Francois Hollande, Say’s Law & ABCT

Per Bylund on Twitter a few weeks back flagged some recent commentary by Professor Steven Kates on Say’s Law. I found Kates’ comments fascinating and I certainly think Say’s Law and its derivatives offers extremely fruitful analytical and theoretical opportunities in the Austrian/causal-realist tradition.

The discussion caught my attention because of how concepts around Say’s Law pertain to business cycle theory, which Kates alludes to in his commentary below.

Kates’ comments were sparked by the surprising invoking of Say recently by none other than French President Francois Hollande. The FT ran the original article about Hollande’s comments here. According to Kates,

“…I take you back to Francois Hollande. What he said in French was this:

“Le temps est venu de régler le principal problème de la France : sa production. Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux. C’est donc sur l’offre qu’il faut agir. Sur l’offre ! Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.”

This is the whole thing in my free translation:

“The time has come to work through the number one problem in France: which is production. Yes, that’s what I said, production. We must produce more, we must produce better. Hence, it is upon supply that we must concentrate. On supply! This is not in opposition to demand. Supply actually creates demand.””

Elsewhere Kates’ notes about Hollande’s new-found ‘Sayism’ that [my emphasis],

“With the now generally recognised failure of the Keynesian stimulus packages, the question has become, what should be done now?

There can be no doubt that the Socialist President of France, who more than anything else would have liked to have spent the French economy into recovery, but having personally experienced the consequences of trying to use Keynesian economic policies, has concluded that economies are not driven by a public sector stimulus. Hollande is therefore looking in another direction and has embraced Say’s Law as best he understands it.

You may be sure Hollande did not do this lightly. This awareness has come as the result of the bitter fruits of experience. The stimulus packages of 2009 are today’s debt and dying economies.

Which brings me to my second issue which is also something I have discussed on this website. The classical economists may well have been right that there will be no recovery until demand is again constituted by actual value adding supply. And what is interesting is that Hollande, far from leading the way in his approach to economic theory, is following in the footsteps of others who are trying to achieve a turnaround in their economies.

Kates’ commentary, the response from Daniele Besomi, and Kates’ reply to Besomi are well worth reading. The way to read the thread is from the bottom of the page to the top, which is a bit awkward, so I’ve reproduced the thread in chronological order below.

***

My own emphasis in the quoted sections below.

25 January 2014
Steve Kates

This only came to my attention a few days ago but apparently François Hollande, the President of France, quoted what he believed to have been the actual words J.-B. Say used to describe the meaning of what we today refer to as Say’s Law: L’offre crée même la demande. He quoted it because he intends to use this maxim as a guide to policy in directing the French economy. Here is the quotation, in French:

Le temps est venu de régler le principal problème de la France : sa production. Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux. C’est donc sur l’offre qu’il faut agir. Sur l’offre ! Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.

François Hollande – January 14, 2014

This only came to my attention because of an article reprinted from The Financial Times dated 19 January and written by one of the FT’s columnists, Wolfgang Münchau.

http://www.ft.com/intl/cms/s/0/0a469808-7f6e-11e3-b6a700144feabdc0.html#axzz2r08HdayQ

This was the relevant para:

“Last week, we heard another Frenchman, President François Hollande, proclaiming: ‘L’offre crée même la demande’, which translates as ‘supply actually creates its own demand’. If you want to look for the real political scandal in France today, it is not the sight of the president in a motorcycle helmet about to sneak into a Parisian apartment building. It is that official economic thinking in Paris has not progressed in 211 years.”

This is significant to me for two reasons which I have discussed in past threads on this site, not to mention in my Defending the History of Economic Thought. First, economic ideas of the past are never transcended in the sense that once something better has been devised, older ways of looking at things never come back. As we can see here, older ideas retain a life of their own and may, in the right circumstances, turn out to be relevant in understanding contemporary events. With the now generally recognised failure of the Keynesian stimulus packages, the question has become, what should be done now?

There can be no doubt that the Socialist President of France, who more than anything else would have liked to have spent the French economy into recovery, but having personally experienced the consequences of trying to use Keynesian economic policies, has concluded that economies are not driven by a public sector stimulus. Hollande is therefore looking in another direction and has embraced Say’s Law as best he understands it.

You may be sure Hollande did not do this lightly. This awareness has come as the result of the bitter fruits of experience. The stimulus packages of 2009 are today’s debt and dying economies.

