Here’s an interesting one:
Google Fiber Offers a Test of Say’s Law
Does supply create demand? Google has introduced ultra fast download capability to the people of Kansas City. Will this transform this city into the next San Francisco? The NY Times hints at an interesting scale issue. Computer programmers are not building Apps that use such fast download capability because few people have access to this technology. Will Chess Champions move to this city to play really good chess computers who can now analyze even more positions per second? Will flash stock traders move there to place their buy orders even faster? Or will teenagers who want to quickly look at hacked phone photos move in droves to this area? Aggregate demand for Google Fiber will be the sum of some interesting idiosyncratic demanders.
What a sad, sad, day when people think Say’s law is that supply creates demand, with a corollary that Google fiber in Kansas City will bring the masses there.
No, guys. That is not Say’s Law at all. Maybe it’s what they teach you in school, because that’s how Keynes, either purposefully or through ignorance, presented it, but that’s not Say’s Law.
To prove it, let’s quote J.B.Say himself, in his intro to Say’s Law:
A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it.
Just the opposite of what the article thinks is Say’s Law. If the demand is not there, you won’t sell your product. Producing your product will not create some demand out of thin air.
According to the article, Say should have written:
[Fake quote]: A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can fully expect such a value to be appreciated and paid for, no matter whether other men have the means of purchasing it, because supply creates its own demand. That’s why Google can introduce ultra fast download capacity right in the middle of the Sahara Desert, and everyone will move there and buy it.
Devil’s Advocate: OK, you proved your point. Say wrote the opposite of what that foolish article thinks. But come on, that’s not fair, Smiling Dave, throwing in the Sahara Desert. Kahn said Kansas City, not the Sahara Desert.
SD: Of course it’s fair. It’s called reductio ad absurdum, a standard tool of logical analysis. In any case, right in that first paragraph, before he even states the famous Law, Say was explaining to Kahn that he is not saying supply creates its own demand. Quite the contrary. If a person thinks there is no market for his wares, he won’t make them in the first place, because he cannot expect anyone to buy it. That’s why Google is working in Kansas City, not the Sahara desert. They think there will not be a market in the Sahara for high speed internet.
DA: Well, what do you expect from some random blogger? I bet that Matthew Kahn never studied economics.
SD: Not only did he study it at the most prestigious schools, he teaches it at the most prestigious schools. Check that link and be impressed with his credentials.
So we’re talking about a respected member of the economics community, who attended the best schools, of both Left and Right flavors. He teaches all over the world, at the very top institutions.
And he still doesn’t know what Say’s Law is!
Now don’t get me wrong. He is not alone in his ignorance. All his buddies and all his professors, and all their students and his, they are all equally ignorant of what Say’s Law actually is.
DA: How did that happen?
SD: Keynes wrote, through malice or ignorance, his own Bizzaro World version of Say’s Law, and that’s what they teach in the mainstream. By sheer coincidence, Say anticipated all Keynes’s outlandish theories, using the real Say’s Law to refute them.
DA: So what is Say’s Law? I always thought it’s that supply creates its own demand.
Smiling Dave: Let’s quote Say’s book, Treatise on Political Economy, in italics, with my snarky comments in regular font. We begin at the beginning of his exposition:
It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices.
Sound familiar? Those adventurers must have been Keyne’s great grand daddies, because they are claiming exactly what he did, and what all mainstream economists are saying. Lack of Aggregate Demand is the problem.
But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so;
True to this very day. The mainstream has no clue what causes this so called lack of Aggregate Demand. In fact, they brag about their ignorance. They are proud of it.
DA: Dave, now you have gone too far. Bragging about their ignorance?
SD: Here’s Krugman:
Krugman: Rather than getting bogged down in an attempt to explain the dynamics of the business cycle – a subject that remains contentious to this day – Keynes focused on a question that could be answered. And that was also the question that most needed an answer: given that overall demand is depressed – never mind why – how can we create more employment?
There you have it. The first ones to admit they have no clue what causes recessions and depressions are the Keynesians.
And there they are, too, bragging about it. Keynes did not get “bogged down” explaining why the Great Depression happened. Never mind why it happened. I, Keynes, will cure it, without even bothering to know its cause. Don’t bog me down with that cause stuff.
DA: But what about the Chicago School, that contraction of the money supply did it?
SD: Too bad that’s been shown wrong, by the mainstream itself. But we digress. Let’s give Say the floor again:
…they treat doubtful points as matter of certainty, often pray for what is directly opposite to their interests, and importunately solicit from authority a protection of the most mischievous tendency.
Accurate to this very day.
Now Say begins at the beginning, assuming no prior knowledge on the part of his readers. He tells us how to study economics:
To enable us to form clear and correct practical notions in regard to markets for the products of industry, we must carefully analyse the best established and most certain facts, and apply to them the inferences we have already deduced from a similar way of proceeding; and thus perhaps we may arrive at new and important truths, that may serve to enlighten the views of the agents of industry, and to give confidence to the measures of governments anxious to afford them encouragement.
Start with the best established and most certain facts. Then use logical reasoning to draw conclusions. Like they taught you in high school geometry. Which of course, is what Austrian Economics is all about, and why their results are correct, and the mainstream just fumbles around.
DA: The mainstream doesn’t begin with best established and most certain facts.
SD: Quite the opposite. They begin with absurd initial assumptions. They turn those absurdities into equations. And then they are proud of themselves, until the model falls on its face. We’ve written about this elswhere, quoting the mainstream itself as proof.
