Only someone with professional training in economics has ever heard of the economic principle now known as Say’s Law of Markets. Indeed it was Keynes’s explicit aim in writing his General Theory – an aim in which he was wildly successful – to have Say’s Law removed from economic discourse.
For all that, if you wish to understand what causes recessions and how they are overcome, it is to Say’s Law you need to turn which, to put it as briefly as possible, argues that an economy cannot be made to grow from the demand side but only through higher productivity. You can therefore see how contrary to modern macroeconomic theory Say’s Law is.
Say’s Law was the bedrock principle of classical economics. I describe it as economic theory’s Law of Gravity. And why I think it is of such importance can be seen from this simple equation:
CE – SL = MT
CE = classical economics (i.e. economic theory before Keynes)
SL = Say’s Law
MT = Macroeconomic theory today
Macroeconomic theory is Keynesian. It is what everyone is taught and has been for seventy years.
If it should turn out that MT is finally recognised for being the useless amalgam of theoretical nonsense I think it is, there is an awful lot of capital that will be burned away. Many of our mis-educated economists will find that what they thought they knew may actually be incorrect, and many of those texts that pour out page after page of MT stuff will need to be junked for presenting the misleading nonsense they do.
It does not surprise me that those who trade on their knowledge of MT economics have a hostile reaction to those who point out that Say’s Law may have been right after all. The Global Financial Crisis (GFC) and the stimulus packages put in place to deal with it have been a crucially decisive test of Keynesian macroeconomic theory. That it has failed this test in every conceivable way – other than through the Krugman/Stiglitz ‘we should have had an even larger deficit’ criterion – is recognised by virtually everyone. Applying Keynesian policies makes things worse. An alternative to today’s MT is therefore needed.
What I argue is that Say’s Law of Markets must be reintroduced into economic theory as a core principle of what is taught. Unless it is, the blunders which have followed one after the other during the two years following the GFC – the same policies which led to the ‘lost decade’ in Japan and created the Great Stagflation of the 1970s – will be repeated time and again.
The problem is that the Law of Markets is difficult to understand, especially after having absorbed the MT theories taught today. But I can see no alternative. Either economic theory once again re-absorbs Say’s Law or the MT economics most economists are taught will remain a danger to any economy attempting to apply the policies it recommends in the real world.