Which brings me to my second issue which is also something I have discussed on this website. The classical economists may well have been right that there will be no recovery until demand is again constituted by actual value adding supply. And what is interesting is that Hollande, far from leading the way in his approach to economic theory, is following in the footsteps of others who are trying to achieve a turnaround in their economies. This is again from the article in The Financial Times:

“The third significance lies in the fact that the new consensus spans the entire mainstream political spectrum. If you live on the European continent and if you have a problem with Say’s Law, the only political parties that cater to you are the extreme left or the extreme right.”

Economic policy everywhere is, according to this article, guided by Say’s Law. I don’t actually believe that is literally true, but the problem remains that while policy makers are trying to walk away from Keynes there are no longer any guideposts on what to do since almost no economics text will explain the actual meaning of Say’s Law, the classical theory of the cycle and what needs to be done to generate a recovery when the economy is in recession.

History of economic thought has its uses as economics. It is not the history and philosophy of science, it is not the discarded ideas of Dead White Males. It is part of the collective wisdom of economists that we, as historians of economic thought, do our best to keep alive.

Professor Kates then followed is post up with this:

01 February 2014
Steve Kates

There are a number of facts that are relevant in any discussion of Say’s Law which I thought I might set out. What I find something of a problem is the common assumption that Say’s Law refers to something that was believed during the early parts of the nineteenth century and was of little significance thereafter. No discussion ever seems to get past Malthus, Say and Mill in looking at what was an embedded principle right up until 1936.

The first thing that might be noted is that the term “Say’s Law” is not classical in origin but was consciously invented by Fred Manville Taylor and introduced into general economic discourse with the publication of his Principles of Economics text in 1921. Before Taylor no one called this association of demand with previous supply “Say’s Law”. Taylor introduced the term because he thought economic theory needed to identify one of its most important underlying principles. The ironies of what followed next are too obvious for comment.

This continuous fixation on the early classical economists has had a number of unfortunate consequences. The first is that economists are always returning to Say as if he provided the definitive statement on Say’s Law. He did not. If you want the point of origin, it is in James Mill in his Commerce Defended published in 1807. Here is the passage that matters, although the whole of his discussion is well worth the effort:

“No proposition however in political economy seems to be more certain than this which I am going to announce, how paradoxical soever it may at first sight appear; and if it be true, none undoubtedly can be deemed of more importance. The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced.”

The final sentence should be familiar but is not the actual origins of the specific words used by Keynes.

It is also important to appreciate James Mill’s role since I see his statement not only as exactly right, but he wrote his book in response to an argument in which too much saving and too little demand were seen as the causes of recession. This was the first instance in which an argument that economies are driven by demand was rejected. Mill was saying an economy could not be stimulated from the demand side. That was the point of Say’s Law, and still is.

This nameless principle was universally accepted by the mainstream. But if you would like to find Say’s Law as clearly stated as it is possible to find it in the classical literature, this is David Ricardo writing to Malthus just after the commencement of the General Glut debate in 1820. Malthus said the post-Napoleonic recessions had been caused by too much saving and too little demand. To this, Ricardo replied:

“Men err in their productions, there is no deficiency of demand.”

That’s it. Say’s Law. Recessions are caused by mis-directed production, not deficient demand. This was the foundation for the entire theory of the cycle that would develop over the following century. It is the disappearance of the theory of the cycle that may be the greatest loss economists have experienced because of the General Theory.

There is then this. At the end of the General Glut debate in 1848, John Stuart Mill published his Principles of Political Economy, which included his fourth proposition on capital. This may be the most enigmatic statement ever made by a great economist, but if you want to see the principle behind Say’s Law, whether you agree with it or not, this is what Mill wrote:

“Demand for commodities is not demand for labour.”

Or as we might put it today, an economic stimulus will not create jobs. This is a statement whose reasoning is perfectly clear to me. I teach it to my students and it is in my text and few ever have any trouble with it. Described in 1876 as “the best test of a sound economist”, in my view it still is. It was a conclusion that policy makers accepted right through until the 1930s and perhaps even for a while after. But it was an enduring concept.

So I take you back to Francois Hollande. What he said in French was this:

“Le temps est venu de régler le principal problème de la France : sa production. Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux. C’est donc sur l’offre qu’il faut agir. Sur l’offre ! Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.”

