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Contributions to Political Economy (1990) 9,69-32

GARY MONGIOVI St. John's University Recent literature has suggested that a union of Keynes' theory of effective demand with the classical theory of value and distribution might be analytically fruitful. The Cambridge critique of orthodox capital theory, it is argued, has removed the logical foundation for the neoclassical synthesis, thereby opening the way to a resuscitation of the theory of effective demand; while Keynes' theory, deprived by the capital controversy of its Marshallian underpinnings, can be provided with a logically sound classical approach to price formation and distribution. The classical system, for its part, would benefit by gaining a theory which can make a contribution toward the explanation of outputs. (See, for example, Garegnani, 1978-79; Eatwell, 1979; Milgate, 1982; Kurz, 1985.) My purpose in this paper is not to discuss the validity of diese claims, which I think are fundamentally sound. I wish instead to focus on an issue which might be problematic to the joining of Keynesian and classical analytics: Say's Law is evidently incompatible with the theory of effective demand, and yet it is typically presumed to be a key element in the classical system; how then may Keynes and the classicals be linked? This question has previously been addressed by Garegnani (1978-79), Kenway (1980), Green (1982) and Milgate (1982); the present contribution is an attempt to develop some of the issues raised by these authors. In what follows, it is argued that the classicals adopted Say's Law to compensate for their lack of a theory of output; and that there is nothing in the logic of classical analysis which justifies the attachment of its early expositors to Say's Law. It is by now well known that the classicals treated the size and composition of the social product as parametric in their explanation of prices. The latter are regulated, in the long run, by the technical conditions of production and the exogenously determined real wage (or, in Sraffa's (1960) formulation, the profit rate). The process by which market prices are brought into line with prices of production (i.e. the process by which a uniform profit rate is established throughout the economy), *I am grateful to Cigdem Kurdas, Heinz Kurz and the editors of this journal for their helpful comments on an earlier draft of this paper.

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NOTES ON SAY'S LAW, CLASSICAL ECONOMICS AND THE THEORY OF EFFECTIVE DEMAND*


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SMITH, RICARDO AND MALTHUS For our purposes, Say's Law may be reduced to two fundamental propositions: (1) Any act of production gives rise to an amount of income just sufficient to purchase the output of that productive act; this proposition is not controversial, and is in fact reflected in the national income accounting convention which defines national income so as to ensure that it is identically equal to national product net of depreciation. (2) The desired level of aggregate spending will tend to accommodate itself to whatever level of output the economy happens to produce; that is, production of a particular level of output calls forth an equivalent level of aggregate demand. The validity of this second proposition is by no means evident. A spurious distinction is sometimes drawn between Say's Equality and Say's Identity (cf. Lange, 1942; Baumol and Becker, 1952; Baumol 1977; Green, 19821). The latter concept cannot be found in the classical literature; not even the staunchest opponents of the idea of the possibility of general gluts believed that an act of saving is identical to an act of investment. Rather, it was held that there is an unfailing tendency for that portion of purchasing power which does not express itself in consumption demand, to manifest itself, rapidly and in its entirety, in a compensating demand for investment goods. Thus, aggregate demand tends inevitably to keep pace with aggregate supply, though the two magnitudes need not be identically equal at every moment in time (Caminati, 1981, pp. 81-22; Hollander, 1979, pp. 512-513). In his chapter on accumulation, Adam Smith (1776, Book II, chapter III) makes some observations which anticipate the doctrine later laid down by Say in the Traite (1821). Smith's main purpose in this chapter was to argue that saving (or frugality, 1 Green (1982, p. 62) adopts the distinction in order to underscore the fact that the classicals did not justify Say's Law by means of interest rate adjustments in the capital market. However, as we shall see below, this point can be made without attributing to the classicals the extreme view that saving is at every moment identically equal to investment.

