. B. Say! The great luminary, Karl Marx, devoted some time to refute him. Who can withstand the fiery blasts from that old dragon?

I find reading Marx unpleasant. Such hatred, such projection in the Freudian sense, such venom. Luckily, we don’t have to read ole Marx himself, because the good Steve Keen has graced us with his explication of how Marx has relegated Say’s Law “to the dustbin of the history of economic thought”. Meaning tossed the thing in the garbage.

If you don’t know what Says’ Law is, you can either do a search on this very site for my previous articles about it, or rely on Steve Keen’s concise and accurate summary. Yes, Keen understood Say’s Law, as did Marx. But they both thought they found a flaw in it.

First, the link to Keen’s article:

Now for a short introductory remark. That Say’s Law is true even when people are “hoarding” money has been shown very nicely by Hazlitt and Rothbard and Mill, quoted at length in earlier articles here. A search will show you where they are. The point of this article is to show how Steve Keen’s article is a total mess, making absurd assumptions and statements. And the point of that is to have fun. I mean, Marx loved talking about internal contradictions of Capitalism. So we, in the same spirit, are going to talk about internal contradictions of Steve Keen’s thesis.

Now for the gist of his argument: Say was 100% correct in a barter economy, where people make things either to use themselves or to trade for other things. But sadly, with the appearance of money, some people do not make things to use, or to trade for useful objects, but to make more and more money. They make a chair, say, and sell it. They use the money from the sale to make more chairs, and more chairs, and more chairs, all for the goal of having more money to stash under their mattress.

Say assumed explicitly that the goal of making money is to ultimately buy something with it. How naive he was, writes Marx. Say did not understand that there exists a type of person who makes money for its own sake, to just fill his house with gold coins and dollar bills, never to be spent.

You see the problem. This fellow who makes chairs and keeps the cash is basically flooding the market with chairs, and taking little to nothing out of the market in return [except for cash]. If we have enough of these guys doing the same thing, the market will be flooded not only with chairs, but with all kinds of other stuff. Thus a general glut is not only possible, but inevitable, if there are enough of those kind of people around.

Marx and Keen even have a formula to describe this process M->C-> M+. Which means converting Money [M] to Chairs [C] to More Money [M+].

Here’s the quote from Marx [get your barf bag ready]:

The expansion of value, which is the objective basis or main-spring of the
circulation M-C-M, becomes his subjective aim, and it is only is so far as the
appropriation of ever more and more wealth in the abstract becomes the sole
motive of his operations, that he functions as a capitalist . . . Use-values must
therefore never be looked upon as the real aim of the capitalist. Neither must the
profit on any single transaction. The restless never-ending process of profit making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation. (Marx 1867: 151)

Keen then goes on to explain all the horrors that follow from people not spending all the money they make. Loyal readers of our humble blog may remember our decisive refutations of this thesis, here [= https://smilingdavesblog.wordpress.com/2013/02/14/how-mises-dismissed-that-whole-keynesian-thing-with-a-decisive-one-liner/] and here [=https://smilingdavesblog.wordpress.com/2013/06/24/where-will-the-money-come-from-to-replace-hoarded-money/] and other places.

But again, the point of this article is not show why Keen and Marx are wrong about hoarding, because we’ve done that in those other places, but that Keen was asleep at the wheel when he wrote his article. It’s full of internal contradictions, which we are about to elaborate on.

The bottom line of all these bad things that come from hoarding, what they all lead up to, continues Keen, is “a potential for instability”. And what are these dread Horsemen that will bring on the Instability Apocalypse?

Leading the charge is “speculative overproduction”.

Then comes the Profit Twins, namely, “excessive and insufficient expectations of profit”.

Neck and neck with the others is “maldistribution of income”.

Bringing up the rear is “excessive debt”.

And, like the hordes of peasants who always follow the knights on horseback, we have “the whole panoply of macroeconomic issues that believers in Say’s Law cannot comprehend”.

And since Say did not understand any of this, Keen concludes that Say did not understand Capitalism. Capitalism, where people exist who hoard money for its own sake. Capitalism, where those hoarders will create a big fat glut of products and sleep on big bags of money.

