Sunday, June 29, 2014

Lord Keynes — A Puzzle about Say’s Law

The fundamental assumption is that left to itself everything (all factors) adjust (in aggregate) in the long run although there may be short run disruptions in some markets. It is further assumed that the only way to facilitate the adjustment process is to reduce frictions, which it is assumed are due to government intrusion in markets. Shortages and gluts are only short terms problems that entrepreneurial ingenuity and creative destruction will work out along with market forces.

May make sense in the laboratory assuming a simple closed system and cet. par., but not so much in the real world where all things are not equal, especially over time, institutions dominate rather than individuals, the system is complex, the future uncertain, people are not always perfectly rational, and asymmetries of information and power skew markets.

Say's law should be called Say's gadget, which, like a Robinson Crusoe-Friday economy, might be useful in Econ 101, or not.

I don't think we should come down too hard on early economists though. After all, they were exploring the territory and carving out a new discipline. In this light their achievements are great even though they made some blunders. 

What is disconcerting is that so many contemporary economists still can't figure it out after the mistakes have been pointed out, sometimes long previously, such as Marx and Keynes with Say. No, markets don't adjust at a full employment equilibrium in the long run, and now we know why based on monetary, institiutional and cognitive-behavioral economics, as well as the failures of equilibrium economics.

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Here’s what Marx thought about Jean-Baptiste Say, courtesy of Sandwichman at Econospeak.

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