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necessarily brings the composition of output into line with the pattern of demand. But the forces which shape final demand were recognised to lack 'known properties of sufficient generality and [permanence]' to support a formally exact treatment comparable to that which characterises the explanation of price (Garegnani, 1984, pp. 298-299). The pattern of final demand was presumed to depend upon the degree of development of the economic system, the distribution of income, and the habits and customs of the populace. It was further recognised that in order for any vector of outputs, and the associated level of employment, to persist as components of a long-period position, expenditure must be sufficient to absorb the value of aggregate output. The question of precisely how total expenditure and the value of output would adjust toward equality was an issue which had to be engaged and ultimately resolved. Resolution was, for most classical writers, accomplished by means of Say's Law of markets.


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The implication appears to be diat the whole of the social product, whatever its magnitude, will be absorbed by the economy's spending. But Smith's discussion of the behaviour of the profit rate as accumulation proceeds suggests that his understanding of the market process is not fully compatible with Say's Law. He argues diat As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arises in consequence a competition [for markets] between different capitals [which drives down prices and hence profit rates] (Smith, 1776, Book I, p. 336). These remarks are inconsistent with Smith's earlier contention that aggregate expenditure accommodates itself to aggregate income; for if all of current income (output) is consumed — in the form of wage goods, luxury goods or capital goods — the profitability of capital cannot be limited in the aggregate by insufficient aggregate demand. Smith's logical slip indicates that his theoretical system cannot unambiguously be said to contain the proposition that production generates an amount of demand sufficient to absorb the whole of what has been produced. Smith did not directly draw the conclusion that as competition for markets reduces profitability, the rate of accumulation drops off. Malthus did make this argument, and the debate between Ricardo and Malthus on this issue throws some light on the function performed by Say's Law in the classical system. Ricardo's deployment of Say's Law was directed at two related errors in Malthus' thinking (Tucker, 1960, pp. 90-92; Milgate, 1982, pp. 48-54). First, Malthus' hypothesis that too rapid a 'conversion of revenues into capital... must, by diminishing the effectual demand for produce, throw the labouring classes out of employment . . . [and lead to] a marked depression of wealth', implicitly rests upon the supposition that the profit rate is governed by competition for markets among capitals (Malthus, 1820, p. 369). The process of capital accumulation is presumed to be characterised

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as he calls it) is conducive to — and is indeed a precondition for—economic expansion. To make this point he had to refute the widely accepted belief, associated with the writings of Mandeville, that productive activity cannot be maintained without the support of unproductive consumption; he needed also to identify the mechanism by which saving gives encouragement to growth. These tasks are simultaneously accomplished (albeit by assertion) in the space of a few paragraphs: Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so by lending it to him for an interest, that is, for a share of the profits ... What is annually saved is as regularly consumed as what is annually spent,... but it is consumed by a different set of people. That portion of his revenue which arichman annually spends, is in most cases consumed by idle guests and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as for the sake of profit it is immediately employed as a capital, is consumed in the same manner,.. .but by.. .labourers, manufacturers, and artificers, who re-produce with a profit their annual consumption (Smith, 1776, Book I, p. 321).