Here’s the quote:
With the presence of a circuit dominated by the desire to accumulate, the
simple harmony of commodity production and consumption (vulnerable only
to disproportionality) gives way to the potential for instability arising from
speculative overproduction, excessive and insufficient expectations of profit,
maldistribution of income, excessive debt, and the whole panoply of
macroeconomic issues that believers in Say’s Law cannot comprehend. Say’s
‘Law’ therefore, is not a recondite insight into the nature of a market
economy, but evidence of a basic failure to comprehend capitalism.

OK, let’s take them one at a time. Here are the evils that exist in a money economy, but not in a barter economy, according to Keen:

1. Speculative overproduction. Since the chair maker is interested in making money, and the only way to make money [for him] is to make chairs, he is going to spend day and night in the shop, making chair after chair after chair, hoping he can sell them [=speculating]. But he might make too many chairs [=overproduction].

Foolish Say did not grasp that in a barter economy, the chair maker only wants to make one chair, enough to trade for a pair of pants. He won’t make more and more chairs, hoping to trade them for a pair of pants, and a shirt, and a pair of shoes, etc. etc. Nope, he is not a greedy capitalist, and he is content to sit around half naked and barefoot, because there exists no money.

Only in an economy where there is money, only then does the chairmaker get greedy. He still is happy to sit around in a pair of pants only [=underconsumes], but he makes more and more chairs because he wants cash. Cash, do you hear me? CASH! For its own sake, not to spend. That’s Steve Keen’s explanation of why Say’s law is true in a barter economy, but false in a money economy.

Can there be anything more absurd than such a proposition? To think that people in a barter economy have finite limited desires, and only the existence of money makes them want more? Even in a barter economy, that chairmaker will work as hard as he can, because there are plenty of good things to be had.

2. Excessive and insufficient expectations of profit. Keen explains this later on:
Euphoric expectations during a boom may lead capitalists to produce
too much of everything relative to the future ability of the system to finance
their sale at a profit
[=excessive expectation of profit] …while …depressed expectations during a slump may lead to a self-fulfilling spiral into depression [=insufficient expectations of profit].

In other words, that poor chairmaker, and all his pals, are bound to miscalculate, surely. As Keen puts it…
In an uncertain world, expectations of what and how much to
produce will necessarily be sectorally and in the aggregate incorrect to at
least some degree.

Can anyone really know exactly how many chairs to make, how many suits, how many anything? Of course not. So that either that chairmaker will make too many chairs, or too few. In either case, the balance that Say postulated, that supply and demand are equal by definition, is just wrong.

…whereas exchange in the C-M-C’ sphere has its own guarantee of overall balance ,[=Say’s Law is true in a barter economy, because then the chairmaker and everyone else knows exactly how many chairs to make always. Not only that, the hens know exactly how many eggs to lay, the cows exactly how much milk to give, the very earth knows exactly how much corn to produce.], no such guarantee exists for exchange done within the M-C-M+ circuit [=where there is money in the economy, then and only then does the chairmaker and everyone else suddenly have no clue how much to make. The glitter of gold and the greenness of dollars makes him and the hens and the cows suddenly not understand what they grasped when there was no money]. That’s a summary of Keen’s argument.

I mean, seriously, folks. Who is paying Keen for producing this drivel? What idiots out there think he is saying something of meaning? People are actually linking to his paper, not to mock it, but thinking it somehow refutes Austrian Economics. The mind boggles.

3. Maldistribution of income. In a barter economy, everybody makes their fair share. You work, you make one chair, you trade it for one pair of pants, everything is fairly distributed. But in a capitalist economy, some people are making much more money than they should be. And why? Keen doesn’t say. He doesn’t say how he knows what the proper amount is that one “should” make. He also doesn’t say why only in a money economy do people make more money than they “should”.

Now, it could be that Keen is a Marxist and believes in the labor theory of value [=workers are exploited by their employers], as did Marx. If that is the case, then refuting him is beyond the scope of this humble article. There are plenty of books and articles over at mises.org showing how stupid that theory is.

But even if we accept the labor theory of value for the sake of argument, and accept that hiring workers creates a maldistribution of income, it is silly to posit that one can only hire workers in an economy that has money. One can hire workers in a barter economy as well. Duh. So if Say’s Law is fine and correct in a barter economy, despite there being workers hired by someone else, it is also correct in a money economy. So if that’s what Keen means, he is not being very keen.

