Jean-Baptiste Say to the rescue of the doomed and failed...

Genial, para quem gosta da boa economia:

http://youtu.be/7uKnd6IEiO0

I thought this would be of interest to historians of economics. John Papola, the animating spirit behind the Keynes-Hayek Rap, has now done a video on Say’s Law, the fundamental principle of the pre-Keynesian theory of the cycle. While most of those who come to this site have an interest in the history of economics, not everyone is a specialist in the issues he raises. To help appreciate the video, here are a few bits of background to catch the full flavour of just how beautifully done it is.

John Maynard Keynes introduced the notion of aggregate demand into economic theory. Before his General Theory of Employment, Interest and Money was published in 1936, demand deficiency as a cause of recession was literally and with no exaggeration seen as a fallacy by virtually all mainstream economists. That is what an acceptance of Say’s Law meant. Today, of course, macroeconomics is the mainstream and when recessions occur the first thought in almost everyone’s mind is to restore the level of demand.

Keynes took the idea of demand deficiency from Thomas Robert Malthus who published his Principles of Political Economy in 1820, the most important aspect of which was his argument that recessions are caused by too much saving leading to too little demand. Keynes was reading Malthus’s letters to Ricardo in October 1932 which was the specific reason that he would eventually write a book on demand deficiency as the cause of recession. Most scholars who have looked into the transition from The Treatise on Money do not accept Malthus as the inspiration for Keynes. But since there is general consensus that Keynes formed the idea of demand deficiency in late 1932 and there is no question that Keynes was reading Malthus in late 1932, there are very strong reasons to believe that it was because Keynes was reading Malthus at just that moment that he wrote The General Theory to explain demand deficiency as the cause of recession. But it is a controversial point so some may not accept the notion that Malthus was the inspiration for Keynes as suggested in the video.
 
Say’s Law, which does not get mentioned by name, was called the Law of Markets during classical times. The principle was not given the name Say’s Law until the 1920s but it was Jean-Baptiste Say in France and James Mill in England who together are responsible for the initial crafting of this bedrock classical proposition. And as a very good first approximation to its meaning there is this, the best short statement on the law of markets and its implications, which was given by David Ricardo in a letter to Malthus dated 9 October 1820. It is briefly referred to in the video as part of a song title as it flashes by:

“Men err in their productions, there is no deficiency of demand.”

Ricardo was trying to explain to Malthus that in his view the recessions that followed the ending of the Napoleonic Wars in 1815 were not due to there having been too much saving and therefore too little spending. It was not even spending that mattered. What had gone wrong was that the goods and services produced did not match the specific demands that people with incomes had ("men err in their productions"). There were therefore unsold goods and services, but not because there was too little spending and too much saving, but because businesses had produced one set of goods (housing in the US to take the most recent example of recession) that could not be sold at prices which covered their costs. The structure of production was wrong  which would inevitably, as it always does, affect credit markets as defaults became legion.

And finally there is the question of effective demand which is different from the notion of aggregate demand. Aggregate demand is just a total. Effective demand explains what creates purchasing power. What makes individuals within an economy able to buy more than they presently do is more production of goods that can find a market. Producing saleable products – raising productivity – is the only means by which economies can grow and therefore, beneath it all as Friedrich Hayek explains, there must be more investment in capital (actual productive assets) and more innovation which improves the technology embodied in the capital. An economy is driven by supply, never demand. Only if value adding supply goes up can demand go up.

That is the message of the video. It is a piece of genius that so much can be so condensed into just over four minutes.
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Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Level 12 / 239 Bourke Street
Melbourne Vic 3000