Filed under: Politics | Tags: Classical Economics, Say's Law, Supply Side Economics
From The Seven Fat Years: And How To Do It Again
by Robert L. Bartley
Jean Baptiste Say (1762-1832) lent his name to the bedrock proposition of classical economics: Supply creates its own demand. That is, manufacturers pay workers to make widgets, and workers use their pay to buy widgets. Savers lend their money to investors who build widget factories, and the factories’ profits go to repay principal and interest. A higher price will call forth more widgets, and higher wages will call forth more widgetmakers, and higher returns will call forth more investment. Unless the government gets in the way, for example by fixing prices, markets will clear and everyone will live happily ever after.
Whether a free economy functions in this self-regulating fashion has been and remains the great issue of macroeconomics. It was at the heart of the differences between Ricardo and Malthus, and of a general 19th-century debate called “the general glut controversy.” In the 1930s, Say’s law fell before the Keynesian onslaught, the massive unemployment showed the labor market had not cleared. Henceforth, governments were expected to correct “market failures.”