Tuesday, June 02, 2009

Say's Law

From Wikipedia:

Say's law, or the law of markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say (1767–1832), which states that in a free market economy goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of real income is created in order to purchase the economy's entire output. That is to say, the total supply of goods and services in a purely free market economy will exactly equal the total demand during any given time period – in modern terms, "there will never be a general glut", though there may be local imbalances, with gluts in one market balanced by disgluts in others.

As far as I know, supply side economics derives from Say's Law. Supply creates demand -- build it and they will come; make it and people will have money to buy.

I grew up in the long shadow of the 1930s, when demand vanished; and there was a general glut, an entire economy full of goods which could not find buyers; and there did not appear to be an end to the situation, until the government began pumping money into the economy, first through the New Deal and then through war spending.

Supply side economics seemed pretty clearly disproved as a theory. What mattered was demand, and getting money into the hands of ordinary people, so they could spend it.

Supply side returned in the Reagan years. I still think it's nuts. Now, as the economy keeps settling down and down, economists are taking another look at John Maynard Keynes, who said endless stagnation is possible.

This brings me to a favorite story, which I have told before.

Walter Reuther and Henry Ford are walking through the Ford Rouge plant, and Henry waves his hand around at the enormous factory and says, "Someday all this work will be done by robots."

Walter says, "Who's going to buy the cars, Henry?"


Blogger Thassa said...

I remember picking up an Economics text book some years ago (found out later that the theory in the book is what is called the Chicago school of economics), and reading it (mostly because I was bored). The first problem I ran into, in the book was the way it treated government taxes as a drain on the economy, and ignored government spending entirely, which is completely foreign to Canadian thinking (for the most part). But the part that made me set the book down and go "This is garbage." was the way lending was treated. Essentially, the way the book described it, almost all economic growth was the result of loaned money. But they way I was raised left me with the belief that loans had the potential to be pure poison. I wound up deeply suspicious of where the economy was going after that, though I was never able to articulate why before.

9:18 PM  

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