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.

On the Basis of the Law of Markets, No Obstacle to Growth Exists on the Demand Side so long as Production Corresponds to the Demands of Buyers

Classical economists had a different and far more penetrating understanding of the nature of recession and the business cycle than Keynes, or indeed most modern interpreters of classical theory, give them credit for. And, in what may be the greatest irony of all, it will be shown that the theory of the cycle held by classical economists was based on an understanding of Say's Law. That is, far from being an impediment to understanding the causes of recession and unemployment, Say's Law was a fundamental part of the theory which explained their occurrence.

What will be shown is that the basis of the classical theory of the cycle was the structure of demand rather than the level of demand. Classical economists argued, on the basis of the law of markets, that no obstacle to growth existed on the demand side, so long as production corresponded to the demands of buyers. Classical theory explained recessions by showing how errors in production might arise during cyclical upturns which would cause some goods to remain unsold at cost-covering prices.

--Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 19.

Röpke Rejects the Over-Saving Argument

This is an over-saving argument and Röpke will have none of it. In the following passage, he rejects the over-saving argument in precisely the form it was later raised by Keynes in the General Theory:

Some ... even go to the length of asserting that there is a permanent tendency for investment to be outrun by savings and therefore a tendency towards a chronic depression which is only interrupted by short-lived fits of concentrated investment. According to these gloomy pessimists -- mostly sanguine inflationists in disguise, if not actually prophets of the end of capitalism -- our economic system is headed for a sort of economic 'entropy' where all economic energy will be paralysed by a suffocating excess of savings ....

Enough has been said on these points to make a refutation of such wild surmises hardly necessary. It all boils down to the question as to whether it is conceivable that savings can ever become so abundant that we do not know what to do with them even at a rate of interest approaching zero. To this question, of course, only one answer is possible. Over-saving as such is an inconceivable thing, belonging to the same species as other economic scares like over-production.

--Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 118.

Understanding Say's Law Prevents One from Making the Error of Believing That Depressions can be due to Over-Production or Over-Saving

Röpke's Crises and Cycles was the last major work published in the English language on business cycle theory before the publication of the General Theory. In this work, Röpke explicitly refers to the insights of Say and Ricardo in providing the first understanding of the nature of the business cycle. He then shows how an understanding of Say's Law prevents one from making the error of believing that depressions can be due to over-production or over-saving.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 7.

Say's Law Was the Basis for the Classical Theory of the Business Cycle and Recession

What therefore remains the greatest irony is that Say's Law, far from assuming full employment, was instead the basis for the classical theory of the cycle. Rather than Say's Law being a denial of the possibility of recession, it was actually part of the explanation for it. Recessions were not caused by a failure of demand, but rather were due to problems associated with the structure of demand relative to the structure of supply. Demand, according to Say's Law, was constituted by supply, that is, by the sale receipts received from selling one's production. If one could not sell then one could not buy. The reason for a failure to sell was that one had miscalculated about what others wished to buy. If production miscalculations occurred in one part of the economy during the expansion phase of the cycle, then excess stocks of unsold goods would be the result, and incomes lower than anticipated would be earned. In consequence, demand for other products would be lower than was originally anticipated, and the economy would contract.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 4.

Are Recessions Caused by the Supply of Commodities in the Aggregate Surpassing the Demand?

The central issue in the debates over Say's Law was thus whether recessions might be due to 'a supply of commodities in the aggregate surpassing the demand', that is, whether recessions are caused by deficient effective demand. The answer, according to Say's Law, was no. Moreover, as the quotation from Mill also shows, Say's Law also denies the possibility of 'a general overproduction of wealth', which is the same phenomenon as a deficiency of demand. Demand deficiency and over-production are two ways of describing the same phenomenon: too much production relative to the demand for it. It was this possibility which Say's Law was formulated to deny.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 1-2.