We come now to a final, critical question about Say's law. Why did the storm over the law appear only in two massive clusters? For the timing of the swirling controversy over the law is no accident. J.B. Say coined the law in 1803, and James Mill brought it to Britain in 1808, converting Ricardo and his disciples. But why was there no particular controversy over the law until much later? Specifically, the storm erupted in 1819, when the French-Swiss economist Jean Charles Leonard Simonde de Sismondi (1773–1842) published his Nouveaux principes d'économie politique (New Principles of Political Economy). Sismondi's book was followed the next year by the Rev. Thomas Robert Malthus's (1766–1834) Principles of Political Economy (1820). The odd point is that both these men had been ardent Smithians for two decades; why publish these heretical underconsumptionist views at virtually the same moment?
Sismondi's aristocratic Florentine family had settled in France, only as Huguenots to be driven by persecution to settle in Geneva, the Calvinist heartland. Sismondi was born in Geneva, the son of a Calvinist clergyman. When the radical influence of the French Revolution reached Geneva, the Sismondis moved to London, where young Sismondi had a chance to study and participate in English business affairs.
Sismondi settled down as a farmer in Tuscany in the late 1790s, publishing a physiocratic tract on Tuscan agriculture in 1801. Soon after, he became an ardent follower of Adam Smith, and published his two-volume Smithian work, De la richesse commerciale (On Commercial Wealth) in Geneva in the same year – 1803 – that Say published his famous Traité. While Say skyrocketed to influence and fame, Sismondi's work was ignored, and remained totally unknown outside France. Perhaps resentment at this fate played a role is Sismondi's radical conversion, embodied in his Nouveaux Principes. But the timing, the prompting for this conversion, was critical, namely: the end, in 1815, of a generation of massive war and inflation in Europe led quickly and inevitably to a post war deflation and depression. Recessions, especially on such a grand scale, were new phenomena in Europe; there was therefore no body of theoretical explanation, and hence the typical business cry of ‘glut’ or ‘overproduction’ struck a chord among many observers. In the case of Sismondi, it led him straightaway and permanently into a thoroughgoing and lifelong statism, including the advocacy of a comprehensive welfare state, a deep hostility to capitalism and the factory system, and a call for return to a simple agrarian economy. In the second edition of his Nouveaux Principes in 1827, Sismondi, in his preface, proclaims the ‘new economics’ or ‘new liberalism’ which ‘invokes government intervention’ instead of laissez-faire.
Sismondi was offered a professorship of political economy at the University of Vilna on the strength of his first book; the Nouveaux Principes brought him an offer from the Sorbonne. But Sismondi preferred to remain in Geneva, churning out a remarkably prolific series of historical works (including a 16-volume history of the Italian republics in the Middle Ages, and a 31-volume history of the French), and tending to the life of a gentleman farmer. On his farm he fought against overproduction in his own dotty way: making sure that production would be as low as possible by choosing the feeblest workers for employment on the farm, and deliberately having his house repaired by an incompetent worker. One wonders why he did not go all the way in his living the exemplary life of underproduction, and stop working or producing altogether. Thoroughly embittered at the lack of recognition of his socialistic views, Sismondi write shortly before his death in 1842: ‘I leave this world without having made the slightest impression, and nothing will be done’. Would that he had been right.
Far more of an impact at the time was made by the simultaneous conversion to underconsumptionism by the Rev. Malthus. Malthus, son of an aristocratic country gentleman, graduated from Cambridge with honours in mathematics, and was ordained in the Anglican clergy. After serving as a fellow of a college in Cambridge, Malthus became a country curate, writing his famous Essay on Population in 1798. Malthus was more than the gloomy population theorist that made his name: he was also an ardent Smithian economist. In 1804, Malthus became the first academic economist in England, taking up a chair of history and political economy at the new small East India College of Haileybury, established by the East India Company to train future employees. Not only was he the first, Malthus was to remain the only academic political economist in England for the next two decades.
