May 09, 2019

Horse 2540 - Say's Law Is Stupid

As a fully paid up member of the Society Of The Perpetually Bewildered there are things about the world that I find incomprehensible. Then after applying both thought and logic to the situation, I move from mere simply misunderstanding to full on exasperation. The biggest problem with having some semblance of a rational thought process, is that when the world is beyond bonkers, than the gears in my brain engage without synchomesh and metaphorical sparks fly.

Because I work in an accountancy firm, I tend to run into people who like to ask for my opinion on matters of economics. Accountancy and Economics are cousins in that they both touch on the subject of money but whereas Accountancy keeps score of the game, Economics attempts to explain the rules of the game. Unlike the hard sciences which have immutable laws which are waiting to be found, Economics as 'the Dismal Science' attempts to extract laws and models from a moving and murky swamp. Economics has the problems of human nature and human invention, which continually throw new things into the swamp, while at the same time the swamp itself is slowly moving. Quite often a description which used to work, no longer applies, and by the time that economists get around to solving a problem, the whole swamp has moved.
As someone who works as an accountant, I want to see how the numbers work before you convince me that a thing is true. When I was asked by someone to explain why Say's Law was correct, I found myself wanting to bang my head repeatedly on the desk. Sparks fly. Gears shift without engaging the clutch and without synchomesh. I remain a member of the Society Of The Perpetually Bewildered.

Say's Law, if it in fact exists at all because I do not think that Jean Baptiste Say proposed this as a hard law to definitely describe how the world works, comes from a passage in his 1803 Treatise on Political Economy:

“It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products."
- Jean-Baptiste Say, Traité d'économie politique (A Treatise on Political Economy; or The Production, Distribution, and Consumption of Wealth), (1803)

As the whole branch of study which we now call Economics wasn't really a thing yet and still living in the realm of Political Philosophy (which arguably it still mostly remains but that is a story for another time), Say wasn't working with anything resembling a modern economic tool kit.
It wasn't until economists actually got hold of data sets that better pictures could be drawn and by X, John Maynard Keynes said of Say's Law:

From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; —meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.
In J. S. Mill's Principles of Political Economy the doctrine is expressly set forth:
"What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of what he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange."
- John Maynard Keynes, The General Theory of Employment, Interest and Money (1936).

My big problem with Say's Law is the same problem that Keynes had with it; namely the rather obvious statement that just because you say a thing, that doesn't mean that it is true. In all the pieces which I have read which defend Say's Law, there isn't a genuine attempt to prove why it is true. Effectively Say's Law states that the supply of any good or service is enough to create demand for that good or service; that's simply not true if people just don't want it to the degree that the good or service has been produced and in extreme cases, whether people even want it at all.

Suppose that I come to the market with a new cultivar of apple.
American folklore speaks of Johnny Appleseed, who went around America planting apples as he went and spreading the gospel. The story which is told, almost always doesn't include the fact that most cultivars of apple are inedible and that the reason why Johnny Appleseed was able to go from place to place planting apple trees was that in planting anything on land, it opened up ownership rights at the time as the land was now 'improved'.

I however as a modern Johnny Appleseed do not want to improve the land, I want to supply inedible apples as a deliberately vexatious example of why Say's Law is rubbish. I'm even going to call my breed of apple the Dingus Apple because the idea is deliberately stupid.
People might be tempted to buy my lovely Dingus Apples at my stall in the market because they are new and shiny. When they get home from the market, they will very quickly discover that the Dingus Apple is awful and they will never want one ever again.
In the first week I will supply ten crates of Dingus Apples and we'll assume that we sell all of them because of their newness and the dingusness of the general public in trying new things. In the second week I will supply ten crates of Dingus Apples but the experience of people who bought them in the first week is enough to put them off forever and their warnings might put future consumers off. In week two I might only sell two crates of Dingus Apples. By week three when everyone knows that Dingus Apples are awful, even though I am still supplying ten crates Dingus Apples, I sell none because nobody wants them.
Say's Law will have you believe that the supply of the good in question (in this case Dingus Apples) is enough to make people want the good. As my ten crates of unsold Dingus Apples prove, that simply isn't true. You can't make people want something that they don't want; especially if that thing is either useless or awful.

Say's Law for its time was a first attempt to explain the operation of the market. Say's Law however doesn't take into consideration the other side of the marketplace, the consumer. It should be obvious to all and sundry that a good or service is sold at the price that both the supplier and customer agree to. The two curves which determine the equilibrium price of a good or service are the results of lots of decisions in the aggregate. It should be obvious that in general suppliers will want to supply more stuff when the price goes up and it should be equally obvious that in general customers will want more stuff if the price goes down. Both of these curves have limits and the shape of these curves is the subject of much discussion in itself. However, Say's Law seems to ignore the basic principle that customers as rational actors will spend their money according to their demands; not because of the supply of goods and services.

Suppose that you found a warehouse which had 100,000 cassingles of Hanson's 'Mmmbop'. Say would have you believe that because the supply of these things exist, then that creates the demand for them. Granted that there might be some hitherto unknown demand for a terrible song on an outdated and obsolete music format but I very much doubt that there's going to be a enough of a market to sell them at $7.99 a piece.

Say's Law is like me trying to read a copy of a Shakespeare Sonnet without wearing my spectacles. I have a vague idea that there's something on the bit of paper but I'm hopeless at telling you what is exactly. Say's Law was perhaps a the best tool available but it was still hopelessly inadequate at providing any useful answers about how markets work.

That is why I don't understand why Say's Law is still treated as though it was useful, by any economists at all. The Austrian School of economists, of which Von Mises was from, seems to like Say's Law, in their attempts to justify other platforms of their general theory. Granted that I already have problems with great swathes of the Austrian School to begin with but setting that aside, if you have arrived at a set of conclusions which we might disagree with then that's fine but if the base assumptions are ridiculous, then don't expect to see me putting forward critiques of the end points of argument.
If P, then Q. No matter how often you state R, and R is ridiculous, then never Q.

A thing is only ever sold when the buyer and the seller come to an agreement. Say's Law would have you believe that because the seller has a thing that there will be a buyer to come to an agreement on that thing and that simply isn't true no matter how often you restate it.
Say's Law is bunk.

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