Did J.-B. Say Retrogress in Expounding his Law of Markets or Outlets?  A Comment on Alain Béraud and Guy Numa’s claims of Say’s changed Formulation* 

ABSTRACT

Most English speaking scholars use the fourth edition of Jean-Baptiste Say’s Treatise on Political Economy.  Alain Béraud and Guy Numa claim that Say changed his mind on his law of markets or outlets in the fifth and sixth editions, which have not been translated into English.  Their claim focuses mostly on Say’s monetary analysis but which turns out to be consistent with that of David Hume and Adam Smith.  Say drew mostly upon Smith’s Wealth of Nations in formulating his law of markets or outlets whose logic is unaffected by classical monetary analysis.  Béraud and Numa’s claim is thus misleading.  

JEL: B12, B22, B31, E10, E12

*James C.W. Ahiakpor, Department of Economics, California State University, East Bay, Hayward, CA.  james.ahiakpor@csueastbay.edu.

I.      INTRODUCTION

John Maynard Keynes (1936) considered Say’s Law of Markets a pernicious impediment to policy formulation to relieve an economy in depression.  Keynes (1936, pp. 18, 21−22, 25−26) interpreted the law as claiming that “supply creates its own demand” and that an economy is always in full employment of labor or “there is no obstacle to full employment.”  Keynes’s claims can easily be shown to be misrepresentations of Say’s own arguments in his Treatise on Political Economy as well as in his Letters to Mr. Malthus (1821b).[1]  Say discusses his law of markets or outlets (loi des débouchés) in six editions of his Treatise, but only the fourth edition (1821a) has been translated into English.  Most English speaking scholars thus utilize the fourth edition, but whose explanation of his law Alain Béraud and Guy Numa (2018a, 2018b) claim Say backed away from.  They claim that Say declared his monetary analysis to be in conflict with his earlier statement of the law.  However, the Say monetary explanations they cite are very much consistent with those of David Hume’s (1752) Political Discourses, particularly in “Of Money” and “Of Interest,” that influenced Adam Smith’s monetary analysis.  And it was Smith’s Wealth of Nations (1776) that Say explains mostly influenced his formulating the law of markets or outlets; see Say’s “Introduction” (1821a, esp. pp. xxxviii−xxxix) and “Letter I” (1821b, p. 21).

Besides, Say’s statement of the law of markets does not depend upon such monetary analysis ─ the Quantity Theory of money, price-specie-flow mechanism, forced-saving doctrine, and the theory of interest─ for its validity.  Thus, if Say changed his mind on the validity of his law in the fifth and sixth editions of the Treatise as Béraud and Numa claim, including that he admitted the possibility of an overproduction of all commodities in the short run, that must constitute retrogression in Say’s understanding of the market process he so clearly earlier explained.  My note argues that the textual evidence Béraud and Numa cite for their claim does not show that Say contradicted his earlier explanation of the law of markets or outlets.  Rather, their claim is misleading; regrettably so, since their work surveys a great amount of the literature on Say’s Law.

II.      THE CORE OF SAY’S LAW OF MARKETS OR OUTLETS Say’s law of markets or outlets is a two-part proposition: (1) Production opens a demand, an outlet, a market, or a vent for other produced goods and services and (2) Productions can only be purchased with or by productions (Say 1821a, pp. 133, 135, 139; 1821b, pp. 2−3, 13, 23, 39).  There are two fundamental reasons for employing the services of labor, land, and capital goods to create an item of utility or value, namely the item’s direct consumption by the producer or the exchange of the produced good for some other useful produced goods or services the producer wants.  This is how production creates demand for some other commodities, except where own consumption was the original purpose of production.  Say goes on to explain that consumption does not create a market or a vent for other produced goods and services but rather terminates it (1821a, p. 139).  The consumption follows after the exchange with one’s produced good has taken place.  Unless the consumption was to enable a producer to recover their productive energies to engage in some further production, what Say (1821b, p. 39) follows Smith in designating “reproductive consumption,” only productions are conducive to an economy’s prosperity rather than consumption: “the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means” (1821a, p. 139).