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by a tendency for output to exceed desired aggregate expenditure — this because excessive parsimony on the part of capitalists inhibits the necessary expansion of markets. As a result, prices are forced down, profits are reduced, 'and the motive to further accumulation [is] checked' (Malthus, 1820, p. 463). This scenario, as Milgate (1982, p. 50) observes, is nothing but an amplification of Smith's position on the determination of profits. Malthus, of course, went beyond Smith's analysis to discuss the implications of declining profitability for the continuation of capitalist expansion; and he reasoned further that the consumption expenditures of unproductive classes might act as a palliative to the system's self-destructive tendencies. But the two men held substantially the same views on how profits are determined. Ricardo argued that the results obtained by Smith and Malthus regarding the relation between the profit rate and accumulation follow from a defective theory of profits. His own theory maintains that, given the amount of land brought into productive use (or, what is the same thing, given rents), then 'no accumulation of capital will permanently lower profits, unless there be some permanent cause for the rise of wages' (Ricardo, 1821, p. 289). Profits are a residual which cannot change unless wages (or rents) change. (It is true that in Ricardo's model profits decline as capitalism develops through history; however, this occurs not because increasing competition among capitals drives prices down, but because more extensive use of land drives rents up.) To demonstrate the superiority of his own position Ricardo had to argue that the profit theory of Smith and Malthus was somehow flawed, and he made use of Say's Law to accomplish this: M. Say has ... satisfactorily shown, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. ... [Hence] there cannot ... be accumulated in a country any amount of capital which cannot be employed productively. .. (1821, p. 290). Ricardo sought to refute the Smith-Malthus contention that competition amongst capitals can cause a permanent reduction in the profit rate. Say's Law rules out market limits to growth, and cleared the way for Ricardo's claim that the only limit to accumulation is that posed by the declining productivity of land, which by pushing rents up squeezes profits out. A key element of the accumulation theory put forth by Malthus is the idea that it is possible for a market economy to experience a universal glut of commodities, by which he meant a situation in which the amount of aggregate expenditure falls short of the value of total output. Ricardo found in this assertion a second opportunity for the application of Say's Law. Ricardo maintained against Malthus that while an oversupply might occur in one or more individual markets, it could not be general throughout the economy: if more of some commodities had been produced than could be sold, then there must have been too little produced of some other good(s) (1821, p. 292). This proposition follows directly and necessarily from the classical postulate that a decision to save is always (if not quite simultaneously) matched by a decision to invest. Throughout the classical literature, a decision to save is


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James Mill (1826, p. 330) had similarly argued that 'demand and supply in the aggregate are always equal.' We have seen that Adam Smith regarded saving as an act which necessarily gives rise to an equal amount of investment. Malthus too understood saving to represent 'the conversion of revenue into capital' (1820, p. 369); in this respect, he was in full accord with Ricardo (and indeed with virtually all writers of the period). However, Malthus failed to see that treating investment as an inevitable consequence of saving is equivalent to embracing Say's Law.1 If that part of income not spent on consumption goods represents a demand for investment goods, then total expenditure will tend to equal the value of output, and an under-consumption crisis is ruled out. The logic employed by Malthus was conspicuously faulty, and Ricardo emerged as the clear winner in the dispute.2 ' Early in his Principles, Malthus (1820, p. 31) paraphrases Adam Smith's observation that whatever is 'saved is as regularly consumed as what is annually spent' (Smith, 1776, p. 321). Ricardo, in his notes on Malthus (1951-73, Vol. II, p. 15), remarked that 'This is an important admission from Mr Malthus, and will be found to be at variance with some of the doctrines which he afterwards maintains.' 2 Costabile and Rowthorn (1985) offer a more sympathetic reading of Malthus, who, they argue, did not regard investment as an inevitable consequence of saving. If saving happens to exceed investment, producers will be unable to sell all of their output at current prices, and competition will lead to a general fall in prices. Since money wages are rigid in the short run, falling commodity prices redistribute real income in favour of workers, who have high propensities to consume, at the expense of capitalists, who tend to save most of their income. Thus, the excess supply of commodities is promptly eliminated by the price system; but the glut may persist in the sense that the price level remains depressed. And by suppressing the profit rate, gluts inhibit accumulation, while higher real wages encourage faster population growth; the ultimate result of these tendencies is that an increasing portion of the population becomes redundant. This interpretation rests upon the contention that for Malthus a decision to save does not entail a decision to invest. Costabile and Rowthorn (1985, p. 423) observe, in support of their argument, that Malthus distinguished between aggregate expenditure and aggregate income — a distinction which makes no sense if saving and investment are identically equal. This begs the question, however; Ricardo's point is precisely that Malthus wishes to argue that saving always gives rise to an equal amount of investment and that deviations between aggregate spending and aggregate income can be persistent.

