The Havoc Caused by Say’s Law
Prabhat Patnaik
JEAN-BAPTISTE Say, a French economist who wrote in the late eighteenth century, had formulated a law to the effect that ‘supply creates its own demand’, which meant that there could never be an inadequate demand for the aggregate of goods produced in any economy. His argument was as follows. Whatever is produced generates an equal amount of income among those associated with its production. This income is either consumed or ‘saved’ (i.e., not consumed). Whatever is consumed generates an equal amount of demand for the produced consumption goods, and whatever is ‘saved’ is either directly used for purchasing capital goods, or offered as a loan to those who wish to purchase capital goods, namely undertake investment, by borrowing. Whatever is ‘saved’ and whatever is invested are ultimately equalised through adjustments in the interest rate, so that through such adjustments whatever is produced gets ultimately demanded in the aggregate, and the capitalist economy has no reasons for not being at a state of maximum production, that is, at full employment. There may be demand-supply mismatches in particular markets, but never in the aggregate.
The problem with Say’s Law is that all demand out of incomes earned in the current period is seen to be for goods produced in the current period, whether for consumption or for adding to one’s wealth (i.e., investment). But if persons wish to add to their wealth in the form of money (and that would be the case if they hold their wealth partly also in the form of money), which is not a good produced in the current period (for instance if they wish to hold paper money out of their current incomes), then there is no reason why the supply of produced goods in the current period should create a demand equal to itself. In the C-M-C circuit, if persons do not wish to convert M into C, then there will be an overproduction of C, i.e., of produced goods. And any reduction in the money-price of produced goods in such a situation of insufficient demand, would only strengthen the demand for money as a form of wealth and hence not eliminate the over-production tendency.
Mainstream bourgeois economics which assumed Say’s Law, held that persons never wished to hold money as a form of wealth, that money was only a medium of circulation but never a form of wealth-holding. This however was an absurd assumption. It was not only empirically untrue, but also logically untenable, which is why Say’s Law was an absurd assumption to make for a capitalist economy. Karl Marx had been quite scathing about Say’s Law and about J B Say as an economist (whom he had called the “trite” Monsieur Say) and had expounded the possibility of over-production crises under capitalism.
Why, it may be wondered, are we talking about such arcane debates in economics, which were settled not only by Marx but resettled in the 1930s by the Keynesian Revolution in bourgeois economics at the time of the Great Depression, when to argue that a capitalist economy can never experience a deficiency of aggregate demand for produced goods was ludicrous in the extreme. Keynes wanted to save western capitalism from a Bolshevik-style revolution, and to do so, he recognised, one had to first admit its failures and repair the system to overcome them so that a revolution could be forestalled.
The reason we are talking about Say’s Law is because it has made a silent return to economic discourse, a return whose very silence makes it as influential as it is insidious. In fact the rationale for the entire neo-liberal economic order is based on assuming the validity of Say’s Law.
The intellectual groundwork for neoliberalism, and for jettisoning the dirigiste strategy that had been prevalent until then (in India the dirigiste strategy is often referred to as the Nehru-Mahalanobis strategy), was laid down in the early seventies. The argument was advanced that four east Asian ‘tigers’ namely South Korea, Taiwan, Hong Kong and Singapore, had shown remarkably high economic growth rates, much higher than countries like India pursuing dirigiste strategies; and that if other countries too abandoned dirigisme, or what the World Bank called their ‘inward-looking’ development strategy, and pursued ‘export-led growth’ instead, then they too could emerge as successful as these ‘Asian tigers’.
This was an absurd argument. If the level of world aggregate demand is expanding at a certain rate, then the output of all countries taken together cannot possibly expand at a higher rate. If the output of some countries is expanding at a higher rate than world aggregate demand, it is because the output of others is expanding at a lower rate. If the output growth of the hitherto slow-growers accelerates then that can only be at the expense of those who were hitherto growing rapidly. Hence to dangle the hope that all countries could grow as rapidly as the ‘Asian tigers’ if only they pursued an ‘export-led growth’ strategy was absurd; it amounted to ignoring the constraint of aggregate demand, namely to assuming Say’s Law. Behind the call to abandon the Nehruvian strategy therefore was an invoking of the absurd Say’s Law.
This invoking however was camouflaged, which is why it succeeded. The camouflage took the form of a ‘small country assumption’. A small country, precisely because it is small, can push out larger exports at the expense of larger countries without causing them damage on a scale that they would notice. For small countries therefore the assumption that they can export more if they wish, namely that they face no noticeable demand constraint, makes some sense, and is often made. But the neoliberal strategy of ‘export-led growth’ was sold to all countries by pretending that each of them could act as if it was a ‘small country’; this was utterly absurd, a flagrant case of the converse fallacy of aggregation, and a back-door entry for Say’s Law.
Of course, the success of the four Asian ‘countries’ was followed by more spectacular growth successes in China and south-east Asia; true, they were not necessarily examples of neoliberal strategy, nor of ‘export-led growth’ pure and simple. And to the extent that they had export successes, this was to a large extent because western metropolitan capital chose to locate plants on their soil for producing for the western metropolitan market; the counterpart of their success in other words was the slower growth of metropolitan capitalist economies, though not of metropolitan capitals, not to mention the fact that other third world countries were left out in the race. It was a race nonetheless among countries.
By falsely assuming Say’s Law, the ‘export-led growth’ strategy actually pitted countries, especially countries of the third world, against one another; for example, India could export more garments only at the expense of Bangladesh, and so on. This in turn meant that the more a country could squeeze its working population by giving them lower wages, extracting from them longer hours of work, and withholding legitimate payments from them through fraud, the more successful it would be in its export drive. Inequalising growth, or even poverty-generating growth, was thus built into the very logic of ‘export-led growth’.
Inequalising growth however ultimately meant a slowing down of the rate of growth of demand in the world economy and hence the onset of a crisis for the export-led growth strategy. Even before the pandemic, the decadal growth rate of GDP for the world economy as a whole had been the lowest among all the decades since the Second World War; and this growth rate has slowed down even further after the pandemic.
This strategy, apart from being ethically repugnant, since it apotheosizes cut throat competition among the oppressed people, has brought the world economy to a cul-de-sac. The only way that an economy of the third world can get out of this dead end is by activating the State to undertake larger expenditure to enlarge the home market. Enlarging the home market requires increasing the rate of agricultural growth (which puts more income in the hands of the peasants and agricultural labourers), raising the level of minimum wages (which puts more income in the hands of the workers), and increasing welfare state measures (which improves the real living standards of the entire working population); and it requires financing such spending through wealth and inheritance taxation. All this however would require imposing capital controls, especially on financial outflows, which in turn would necessitate trade controls. It would require, in short, abandoning the strategy of ‘export-led growth’ and hence overcoming the stranglehold of Say’s Law that has already done so much damage.
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