Say's Law and the Secret Police

In Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, Jeff Madrick ranked Say's Law (and austerity economics) as Bad Idea #2.  How can that be when the erstwhile "law" reputedly sank without trace after Keynes demolished it in the 1930s? In his 1975 book, Money: Whence It Came, Where It Went, John Kenneth Galbraith mused,

…on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.

It turns out that Bad Idea #2 didn't sink without trace after all! It went underground -- which was easy to do since the argument had always been a shape-shifter and master of disguise. Operating clandestinely, the Say's Law secret police are beyond and above the rule of law.

In truth, Say's Law wasn't actually Say's. It was a widely held anti-mercantilist notion that was subsequently attributed to Say to lend it panache. Inklings of the idea can be found long before Say in Henri Martyn's 1701 Considerations on the East India Trade. My own candidate for canonical statement from the early industrial period would be Dorning Rasbotham's 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," written in response to anti-factory riots at Bolton, England the previous year.

Squire Rasbotham formulated his dictum succinctly as "a cheap market will always be full of customers." Significantly, the Lancashire magistrate prefaced his truism with a rebuke to that unidentified rabble who falsely believed that there was only a certain quantity of labour to be performed.

These two tracks of the argument were crucial to the disguise. If one's brash claim about the automatic inevitability of effective demand is shown to be theoretically untenable and empirically unfounded, one can deftly switch to the other track of scorning an opponent's silly assumption that there is "only a fixed amount of work to be done." Say's Law "sank without trace" only if one overlooks its not-a-fixed-amount-of-work doppelganger.

Or one could get confounded by the sheer proliferation of aliases: Malthusian fallacy, mercantilist fallacy, Luddite fallacy, fixed work-fund, lump of labor, lump of work and make-work fallacy are the more common negative renderings. Positively, the principle has been defined as supply creates its own demand, technology creates more jobs than it destroys and the impossibility of a general glut. Marx encountered (and dissected) "the theory of compensation as regards the workpeople displaced by machinery."  William Stanley Jevons elaborated the cheerful principle thusly:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

In his review of Seven Bad Ideas, Paul Krugman disputed Madrick's claim that Say's Law was a staple of mainstream economics,

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending. 

But is this “mainstream economics”? ... Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Was "lumping" a Freudian slip? In the late 1990s, Krugman castigated William Greider's One World, Ready or Not, characterizing Greider as an "accidental theorist" and accusing him of committing the "old misunderstanding... sometimes referred to as the 'lump of labor' fallacy":

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available.... It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

As hard as it might be to explain that the idea involves a fallacy of composition, it would have been much harder to prove that Greider actually committed the fallacy. Krugman didn't bother to try. The lump-of-labor fallacy always involves innuendo that anyone doubting the tacit supply-creates-its-own-demand rule could only conceivably do so under the influence of the untenable idea that there is a fixed amount of work to be done. Apparently, accusing one's opponent of committing a fallacy excuses the complainant from any need to defend -- or even acknowledge -- his own assumptions or prove his allegations.

If Say's Law became the law that dared not speak its name during the heyday of triumphant political Keynesian demand-management policy, its ventriloquist surrogate was the ubiquitous fallacy claim. Cardiff Garcia described the accusation as a "lazy but common retort to the idea that technological advancement would massively displace workers." In the early 1960s, Cornell industrial relations researcher Marcia Greenbaum noted economists' "nearly unanimous" opinion that calls for a shorter workweek to cope with unemployment were based on the lump-of-labor idea:

If this chapter has painted a gloomy picture of the economic implications of the shorter workweek, it is simply reflecting the nearly unanimous opinion of economists outside of the labor movement. Every other labor proposal for coping with unemployment . . . receives support from at least some economists and public officials. In their plea for shorter hours, however, union leaders stand alone, attacked even by the leading officials of a friendly Administration.

As Larry Summers recently pointed out,

…when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out...

"It would all sort of work itself out." Walks like Say's Law. Quacks like Say's Law. And as Galbraith noted, when Say's Law ruled economics, "to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots." Summers's account of his experience as an undergraduate at MIT in the 1960s is eerily reminiscent of Galbraith's account of the days before the 1930s when Say's Law prevailed.

Might I be unjustly lumping the lump-of-labor fallacy claim with Say's Law -- two concepts that "correct or not, are actually quite different"? Not according to Raymond Bye, who wrote one of the most widely-used introductory economics textbooks of the 1920s and 30s. In Bye's account of the "lump of work" or "make-work" fallacy, it was precisely the principle that supply creates its own demand that proved the fallacy of the alleged assumption that the amount of work to be done was fixed.

The complementarity of the fallacy claim and Say's Law is transparent in the writing of conservative adherents to Say's Law -- which brings me to a point that I would like to stress: conservative consistency on Say's Law and the lump of labor contrasts markedly with mainstream liberal equivocation. The fallacy claim and the Say's Law notion are two sides of the same coin. You can't reject one side while invoking the other. No doubt observers sense a discrepancy even if they can't analytically put their finger on what it is. Disparaging those who venerate the law while deriding those who violate it may seem like centrist even-handedness to tenured sophisticates but it smacks of hypocrisy to the hoi polloi.

So what's wrong with economics? Madrick pointed out seven bad ideas. I would add that those bad ideas often circulate in disguise, under aliases, and insinuate themselves back into the discourse in ways that are more pernicious because they are harder to detect. Like the secret police, these clandestine versions of the bad ideas can be used to suppress dissent while preserving official deniability.

UPDATE: Nick Rowe ponders Lump of Labour, Say's Law, and the slope of the AD curve at Worthwhile Canadian Initiative and Sandwichman replies with reference to The Pathos of Aggregate Demand Management.