Say's Law - Say's Law As A Theoretical Point of Departure

Say's Law As A Theoretical Point of Departure

The whole of Neoclassical equilibrium analysis implies that Say's law in the first place functioned to bring a market into this state – Say's law is the mechanism through which markets equilibrate uniquely. Equilibrium analysis and its derivatives of optimization and efficiency in exchange live or die with Say's law. This is one of the major points, if not the major point, of contention at perhaps the most fundamental level between the Neoclassical tradition, Keynes, and Marxians. Ultimately, from Say's law they deduced their vastly different conclusions as to the functioning of capitalist production.

The former, not to be confused with 'New Keynesian and the many offsprings and various syntheses of 'The General Theory', take the fact that a commodity-commodity economy is substantially altered in content once it becomes a commodity-money-commodity economy, or once money becomes not only a facilitator of exchange as is its only function in marginalist theory but a store of value and means of payment as well. What this means is simply that money can be (and must be) hoarded: it may not reenter the circulatory process for some time and thus a general glut is not only possible but, to the extent that money is not rapidly turned over, highly probable.

A response to this in defense of Say's law (echoing the debates between Ricardo and Malthus in which the former denied the possibility of a general glut on its grounds) is that consumption abstained from through the hoarding function is simply transferred to a different consumer – overwhelmingly to factor (investment) markets which, through financial institutions, function through the rate of interest.

Keynes' innovation in this regard was twofold:

First, he was to turn the mechanism which regulates savings and investment, the rate of interest, into a shell of its former self (relegating it to the price of money) by showing that supply and investment were not independent of one another and thus could not be related uniquely in terms of the balancing of dis-utility and utility.

Second, after Say's law was dealt with and shown to be theoretically inconsistent there was a gap to be filled – if Say's law was the logic by which we thought financial markets came to a unique position in the long run, and if Say's law were to be discarded, what were the 'rules of the game' of the financial markets; how did they function and how did they remain stable?

To this he responded with his famous notion of 'Animal Spirits' – that they were ruled by speculative behavior influenced not only by one's own personal equation but by his or her perceptions of the speculative behavior of others; in turn others behavior was motivated by their perceptions of others behavior, et al. Financial markets without Say's law keeping them in balance were thus inherently unstable, and through this identification Keynes deduced the consequences to the macro-economy of long run equilibrium being attained not at only one unique position which represented a 'Pareto Optima' (a special case), but through a possible range of many equilibria that could far under employ human and natural resources (the general case).

For the Marxian critique, which is more fundamental, one must start at Marx's distinction from the outset of use value and exchange value, use value being the use somebody has for an object, and exchange value being what an item is traded for on a market. In Marx's theory, there is a gap between the creation of surplus value in production, and the realisation of that surplus value via a sale. To realise a sale, an object must have a use-value for someone, in order so that they purchase the commodity, and complete the cycle of M-C-M'. Capitalism, which is purely interested in value (money as wealth), must create use value. The capitalist has no control over whether or not the value contained in their product is realised through the mechanism of the market. This gap in between production and realisation creates the possibility for capitalist crisis. As the realisation of capital is only possible through a market, Marx criticised other economists, such as David Ricardo, who argued that capital is realised via production. Thus, on Marx's theory, there can be general overproductive crises within capitalism.

Once these concepts and their implications are understood it will become obvious why Say's law does not hold in the Marxian framework. Not only that, but the theoretical core of the Marxian framework's contrast with the Neoclassical and Austrian traditions will be clearly visible.

Conceptually, the distinction between Keynes and Marx is that for Keynes the theory is but a special case to his general theory, whereas for Marx it never existed at all.