But maybe he isn’t a Marxist. Maybe he understands that the labor theory of value is silly. Maybe what he means by maldistribution of income is that in a money economy there are bankers, who make money unfairly, charging interest and stuff. Here’s the quote from Keen’s article that makes me think this:

…a monetary production economy has a triangular relationship
between a seller at one apex, a buyer at another, and a bank at the third that
records the transaction as a debit to the buyer and a credit to the seller, and
charges and pays differential interest.

Again, this is why Keen thinks that in a barter economy there is no maldistribution of income, but in a money economy there is. Because in a money economy there exists interest.

Here, too, Keen forgets that you don’t need money to charge interest.The chairmaker needs wood. He goes to his neighbor who has some trees. the cahirmaker borrows some wood, promising to return it plus 5% more at the end of the year. What’s so hard to understand?

4. Excessive debt. He gets this one from Minsky. Here’s the quote:

If income is to grow, the financial markets, where the various plans to save and
invest are reconciled, must generate an aggregate demand that, aside from brief
intervals, is ever rising. For real aggregate demand to be increasing, . . . it is
necessary that current spending plans, summed over all sectors, be greater than
current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963 [1982]: 6)

Well, I guess we can’t blame Keen for swallowing Keynes’ nonsense. Whole generations have been brainwashed into thinking that a country gets richer by going into debt, as opposed to by increasing production. But again, this is as true [or false] of a barter economy as it is of a money economy.

Bottom line, if Say’s Law is true in a barter economy, which Keen grants, nothing has changed by having money in the economy. At least none of the four things Keen mentioned. And if Keen’s four Horsemen will come wreak havoc in a money economy, they will also do so in a barter economy. Keen’s distinctions may exist in Bizzaro World, but not in this world.

Originally I was bothered by the simple question, “What was Keen thinking? Isn’t he smart enough to know when he is being foolish? Are the rebuttals to his arguments so subtle his mind can’t grasp them?”

But thinking it over, I’ve decided, who cares? Perhaps a professor of Abnormal Psychology will find an answer. Smiling Dave’s humble task is merely to expose the flaws in Keen’s very flawed economics.


  1. noiln says:

    Economics Development is a process whereby an economy’s real National Income Increases over a long period of time, and if the rate of development is greater than the rate of population growth, then pre capital real income will increase. Banks are the custodians and distributors of liquid capital which is the life blood of our commercial and industrial activities.


  2. Smiling Dave says:

    TY for your comment, noiln.Not sure how it is relevant to my article.All the best.


  3. "Say did not understand that there exists a type of person who makes money for its own sake, to just fill his house with gold coins and dollar bills, never to be spent."I think you misunderstand Marx's and Keen's argument here. They don't think capitalists pursue money as their "ultimate end." In fact, the idea of such an ultimate end is fallacious, as I will explore in my upcoming critique of Mises. As the quote from Marx you used says, "The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation." There is no ultimate end to this activity. The capitalist sells to make money in order to spend money in order to make money in order to spend money…etc. What matters is the continual maximization of profits not some ultimate end–be that the purchase of consumer goods or the filling of one's house with gold coins. Barter is different. The chair maker in your example is not trading something in order to throw something back into circulation. Marx and Keen don't view the problem as a lack of consumption of specific things, but of "consumption in general." Such an idea of consumption is only possible in a monetary economy (note: they don't adhere to the Misesian definition of consumption). To illustrate this difference, imagine two runners. One of them only runs for specific reasons–if he is going to be late for work, if he's being chased for dogs, etc. He runs in order to accomplish something else. The other runner, on the other hand, runs for the challenge. His goal is to always beat his previous time. The second runner has no end goal apart from running. He only runs an 8 minute mile in order to run a 7 minute mile. He runs a 7 minute mile to run a 6 minute mile. One run merely serves to set up the next. For the first runner, the runs are not dependent upon their antecedents. The difference between these two runners is important for understanding and predicting their behavior. The presence of rain or snow will probably not affect the likelihood the first runner will run. But the second will not likely run in such conditions as he is not likely to surpass his time in them. There is a similar difference between a barter economy and a monetary one. "One can hire workers in a barter economy as well. Duh. So if Say's Law is fine and correct in a barter economy, despite there being workers hired by someone else, it is also correct in a money economy."I think Keen is assuming a barter economy doesn't have hired workers (whether it's possible to hire workers, it's certainly impractical). In any case, that's what Say's Law applies to–a peasant/artisan economy.


