[UPDATE in the text.]
In my last post I linked to a critique of my position on Say’s Law, and said that because the writer (“Smiling Dave”) went so far as to wonder aloud if I had even *read* Say’s Law, that it wasn’t worth my time debating him.
In the comments, long-time commenter “Major Freedom” encouraged me to point out the problem, since he (MF) thought the guy had a point. So, lest I come off as a snob, here it is. (But one quick clarification: Look at how the guy handles himself in the comments. My reluctance to engage in scholarly debate isn’t because “waaaa he hurt my feelings,” but because it is crystal clear he won’t change his mind. I stand by my original cost/benefit analysis: An additional hour of my time spent with Team Brittany would be much better for the world.)
So here’s the progression of the argument over Say’s Law, and why I thought Gene Callahan’s post was interesting.
1) People from time immemorial have blamed depressions on a “general glut,” i.e. too much production of every good and service.
2) J.B. Say made some observations about markets, out of which popped the notion that a “general glut” was actually impossible. What was possible is that some markets were producing “too much” (in a sense that economists could precisely define), but the corollary was that other markets were producing “too litte.” The way to fix that wasn’t to scale back “total output” per se, but simply to redirect resources from the “over” to the “under” lines. Flexible prices and absence of government intervention were great ways to hurry that process along.
3) Now at this point, Smiling Dave interjects that my point (2) shows that I have forgotten Austrian business cycle theory, and makes him wonder if I even read Say’s Law in the first place. (Note: Smiling Dave says he edited his original post to take out the snark, so it might not be there now. But these are claims he made in the original critique.) This is ironic, since point (2) above wasn’t original with me, it comes from Murray Rothbard’s description:
But if there can be no general overproduction short of the Garden of Eden, then why do businessmen and observers so often complain about a general glut? In one sense, a surplus of one or more commodities simply means that too little has been produced of other commodities for which they might exchange. Looked at in another way, since we know that an increased supply of any product lowers its price, then if any unsold surplus of one or more goods exists, this price should fall, thereby stimulating demand so that the full amount will be purchased. There can never be any problem of “overproduction” or “underconsumption” on the free market because prices can always fall until the markets are cleared…Those who complain about overproduction or underconsumption rarely talk in terms of price, yet these concepts are virtually meaningless if the price system is not always held in mind. The question should always be: production or sales at what price! Demand or consumption at what price! There is never any genuine unsold surplus, or “glut,” whether specific or general over the whole economy, if prices are free to fall to clear the market and eliminate the surplus.
So, if Smiling Dave is right that even my recapitulation of the “typical free market response” on Say’s Law shows my ignorance of Austrian business cycle theory, then Murray Rothbard must have missed the boat too. Again, that’s *possible*, but I’m going to go with Rothbard and myself, over Smiling Dave, on this one.
4) Gene Callahan gave a little thought experiment, that made me think in terms of present and future goods and services. (Note how “Austrian” this is…) We also needed to deal with the fact that leisure is a present consumption good. In light of these subtleties, I realized that maybe it’s a bit odd to say, “No, a general glut is impossible, there can be overproduction in some lines, but only if there is underproduction in others lines,” if it so happens that all of the overproduction is concentrated in present goods
(including leisure), while the underproduction is concentrated in future goods. If you think through what that would look like, why it has the same observable features as “an economic depression.”
5) The point here isn’t to say, “Ha ha, J.B. Say was an idiot and Keynes kicks butt!! Obama Stimulus Package for the win!” No, the point (at least my point) was that the way I had always handled Say’s Law, and its place in the history of economic thought regarding the analysis of economic depressions, needed to be more nuanced. I had always thought of it exclusively in a static sense, with markets for present goods and services only. But once you introduce the time element, it’s a little trickier and makes people who talk about an excess demand for money or for “safe assets” not seem as crazy after all.
UPDATE: I should have re-read my original post more carefully before giving this summary. The type of example Gene gave isn’t really one resembling a depression, but rather is a more intuitive example of people producing “too much stuff” in the present (or recent past, if you prefer). If every human being worked 20 hours a day for the next year, and we burned off 90% of the depletable natural resources (crude oil, natural gas, etc.) on earth, there would be a definite sense in which “we produced way too much this year.”
Now the way to salvage Say’s Law–in the conventional free-market handling of it–is to say, “No, we produced too much of all of the goods and services that are conventionally for sale, and we underproduced the goods ‘present lesiure’ and ‘oil and natural gas that could have been sold in the future.'” There’s nothing objectionable to that, per se, but it’s a little funky, and in any event it redefines terms from what a lot of people mean when they say, “A general glut is possible.”
So, this really has nothing to do with diagnosing a depression, so much as it was a quirky little thing to show that the standard way free-market people dispose of the idea of a “general glut” is more nuanced than the usual exposition shows.