Malthus was a firm friend of Ricardo, and his break with the Smith-Ricardo tradition on underconsumption did not mar their close friendship. The controversy gave rise to a famous correspondence between them, and when Ricardo died in 1823 he left Malthus a small legacy as a token of their camaraderie. More important is the fact that Malthus lost interest in his underconsumptionist heresy after 1824, and quickly reverted to being a leader of Smithian classical economics. Clearly the reason for Malthus's loss of interest was the fact that Britain recovered from the post-Napoleonic depression after 1823, and the first storm over Say's law was over.
Despite the fact that Malthus's interest in his underconsumption theory was generated and maintained solely by the postwar recession, his doctrine was, oddly enough, not a cyclical theory at all but an alleged tendency of free markets to a permanent depression. It should also be noted that Malthus was not worried about savings leaking out into hoarding and remaining unspent, He was an overproductionist as well as an underconsumptionist, so that invested savings only made matters worse by increasing production: ‘If... commodities are already so plentiful that an adequate portion of them is not profitably consumed, to save capital can only be still further to increase the plenty of commodities, and still further to lower already low profits’.
While Say, in reply to critics, did not of course come up with a full-fledged theory to explain the general recession and ‘overproduction’ in relation to a profitable selling price, he did offer some remarkably prescient insights which have been completely overlooked by historians, perhaps because they were presented in his Letters to Malthus rather than in his Treatise.
First, Say takes up the postwar depression in the United States, for Malthus had claimed in response to Say, that since the US enjoyed low taxes and free markets, their absence could not be the reason for the glut suffered there. Say very sensibly attributes the basic problems in the US to the great prosperity that country had enjoyed as a neutral during most of the Napoleonic wars, so that, unburdened by blockade, its exports and its commerce enjoyed unusual prosperity. Thus, with the end of the wars in 1815, and the swift return of European maritime trade in both hemispheres, the US was found to have overexpanded its mercantile products and, in contrast, underproduced agricultural or manufactured goods. So in a deep sense, the problem is not general overproduction, but an overproduction of some goods and underproduction of others. What the United States is suffering from, then, is underproduction of these other goods. The Americans could have used the increased production to exchange for more of the goods offered by the resurgent European maritime trade. Prophetically, Say predicted that ‘A few years more and their [American] industry altogether will form a mass of productions, amongst which will be found articles fit to make profitable returns or at least profits, which the Americans will employ in the purchase of European commodities’. And then Americans and Europeans will each produce whatever they are best and most efficient at.
Those commodities which the Europeans succeed in making at least expense will be carried to America, and those which the American soil and industry succeed in creating at a lower rate than others, will be brought back. The nature of the demand will determine the nature of the productions; each nation will employ itself in preference about those productions in which they have the greatest success; that is, which they produce at least expense, and exchanges mutually and permanently advantageous will be the result.
And how about European business? What is the problem there? Why is it depressed? Here, Say put his finger on the heart of the problem: ‘costs of production multiplied to excess’. In short, the problem with the European depression was not that there was a ‘general overproduction’ but that entrepreneurs had bid up costs of production (factor prices) too high, so that consumers were not willing to purchase the products at prices high enough to cover costs. The problem, in fact, was neither the producing of too many goods nor not buying enough, but a bidding up of costs to too high a level. Say goes on to say that these excessive costs created ‘disorders... in the production, distribution, and consumption of value produced; disorders which frequently bring into the market quantities greater than the want, keeping back those that would sell, and whose owner would employ their price in the purchase of the former’. In short, the bidding up of excess costs in some way distorted the production structure so as to cause a massive overproduction of some goods and an underproduction of others.
After these passages, pregnant with hints of the later Austrian theory of the trade cycle, Say unfortunately goes off on a tangent in ascribing the excess costs to the taxation of industry and the market. But then he returns with a remarkably perceptive passage, attributing seeming ‘superabundance’ to massive ignorance and error on the part of the entrepreneurs:
This superabundance... depends also upon the ignorance of producers or merchants, of the nature and extent of the want in the places to which they sent their commodities. In later years there have been a number of hazardous speculations, on account of the many fresh connexions with different nations. There was everywhere a general failure of that calculation which was requisite to a good result...
