Say vs. Keynes: Part 1

When I was an undergraduate in economics I had a professor – to use the term generously – whose ignorance of even basic economics was overshadowed only by his arrogance in what he claimed to know. We students lost faith in him so fast that after three classes about 80 percent of us spent the time in the library instead, studying economics.

In honor of this professor we invented a term: perbertility. It is a spoof on his name and means, plainly, that the person in question has a job where he is supposed to be an expert, is completely ignorant of what he is supposed to be an expert on, and couples that ignorance with an equal or larger portion of arrogance.

It was comparatively easy to find fine examples of perbertility in Sweden, where I grew up and went to college. It is more difficult to find such instances here in America, primarily because our academic system is semi private and the schools need to operate on a market in order to secure their own future existence. That, however, does not insulate us against perbertility: on rare occasions (though they seem to be growing in number) I run across a perbertile academic.

Today, my Facebook newsfeed offered me a storefront example, courtesy of the American Institute for Economic Research. Now, before we get down to today’s exercise in perbertility I should note, for full disclosure, that I on two occasions have done some work for the AIER, most recently a couple of years ago when I did some blog writing for them. I quit when I was told that the AIER was not pursuing solutions to societal problems – they just wanted to keep a conversation going. I don’t know if this is the case today, but it was certainly an insightful experience in terms of where the American libertarian movement is heading.

The article highlighted in my Facebook feed was a piece called “Say’s Law versus Keynesian Economics” and was penned by Richard M Salsman. It was published in February 2020, and at first I wondered why the AIER suddenly chose to highlight it again. Presumably, the reason is that the AIER is trying to drum up opposition to President Biden’s gigantic budget for fiscal year 2022, and that their approach angle is to tag the budget as “Keynesian”. By their conventional logic, that would allow them to attack Keynesian economics and thereby somehow undermine the economic reasoning behind the Biden budget.

Again, I don’t know for a fact whether or not the AIER has taken this angle, but be that as it may. Their recent interest in telling the world how poor of an economist John Maynard Keynes was is actually amusing in its feebleness – and, again, offers us a good example of perbertility at work.

The current proprietor of this dubitable character trait is the aforementioned, venerable Richard M Salsman. At the time of his article’s publication with the AIER, he was listed as visiting assistant professor of political economy at Duke University. Hence, his reasoning in the article about Say’s Law can be assumed to reflect his scholarship as dispensed in the classroom.

Salsman’s thesis is to educate his reader on what he refers to as the first principle of political economy. This first principle, he explains, is Say’s Law. Formulated about two centuries ago, this law prescribes that supply of goods and services in the economy always create their own demand. Wherever someone adds new supply of something – be it sneakers or college lectures – there will always be demand for that product.

According to Say’s Law, the economy is always going to be in full-employment equilibrium, without any recessions and without any unemployment, so long as government keeps its hands off the economy. The magic that perpetuates this full employment is known as the “price mechanism” and it works as follows:

  • If there is new supply on a market but no new demand, the price falls instantaneously until people buy so much more goods that the market reaches a new equilibrium;
  • The lower price raises real wages and people spend more money across the economy, causing demand for labor to rise;
  • When demand for labor rises and the economy is already in full employment (as it always is under Say’s Law) money wages rise until the increase in real wages has been eliminated;
  • Once real wages are back to where they were before this process started, the economy once again operates at full employment general equilibrium; the only lasting result is a re-allocation of resources from the rest of the economy to the market where supply initially increased.

When explained this succinctly, Say’s Law seems to make a lot of sense. It is easy to fall for its clean simplicity and obvious logic.

The only problem is that it rests on an absurd implicit axiom, one that none of its proponents has ever been able to explain. To get to it, let us walk through Salsman’s AIER article and its attempt to make a passionate case for Say’s Law.

Salsman starts off boldly:

Say’s Law is the most important first principle in economics, with innumerable important corollaires and implications; its logic is irrefutable, its empirics undeniable.

And now for the punch line:

Any economist who denies the Law is akin to a physicist who denies the Law of Gravity; an economist opposed to Say’s Law isn’t really an economist, any more than a gravity denier is a true physicist.