This is the whole thing in my free translation:

“The time has come to work through the number one problem in France: which is production. Yes, that’s what I said, production. We must produce more, we must produce better. Hence, it is upon supply that we must concentrate. On supply! This is not in opposition to demand. Supply actually creates demand.”

It is true the point Hollande makes takes you back to J.-B. Say, David Ricardo and James and John Stuart Mill, all of whom are, of course, classical. But he also takes you back to Fred Taylor whose book was published only a few years before the General Theory, where he was trying to state what every economist of his own generation knew and accepted. Today, so far as aggregate demand goes, we are all Keynesians now, with some very few exceptions.

And while we’re at it, you might also ask yourself how Taylor’s very much twentieth century phrase ended up in The General Theory. The standard story of the trek from the Treatise to the General Theory has a lot of gaps, even after the hundred million words that have been devoted to explaining what the General Theory means and how it came to be written.

Daniele Besomi then replied to Kates:

01 February 2014 
Daniele Besomi

If we want to set the facts concerning Say’s law straight, let’s do it properly. Its history begins far earlier than Mill, since it is very precisely stated in a dictionary in 1780:

‘Nobody can be a buyer unless he is also a seller; since buying implies paying, nobody can buy unless he sells, because only by selling can he procure the money to buy what he buys. From the fact that every buyer must be a seller and that he can buy only if he sells, a second axiom results, namely, that every seller must also be a buyer, and he cannot sell unless he buys. Therefore every vendor must, by way of the purchases he performs in turn, provide everybody else with the money for buying the goods the vendor wants to sell them.’ There may not be perfect matching between individual sales and purchases, but if someone becomes richer by selling more than he buys, someone else is ruined by buying more than he sells, so that ‘by the opposition between these two sorts of disorder, equilibrium is re-established in the general mass of sales and purchases (entry on COMMERCE in Robinet’s Dictionnaire universel des sciences morale, économique, politique et diplomatique, vol. 12, pp. 444–445).

As to Taylor’s invention of the term. First, let’s be precise about the dating: the 1921 edition was the 8th; the book was first published in 1911, and the expression ‘Say’s law’ was already there, in Ch. VII. Second, the expression does not first appear in Taylor’s book. Taylor himself used the expression 2 years earlier in an article on ‘Methods of Teaching Elementary Economics at the University of Michigan’. But there is at least a previous instance, in the English translation of Rodbertus’s Overproduction and crises’, 1898, p. 40; the German original text is ‘Say’s Gesetz’ (that the original was in German is not irrelevant: see below). And, third, at any rate the expression doesn’t surely come out of the blue. The French term, loi des débouchés, was clearly associated to Say in the French literature since at least Coquelin’s dictionary in 1852, where there is an entry on DEBOUCHES that is almost entirely constituted by quotations of Say’s writings. This leaked in the English language literature by being taken up and translated in Lalor’s Cyclopædia of political science, vol. 3, 1884, as OUTLET; the entry is attributed to J. B. Say himself.

Finally, it is not true that Say’s law was universally accepted by the mainstream (unless, of course, one defines as ‘mainstream’ those accepting Say’s law). This may be approximately true in the English, French and Italian literature (which doesn’t mean that the law wasn’t questioned: it was, and not only by cranks), but is surely false for the German language literature, where Say’s law was explicitly debated and often rejected by academic economists in connection with the discussion of crises. Indeed it is precisely out of this literature that the most serious theoretical approaches to crises and later (end of the 19th C.) to business cycles emerged. In the English and French literature, in fact, most theories of crises consisted in exercises of dodging Say’s law: since the law forbids overproduction (on this, everybody agreed), the alternatives were simply either to reject the law (as did many German economists, but also some French and some English writers) or to blame monetary factors instead (the credit-overtrading-speculation approach: thanks to credit one can trade beyond his capital, this raises prices, induces speculation, which in turn fosters more trade and credit. This, in one version or another, was by far the most common explanation of crises during the middle half of the 19th C, once the idea that crises are the occasional and unsystematic consequences of a ‘political disease’ was discarded following the fairly regular and periodic outbursts of violent crises).

The context in which Say’s law was discussed was, at least since the gluts debate, in connection with crises. If, after J.S. Mill’s trodding ‘the thin line between acceptance and rejection of Say’s law’, the law almost disappeared from explicit discussion in the English literature it is precisely because it hindered theoretical advances in the theories of crises: it was the elephant in the room that everybody preferred not to mention.