Critical to the logic of Say’s argument is the fact that money (specie: gold and silver coins) also was a produced commodity.  Money’s producers employ the services of labor, land, and capital goods to turn bullion into coins.  Out of the value (purchasing power) so created, they pay the wages of labor, rent on land and capital equipment, as well as interest on borrowed “capital” (funds) to set up the production process.  The profits from the money’s creation enable the money producers to acquire other produced goods and services for their own consumption or to lend at interest.  Were money’s value in the domestic economy to fall below that abroad, some of the money will be exported in exchange for foreign produced goods.  A rise in money’s domestic value (fallen prices) creates an increased incentive for money’s increased domestic production or increased importation of money.  Say’s argument reflects those in Hume’s (1752) “Of Money” (the quantity theory) and “Of the Balance of Trade” (the price-specie-flow mechanism), also argued by Smith (WN, 1: 345−46, 378, 453−57, 460; 2: 416):

As soon as there is a supply of money sufficient to circulate all the commodities there are to be circulated, no more money is imported; or, if a surplus flow in, it emigrates again in quest of a market, where its value is greater, or where its utility is more desired.  It is seldom or never that any body keeps in his purse or his coffers more specie than enough to meet the current demands of his business or consumption.  Every excess beyond these demands is rejected, as bearing neither utility nor interest; and the community at large is fully supplied with specie, as soon as each individual is possessed of the portion suitable to his condition and relative station in society. (Say 1821a, p. 273; see also 1821a, p. 134) Beyond what sellers consume from of their incomes they lend a portion (savings) in return for interest and/or dividend payments, and keep the remainder in money (cash) towards making future purchases (Say 1821a, p. 218).  Thus, rather than two forms of spending one’s disposable income, there are three: consumption, saving, and holding money (cash hoarding).  The more financial assets income earners demand (increased savings), the higher their prices rise (interest rates fall) on the credit or “capital” markets, and vice versa; the more cash they demand to hold, the lower the level of commodity prices become (value of money rises), and vice versa.  This is how the markets for produced goods and services, credit, and money are interconnected through variations in relative prices, interest rates, and the level of prices in the monetary economy Say describes. 

Another important element in Say’s description of the market exchange process is the timing between production and the opening of a market or a vent for other produced goods and services.  It is immediately: “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 [utility]” (Say 1821a, p. 134).  It may take some time before the exchange process is completed but the desire to engage in the exchange exists from the instant of production.  If the expected exchange does not take place, it must be either because some others have not produced enough to make the exchange or the product is not what others want: “the glut of a particular commodity arises from its having outrun the total demand for it in one of two ways: either because it has been produced in excessive abundance, or because the production of other commodities has fallen short” (Say 1821a, p. 135; see also 1821b, pp. 31−32).  

The latter explanation by Say may appear to suggest demand deficiency is a relevant explanation of poor sales.  But since no one can purchase without income from their own productions (other than from borrowed funds), it is rather production deficiency that is the true explanation.  This is the basis of Say’s clarification of the impossibility of an overproduction of all goods and services, including money, at the same time.  And, “precisely at the same time that some commodity makes a loss, another commodity is making excessive profit” (1821a, p. 135), Say argues.  Say also devotes his second letter to Thomas Malthus to disputing the claim that “there may be a superabundance and glut of all commodities at once” (1821b, p. 24).  David Ricardo (3, p. 108) similarly argues: “no country ever possessed a glut of all commodities.  It is evidently impossible.” [2]