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presumed to entail a decision to add to one's capital stock; the portion of national income not spent on consumption goods is by assumption used to expand the economy's productive capacity, so that aggregate demand is almost instantaneously made equal to the value of output. In an early essay 'On the Influence of Consumption on Production' (1844), John Stuart Mill summed up the classical position: .. .[I]t was triumphantly established by political economists that consumption never needs encouragement. All which is produced is already consumed, either for the purpose of reproduction or of enjoyment.... Where there is [production], we may be sure there is no lack of [consumption]. ... There will never ... be a greater quantity produced, of commodities in general, than there are consumers for (1844, pp. 48-49). There can never ... be a want of buyers for all commodities. ... The sellers and buyers, for all commodities taken together must, by the metaphysical necessity of the case be an exact equipoise to each other; and if there be more sellers than buyers for one thing, there must be more buyers than sellers for another (1844, p. 69).


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MARX'S CRITIQUE OF SAY'S LAW Marx (1863, Vol. II, pp. 492-543) was sharply critical of Say's Law and of Ricardo's position on the possibility of a general glut. Kenway (1980) provides an insightful discussion (from which some of the following observations are drawn) of Marx's critique and its relation to Keynes' theory of output. Capitalist production, Marx begins, is, above all, commodity production — that is, production the ultimate purpose of which is not consumption but the appropriation of surplus value. Capital follows a circuit which permits the extraction of surplus value (in the form of profits) to occur; money is an indispensible element in the circuit. The capitalist's purpose is not to transform commodity capital C into commodity capital C, though this is necessarily a part of what takes place; rather, he aims to transform money capital M into an even larger quantity of money capital M'. The process by which a surplus is created and distributed within capitalism requires that money capital be transformed into commodity capital and then be transformed back into money capital, so that money, far from being merely a medium of exchange, is 'an essential aspect of the commodity' in this process of metamorphosis (Marx, op. cit., p. 502). It is the system's reliance upon money which makes realisation crises possible. Capitalists wish to complete the circuit M — C . . . P . . . C — M'; but their ability to do so depends upon the willingness of those from whom diey purchased inputs (raw materials, produced means of production, and labour power) to complete the circuit C — M — C . Because money is by its nature a store of value, the sequence C — M need not coincide in time or location with the sequence M — C; i.e. the act of receiving income may be divorced from the act of spending it. If income receivers choose to withhold too large a portion of their incomes from the expenditure stream, capitalists may be unable to realise the sequence C — M'. There is no reason that this phenomenon should be confined to one or a few sectors, or that if excess supply is experienced by an isolated group of industries it will be compensated by excess demand in another group. On the contrary, once a realisation problem appears in any part of the economy, it is quickly transmined to the rest of the system by the inability of those first hit to meet their obligations to creditors. In this 1 For, in Ricardo's words, 'it is not probable that [a seller] will continually produce a commodity for which there is no demand' (1821, p. 290).

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The classical position on Say's Law does not, of course, preclude the possibility of crises altogether. Ricardo's attention was centered almost entirely upon the long-period positions toward which the economy gravitates, and he had little to say directly on the subject of short-period, or temporary, interruptions of the gravitational process. Nevertheless, he did recognise that producers might miscalculate the demands for their commodities, so that too much of some goods and too little of others might be supplied; and the supposition that such miscalculations might generate crises is not inconsistent with Ricardo's analysis. These disturbances, though, must be seen as transitory,1 and they are clearly not to be associated with a general condition of under-consumption or overproduction.


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that in the case of barter, the selling and the buying are simultaneously confounded in one operation.... Now the effect of the employment of money .. is, that it enables this one act of interchange to be divided into two separate acts or operations, one of which may be performed now and the other a year from hence, or whenever it should be most convenient.... The buying and the selling being now separated, it may very well occur that there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case in those periods which are described as periods of general excess (Mill, 1844, p. 70).