Daniele Besomi

And Kates’ excellent response:

03 February 2014
Steve Kates

I appreciate Daniel Besomi’s comments, which I hope will help us clarify these issues. I might also mention that most of what I summarise here, as in the previous post, was discussed in my *Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way* (Elgar 1998).

The first point I am trying to make begins here. There are two fundamental economic questions:

1) what is the basis for demand?

2) what causes recessions, or perhaps more accurately in this case, what does not cause recessions?

What Say, and Robinet, were explaining was the origins of demand, which they argue is based on previous sales. Demand is constituted by supply. What they wrote is an answer to the first question, but it is not an answer to the second.

The second question may be rephrased in this way: can there be such a thing as a general glut? This is a completely different question from the first, and the answer, as a consequence of the general glut debate, was that no, there is no such thing as a general glut, demand deficiency does not cause recessions. James Mill’s answer to this question was, in part, premised on Say’s answer to the first but were not an answer to the first. They are separate but related issues. Mill used Say’s discussion on the basis for demand to explain why a general glut was impossible.

It is because James Mill was the first, so far as I know, to answer the second question that I see him to have been the first to frame the classical statement on what is now called Say’s Law. *The General Theory*is about whether demand deficiency, a general glut, is possible. And when one finally accepts the classical answer to question 2, as FH may have done, then, but only then, the economic issues revolve around 1, which is what kind of supply will actually create demand.

And then, in answering that question, we can ask ourselves whether the Keynesian notion that spending on anything at all will do the trick is a correct answer. To a classical economist, it need hardly be said, the idea that anyone would think non-value-adding production could create growth and employment is too ridiculous even to contemplate. Only a modern economist might think so, but to anyone from the classical tradition, the idea is still ridiculous.

Daniel also points out that Fred Taylor had used the phrase “Say’s Law” earlier than 1921. This is true, but 1921 nevertheless remains the significant date, which is why I chose my words very carefully. What I wrote was this:

“The first thing that might be noted is that the term ‘Say’s Law’ is not classical in origin but was consciously invented by Fred Manville Taylor and introduced into general economic discourse with the publication of his *Principles of Economics* text in 1921.”

If you go to my Say’s Law text (pp 148-149 and especially the footnote), you will find that I discuss Taylor’s invention of the term, including his first use in 1909 in an obscure article on how to teach economics. He then brings Say’s Law into his introductory text, but the first seven editions were student editions distributed only within the University of Michigan. It is only following the publication of the eighth edition as a general text with commercial distribution that the term enters general economic discourse. It is the publication of the book for sale outside the U of M campus that brings the term to a wider public, and it is only after 1921 that it enters into more general discourse.

But it is really neither here nor there whether Taylor invented the term in 1909 or 1921. What is important to understand is that the term was invented in the twentieth century and it was invented by Taylor. What is not in any way affected by the dating is the need recognise that Keynes must, as an absolute certainty, have been reading other things about the various issues that end up in *The General Theory* that he never mentioned to anyone else. The locked-himself-in-a-room-and-came-up-with-these-ideas-one-by-one version, as he tells the tale himself and is now repeated as gospel, is obviously untrue since Keynes had to have picked up the phrase from somewhere else. If not from Taylor than from someone who had read Taylor.

Then, on the third point raised, if it can be said, as Daniel says, that my stating that everyone accepted Say’s Law through until 1936 was only “approximately true in the English, French and Italian literature”, that’s more than good enough for me. I perfectly well understand that there were some very few and generally obscure dissenters, particularly in English. I even discuss this very weak opposition in my book, with the two (three, I guess) most important dissenters in English having been John Hobson on the one hand and Foster and Catchings on the other. Keynes can himself name only five in his “Brave Army of Heretics” (*GT* 371), and if you look at the list and choose only his contemporaries, aside from Hobson who is iffy, you are looking at a very dubious list of authorities, namely, Silvio Geselle and Major Douglas. During the period up until 1936, there may hardly have been a theory more universally accepted than Say’s Law.

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About Russell Lamberti

Russell Lamberti is a regular contributor to Mises SA. He is Chief Strategist at ETM Analytics, an Austrian-influenced economic research firm based in Johannesburg. Although he wrties about many topics, you'll most often find him slaying patent and copyright law and exposing the biggest bubble in history: fractional reserve banking.
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