Three Widely Believed Economic Fallacies

[Newpublius]

Natural selection makes no requirements.

Say's Law: supply creates its own demand.

Indeed and what it is initially counterintuitive because people think of 'demand' as wanting things which is part of the equation, but it should mean the more obvious, ie you can 'demand' because you supply things to trade for other things. And if you don't do those things you will still have literal demands but not any economic demand.

Of course demand can be transferred but there's no free lunch.

[Chris]

Say's law doesn't work in a world that doesn't operate according to Say's premise. Those regulatory factors that you blame are a fact of life, whether you like them or not and change the rules of the game in fundamental ways.

Say's law doesn't work in a world that doesn't operate according to Say's premise.

Quite a claim. Utterly meaningless. So far you've demonstrated you misunderstand Say's Law as Keynes did. This new thing about his premise, is that from Keynes too? And of course, the grandiouse claim you know the real world when no one else does--except you seem unterly incapabable of describing it.

Those regulatory factors that you blame are a fact of life, whether you like them or not and change the rules of the game in fundamental ways.

No one argued regulations don't exist. The argument was they hamper production and cause downturns. Try arguing with what you quote.

[Dr. Who]

Quite a claim. Utterly meaningless. So far you've demonstrated you misunderstand Say's Law as Keynes did. This new thing about his premise, is that from Keynes too? And of course, the grandiouse claim you know the real world when no one else does--except you seem unterly incapabable of describing it.



No one argued regulations don't exist. The argument was they hamper production and cause downturns. Try arguing with what you quote.

What you and Say do not acknowledge is that for good or ill, competition in the market is imperfect, largely because of the influence of major corporate actors on regulators and an uneven playing field. (all that corporate rent-seeking and government collusion that you are want to bring up in other discussions). The truth is that in modern capitalist economies there is a strong tendency towards monopoly.

Furthermore, wages do not rise and fall in pace with demand for goods and services. Manufacturing plants are frequently unionized, thus employee wages are contractually protected. Many other employees are also protected by contracts of employment - in fact, most white-collar workers are thus protected. Thus only employees at will may have their wages or hours cut, but they cannot be cut below the state minimum wage. Consequently, since wages are not rising and falling in pace with demand, prices do not rise and fall in pace with demand and the net result is layoffs and unemployment and resultant decreased demand. As an aside, it is unlikely that the price of many goods would fall by much even if wages could be reduced given the ROI demanded by shareholders and the profit margins demanded by major corporate entities.

Private enterprise is guided by profit motive and may, therefore, not invest, leading to economic retraction and individuals to follow suit and start saving. Thus their money is neither spent on investment goods, nor used for consumption. The stability of the aggregate demand can only be attained when the gap between current income and current consumption is made up completely by the necessary amount of investment. When that doesn't happen, as a result of a preference for liquid assets (cash), unemployment ensues.

Monetary policy is not set by the market, but by central banks/government. Say’s Law presumes that all savings are automatically invested and the rate of interest brings about the necessary adjustment between savings and investment. However what generally happens when people stop investing is that interest rates are reduced to encourage borrowing. A liquidity trap occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, an increase in the money supply will fail to increase spending and investment because interest rates can't fall any further.

[Chris]

What you and Say do not acknowledge is that for good or ill, competition in the market is imperfect, largely because of the influence of major corporate actors on regulators and an uneven playing field. (all that corporate rent-seeking and government collusion that you are want to bring up in other discussions). The truth is that in modern capitalist economies there is a strong tendency towards monopoly.

Furthermore, wages do not rise and fall in pace with demand for goods and services. Manufacturing plants are frequently unionized, thus employee wages are contractually protected. Many other employees are also protected by contracts of employment - in fact, most white-collar workers are thus protected. Thus only employees at will may have their wages or hours cut, but they cannot be cut below the state minimum wage. Consequently, since wages are not rising and falling in pace with demand, prices do not rise and fall in pace with demand and the net result is layoffs and unemployment and resultant decreased demand. As an aside, it is unlikely that the price of many goods would fall by much even if wages could be reduced given the ROI demanded by shareholders and the profit margins demanded by major corporate entities.

Private enterprise is guided by profit motive and may, therefore, not invest, leading to economic retraction and individuals to follow suit and start saving. Thus their money is neither spent on investment goods, nor used for consumption. The stability of the aggregate demand can only be attained when the gap between current income and current consumption is made up completely by the necessary amount of investment. When that doesn't happen, as a result of a preference for liquid assets (cash), unemployment ensues.

Monetary policy is not set by the market, but by central banks/government. Say’s Law presumes that all savings are automatically invested and the rate of interest brings about the necessary adjustment between savings and investment. However what generally happens when people stop investing is that interest rates are reduced to encourage borrowing. A liquidity trap occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, an increase in the money supply will fail to increase spending and investment because interest rates can't fall any further.

Once again, it is your premise that is wrong, and there goes your entire argument. Say certainly does accept the competition and cooperation in the market is imperfect, that supply and demand can get out of sync. It would probably help if you read Say and his followers and not his detractors following Keynes.