In short, the problem centres on a general failure of entrepreneurial forecasting and ‘calculation’ leading to what turns out to be an excessive bidding up of costs. Unfortunately, Say does not pursue this crucial point to query why such an unusual entrepreneurial failure should have taken place. But he does go on to anticipate von Hayek's important point about entrepreneurs and producers employing the market as a learning experience, to become better at estimating costs and demands on the market. Say writes:
but because many things have been ill done does it follow that it is impossible, with better instruction, to do better? I dare predict, that as the new connexions grow old, and as reciprocal wants are better appreciated, the excess of commodities will everywhere cease; and that a mutual and profitable intercourse will be established.
With the recovery of Europe from the postwar depression, Say's law – at least in the rather vulgarized form adopted by the British classical school16 – became absorbed into the mainstream of economic thought and was challenged only by cranks and crackpots who properly constituted what Keynes later called ‘the underworld’ of economics. These denizens were resurrected by John Maynard Keynes in his General Theory, which, written during the depths of another and even more intense depression (1936), hailed them all – from Malthus to later underconsumptionists and to the egregious German-Argentinian merchant Silvio Gesell (1862–1930), who urged that the government force everyone to spend money in a brief period of time after receiving it. Gesell's objective, as in the case of all the most flagrant money cranks, was to lower the rate of interest to zero, a goal Keynes was later to echo in his call for the ‘euthanasia of the rentier [bond-holder]’. It is perhaps fitting that this Gesell, whom Keynes called ‘the strange, unduly neglected prophet’, capped his dubious career by becoming the finance minister of the short-lived revolutionary Soviet republic of Bavaria in 1919.
Keynes's own doctrine followed in the line of Malthus and the others, except that underspending in general was substituted for underconsumption as the allegedly critical economic problem. Keynes made a denunciation of Say's law the centrepiece of his system. In stating it, Keynes badly vulgarized and distorted the law, leaving out the central role of price adjustments, and had the law saying simply that total spending on output will equal total incomes received in production.
Since Keynes's day, economists have managed to obfuscate Say's rather simple notion with a welter of turgid discussions of Say's alleged ‘principle’ or ‘identity’, made all the more obscure by a plentiful use of mathematics, a form of alleged explication particularly out of place when dealing with such an anti-mathematical theorist as J.B. Say.
Sismondi's aristocratic Florentine family had settled in France, only as Huguenots to be driven by persecution to settle in Geneva, the Calvinist heartland. Sismondi was born in Geneva, the son of a Calvinist clergyman. When the radical influence of the French Revolution reached Geneva, the Sismondis moved to London, where young Sismondi had a chance to study and participate in English business affairs.
Sismondi settled down as a farmer in Tuscany in the late 1790s, publishing a physiocratic tract on Tuscan agriculture in 1801. Soon after, he became an ardent follower of Adam Smith, and published his two-volume Smithian work, De la richesse commerciale (On Commercial Wealth) in Geneva in the same year – 1803 – that Say published his famous Traité. While Say skyrocketed to influence and fame, Sismondi's work was ignored, and remained totally unknown outside France. Perhaps resentment at this fate played a role is Sismondi's radical conversion, embodied in his Nouveaux Principes. But the timing, the prompting for this conversion, was critical, namely: the end, in 1815, of a generation of massive war and inflation in Europe led quickly and inevitably to a post war deflation and depression. Recessions, especially on such a grand scale, were new phenomena in Europe; there was therefore no body of theoretical explanation, and hence the typical business cry of ‘glut’ or ‘overproduction’ struck a chord among many observers. In the case of Sismondi, it led him straightaway and permanently into a thoroughgoing and lifelong statism, including the advocacy of a comprehensive welfare state, a deep hostility to capitalism and the factory system, and a call for return to a simple agrarian economy. In the second edition of his Nouveaux Principes in 1827, Sismondi, in his preface, proclaims the ‘new economics’ or ‘new liberalism’ which ‘invokes government intervention’ instead of laissez-faire.
