by Mario Rizzo
In March of this year Brad DeLong wrote a post called “More from the History of Economic Thought: John Stuart Mill Contra Say’s Law, 1844”
It contained a long quotation from John Stuart Mill from his essay “Of the Influence of Consumption on Production,” in Some Unsettled Questions of Political Economy (1844, but written in 1829/30). The quotation purports to show that even John Stuart Mill did not believe “Say’s Law.” However, DeLong leaves out the three final paragraphs of the article. (I append them at the conclusion of this post. The italics are mine.)
These paragraphs make clear that to say “there cannot be excessive production of commodities in general” is not to say that depressions are impossible. Mill makes clear that this is a wrong interpretation of Say’s Law: “[I]t in no way contradicts those obvious facts.” Furthermore, Mill says that the deniers of general overproduction have never claimed otherwise.
The only meaning of a general “excess” of commodities that makes sense is a fall of their value relative to money. In other words, people might want to hold more money as a proportion of their income. Say’s Law does not exclude this.
What is does exclude is the possibility that production of wealth might not create the potential to demand it. In other words, we need not worry about deficient demand when commodities are produced in the proportions desired by consumers.
What becomes clear, especially in Mill’s Principles of Political Economy (1848), is that Say’s Law points us in the direction of entrepreneurial miscalculation and the associated “want of confidence” as the fundamental cause of depressions. The fall in the money value of commodities in general (the only valid sense of “excess production”) is a symptom of something more basic than demand failure. That more basic thing is, however, simply alluded to here as the “want of confidence.”
Fundamentally, DeLong is suggesting that Mill did not (always) believe Say’s Law when, in fact, Mill is explaining Say’s Law and claiming that his understanding is not novel — but the same as those who expounded the law in the past.
In Mill’s presentation, the most important implication of Say’s Law is: Economic growth can never be “too fast” for the consequent increase in wealth to be demanded by consumers. People have unlimited desires and entrepreneurs would not invest and produce unless there was demand for the output.
If problems develop it is because of a breakdown in the market mechanism and not a fundamental lack of demand. The cause of what appears to be a general glut is panic-induced want of confidence leading to increases in the demand for money. In an analytical sense, the increase in the demand for money is a secondary phenomenon. Thus, Say’s Law warns us not to mistake symptoms for causes.
We do not, of course, have a business cycle theory per se in Say’s Law. And, in fact, Say’s Law, as Mill is rendering it here, is about capital accumulation and economic growth, not about business cycles. It makes the point that there is no secular or long-run limit to growth based on a failure of demand.
But when correctly understood, the implication of Say’s Law for the analysis of business cycles is to distinguish what is fundamental from what is superficial. Demand failure is not the cause of depressions.
Mill believed in Say’s Law as most economists of his day understood it and would continue to understand it for many decades – and not as John Maynard Keynes (and presumably Brad DeLong) understood it. It is a misinterpretation of Say’s Law and of Mill to claim that Mill did not adhere to Say’s Law.
Why does this matter, especially if the reader is not a historian of economic thought?
It matters because people, including academics, use history to make points about the present.
This is the point of DeLong’s mangled intellectual history: Say’s Law is the basic assumption held by the critics of Keynes and if one of the smartest classical economists did not believe in Say’s Law, then these critics cannot claim the support of a great classical economist. And thus this history should give us pause before accepting the ideas of modern day “classical” critics of Keynes.
Nice try, but the story fails. Mill believed in the real Say’s Law. He did not believe in the distorted version reported by Keynes and seemingly endorsed by DeLong. Bad history of economic thought contributes to bad economics.
A mere three more paragraphs of reading would have avoided many errors.
Appendix: From John Stuart Mill, Some Unsettled Questions of Political Economy (1844):
It is, however, of the utmost importance to observe that excess of all commodities, in the only sense in which it is possible, means only a temporary fall in their value relatively to money. To suppose that the markets for all commodities could, in any other sense than this, be overstocked, involves the absurdity that commodities may fall in value relatively to themselves; or that, of two commodities, each can fall relatively to the other, A becoming equivalent to B – x, and B to A –x, at the same time. And it is, perhaps, a sufficient reason for not using phrases of this description, that they suggest the idea of excessive production. A want of market for one article may arise from excessive production of that article; but when commodities in general become unsaleable, it is from a very different cause; there cannot be excessive production of commodities in general.
The argument against the possibility of general over-production is quite conclusive, so far as it applies to the doctrine that a country may accumulate capital too fast; that produce in general may, by increasing faster than the demand for it, reduce all producers to distress. This proposition, strange to say, was almost a received doctrine as lately as thirty years ago; and the merit of those who have exploded it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity. It is true that if all the wants of all the inhabitants of a country were fully satisfied, no further capital could find useful employment; but, in that case, none would be accumulated. So long as there remain any persons not possessed, we do not say of subsistence, but of the most refined luxuries, and who would work to possess them, there is employment for capital; and if the commodities which these persons want are not produced and placed at their disposal, it can only be because capital does not exist, disposable for the purpose of employing, if not any other labourers, those very labourers themselves, in producing the articles for their own consumption. Nothing can be more chimerical than the fear that the accumulation of capital should produce poverty and not wealth, or that it will ever take place too fast for its own end. Nothing is more true than that it is produce which constitutes the market for produce, and that every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand.
This is the truth which the deniers of general over-production have seized and enforced; nor is it pretended that anything has been added to it, or subtracted from it, in the present disquisition. But it is thought that those who receive the doctrine accompanied with the explanations which we have given, will understand, more clearly than before, what is, and what is not, implied in it; and will see that, when properly understood, it in no way contradicts those obvious facts which are universally known and admitted to be not only of possible, but of actual and even frequent occurrence. The doctrine in question only appears a paradox, because it has usually been so expressed as apparently to contradict these well-known facts; which, however, were equally well known to the authors of the doctrine, who, therefore, can only have adopted from inadvertence any form of expression which could to a candid person appear inconsistent with it. The essentials of the doctrine are preserved when it is allowed that there cannot be permanent excess of production, or of accumulation; though it be at the same time admitted, that as there may be a temporary excess of any one article considered separately, so may there of commodities generally, not in consequence of over-production, but of a want of commercial confidence.