  4. “The chair maker in your example is not trading something in order to throw something back into circulation”
    Hmm, he could as well build more chairs to exchange for more wood (and tools and labor of hired hands) to build more chairs, etc.
    Money does not add anything to this production spiral. At least, “honest” money, but I do not think Marx critique was against fiat money.


  5. sdavesblog says:

    Fool on the Hill’s comment is very flawed.
    For instance, his very first assertion is wrong. Of course the quote from Marx says capitalists pursue money as their ultimate end, unlike what he says.
    Which is why I didn’t bother replying.
    Thanks for taking up the task, Andris.


  6. Fool on the Hill says:

    Nope, Marx very clearly says that capitalists are after value and not money. “The expansion of value, which is the objective basis or main-spring of the circulation M-C-M, becomes his subjective aim, and it is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist.”


  7. sdavesblog says:

    FOTH just contradicted himself. He wrote earlier, “” In fact, the idea of such an ultimate end is fallacious… There is no ultimate end to this activity.”

    Now he writes, “capitalists are after value”.

    Also, the distinction between money and value is silly. Value is all very nice as a concept, but you don’t get rich from having a concept in your house. Value has to be embodied in something. And guess what that something is? Money.

    Now I can be charitable and assume that FOTH thought the word “end” means the same as “stop, cease, not go on further”. And that’s why he said there is no end to this activity, because it goes on forever. But I’m not sure that is being charitable, because it assumes a howling lack of reading comprehension on his part.

    In any case, FOTH, this is not my first rodeo with you. Over at mises.org, we have been through similar scenarios many times. I have said many times we do not think the same way, and I am only replying this once to your possibly excellent comments, because I have found there is nothing to be gained by it for me, and I think for my readers.

    So have fun. I won’t delete your comments, but I won’t reply to them.


  8. Fool on the Hill says:

    Just because someone is after something doesn’t make it an “ultimate end.” by ultimate end, I understand an end that doesn’t also serve as a means to another end. Because capitalists are always after value doesn’t mean that the value doesn’t also serve some other end, such as earning a living or increasing one’s social standing. So there is no contradiction between denying ultimate ends and saying that capitalists are after something–that is, that they have regular ends.

    The distinction between value and money is certainly not silly. Value does not have to be embodied in money. Both money and commodities have value. The capitalists don’t particularly care which of the two value is embodied in. They care about whether the value is increasing or not.


  9. Sam Swicord says:

    A response by Keen (via e-mail):

    Tell the author to read “Solving the Paradox of Monetary Profits” on the Economics E-journal. I’m not saying excessive debt is the reason Says’ Law doesn’t hold–in that paper I operationalize the notion of sustainable debt. And I disprove the Labor Theory of Value elsewhere in my academic work–so the author was moderately wise to hedge his bets on that one.


  10. sdavesblog says:

    “I’m not saying excessive debt is the reason Says’ Law doesn’t hold.” Nor did I claim you did. You said that excessive debt is an evil, inevitable, byproduct of a money economy, which doesn’t exist in a barter economy. I quoted you in full to that effect, and also showed the error in such a statement.

    If you have now changed your mind and decided that Capitalism does not generate excessive debt, good for you. One less evil of Capitalism, hey? Time to erase one wink or one nudge from the title of your anti-Say paper.

    My own position is that Capitalism per se does not create debt, sustainable or otherwise. It’s a govt that borrows money that creates unsustainable debt, in the sense that someone is going to get the shaft from the creation of that debt. The govt does not run a business, and thus has no profits, and thus has to pay its debts by taking the money away from the populace one way or another. Or else they can default. Either way, someone is getting the shaft.

    By the way, I wrote an article on my humble blog, Steve Keen as Santa Claus, critiquing one of your suggestions to end this recession.


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