Say lists several factors that may impede the requisite production or cause a recession.  They include, “wars, embargoes, oppressive duties, [and] the dangers and difficulties of transportation”; “times of alarm and uncertainty, when social order is threatened, and all undertakings are hazardous”; “the general dread of arbitrary exactions, when every one tries to conceal the extent of his ability”; and “times of jobbing and speculation, when the sudden fluctuations caused by gambling in produce, make people look for a profit from every variation of a rise, and money in prospect of a fall” (1821a, p. 142).  None of these is a deficiency of demand.  The consequences of such economic disruption may be as severe as “families before intolerable circumstances [becoming] more cramped and confined; and those before in difficulties [being] left altogether destitute.  Depopulation, misery, and returning barbarism, [occupying] the place of abundance and happiness” (Say 1821a, p. 140).  Nothing like Keynes’s claim that Say’s Law presumes an economy’s being always in full employment.[3]

III.      THE MISLEADING NEW INTERPRETATION OF SAY’S ARGUMENTS Béraud and Numa claim to find two shortcomings in most analysts’ work on Say’s Law: “First, they entertain the erroneous idea that, for Say, money played only the role of simple intermediary.  Second, they fail to explore the contradictions between Say’s Law and Say’s actual monetary views” (2018a, p. 218).  Béraud and Numa argue that Say “acknowledged [that] his monetary theory contradicted his initial framework in which commodities were purchased only with other commodities” (2018a, p. 231; italics added).  But Say’s own words they cite in illustration are: “in spite of the principles that teach us that money plays only the role of a simple intermediary, and that products can ultimately be purchased only with products, more abundant money fosters all sales and the reproduction of new values” (2018a, p. 231; italics added).  However, Say’s argument in the fourth edition of his Treatise is, “almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce” (1821a, pp. 133-34; italics added).[4]  Say did not earlier argue that commodities (except money) were exchanged directly with other commodities but rather that money serves as a means of exchange—“the agent of the transfer of values” (Say 1821a, p. 135).  Besides, money’s serving more than as a medium of exchange does not change Say’s fundamental proposition that “it is production which opens a demand for products” (Say 1821a, p. 133). 

Also, the fourth edition of Say’s Treatise discusses individuals’ holding money in anticipation of making future purchases and the consequences for prices of variations in money’s supply and demand (Say 1821a, pp. 218, 273).  It is one thing to dismiss, as irrelevant, arguments about the so-called “Identity” versus “Equality” versions of Say’s Law.  It is quite another to claim that, until the fifth or sixth editions of the Treatise, Say did not engage in monetary analysis.             

Béraud and Numa (2018a, pp. 228−33; 2018b, p. 287) also describe elements of the classical forced-saving phenomenon in which increases in the quantity of money raise commodity prices before contracted interest, wage rates, and rents rise, and the process raising producers’ profits in in the short run.  The reverse occurs from a contraction of money; Ahiakpor (2009) elaborates.[5].  But they do not recognize the phenomenon as such.  Rather, they draw a contrast between Keynes and Say: “Keynes stands out with his assumption of downward rigidity of money wages.  This is not the focal point of Say’s and Mill’s analyses … Keynes’s contribution is a macroeconomic model that formalizes markets interaction [sic] under a condition of money-wage stickiness” (Béraud and Numa 2018b, p. 288).  This in spite of their having noted, “Say … admitted that some costs became sticky – particularly money wages” (2018b, p. 287). 

Also, producers of money, as Say explains, immediately sought to exchange that commodity for other commodities for their own consumption or use, including lending at interest.  It thus constitutes no contradiction of Say’s explanation of the law of markets when he argues that the increased production of money “fosters all sales and the production of new values.”  But Béraud and Numa (2018a, p. 228) rather claim, “Say’s endorsement of the quantity theory of money was far from strict.  In Cours and in the fifth and sixth editions of Traité, Say detailed several monetary expansion scenarios that spurred prosperity”; but which can only be in the short run.  Hume’s (1752) “Of Money” already makes that argument: “though the high price of commodities be a necessary consequence of the increase of gold and silver, yet it follows not immediately upon that increase … it is only in [the] interval … between the acquisition of money and rise of prices, that the increasing quantity of gold and silver is favourable to industry” (pp. 37−38).[6]