But enough talk about the wrong way of doing economics. Let’s sit at the feet of the master, Jean Baptiste Say, as he starts from first principles and culminates with the great Say’s Law, refuting Keynes before he was even born. [Which is why Keynes hated him so, and used dirty tricks to besmirch Say’s Law].
Say: A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it.
DA: Sounds iron clad. You won’t bother making something if you know nobody can afford to pay for it.
Say: Now, of what do these means consist?
SD: Meaning, where do people get the money to buy stuff?
Say: Of other values of other products, likewise the fruits of industry, capital, and land.
SD: They have money to buy things because they worked hard and produced products, which they can sell or trade with.
DA: Iron clad again.
SD: Here comes Say’s Law, right now:
Say: Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.
DA: Wait a minute. Isn’t that what Kahn was claiming? That supply creates its own demand?
SD: Not at all. Let’s clarify with a little romantic story. You know about dating sites, right?
DA: Sure, I’ve been there myself. Somehow I didn’t get any dates though. I posted pictures, was myself, everything. But no dates.
SD: According to Kahn and the mainstream, you should have been overwhelmed with girls throwing themselves at you. Supply creates its own demand. You created a supply, yourself, and that creates its own demand, meaning girls magically show up wanting to date you.
DA: OK, that’s Kahn’s incorrect version. What’s the correct version?
SD: Say’s argument in syllogistic form is as follows.
- Smith cannot sell his wares unless Jones has money to buy them.
- But Jones gets money by being productive.
- Thus, being productive is what allows Jones to buy Smith’s wares.
Restated, the conclusion is that it is production [by Jones] which opens a demand [by Jones] for Smith’s products.
Which is exactly what Say wrote:
It is production [by Jones] which opens a demand [by Jones] for [Smith’s] products.
Bottom line, the wrong version is: If Smith makes something, Jones will automatically demand it. Supply by Smith creates demand by Jones. Google does things on Mars, and people will move to Mars to buy them. Patent nonsense.
The right version is: If Jones produces and gets paid, that gives Jones the power to buy things from Smith. Supply by Jones creates demand by Jones for Smith’s product.
DA: The wrong version is, “Supply by A creates demand by B.” The right version is, “Supply by A creates demand by A.”
SD: The corrolary is, “If there is no Demand by A, it’s because A was not supplying.” And of course Supplying means “creating marketable goods”.
DA: Which means if we have a lack of Demand, that’s caused by people not producing.
SD: All these recessions happen when people waste their time making non marketable goods. Take the recent housing bubble. People made way more houses than there was a market for. Result, our Great Recession.
DA: But shouldn’t the govt print more money and buy up those non marketable goods, thus enabling the producers to make even more non marketable goods? Wait a minute. That sounds really stupid.
SD: It does indeed. And that’s the Keynesian prescription. Let the govt intervene somehow and allow companies to keep on making non marketable goods.
DA: What’s your solution then, Monsieur Say?
Say: …the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.
DA: But Obama tried that. he gave half billion dollars to Solyndra, and they went bankrupt.
SD: Because Obama and all politicians are, by definition, not businessmen putting their own money on the line.
DA: What difference does that make?
SD: To get out of the recession, should we be producing any goods, or marketable goods?
DA: Marketable goods, of course. Producing non marketable ones will just deepen the recession, as just explained.
SD: Obama and all politicians are not interested in making maretable goods. They just want to have an excuse to give money to their friends. It’s entrepreneurs in the free market that know how to make marketable goods. They have to know how, or they will go out of business.
Say: How right you are, Smiling Dave.
Having once arrived at the clear conviction, that the general demand for products is brisk in proportion to the activity of production, we need not trouble ourselves much to inquire towards what channel of industry production may be most advantageously directed. The products created give rise to various degrees of demand, according to the wants, the manners, the comparative capital, industry, and natural resources of each country; the article most in request, owing to the competition of buyers, yields the best interest of money to the capitalist, the largest profits to the adventurer, and the best wages to the labourer; and the agency of their respective services is naturally attracted by these advantages towards those particular channels.
SD: Meaning people make things not for fun, but to make money. And they make the most money when they make the most demanded, i.e marketable things. Thus, that’s what they will make. So just stay out of the way, Keynes and all your ilk, and let the free market do its thing.
DA: But Dave, you just admitted that a recession is caused by tons of people making non marketable goods. So the free market can make huge mistakes.
SD: Austrian Economics has shown that it’s govt inflation of the money supply that causes those mistakes. So again, stay out of the way, govt, and let the economy thrive.
Don’t forget to do a search of this site for more good stuff on Say’s Law.
LATER: One Major freedom over at Bob Murphy’s blog had this to say [snark omitted]:
I highly recommend that you add a few back and forths that include DA asking something like
“OK, I now get that in order for people to demand goods, Say says that they must produce marketable goods. But the Keynesians only care about employment in the present, not employment in the future after employment slowly recedes as marketable products increase relative to non-marketable products. Krugman himself said that with no government “stimulus” the market would eventually after some time reduce employment. But they insist that it is better for government to stimulate the demand for ALL production, including what would otherwise be non-marketable products, and reduce unemployment now, rather than wait for the market to gradually eliminate non-marketable goods.”
They don’t care about non-marketable goods in the market. They only care about unemployment.
Devils’ Advocate: I have a fan! He wants to hear my opinions!
SD: Devil, I love you like my very self, but that argument sounds a lot like “The beatings will continue until morale improves.”
“Stimulate demand for … non marketable products” means pay people to use up valuable resources to make useless garbage. That will save the economy?
DA: It will end the unemployment, at least, gotta give ’em that.
SD: Devil, we talked about this back in the day.
DA: Remind me.