With this bombastic opening, Salsman obviously needs to deliver a substantial case for Say’s Law. Ideally, it should be both empirical and theoretical, but since we are talking fundamental economic theory here, a solid theoretical case should suffice.

Specifically, that case must address the absurd implicit axiom. Before we reveal what it is, let us see if Salsman actually brings it up.

His first explicatory foray into Say’s Law brings up its decidedly supply-side nature:

Among the many important implications of Say’s Law is that prosperity and economic expansions are supply-side phenomena, a consequence of entrepreneurs, the profit motive, saving, investment and capital accumulation. Put negatively, “consumers” per se don’t drive economies

It is curious to see an economist put quotation marks around the term “consumer”. But even more so, Salsman owes us an explanation to what would happen to the economy if consumers tomorrow decided to cut their spending in half. A lot of people lose their jobs and the economy is now in a recession. If capital formation drives economic growth, then surely at this point businesses will immediately bring the economy back to full employment by doubling investments – right?

Salsman has an answer to that. It runs along the four points above, which when taken out of their axiomatic context again seem to make perfect sense. The problem, though, is that there is some sort of time sequence needed in order to set in motion and complete this return to full employment. If no such return happens immediately (and by “immediately” we really mean “in an instant”) it is the government’s fault.

Needless to say, you don’t put out a theory as simplistic as Say’s Law without attracting criticism. The first major blow to it came from John Maynard Keynes, whose analysis of Say’s Law centers in on the interaction between prices and wages. His analysis of how wages and prices change, especially in response to a recession, is essential to anyone’s understanding of both Say’s Law and his alternative, sometimes called Keynes’s law: in order for the economy to restore full employment in a recession, Keynes explains, the money wage must fall faster than prices. In short: workers must in the aggregate take a real pay cut. The problem with this, Keynes notes, is that it means there is less spending in the economy, whereupon businesses have less revenue and therefore are less inclined to hire back workers who los their jobs due to the recession.

For Say’s Law to work, the real wage has to move in the exact opposite direction: prices must fall faster than money wages. But if they do, then in the aggregate businesses will lose money if they hire more workers. This loss comes on top of the losses they have already suffered as a result of the recession.

In other words, if we actually try to make a logical sequence of Say’s Law, it becomes a contradiction in terms. The very mechanisms that are there to guarantee that the Law works – the free-market prices for products and labor – and return the economy to full employment, actually guarantee that the Law does not work. Instead, the economy is trapped in a recession.

Keynes goes to great length already in the beginning of his General Theory. By reference, Salsman recognizes this book as Keynes’s cardinal attempt at disproving Say’s Law, yet not with one word does he mention Keynes’s analysis of the price-wage sequence. This is stunning and gives the reader of Salsman’s article the impression that he has never even opened the General Theory.

Instead of trying to disseminate the sequence that will unfold Say’s Law, Salsman resorts to conceptual masturbation. Let us listen to him in steps. First:

Say’s Law holds that supply constitutes demand (not “supply creates its own demand”), with the crucial corollary that aggregate supply always equals aggregate demand. There can never be a deficiency (or excess) of aggregate demand relative to aggregate supply; the two phenomena are the same thing (or “two sides of the same coin”) viewed from different sides.

In other words, the outlays a car manufacturer has while producing a passenger car are equal to the revenue he receives. Not upon selling the car – upon producing it. The instant the car rolls off the assembly line, its accrued costs turn into revenue. Nobody has to buy the car for this to happen. All that is required is that the car is produced.

Sounds absurd? There’s more. Secondly, Salsman states:

It’s misleading to define Say’s Law as “supply creates its own demand” (or, so goes a typical ridicule, that supplying bikinis will create a demand for bikinis, even in Alaska). In truth, newly created bikinis entail a demand for things other than bikinis. There can be a “glut” (surplus) of goods (or money) in some markets (microeconomic), but no “general glut” in all markets (macroeconomic), and to deny this is to commit the fallacy of composition (“what’s true of the parts is true of the whole”).

If the car does not turn into instant revenue for the manufacturer, then everyone who is laid off at the assembly line can immediately – in a split second because there is no time factor in Salsman’s analysis – go sew and sell bikinis instead. Everyone is always employed. And since everyone is always employed, every resource is always utilized. The unsold car is presumably, and instantaneously, dissolved and transformed into a bikini warehouse.