Béraud and Numa (2018a, p. 231) also claim that Say changed his mind regarding the law of markets because he acknowledged the short-term effect of an increased quantity of money on interest rates.  However, that analysis also belongs in Hume’s (1752) essay, “Of Interest,” that Smith (WN, 1, p. 376) adopts.[7]  Hume argues that the level of interest rates is not ultimately determined by the abundance or scarcity of money (specie) but by savings relative to their demand.  Smith explains that, in the act of lending, “money is, as it were, but the deed of assignment, which conveys from one hand to another those capitals which the owners do not care to employ themselves” (WN, 1, p. 374).[8]  Say (1821a, pp.352−53) repeats the same arguments, including, “The article lent is not any commodity in particular, or even money, which is itself a commodity, like all others; but it is value accumulated and destined to beneficial investment” (p. 352).  Say (1821a, p. 353) also considers it “a great abuse of words, to talk of the interest of money; and probably this erroneous expression has led to the false inference, that the abundance or scarcity of money regulates the rate of interest.”  Say (1821a, pp. 353–54) further observes, “The theory of interest was wrapped in utter obscurity, until Hume and Smith dispelled the vapour.”  Instead, Béraud and Numa (2018a, p.229) follow Keynes’s (1936, Ch. 13) liquidity (cash) preference theory of interest to claim that Say had “a conception of the interest rate defined as the reward for parting with cash.”

Say (1821a, p. 272) considers Smith’s treatment of money and banking institutions as “one of Smith’s happiest efforts; yet it is not every body that comprehends his reasoning.”  However, Béraud and Numa miss recognizing Say’s explanation of defaults on bank loans by speculators that resulted in economic contraction and increased unemployment as being the same explanation in Smith’s citing the bankruptcies of some Scottish banks that resulted in economic ruin, from their having engaged in too liberal lending.  Smith used that experience to caution against banks’ lending to “projectors” on “fictitious bills of exchange” instead of lending only on “real” bills (WN, 1, pp. 328–37); this is the basis of the modern so-called “real bills doctrine.”  Rather, they treat Say’s analysis of such financial crisis as being “quite different from the overly reductive interpretation too often attributed to Say’s analysis on outlets” (2018a, p. 235).  In fact, J.S. Mill (3, pp. 540-44) also gives a similar account of speculative business activities, sustained by bank and other commercial credit as Smith and Say, but without abandoning Say’s Law or the Quantity Theory. 

Béraud and Numa also fail to recognize Say’s (1821b, p. 39) having adopted Smith’s explanation, “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different type of people” (WN, 1, p. 359).[9]  Thus, they argue, “All in all, for Say, the accumulation of capital generated higher output and thereby increased income, enabling increased consumption that eventually absorbed the surplus income” (2018a, p. 224; italics added).  It is Keynes’s definition of saving as not spending that leads to Béraud and Numa’s interpretation. 

Perhaps Béraud and Numa’s most serious undermining of a correct interpretation of Say’s Law is their having adopted Clower and Leijonhufvud’s (1973) so-called “Say’s Principle” to contradict Say’s own denial of a general glut of commodities in the Treatise (1821a, p. 135) and in his Letters to Mr. Malthus (Say 1821b, p. 24).  They claim,

Say … recognized that the failure to produce (or the failure of factor owners to sell their services) must have repercussions on the demand for output, because the demand for product was financed out of earned income.  Literally, this means that demand deficiency was possible and could lead to economic crisis.  It could be that a glut could occur only in the short run, but it would still be a general glut” (2018b, p. 287; italics original).[10]  

They also draw upon Hollander’s (2005a, pp. 214-19; 2005b, p. 384) altered version of Say’s own proposition, “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” (1821a: 134; italics added), to claim, “Say never meant that supply created its own demand, but simply meant that selling goods increased one’s holding of money, thus potentially, but not necessarily, allowing the purchase of other goods with the proceeds of the sale” (Béraud and Numa 2018a, p. 218; italics original).  They insist that Say’s Law “was not that supply was necessarily equal to demand or that demand deficiency could not cause crisis” (2018b, p. 287).  But money was a commodity in Say’s analysis.  That is why there cannot be an overproduction of all goods, including money, at the same time in Say’s law of markets.