Sismondi was offered a professorship of political economy at the University of Vilna on the strength of his first book; the Nouveaux Principes brought him an offer from the Sorbonne. But Sismondi preferred to remain in Geneva, churning out a remarkably prolific series of historical works (including a 16-volume history of the Italian republics in the Middle Ages, and a 31-volume history of the French), and tending to the life of a gentleman farmer. On his farm he fought against overproduction in his own dotty way: making sure that production would be as low as possible by choosing the feeblest workers for employment on the farm, and deliberately having his house repaired by an incompetent worker. One wonders why he did not go all the way in his living the exemplary life of underproduction, and stop working or producing altogether. Thoroughly embittered at the lack of recognition of his socialistic views, Sismondi write shortly before his death in 1842: ‘I leave this world without having made the slightest impression, and nothing will be done’. Would that he had been right.
Far more of an impact at the time was made by the simultaneous conversion to underconsumptionism by the Rev. Malthus. Malthus, son of an aristocratic country gentleman, graduated from Cambridge with honours in mathematics, and was ordained in the Anglican clergy. After serving as a fellow of a college in Cambridge, Malthus became a country curate, writing his famous Essay on Population in 1798. Malthus was more than the gloomy population theorist that made his name: he was also an ardent Smithian economist. In 1804, Malthus became the first academic economist in England, taking up a chair of history and political economy at the new small East India College of Haileybury, established by the East India Company to train future employees. Not only was he the first, Malthus was to remain the only academic political economist in England for the next two decades.
Malthus was a firm friend of Ricardo, and his break with the Smith-Ricardo tradition on underconsumption did not mar their close friendship. The controversy gave rise to a famous correspondence between them, and when Ricardo died in 1823 he left Malthus a small legacy as a token of their camaraderie. More important is the fact that Malthus lost interest in his underconsumptionist heresy after 1824, and quickly reverted to being a leader of Smithian classical economics. Clearly the reason for Malthus's loss of interest was the fact that Britain recovered from the post-Napoleonic depression after 1823, and the first storm over Say's law was over.
Despite the fact that Malthus's interest in his underconsumption theory was generated and maintained solely by the postwar recession, his doctrine was, oddly enough, not a cyclical theory at all but an alleged tendency of free markets to a permanent depression. It should also be noted that Malthus was not worried about savings leaking out into hoarding and remaining unspent, He was an overproductionist as well as an underconsumptionist, so that invested savings only made matters worse by increasing production: ‘If... commodities are already so plentiful that an adequate portion of them is not profitably consumed, to save capital can only be still further to increase the plenty of commodities, and still further to lower already low profits’.
While Say, in reply to critics, did not of course come up with a full-fledged theory to explain the general recession and ‘overproduction’ in relation to a profitable selling price, he did offer some remarkably prescient insights which have been completely overlooked by historians, perhaps because they were presented in his Letters to Malthus rather than in his Treatise.
First, Say takes up the postwar depression in the United States, for Malthus had claimed in response to Say, that since the US enjoyed low taxes and free markets, their absence could not be the reason for the glut suffered there. Say very sensibly attributes the basic problems in the US to the great prosperity that country had enjoyed as a neutral during most of the Napoleonic wars, so that, unburdened by blockade, its exports and its commerce enjoyed unusual prosperity. Thus, with the end of the wars in 1815, and the swift return of European maritime trade in both hemispheres, the US was found to have overexpanded its mercantile products and, in contrast, underproduced agricultural or manufactured goods. So in a deep sense, the problem is not general overproduction, but an overproduction of some goods and underproduction of others. What the United States is suffering from, then, is underproduction of these other goods. The Americans could have used the increased production to exchange for more of the goods offered by the resurgent European maritime trade. Prophetically, Say predicted that ‘A few years more and their [American] industry altogether will form a mass of productions, amongst which will be found articles fit to make profitable returns or at least profits, which the Americans will employ in the purchase of European commodities’. And then Americans and Europeans will each produce whatever they are best and most efficient at.
