The Classical Meaning of Say's Law and the Modern Meaning (the Division of Say's Law into “Walras' Law,” “Say's Identity” and “Say's Equality”) Are Very Different

In the professional journals, the single most influential article has been Becker's and Baumol's 'The Classical Economic Theory: The Outcome of the Discussion' (1952), which was a summing up of a journal debate conducted during the late 1940s and early 1950s. The importance of this article lies in its introduction into economic theory of the three-part division of Say's Law into 'Walras' Law', 'Say's Identity' and 'Say's Equality'. It is these terms which have become the basis for the modern interpretation of Say's Law. While these terms will be more fully explained as part of the evolution of the modern interpretation of Say's Law, it is important to have some familiarity with them as modern discussion of classical theory often conceives of the issues in their terms.

'Walras' Law' generally means that total demand, including the demand for money, is equal to total supply, including money. This is merely a definition and has no economic implications. 'Say's Identity' refers to the proposition that the total demand for goods is always equal to the total supply of goods. Therefore, variations in the demand for money do not affect the level of economic activity. It is this proposition which is generally seen as the meaning of Say's Law contained in the General Theory. Finally, 'Say's Equality' means that while the demand for goods may move out of equilibrium with the supply of goods, the processes of the economy will rapidly bring the two back into equilibrium. This proposition is generally seen as the meaning of Say's Law held by classical economists.

The significant point is that the classical meaning of Say's Law and the modern are very different. And in this it is important to recognise that, although there is a modern meaning to Say's Law, if it is not what classical economists meant by it, then it has no intrinsic value as a means to understand pre-Keynesian economic theory. Say's Law should have only the meaning attached to it by economists who believed it was a valid principle of economic analysis. Sowell (1972: 5, 37), for example, argues that the modern interpretation is as valid as any other. Modern interpretations, which do not explain what classical economists actually meant, may have value in their own terms, but they should not be confused with the classical meaning of the law of markets.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 5.