As I, at least, see it, there are four big questions in the debate over “Say’s Law”:
- Is Walras’s Law–the claim that at any price factor the excess demand for all commodities taken together must adept zero–a good way to think about macroeconomics in general, or do we have to jump to Clower-Leijonhufvud-Malinvaud rationed-equilbrium approaches?
- Does it therefore immediately provide a refutation of the naïve Say’s Law claim–the claim that there is no such thing as a “general glut”, as an excess demand of commodities as a whole and of labor–via John Start Mill’s observation that, in Walras’s Law terms, an excess demand for money is an excess supply of commodities in general plus labor?
- Did the people whom Keynes claimed really believed in their hearts-of-hearts in “Say’s Law” from Say to Pigou actually do so?
- If (2) holds, how do we make sense of 2008-2014 (and of other episodes) given that an excess demand for money should show itself in high interest rates, as people dump interest-earning assets to try to build up their stocks of liquid cash money?
Four big questions. Five related posts in dialogue with each other that shed some light on them:
David Glasner: Who’s Afraid of Say’s Law?: “There were two famous objections made to Say’s Law:
first, current supply might be offered in order to save for future consumption, and, second, current supply might be offered in order to add to holdings of cash. In either case, there could be current supply that is not matched by current demand for output, so that total current demand would be insufficient to generate full employment…. The savings argument goes back to the nineteenth century, and the typical response was that… the shortfall in consumption demand would lead to an increase in investment demand driven by falling interest rates and rising asset prices…. Keynes proposed an argument about liquidity preference and a potential liquidity trap, suggesting a reason why the necessary adjustment in the rate of interest would not necessarily occur….
The argument that the existence of money implies that Say’s Law can be violated was widely accepted…. Oskar Lange… introduced a distinction between Walras’s Law and Say’s Law (“Say’s Law: A Restatement and Criticism”)…. Lange showed that Walras’s Law reduces to Say’s Law only in an economy without money. In an economy with money, Walras’s Law means that there could be an aggregate excess supply of all goods at some price vector, and the excess supply of goods would be matched by an equal excess demand for money. Aggregate demand would be deficient, and the result would be involuntary unemployment….
One of my regular commenters, Tom Brown, asked me recently whether I agreed with Nick Rowe’s statement: “the goal of good monetary policy is to try to make Say’s Law true.” I said that I wasn’t sure what the statement meant, thereby avoiding the need to go into a lengthy explanation about why I am not quite satisfied with that way of describing the goal of monetary policy.
There are at least two problems with Lange’s formulation of Say’s Law. The first was pointed out by Clower and Leijonhufvud…. Lange’s analysis was based on the absence of trading at disequilibrium prices…. In a real-time economy in which trading is routinely executed at disequilibrium prices, transactors may be unable to execute the trades that they planned to execute at the prevailing prices. But when planned trades cannot be executed, trading and output contract, because the volume of trade is constrained by the lesser of the amount supplied and the amount demanded…. If transactors do not succeed in supplying as much as they planned to supply at prevailing prices, then, depending on the condition of their balances sheets, and the condition of credit markets, transactors may have to curtail their demands in subsequent periods….
Continue reading “Say’s Law: Theory, Practice, and History: A Virtual Debate Made Up of Five Somewhat-Related Posts Worth Reading” →