Abstract
Say’s Law occupies a prominent, but equivocal, position in the history of economics, the object of repeated controversies about its meaning and significance since first propounded in the nineteenth century. This chapter proposes a unifying interpretation of Say’s Law based on the idea that the monetary sector of an economy with competitively supplied money involves two distinct markets, not one. Beyond modifying the interpretation of the inconsistency between Say’s Law and a monetary economy, the paper challenges another interpretation of Say’s Law as being refuted by depressions and lapses from full employment. Under the alternative interpretation, Say’s Law suggests a causal theory whereby disequilibrium in one market reduces demand in other markets, initiating a cumulative shrinkage of both demand and supply.
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Notes
- 1.
- 2.
I draw attention, in Chapter 17, to the insights of the intertemporal-equilibrium framework in which, owing to the incomplete array of markets, expected prices must be viewed as equilibrating variables rather than as parameters, or as definitionally rational, so that expected prices are always assumed to be equal to their future equilibrium values.
- 3.
By “involuntary,” I mean a failure of the optimizing choices of independent agents to be mutually consistent, so that some or all of those optimizing choices cannot be executed as intended. I discuss the point about the inability of agents to execute their optimizing plans at length in Chapter 17 and more briefly in Sect. 9.6 of this chapter.
- 4.
Excess supplies are recorded as negative excess demands.
- 5.
The classical economists generally regarded gold or silver as the appropriate underlying asset into which privately issued monies would be convertible, but the possibility of a fiat standard was not rejected on analytical principle.
- 6.
- 7.
For analytical convenience and other reasons, but without strong analytical justification or plausibility, the equilibrium price vector is typically assumed to be unique.
- 8.
I refer to a price vector, because the amounts demanded and supplied of almost any good depend not just on the price of that particular good, but on the entire array of prices for substitutes and complements to that particular good. However, price adjustments for any particular good are generally responsive, in the first instance, to the state of excess demand for that particular good.
- 9.
By “normally,” I mean that suppliers cannot compel unwilling buyers to purchase their unsold wares.
- 10.
This statement is not strictly correct inasmuch as it is at least theoretically possible that, at the equilibrium price vector, the amount of a particular commodity that is actually supplied would be less than the notional supply at the disequilibrium price vector owing to changes in the prices and quantities of other commodities that cause a contraction in the equilibrium amount demanded and supplied of any particular commodity.
- 11.
Demands for goods that are close substitutes might actually increase since the above-equilibrium price for any particular good might increase the demand for goods that are close substitutes.
- 12.
The point is not whether prices (and wages) are “sticky”; it is whether flexibility leads to the restoration of an equilibrium. The flexibility of prices is irrelevant; what matters is whether the price vector is at an equilibrium. Prices in each market, responding to the excess demand or supply in that market, will not necessarily arrive at an equilibrium, because the equilibrium price in each market depends not just on the price in that market, but on prices in all other markets. The Walrasian price-adjustment algorithm need not reach the equilibrium price vector in a finite number of iterations.
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Glasner, D. (2021). Say’s Law and the Classical Theory of Depressions. In: Studies in the History of Monetary Theory. Palgrave Studies in the History of Economic Thought. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-83426-5_9
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