Say's Law in Context

Say admits that there can be short-term gluts of a commodity. However, this can only happen if supply has outstripped demand or others do not have goods to exchange in return. Say very precisely deals with the first point by showing that the profit and loss mechanism in production will drive producers away from unprofitable production to areas that promise a greater return. The only thing preventing such a beneficial change in production would be the interference of the government or a natural disaster.

Ceraintly some of those regulations come about by the lobbying of rent seekers, but it is still the government distorting the market.

Wages are also goods and services, a commodity.

Money is also a commodity.

Also subject to Say's Law...except when the government interferes.

And that addresses all your relevant points.

[Chris]

Say's Law is so simple a concept it's hard to believe it can be misconceived.

All it says is that in order to consume you must produce something of value to others in order to exchange it and purchase what you value.

[Dr. Who]

Once again, it is your premise that is wrong, and there goes your entire argument. Say certainly does accept the competition and cooperation in the market is imperfect, that supply and demand can get out of sync. It would probably help if you read Say and his followers and not his detractors following Keynes.

Say's Law in Context



Ceraintly some of those regulations come about by the lobbying of rent seekers, but it is still the government distorting the market.

Wages are also goods and services, a commodity.

Money is also a commodity.

Also subject to Say's Law...except when the government interferes.

And that addresses all your relevant points.

Say's Law is so simple a concept it's hard to believe it can be misconceived.

All it says is that in order to consume you must produce something of value to others in order to exchange it and purchase what you value.

Terrific, however you can't apply an economic theory that won't work unless the government gets rid of the Fed, abolishes all minimum wages, undoes any legislation that favors major corporations, deregulates the stock exchange, changes banking laws, revises the tax code and also does the same for virtually every other major US trading partner in the western world. Say's law is predicated on a libertarian free market fantasy. A mythical perfect free market world where widgets, money and labor are pure commodities and regardless of what happens (short of a natural disaster or war) equilibrium is maintained. The deficiencies in Say's law became highly apparent after the crash of '29 and the ensuing depression. Nothing worked as Say's law predicted because the theory was overly utopian and in the time since the great depression, the complicating factors have not diminished, they have multiplied.

[Chris]

Terrific, however you can't apply an economic theory that won't work unless the government gets rid of the Fed, abolishes all minimum wages, undoes any legislation that favors major corporations, deregulates the stock exchange, changes banking laws, revises the tax code and also does the same for virtually every other major US trading partner in the western world. Say's law is predicated on a libertarian free market fantasy. A mythical perfect free market world where widgets, money and labor are pure commodities and regardless of what happens (short of a natural disaster or war) equilibrium is maintained. The deficiencies in Say's law became highly apparent after the crash of '29 and the ensuing depression. Nothing worked as Say's law predicted because the theory was overly utopian and in the time since the great depression, the complicating factors have not diminished, they have multiplied.

Good grief, one doesn't apply a descriptive theory as if it's prescriptive.

If the free market is mythical then what does the government try to rgulate with that ton of rules you list?

What deficiencies?

Here, let me help you, let get a clear statement of the Keynesian argument against Say's Law, for that is what you're plagiarizing without sources. From Understanding Say's Law of Markets:

...In a somewhat more sophisticated understanding, one which John Maynard Keynes appeared to pin on the Classical economists, Say’s Law is supposed to be saying that the aggregate supply of goods and services and the aggregate demand for goods and services will always be equal. In addition, Say was supposed to have been saying that this equality would occur at a point where all resources are fully employed. Thus, on this view, the Classical economists supposedly believed that markets always reached this full-employment equilibrium. In one sense this is trivially true. If we compare the actual (ex post) quantities of goods bought (demanded) and sold (supplied) they will always be equal. Whatever is sold by one person is bought by another. Presumably, however, Keynes thought the Classical economists meant something else, perhaps more along the lines of market economies will never create general gluts or shortages because the income generated by sales will always be sufficient to purchase the quantity of goods available to buy. There is a strong sense in which this is true, but by itself it does not assure that full employment will take place because obvious examples of significant unemployment and unsold goods can easily be pointed to. And, in fact, this is what critics of Say’s Law have done. By pointing to the various recessions and depressions that market economies have experienced, they claim to show that Say’s Law was at the very least naive, and probably downright wrong.

Now anyone can go back over your repeated points and see who you plagiarized: Keynes and his misrepresentation of Say's Law.

But that's none of what Say said:

What Say Said

If we want to get a more accurate understanding of Say’s Law, perhaps we should consult what Say himself had to say about his supposed law. In the passage where he gets at the insight behind the notion that supply creates its own demand, Say writes: “it is production which opens a demand for products. . . . Thus the mere circumstance of the creation of one product immediately opens a vent for other products.”[2] Put another way, Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher (lower) that productivity, the higher (lower) is my power to demand.

