Tuesday, January 17, 2012

Say’s Law

What a man produces is what he can bid for the produce of others. The value of what he creates – that is, its value to others – represents his effective demand in the marketplace. If he produces nothing, if what he produces has no value (mud pies), if what he produces loses its value (stone knives in the Bronze Age), or if he produces more than can be consumed (houses after a housing bubble has burst), he has no effective demand though his needs be unchanged.

Say’s Law

This restates Say’s Law, which Keynes in his General Theory popularly, though misleadingly, formulated as: Supply creates its own demand – misleading because a supply of goods with no value yields no effective demand and because supply that does have value to others does not create effective demand, it is effective demand.

What Keynesians do not understand is that if a man is hired to dig holes and then fill them back up, he is fully employed but he produces nothing of value; effective demand is not increased by his efforts. Nor does giving him money or goods in exchange for his useless labor create effective demand; it only shifts it from the people who produced what was given him.

Only production creates effective demand and only after what was produced is sold can other goods can be purchased and consumed. What changed England was not increased consumption but increased production, production that made increased consumption possible.

http://www.thefreemanonline.org/headline/keynesian-cure/

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