Now the “Say’s Principle” is an attempt to salvage Keynes’s misrepresentation of Say’s Law by alleging coordination failures between agents’ plans regarding what to produce and what to purchase in return, based on their ability to sell factor services, including labor.  Thus, Béraud and Numa employ a model in which there are “four types of commodities: factor services, products, financial assets, and money” (2018a, p. 239; italics added) rather than only produced goods and services; see also Béraud and Numa (2018b, p. 287).  But Say (1821b, p. 22-23) vigorously objects to Malthus’s inclusion of labor services among the “commodities” he discusses in the law of markets.  Besides, when some factor services are not sold, that must mean less output has been planned for production.  We cannot then conclude that too much of everything, including money, will have been produced for there to arise a general glut of commodities. 

Furthermore, the “Say’s Principle” view is not the same as Say’s explaining that “A buyer is effectively ready to buy as long as he has money to do so … he can only obtain money with the products he created, or those created for him; hence the fact that it is production that generates outlets” (quoted in Béraud and Numa 2018a, p. 223; italics added).  Money in Say’s statement there refers to income.  But Béraud and Numa interpret Say as arguing that “the buyer lacked money” (ibid.).  That is the very misapprehension Say (1821a, p. 132) seeks to clarify about money in the market exchange process: it is not the scarcity of money that hampers purchases but the lack of adequate productions.  Say (1821a: 133) further explains, “[Money’s] whole utility [in the exchange process] has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others”; see Smith’s (WN, 1: 306) equivalent explanation.  “Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause,” Say (1821a, p. 133) insists.  

Also, note that Say, in the Béraud and Numa’s (2018a, p. 223) quoted statement, mentions “products created,” not factor services: “he can only obtain money with the products he created.”  Thus, Say (1821a, pp. 86-90) could explain increased unemployment along with increased production, owing to the introduction of machinery, contrary to Keynes’s (1936, p. 25─26) firmly linking the level of employment to the level of production; see also Say’s Letter IV to Malthus (1821b, pp. 62−74).[11]  Instead, Béraud and Numa (2018b, p. 286) claim, “the concept of ‘unemployment’ is not analyzed in Say’s writing … It was used to designate work disruption during holidays.  Say was perfectly aware that some individuals could not find employment, but he did not offer any theoretical explanation.”

IV.      CONCLUSION

Say updated his Treatise on Political Economy, first published in 1803, to take account of subsequent economic events or to respond to some criticisms of his arguments.  The fact that he tried to write a textbook for instruction in political economy but adopted the strategy of first reading, forgetting what he had read, and then trying to restate the principles from Smith’s Wealth of Nations and other sources (Say 1821a, p. xlv), also inevitably necessitated his filling in some gaps in argument.  However, there is no evidence of his having changed his mind on his fundamental explanation of the monetary exchange process by which (a) a production opens a demand or an outlet for other produced goods and services and (b) productions can only be purchased by or with productions ─ the law of markets.  Neither is the Hume-Smith monetary analysis he employed contradictory to his law of markets.  Béraud and Numa’s (2018a, p. 235) insistence, “Say eventually acknowledged that his monetary theory contradicted his initial articulations of the law [of markets]” is thus mistaken and misleading.  Neither are they correct in claiming that, until we have read the fifth and sixth editions of his Treatise (in French), we cannot fully understand Say’s law of markets.  Béraud and Numa could have found a lot more consistency of Say’s monetary analysis with those of David Hume and Adam Smith, the latter of whose Wealth of Nations Say cited the most in his Treatise. 