In his excellent book on Say’s Law, Hutt states this as: “All power to demand is derived from production and supply. . . . The process of supplying—i.e., the production and appropriate pricing of services or assets for replacement or growth—keeps the flow of demands flowing steadily or expanding.”[3] Later, Hutt was to be somewhat more precise with his definition: “the demand for any commodity is a function of the supply of noncompeting commodities.”[4] The addition of the modifier noncompeting is important. If I sell my services as a computer technician, it is presumed that my resulting demands will be for goods and for services other than those of a computer technician (or something similar). The goods or services competing with those that I sell can always be obtained by applying my labor directly, so I am unlikely to demand them. The demand for my services as a computer technician is a result of the supplying activities of everyone but computer technicians.

This way of viewing Say’s Law gets at the interconnections between the various sectors of a market economy. In particular, it makes sense of the claim that the employment of all is the employment of each. As each worker finds employment, he or she is able to turn around and demand goods and services from all other noncompeting suppliers, creating the opportunity for their employment. From this perspective, Say’s Law has nothing to do with an equilibrium between aggregate supply and aggregate demand, but rather it describes the process by which supplies in general are turned into demands in general. It is always the level of production which determines the ability to demand.

As to money:

Unlike Keynesian critics of Say’s Law of Markets who saw deficient aggregate demand resulting from various forms of market failure as causing economic downturns, we have argued that a more accurate understanding of Say’s Law suggests that there is no inherent flaw in the market that leads to deficient aggregate demand, nor is the existence of real-world recessions a refutation of the Law. Rather, once we understand the role of money in making possible the translation of our productive powers of supply into the ability to demand from other producers, we can see that the root of macroeconomic disorder is most likely monetary, as too much or too little money will undermine that translation process. Despite having been dismissed in the onslaught of the Keynesian revolution, Say’s Law, when properly understood both in its original meaning and its relationship to the banking system, remains a powerful insight into the operations of a market economy.

Now, Who, if you want to continue to argue Keynes's strawman, by all means demonstrate such foolishness.

OTOH, if you have something to say about what Say said, by all means, let's discuss.

[Dr. Who]

Good grief, one doesn't apply a descriptive theory as if it's prescriptive.

If the free market is mythical then what does the government try to rgulate with that ton of rules you list?

What deficiencies?

Here, let me help you, let get a clear statement of the Keynesian argument against Say's Law, for that is what you're plagiarizing without sources. From Understanding Say's Law of Markets:



Now anyone can go back over your repeated points and see who you plagiarized: Keynes and his misrepresentation of Say's Law.

But that's none of what Say said:



As to money:



Now, Who, if you want to continue to argue Keynes's strawman, by all means demonstrate such foolishness.

OTOH, if you have something to say about what Say said, by all means, let's discuss.

From your second quotation:
"we can see that the root of macroeconomic disorder is most likely monetary, as too much or too little money will undermine that translation process".

This is precisely what Say's Law fails to account for and what utterly changes the entire dynamic. How can anyone support an economic theory that fails to consider such a major economic variable? If you can't see that this is a major flaw in his theory, then there is no point in any further discussion. I'll leave you with this: Why Economists Cling to Discredited Ideas - Free-market theory may be at odds with reality, but it fits the needs of the rich and the powerful.

[Chris]

From your second quotation:
"we can see that the root of macroeconomic disorder is most likely monetary, as too much or too little money will undermine that translation process".

This is precisely what Say's Law fails to account for and what utterly changes the entire dynamic. How can anyone support an economic theory that fails to consider such a major economic variable? If you can't see that this is a major flaw in his theory, then there is no point in any further discussion. I'll leave you with this: Why Economists Cling to Discredited Ideas - Free-market theory may be at odds with reality, but it fits the needs of the rich and the powerful.

The three fallacies are unrelated other than as fallacies.

You still don't have a clue what Say's Law is. You're talking nonsense because you don't understand the sources you plagiarize. You would have to read the rest of what Say wrote to understand how economic theory, the law is just a small and frankly minor part of it. You would know that if you knew any economics.

No, I refuse to deal with your repeating Keynes's strawman: from your source:

Say’s Law and Austerity Economics. A close cousin of the invisible hand is Say’s Law, legacy of the 19th-century economist Jean-Baptiste Say. In shortened form, it argues that supply creates its own demand. In other words, if you make it, people will buy it. John Maynard Keynes devoted his classic General Theory to dismantling the idea. Say’s Law is the corollary to Smith’s premise that economies are self-adjusting as long as government steps out of the way.

No, for the umpteenth time you're just repeating Keynes's strawman argument.

You're like the little kid in the back seat whining are we there yet are we there yet are we there yet. The monotony is boorish and boring.

And I refuse to follow you as you try to derail the topic into you fantasies about reality and the free market. You're the epitome of bad faith posting.

[Dr. Who]

The three fallacies are unrelated other than as fallacies.

You still don't have a clue what Say's Law is. You're talking nonsense because you don't understand the sources you plagiarize. You would have to read the rest of what Say wrote to understand how economic theory, the law is just a small and frankly minor part of it. You would know that if you knew any economics.

No, just as I refuse to deal with your repeating Keynes's strawman I refuse to follow you as you try to derail the topic into you fantasies about reality and the free market. You're the epitome of bad faith posting.

Your accusations of plagiarism and bad faith posting are beyond offensive. You are welcome to your thread and the sound of the crickets.