In so far as Ricardo made use of Say's Law to deny absolutely the possibility that a crisis might result from conditions of general under-consumption, Marx's critique is valid. But Mill's anticipation (by 25 years) of the substance of that critique suggests that the differences between Marx and the Ricardo regarding Say's Law had less to do with the structural characteristics of their theoretical frameworks — for the frameworks were in most respects structurally identical (cf. Garegnani, 1984) — than with the relative weights they assigned to certain institutional features of capitalism (i.e. credit markets and money) as impediments to smooth adjustment.1 In any case, Marx regarded crises as temporary (though inevitably recurring) deviations from a 'normal' position or path which is presumably characterised by full utilisation of capacity and equality of aggregate supply and aggregate demand: 'Permanent crises do not exist' (Marx op. cit., p. 497n).2 Ricardo and James Mill likewise maintained that maladjustments of output, in which some sectors experience excess supplies and others (counterbalancing) excess demands, are transitory in nature. And John Stuart Mill wrote along similar lines that the 'periods of general excess' which are made possible by monetary exchange 'can be only temporary, and must even be succeeded by a reaction of corresponding violence, since those who have sold without buying will certainly buy at last, and there will then be more buyers than sellers' (1844, p. 71). Malthus alone, of the period's important 1 See, for example, J. S. Mill (1844, p. 56): 'This perpetual non-employment of a large portion of capital, is the price we pay for the division of labour. The purchase is worth what it costs; but the price is considerable.' 2 Crises, for Marx, can also result from a decline in the profit rate below the minimum level at which capitalists find it worthwhile to accumulate. Here the crisis functions as an equilibrating process which enables the system gradually to attain a profit rate that will induce capitalists to renew their investment activity. Though such crises are inevitable, recurring, and of progressively increasing severity, they are also temporary and self-correcting.

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sense a general glut, arising from under-consumption, is indeed possible; and, Marx argues, Ricardo and the classicals are able to minimise the significance of crises only by denying that capitalism is by definition a monetary system and that it behaves in certain ways because of this. The tone ofMarx's rhetoric is harsh; but there is little in the substance ofhis remarks to which the classical writers could have strongly objected. In fact, John Stuart Mill, in the early paper previously cited, makes an argument which is remarkably similar to that of Marx; crises are traced to the ability of money to function as a store of value. The difference between exchange by barter and exchange by means of money is


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THE SIGNIFICANCE OF SAY'S LAW IN THE CLASSICAL SYSTEM We are now in a position to evaluate the significance of Say's Law for classical analysis. An observation which can be made at the start is that Say's Law, as it appears in the classical literature, implies nothing whatsoever about the tendencies of capitalism with respect to the level of employment. Samuelson (1978, p. 1421), describing what he calls the 'canonical classical model', gives voice to a pervasive misconception when he writes that For Smith, Ricardo, and Mill, saving and investing never fail to be equated at full-employment conditions; only Malthus expressed doubts, envisaging in 1820 .. the possibility of oversaving and the violation of what we know loosely as Say's Law. In fact, Say's Law does not entail full employment, and it was not used by the classicals to derive conclusions about the performance of the labour market.' Ricardo made use of the Law to support his own theory of profits against the claim of Smith and Malthus that accumulation, and hence the profit rate, is constrained by aggregate demand. Secondly, the Law was used more generally to refute Malthus' argument that a persistent state of industrial depression — a universal glut of commodities — could occur if capitalists save too large a portion of their incomes. Neither of these applications has anything directly or indirectly to say concerning the state of the labour market. To be sure, they do imply that under capitalism, existing productive capacity will tend to be fully utilised,2 and that episodes of unplanned inventory 1 The point being made here is simply that Say's Late does not imply, and was not taken by the classicals to imply, full employment. A thorough discussion of whether some classical writers believed that capitalist economies might, for reasons independent of Say's Law, exhibit a tendency toward full employment lies beyond our present scope. However, it is worth noting here that the theoretical core of classical analysis contains no mechanism which might support a tendency toward full employment, and that the classicals generally did not suppose that downward flexibility of wages would reduce the degree of unemployment (see, for example, Smith, 1776, p. 64). 2 But in a letter to James Mill (9 July 1821) Ricardo writes:

Malthus . . . says I have misunderstood his book, as the principle object of his enquiry was as to the motives for producing, and to account why with such vast powers of production adequate motives were not afforded to produce. I think he has not understood himself, for what are all his attacks on Say and me, tartly not because we have said that in all cases there would be motives sufficient to push production to its utmost extentt but because we have said, that, when produced, commodites would always find a market... (1959-73, Vol. IX, p. 13, emphasis added).