         Say explained that he proposed his law of markets to show the error of such popular misconceptions on the part of businesspeople (adventurers) that a slack in business conditions results from insufficient demand rather than from a reduced production or their blaming it on the scarcity of money.  He believed a correct understanding of the market exchange process will facilitate the arrival of “new and important truths, that may serve to enlighten the views of agents of industry, and to give confidence to the measures of governments anxious to afford them encouragement” rather than governments granting protection to domestic industry, which he considered to be of the “most mischievous tendency” (1821a, p. 132).  From Say’s law of markets we also learn the futility of government taxation and spending (fiscal policy) in hopes of promoting aggregate demand, besides Smith’s explanations in the Wealth of Nations. 

[1]   Keynes (1936, pp. 18−19) bases his understanding on Say’s Law mostly on extracts from John Stuart Mill’s Principles and Alfred Marshall’s Pure Theory of Domestic Values.  He probably never read Say’s Treatise or Letters to Mr. Malthus.  Even so, Keynes’s treatment of the law of markets seriously misrepresents Mill’s and Marshall’s statements; see Ahiakpor (2003) and Samuel Hollander (2011).  Thomas Sowell (1974) is of little help in clarifying Keynes’s confusion.  Steven Kates’s (2015) equating Say’s Law with J.S. Mill’s fourth fundamental theorem respecting capital is also mistaken.

[2]   Alfred Marshall also describes an economy’s recession brought on by shaken business confidence that causes increased unemployment of workers: “Those whose skill and capital is specialized in [particular] trades are earning little, and therefore buying little of the produce of other trades … the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization” (1920, pp. 591−92) until business confidence is restored. 

[3]  John Stuart Mill (3, p. 574) regards “the notion of general oversupply” an “irrational doctrine.”  He adds, “I know not of any economical facts… which can have given occasion to the opinion that a general over-production of commodities ever presented itself in actual experience.  I am convinced that there is no fact in commercial affairs, which, in order to its explanation, stands in need of that chimerical supposition” (3, p. 575).  

[4] This is the source of the characterization, “C-M-C,” commodities exchanged for money to be exchanged for commodities, to represent Say’s explanation.  However, it differs from Karl Marx’s (adopted by Keynes), C-M-C′, where C′ > C, allegedly to describe the capitalist mode of production (John Henry 2003).

[5] See particularly Ricardo (3, pp. 318-19; 4, pp. 36-37; 5, p. 13; 6, p. 233) and J.S. Mill (3, pp. 511-16; 1874, pp. 67-68, 118), who drew upon Hume’s and Smith’s monetary analyses and also contributed to the subsequent development of Say’s Law.  

[6]  Ricardo (4, pp. 36−37) refers to Hume’s argument as the first explanation of money’s temporary expansionary effect on output and employment: the forced-saving doctrine.  It is noteworthy that Hume and Smith distinguished money from its paper substitutes, as Béraud and Numa (2018a, p. 226) cite Say to have done.  But the introduction of paper money, whether convertible or not, does not much change the argument; see Henry Thornton (1802, pp. 238−40).

[7]  Ricardo’s (3, p. 90-92) argues the same principle, but without renouncing the law of markets or the Quantity Theory of money.

[8]  It was Keynes’s (1936, pp. 186−87) failure to recognize “capital” as savings in the classical theory of interest that led to his adopting the mercantilist money supply and demand (liquidity preference) theory of interest; Ahiakpor (1990) elaborates.

[9]  Say (1821b, p. 39n) also cites from Thomas Malthus’s Principles of Political Economy the same argument: “It must be allowed that the produce annually saved is as regularly consumed as that which is annually spent, but that it is consumed by a different set of people.”

[10]  They also claim “general gluts” in Say’s analysis (Béraud and Numa 2018a, p. 233).

[11]  See also Ricardo’s (1, p. 395) reference to the constant competition between machinery and labor in the production process, and the increasing use of machinery as output level is increased.

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