Say's Law Was Specifically Formulated to Deny the Relevance of Demand Deficiency As a Cause of Depression

Aggregate demand has since 1936 played the central role in the theory of recession. Recessions are attributed to an absence of demand, and even where they are not, overcoming recessions is seen as dependent on the restoration of demand, which is the active responsibility of governments.

Until 1936, no mainstream theory of recession had so much as glanced at the notion of demand deficiency as a cause of recession. It was specifically to deny the relevance of demand deficiency as a cause of recession that Say’s Law had been formulated in the first place. Accepting the possibility of demand deficiency as a cause of recession was then seen as the realm of cranks. How the world does change.

This, it cannot be emphasized enough, did not mean that the possibility of recessions was denied. There was, and is, no end of potential causes of recession that have nothing to do with demand failure.

Indeed, no one explains the causes of the present economic downturn, the global meltdown we are in the midst of, in terms of deficient aggregate demand. It would be absurd to suggest that the problems now being experienced have been caused by consumers no longer wishing to buy more than they have or savings going to waste because investors have run out of new forms of capital into which to invest their funds.

Classical theory had taught that whatever might cause a recession to occur, it would never be a deficiency of aggregate demand. Production could never exceed the willingness to buy, and therefore treating the symptoms of a recession by trying to raise demand through increased public spending was utterly mistaken.

--Steven Kates, “The Crisis in Economic Theory: The Dead End of Keynesian Economics,” in Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Financial Crisis, ed. Steven Kates (Cheltenham, UK: Edward Elgar Publishing, 2010), 113-114.