Ricardo could hardly have meant by this that physical productive capacity might not be fully utilized; for if any level of output generates its own market, failure by capitalists to operate plant and equipment at full capacity would entail a refusal to exploit sure opportunities for additional profits. (And if part of the productive capacity is embodied in fixed capital, abnormally high excess capacity entails a lower rate of return than full capacity utilisation.) It is probable that Ricardo meant simply that, in the normal operation of the economy, a certain amount of potentially productive labour will not be offered employment; that is to say, the stock of plant and equipment will not be enlarged to the maximum level compatible with the available labour force.

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figures, believed that gluts could be persistent, but the reasoning upon which he based his position was defective. Paradoxically, then, Marx and the classicals (with the exception of Malthus and Lauderdale) held similar views about the temporary nature of crises; this despite the fact that they appear to take different positions on Say's Law — with Ricardo and James Mill accepting it unconditionally, John Stuart Mill accepting it with qualifications, and Marx rejecting it outright.


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Milgate is onto something here, but he has not quite hit the mark. In Ricardo's argument, the reason that the profit rate cannot be permanently influenced by aggregate demand is precisely that, by Say's Law, no level of output can fail to find a market. An implication of Say's Law is that if entrepreneur-capitalists make a mistake and produce more output than is consistent with ex ante aggregate demand, ex post aggregate demand rises to correct for the error. But according to Keynesian theory, an ex ante miscalculation by businesses, in which they produce too much output, leads to an unwanted accumulation of inventories and to a subsequent reduction in the level of activity, until the value of output is equal to that of planned expenditures. Or to put it another way: Say's Law asserts that any level of output which is produced will be sold, whereas the theory of effective demand claims that the economy will tend to produce that level of output which can be sold. Still, the simple assertion that any level of national income is sustainable presupposes nothing about how that level of output is determined in the first place. Here we start to see how Say's Law may be disengaged from classical theory. Since classical analysis provides no explanation of outputs, at either the aggregate or sectoral level, we may, if we wish, superimpose the theory of effective demand on the classical price equations to locate the equilibrium level of national income; see Kurz (1985) for a formal illustration of how this might be accomplished. Say's Law is of course incompatible with the disequilibrium dynamics of such a construct; but the classicals were at least able — without actually providing a theory of output — to identify correctly the macroeconomic equilibrium requirement that saving equal investment. Say's Law reflects the assumption that this equilibrium condition will be met at any level of output. In a sense this assumption is understandable in the absence of a satisfactory theory of output. If classical analysis provides no rules by which a particular level of national income may be regarded as more 'necessary' or more 'natural' than any other, then the supposition that any level of output is sustainable can eliminate the need to deal with a potentially troublesome question: what mechanism, if any, will carry the economy to a sustainable level of national income if the actual level is not sustainable? It follows, however, that once a theory of output

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accumulation will be short lived; but they do not, in themselves, imply that the labour market tends to clear. Milgate has pointed out that the specific functions which Say's Law performs in the classical system do not come into conflict with the theory of effective demand; he suggests, in particular, that Ricardo's refutation of the profit theory advanced by Smith and Mai thus need not come into conflict with Keynes' theory of employment: In relation to the subsequent 'Keynesian critique of Say's Law', this aspect of Ricardo's use of the notion that 'demand is only limited by production' does not seem to involve the errors toward which that critique was directed. For while Ricardo denies that aggregate demand can permanently influence the rate of profit, there is nothing in his argument... that would necessitate a rejection of Keynes' idea that effective demand determines the level of output ... (Milgate, 1982, pp. 50-51).


