SEE the following for Parts II and III:
Lord Keynes’s main contribution did not lie in the development of
new ideas but “in escaping from the old ones,” as he himself declared
at the end of the preface to his General Theory. The Keynesians tell
us that his immortal achievement consists in the entire refutation of what
has come to be known as Say’s Law of Markets. The rejection of this law,
they declare, is the gist of all Keynes’s teachings; all other propositions of
his doctrine follow with logical necessity from this fundamental insight
and must collapse if the futility of his attack on Say’s Law can be demonstrated.2
Now it is important to realize that what is called Say’s Law was in
the first instance designed as a refutation of doctrines popularly held in
the ages preceding the development of economics as a branch of human
knowledge. It was not an integral part of the new science of economics as
taught by the Classical economists. It was rather a preliminary — the exposure and removal of garbled and untenable ideas which dimmed people’s
minds and were a serious obstacle to a reasonable analysis of conditions.
Whenever business turned bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in The Wealth of Nations, exploded the fi rst of these myths. Say devoted himself predominantly to a thorough refutation of the second.
As long as a definite thing is still an economic good and not a “free
good,” its supply is not, of course, absolutely abundant. There are still
unsatisfied needs which a larger supply of the good concerned could satisfy. There are still people who would be glad to get more of this good than
they are really getting. With regard to economic goods there can never
be absolute overproduction. (And economics deals only with economic
goods, not with free goods such as air which are no object of purposive
human action, are therefore not produced, and with regard to which the
employment of terms like underproduction and overproduction is simply
With regard to economic goods there can be only relative overproduction. While the consumers are asking for definite quantities of shirts and of
shoes, business has produced, say, a larger quantity of shoes and a smaller
quantity of shirts. Th is is not general overproduction of all commodities.
To the overproduction of shoes corresponds an underproduction of shirts.
Consequently the result cannot be a general depression of all branches of
business. The outcome is a change in the exchange ratio between shoes
and shirts. If, for instance, previously one pair of shoes could buy four
shirts, it now buys only three shirts. While business is bad for the shoemakers, it is good for the shirtmakers. The attempts to explain the general
depression of trade by referring to an allegedly general overproduction are
Commodities, says Say, are ultimately paid for not by money, but
by other commodities. Money is merely the commonly used medium of
exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities. Every commodity produced is therefore a price, as it were, for other
commodities produced. The situation of the producer of any commodity is improved by any increase in the production of other commodities.
What may hurt the interests of the producer of a definite commodity is his
failure to anticipate correctly the state of the market. He has overrated the
public’s demand for his commodity and underrated its demand for other
commodities. Consumers have no use for such a bungling entrepreneur;
they buy his products only at prices which make him incur losses, and
they force him, if he does not in time correct his mistakes, to go out of
business. On the other hand, those entrepreneurs who have better succeeded in anticipating the public demand earn profits and are in a position to expand their business activities. This, says Say, is the truth behind
the confused assertions of businessmen that the main difficulty is not in
producing but in selling. It would be more appropriate to declare that the
fi rst and main problem of business is to produce in the best and cheapest
way those commodities which will satisfy the most urgent of the not yet
satisfied needs of the public.
Thus Smith and Say demolished the oldest and most naïve explanation
of the trade cycle as provided by the popular effusions of ineffi cient traders. True, their achievement was merely negative. They exploded the belief
that the recurrence of periods of bad business was caused by a scarcity of
money and by a general overproduction. But they did not give us an elaborated theory of the trade cycle. The first explanation of this phenomenon
was provided much later by the British Currency School.
The important contributions of Smith and Say were not entirely new
and original. The history of economic thought can trace back some essential points of their reasoning to older authors. This in no way detracts from
the merits of Smith and Say. They were the first to deal with the issue in
a systematic way and to apply their conclusions to the problem of economic depressions. They were therefore also the first against whom the
supporters of the spurious popular doctrine directed their violent attacks.
Sismondi and Malthus chose Say as the target of passionate volleys when
they tried — in vain — to salvage the discredited popular prejudices.
1[Ludwig von Mises, Planning for Freedom and Sixteen Other Essays and Addresses (1950;
South Holland, Ill.: Libertarian Press, 1980), chap. 5, pp. 64–71.]
P. M. Sweezy in Th e New Economics, Ed. by S. E. Harris, New York, 1947, p. 105.
The Mises Reader–Unabridged, pp. 341-343, Shawn Ritenour, Editor
Keynes possessed only a very limited knowledge of economics in general, and of the market processes of entrepreneurial coordination in particular