Say's law: the classical position clarified

October 2006 To begin with the notion that there was a law in the work of Jean Baptiste Say's original work that supply always creates its own demand is somewhat of a simplification. A number of writers including Donald Patinkin, Axel Leijonhufvud and Thomas Sowell argue that one must distinguish between Say's identity,Say's principle, Say's law and Walras's law. Some of these writers accuse Keynes of setting up a straw man in the GT and attributing to classical theory a dogma that they did not believe in. Let us explore this in some detail. For starters look at how Keynes in the GT described Say's law. He writes of it on p.26 "Thus Say's law , that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment." Patinkin, p.193 in Money, interest and Prices defines Say's identity as follows:"regardless of the prices and interest with which they are confronted-individuals always plan to use all of their proceeds from the sale of commodities and bonds for the purpose of purchasing other commodities and bonds. In other words, they never plan to change the amount of money they hold:its amount of excess demand is identically zero....In other words the aggregate value of the amounts of excess supply of commodities must always equal the value of the amount of demand for bonds:people divert any reduced expenditures on commodities to the purchase of bonds, never to the building up of money balances." Say's identity implies the existence of a barter economy.for in such an economy it is physically impossible to sell one commodity or bond without buying another...People never plan to change their money balances in barter economy because by definition such balances are always zero."


( October 11, 2010. But in a modern non barter trade economy as Keynes points out there is often a reason to hold cash balances. these will be for transactions purposes, precautionary reasons and for liquidity preference speculative reasons.if one expects interest rates have fallen as far as they can go and therefore one avoids bonds because of the high risk that their price will collapse when interest rates rise and one is satiated with respect to consumer purchases and is fearful of buying equities then holding cash in overnight no notice bank accounts becomes a real option. Hence, in the current circumstances there is a very large horde of cash sitting on the sidelines. So contrary to the classical position there is a net demand for cash and the principles of Say's law do not hold.Quasi hoarding of cash also appears to occur in the derivatives markets where radical and very risky speculation occurs particularly when there is a bubble underway. These large amounts of wagers or bets appear to be undertaken under extreme conditions of risk where there is a willingness to bet the farm because the payoffs if successful is very large. the casino rather than the investment market comes to mind. Given these facts the notion that supply creates its own demand and unemployment is always voluntary must be cast aside as wrong.)