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No man produces but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person (Ricardo, 1821, p. 290). To produce implies that the producer desires to consume; why else should he give himself useless labour? He may not wish to consume what he himself produces, but his motive for producing and selling is the desire to buy (J. S. Mill, 1844, p. 49). A man produces only because he wishes to possess. . . . When a man produces a greater quantity of a commodity than he desires for himself, it can only be on account; namely, that he desires some other commodity which he can obtain in exchange for the surplus of what he himself has produced. It seems hardly necessary to offer anything in support of so necessary a proposition; it would be inconsistent with the laws of human nature to suppose, that a man would take the trouble to produce anything without desiring to have anything (James Mill, 1826, pp. 326-327).

The inability of the classical theorists to provide a formal rationale for Say's Law suggests that the doctrine is not implicit in the logic of their analytical system. In fact, the system contains no mechanism which can ensure that planned investment will always gravitate toward equality with aggregate saving. This aspect of classical theory may be contrasted with the neoclassical treatment of Say's Law, in which the interest rate adjusts to ensure that investment is brought into line with saving. But in a neoclassical context, it is not strictly speaking true that any level of national income is sustainable. Since in a general equilibrium model all markets are inter-related, investment and saving will, in general, be equal only when all other markets have cleared; hence, only that level of national income

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consistent with the classical model is discovered, Say's Law is no longer needed to neutralise the possibility of persistent disequilibrium of this sort. [This interpretation of the role of Say's Law in classical analysis differs somewhat from that of Green (1982), who attributes the absence of a classical theory of output to the fact that the Law of Markets eliminated the need to provide such a theory. It seems more likely that causality ran in the opposite direction. Without a theory of output, the classicals could establish explanatory relevance for their theoretical system (i.e. ensure gravitation toward a long-period position) only by adopting Say's Law; cf. Garegnani (1978-79, pp. 27-28). While the availability of Say's Law may have rendered the need for an explanation of output less urgent, the difficulties which the Law was meant to suppress derive entirely from the lack of an output theory.] It is significant that nowhere in their writings do the classicals provide rigorous support for the proposition that production 'never furnishes supply, without furnishing demand .. to an equal extent' (James Mill, 1826, p. 332). The justification given for Say's Law almost never goes beyond the unconvincing assertion that agents will expend the effort required to create a certain amount of income only if they ultimately intend to spend that amount of income. For example:


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consistent with full employment can persist. Thus, Say's Law, as it was understood by the classicals, plays no part in marginalist theory. What the Law means in this setting, if it can be said to mean anything, is that, whatever the full employment level of income happens to be, total expenditure will (in equilibrium) be sufficient to support it. But marginalist theory does not require a special doctrine to arrive at this result: the outcome is ensured by the theory which is presumed to describe the determination of prices, outputs and incomes. It might therefore be appropriate to discontinue the tradition, begun in error by Keynes, of imputing Say's Law to the neoclassicals. The rules which govern markets in classical analysis, by contrast, do not determine a macroeconomic equilibrium or contain a mechanism (e.g. factor substitution, or the principle of effective demand) which can ensure that some tendency to such an equilibrium will exist. No classical writer ever conceived of the interest rate as the mechanism which might validate Say's Law, for the simple reason that there is nothing in classical theory which suggests that the interest rate can perform this function. Interest on money, when it was distinguished from profit, was typically thought by the classicals to be an appropriation of part of the social surplus by the owners of money capital, determined as the outcome of a class struggle between finance capitalists (rentiers) and the owners of commodity capital (Panico, 1980). A number of classical writers — for example, Joplin (1823, 1832), Tooke (1826), and J. S. Mill (1844,1871) — did explain the interest rate in terms of the supply and demand for loanable funds. But it was not generally inferred that this relation might provide a superior logical basis for Say's Law, which they continued to justify on the feeble grounds embodied in the passages cited above. The mechanism which these writers had in mind appears, in any case, not to have been the same as that which characterises the marginalist theory of interest. Joplin, for example, argued that the volume of saving depends primarily upon the income of the capitalist class. Thus, an increase in the demand for loans could be accommodated by additional saving only if the distribution of income changes in favour of capitalists; the link between saving and the interest rate is indirect, and is comprised entirely of an income effect. Moreover, in Joplin's schema, saving clearly adjusts to investment — by a process which bears some similarity to Kaldor's (1955) Keynesian treatment of distribution — rather than the other way round (Joplin, 1823; see also Meek, 1967). Joplin was evidently not thinking in terms of the well-defined interest elastic Saving and Investment functions found in marginalist theory. Indeed, the lack of a credible justification for Say's Law in classical analysis cannot be remedied by requiring the interest rate to perform the appropriate equilibrating function, as it does in neoclassical theory. Since downward sloping factor demand functions play no role in classical theory, there can be no presumption of a tendency toward full employment. Hence the positions of the (hypothetical) Saving and Investment curves could not be established, and there would be no reason whatsoever to suppose that variations in the interest rate could bring investment and saving into line with one another (cf. Garegnani, 1978-79, p. 58). The failure of practically all classical