Every worker laid off at the car manufacturer knows immediately, without delay, where there is work to be found and at what wages. They immediately show up there, are hired in a split second and put on payroll.



Production is the creation of wealth (utility) and spending is the exchange of wealth while questions about who earns wealth (and how much – and why) pertain to the distribution of wealth; the consumption of wealth is not equivalent to demand but to the destruction of wealth (utility), the opposite of creating it (production). Demand is not equivalent to consumption; it’s a desire to purchase plus purchasing power (and the latter comes only from the creation of supply, or from the income one is paid for doing so). One cannot demand unless one first supplies (produces) something of value for offer to others in exchange for their goods. Markets are made by producers, not by consumers qua consumers (because consumption is the destruction of wealth, or utility). 

This paragraph is so riddled with illogical cul-de-sacs that it is difficult to capture them all without taking a considerable toll on the reader’s time. Therefore, let us focus on the most essential delusion, namely that spending – by consumers – is “exchange of wealth” but that consumption is “the destruction of wealth (utility)”.

Here, Salsman claims that the consumer acquires wealth – which for some inexplicable reason he equates to utility – by buying a new car. Then, if the consumer consumes the car, he destroys utility. In fact, by Salsman’s standard the economy is better off if manufacturers just produce cars and pile them up in some parking lot somewhere.

I do not know why Salsman would buy a car. I don’t know if he owns one or not. But under the not too audacious assumption that he does, presumably he derives some sort of positive experience from using that car. This experience is referred to in economics as “utility”. In other words, the consumption of the car is a positive experience according to the very same microeconomics that Salsman claims Keynesians are disconnected from. Yet Salsman claims that using a car somehow generates a negative utility experience, i.e., a negative value experience for the car owner/consumer.

It should be noted that Salsman uses the term “consumption” in a way that does not comply with standard terminology in economics. An act of consumption is an act of spending money in exchange for a good or a service; the purchase of a car is an act of consumption. Salsman chooses to call this act “spending”, which is pointless when there is a perfectly established term – consumption – in both macroeconomics and microeconomics. But his terminological confusion pales next to the absurd notion that consumers have negative experiences, disutility, from using the services and goods they purchase.

Why else would they spend money?

Let us also note that Salsman’s tirade about wealth/utility is eerily similar to how a Marxist would apply Marxian labor-value theory. The consumer is irrelevant; the accumulation of labor value in products and productive capital is the only path to prosperity.

If consumption has nothing to do with value creation, then should not the Marxian system work? If free markets operate just like Marxian theory says, then should not the central planners in the Soviet Union have been closer to endless prosperity than the pesky, consumption-based capitalist economies?

With Say’s Law being lost in some crypto-Marxist labyrinth, it is almost pointless to bring up the implicit axiom we mentioned earlier. This is the axiom that holds Say’s Law together. This is the axiom of logical time.

Remember the price-wage sequence we tried to unfold in order to make Say’s Law work? The only way to successfully bring that sequence to the conclusion needed to validate Say’s Law, is to allow each and every economic decision maker to be in possession of perfect foresight: to guarantee full employment at every turn, at every point in time, each worker must always possess perfect information about where there are jobs, and what is needed to get them. He must then be able to skill himself exactly as needed for the job, and to adapt his private finances to that he can smoothly adjust his life to whatever job is available.

This can only happen if people can move back and forth in time, to “trial and error” into the future to eventually acquire all the knowledge about tomorrow that they need in order to make the perfect decision today. The future can in no way be uncertain, or even probabilistic; each decision maker must have perfect foresight, or else Says’ Law cannot generate full employment in the aggregate.

Perfect foresight means that you know everything there is to know for you to make the perfect economic decisions. That, in turn, is equivalent to logical time. Or time travel, if you will.

The opposite of logical time is historical time, which is what our reality is equipped with. Salsman has chosen to completely ignore historical time, which is like a physicist ignoring the Law of Gravity.

In the second part of this essay we will explore how we can make Say’s Law work under historical time. Except, when we do, it becomes Keynes’s Law.

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