On Thursday, US Secretary of Energy Rick Perry flubbed one of the most fundamental lessons of modern economics.
“Here’s a little economics lesson: supply and demand. You put the supply out there, and the demand will follow,” he said at a coal plant, according to Taylor Kuykendall, an energy reporter at S&P Global Market Intelligence.
Contemporary mainstream economists generally agree that the reverse is true: demand is the driver.
However, Perry is not the first to propose this unorthodox line of thinking. And this brings us to Say’s Law.
In his 1803 work “A Treatise on Political Economy,” the French economist Jean-Baptiste Say argued 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.”
He continued: “Each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”
Taking it a step further, Say argued that a general glut – by which his contemporaries meant a widespread excess of supply over demand – could not occur. He said that if there were goods that were unsold, that was because other goods weren’t being produced. This was a popular idea in the 19th century – although even then, others questioned the idea that a general glut couldn’t exist.
But in 1936, in “The General Theory of Employment, Interest, and Money, the economist John Maynard Keynes slapped down what he said was the idea that “supply creates its own demand.” (Some economists maintain that Keynes misinterpreted what Say was trying to say.)
“Say’s Law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment,” he wrote.
Notably, in the early 20th century, the Great Depression suffocated the US economy, and the unemployment rate skyrocketed to about 25%. This presented a problem for Say’s Law in that there was a huge supply of labor but no demand for it – in other words, lots of people were available to do work (supply), but there were no jobs (demand).
Today, many of Keynes’ ideas from his seminal work are central to modern macroeconomics. But it’s interesting to think that just a few hundred years ago, Say’s Law – and what Perry said on Thursday – was considered mainstream.