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CONCLUSION Say's Law, then, is hardly a serious stumbling block to the integration of classical theory and the theory of effective demand. For the joining of Keynesian and classical analysis would in itself provide the basis for dropping the Law. There is a curious irony in Keynes' critique of Say's Law. He attempts to discredit the Law by attacking the orthodox theory of interest, which he correctly identifies as its theoretical underpinning (at least in a marginalist setting). The thrust of his critique is that the Saving and Investment functions by which conventional theory attempts to determine the interest rate are inadequate to accomplish that task. Saving depends upon income as well as upon the interest rate; income, in turn depends upon investment. Thus, without a third function showing the relation between income and investment, the interest rate cannot be ascertained. The orthodox theory of interest was therefore both misspecified and underdetermined (Keynes, 1936, pp. 179-181). Keynes was able to make this argument only by isolating the traditional theory of interest from its general equilibrium setting, i.e by framing the problem in terms of partial analysis. In the general formulation of the marginalist theory, however, the interest rate and the level of national income are both fully determinate: they always gravitate toward just those values which are consistent with the full employment of all scarce resources. The marginalist theory of interest is therefore not indeterminate, and Keynes' critique of it was unfounded. We have noted above that a striking feature of the classical system is that it is open with respect to output. The mechanism toward which Keynes directed his critique is not implicit in classical theory. It could not in any case have been used to demonstrate the validity of Say's Law, precisely because, owing to the absence of a classical theory of output, if saving depends upon income as well as the interest rate, the classical theory of interest would then be one equation short. Since there is no requirement that all inputs with positive prices be fully employed, classical theory cannot by itself establish a definite level of national income; hence, given the income elasticity of saving, an explanation of the interest rate in terms of the interaction of

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economists to see a connection between a supply-and-demand determination of the interest rate on the one hand, and the logic of Say's Law on the other, undermines attempts by some recent interpreters (Blaug, 1978, pp. 154-165; Caminati, 1981) to locate in classical theory a mechanism which validates the Law of Markets. The conclusion toward which the preceding discussion points should by now be apparent. The position which Say's Law occupies in classical analysis can be filled by a satisfactory theory of aggregate output; thus, had the principle of effective demand been available to the classicals, they could have abandoned the Law of Markets without raising any difficulties relating to the determinacy of the level of output. To go a step further, we may say that since Say's Law can derive no support from the theoretical core of classical analysis, it must be judged, in general, to be false within the context of that analysis.


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the supply and demand for saving must also be incapable of giving determinate results. There is something faintly ironic in the idea that a body of analysis which is marked by the very flaw which Keynes wrongly attributed to neoclassical theory, should turn out to be the starting point for a renewed defence of the theory of effective demand.

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NOTES ON SAY'S LAW, CLASSICALECONOMICS AND THE THEORY OFEFFECTIVE DEMAND