Those commodities which the Europeans succeed in making at least expense will be carried to America, and those which the American soil and industry succeed in creating at a lower rate than others, will be brought back. The nature of the demand will determine the nature of the productions; each nation will employ itself in preference about those productions in which they have the greatest success; that is, which they produce at least expense, and exchanges mutually and permanently advantageous will be the result.
And how about European business? What is the problem there? Why is it depressed? Here, Say put his finger on the heart of the problem: ‘costs of production multiplied to excess’. In short, the problem with the European depression was not that there was a ‘general overproduction’ but that entrepreneurs had bid up costs of production (factor prices) too high, so that consumers were not willing to purchase the products at prices high enough to cover costs. The problem, in fact, was neither the producing of too many goods nor not buying enough, but a bidding up of costs to too high a level. Say goes on to say that these excessive costs created ‘disorders... in the production, distribution, and consumption of value produced; disorders which frequently bring into the market quantities greater than the want, keeping back those that would sell, and whose owner would employ their price in the purchase of the former’. In short, the bidding up of excess costs in some way distorted the production structure so as to cause a massive overproduction of some goods and an underproduction of others.
After these passages, pregnant with hints of the later Austrian theory of the trade cycle, Say unfortunately goes off on a tangent in ascribing the excess costs to the taxation of industry and the market. But then he returns with a remarkably perceptive passage, attributing seeming ‘superabundance’ to massive ignorance and error on the part of the entrepreneurs:
This superabundance... depends also upon the ignorance of producers or merchants, of the nature and extent of the want in the places to which they sent their commodities. In later years there have been a number of hazardous speculations, on account of the many fresh connexions with different nations. There was everywhere a general failure of that calculation which was requisite to a good result...
In short, the problem centres on a general failure of entrepreneurial forecasting and ‘calculation’ leading to what turns out to be an excessive bidding up of costs. Unfortunately, Say does not pursue this crucial point to query why such an unusual entrepreneurial failure should have taken place. But he does go on to anticipate von Hayek's important point about entrepreneurs and producers employing the market as a learning experience, to become better at estimating costs and demands on the market. Say writes:
but because many things have been ill done does it follow that it is impossible, with better instruction, to do better? I dare predict, that as the new connexions grow old, and as reciprocal wants are better appreciated, the excess of commodities will everywhere cease; and that a mutual and profitable intercourse will be established.
With the recovery of Europe from the postwar depression, Say's law – at least in the rather vulgarized form adopted by the British classical school16 – became absorbed into the mainstream of economic thought and was challenged only by cranks and crackpots who properly constituted what Keynes later called ‘the underworld’ of economics. These denizens were resurrected by John Maynard Keynes in his General Theory, which, written during the depths of another and even more intense depression (1936), hailed them all – from Malthus to later underconsumptionists and to the egregious German-Argentinian merchant Silvio Gesell (1862–1930), who urged that the government force everyone to spend money in a brief period of time after receiving it. Gesell's objective, as in the case of all the most flagrant money cranks, was to lower the rate of interest to zero, a goal Keynes was later to echo in his call for the ‘euthanasia of the rentier [bond-holder]’. It is perhaps fitting that this Gesell, whom Keynes called ‘the strange, unduly neglected prophet’, capped his dubious career by becoming the finance minister of the short-lived revolutionary Soviet republic of Bavaria in 1919.
Keynes's own doctrine followed in the line of Malthus and the others, except that underspending in general was substituted for underconsumption as the allegedly critical economic problem. Keynes made a denunciation of Say's law the centrepiece of his system. In stating it, Keynes badly vulgarized and distorted the law, leaving out the central role of price adjustments, and had the law saying simply that total spending on output will equal total incomes received in production.
Since Keynes's day, economists have managed to obfuscate Say's rather simple notion with a welter of turgid discussions of Say's alleged ‘principle’ or ‘identity’, made all the more obscure by a plentiful use of mathematics, a form of alleged explication particularly out of place when dealing with such an anti-mathematical theorist as J.B. Say.
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