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In his principal work A Treatise on Political Economy, French economist Jean-Baptiste Say advanced a theory that laid out the relation between production and aggregate demand. Known as the Say’s Law, it states that ‘a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.’

However, famous economist John Keynes later came to misunderstand the law. In his latest op-ed, Dr. Craig S. Wright believes that such misunderstandings have been the source of so much misery in the last century.

Keynes mistook Say’s Law that ‘supply creates its own demand’ to mean that all produced goods would be purchased and consumed. Using this flawed logic, Keynesians have criticized Say, implying that he could not explain the business cycle and that he also made the assumption of full employment.

However, Say’s Law simply stated that the producer of one product becomes the consumer and purchaser of another. Revenue obtained from the sale of one good creates a market in the distribution of free and disposable income. A producer doesn’t create goods simply to collect and store the money; rather, he does it so he can create wealth which he ultimately consumes. Dr. Wright notes:

The simple answer here is that production is the cause of consumption. Without sales, one cannot make purchases.

Say’s Law means that improved production naturally leads to greater levels of consumer spending. This sparks economic growth. The law also implies that spending money to produce goods and services must come before spending it for consumption.

Keynes further misinterpreted Say’s Law to mean that recessions were caused by failure of demand. However, Say had proposed that it was the failure in the structure of supply and demand that caused recession.

Dr. Wright noted, “What it meant was fairly simple: recession follows production errors. When a producer fails to determine just what a consumer really wants, he continues to make and stockpile goods that cannot be sold at a profit (if at all). It was a common situation in the USSR where goods were estimated to be worth less than the value of the materials used in their manufacture.”

Keynes may have had it right with many of his macroeconomic theories, but when it came to his interpretation of Say’s Law, he got it horribly wrong. The implications of this misinterpretation can still be felt today, several decades later.

Dr. Wright concludes, “Keynes did not want to fix capitalism; he wanted to build his own tower. Unfortunately for us all, it is a tower of cards that has repeatedly fallen over in the wind of change due to having been built on a foundation of logical flaws and grossly misrepresenting errors.”

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