No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seventeen: A Short History of Macroeconomics 427 why trade might be poor. In one example recounted by economic historian Joseph Schumpeter, Say addressed why English export trade to Brazil was so poor. It was not the case that there was an overabundance of English goods, but rather only two possibilities: either the English producers were making a product that Brazilians didn’t want to purchase, or the Brazilians had nothing to trade for the valued English products. Money is only an intermediary—ultimately, goods must trade for goods. If Brazil is to demand more English goods, they must create more goods that the English traders would like to take back for sale at home. If exports are poor and the Brazilians desire English goods, the solution is clear: Brazil must produce more. Brazil must increase their supply of goods to enable them to demand English goods. The idea that goods trade for goods is fairly straightforward in the case of exports/imports, but as Schumpeter argues, Say was the first to see more clearly than others that this is a general law affecting all trade—including domestic trade. When under-consumption theorists argued that there was not enough money in circulation, Say countered that there is always enough money: what is needed is not more money, but for prospective buyers to produce more. J. M. Keynes in his General Theory would later caricature Say’s Law as “Supply creates its own Demand,” which unfortunately is how many economists understand the concept today. Yet this definition is not true, nor is it how any of the advocates of Say’s Law would characterize it. A more accurate and fair way to describe it would be to say that production of valued goods and services generates the potential purchasing power to enable demand of other goods and services. Supply does not necessarily create its own demand, and if there is not enough demand, it is because there has not been enough supply of valued goods and services by potential demanders in the correct proportions . In a small town near my university (Yellow Springs, Ohio), there are several shops that sell aspiring artists’ products. Paintings that may have required dozens of hours labor in addition to cost of materials will sit on shelves unsold. Meanwhile, the struggling artists may sit on the street corners playing their guitar for donations, unable to make ends meet from the sale of paintings or music they offer. If these artists do not make food purchases and restaurants subsequently have slow sales, we wouldn’t say there is a “general glut” of excess food and paintings—we realize that if the artists would simply change their employment to produce goods and services that people actually want to pay for, then they would have the resources to buy a meal. The solution to the problem of excess capacity in the restaurant business is not to stimulate demand, but for supply to change—stop supplying unwanted paintings and music and start supplying things people value. Production of valued goods and services in proportion to consumers’ desires is exactly what provides the resources to purchase other unrelated goods and services. Those purchases will then stimulate the business of the unrelated businesses (say restaurants in Yellow Springs), which will then use the additional sales proceeds to make purchases in still other businesses. Slowly but surely, as supply is reordered into products that people want to buy—in the proportion that they wish to buy them— full employment will be restored. This is the essence of Say’s Law. Say’s Law does not preclude a general slump, or even a prolonged slump. What it does say is that a general