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Wednesday, June 22, 2011

Reddit links to another refutation of Say's Law [which misunderstands aggregate demand].

And who should it be but our old friend Lord Keynes again.

But this is not so much an attack on Say, but using Say to slay modern Austrian dragons.
He quotes William L. Anderson:
When Krugman uses "demand," he means "aggregate demand," which economically speaking is a nonsensical term. There is no such thing as "aggregate demand;"

Anderson wrote that in response to Krugman's line:
Millions of willing workers are idle because of lack of demand;

LK really goes to town, proving that Say's Law presupposes the concept of aggregate demand, and quoting Thomas Sowell using "aggregate demand" when stating various versions of Say's Law.

The idea being, how can Anderson write there is no such thing as aggregate demand, when Say's Law, accepted by every Austrian, assumes that there is such a thing?

Yep, it's a real good question. Kudos to LK for raising it. And kudos to William Anderson for providing an answer in the comments on his blog, where he links to an article by Bob Higgs. We'll quote the relevant part:

The root problem, I believe, lies in the aggregative character of contemporary thinking about macroeconomic fluctuations. In this view, rising aggregate real output is good, no matter what the composition of the newly produced goods and services. A recession, which most analysts understand as a sustained decline of aggregate real output, is bad, and, in their view, it should be combated by fiscal "stimulus" and by expansionary monetary policy in order to reverse the decline in aggregate demand. They do not worry about — indeed, they rarely even pay much attention to — the makeup of the aggregate output that is added during business expansions, lost during business recessions, or brought into being by the government's compensating fiscal and monetary actions. Output is output; spending is spending. In fact, the whole idea of using government spending to offset reduced spending by investors or consumers turns on this assumption that a dollar spent is a dollar spent, regardless of what it is spent for.

In other words, when an Austrian says there is no such thing as aggregate demand, he means it is a very special sense. He is making that statement to disagree with the Keynes-Krugman school, that holds govt spending on anything at all will help an economy in recession. An Austrian says that you cannot lump the whole economy together that way, and think that spending more in any part at random will cure the economic ills.

Of course Say's Law is not talking about spending money to cure recessions at all. There "aggregate demand" is used by Sowell and others to mean "the sum total of purchasing power of all people in an economy", which is a mathematical entity. Whether mathematical entities exist or not is an interesting philosophical question, but way off our topic.

In other words, LK was fooled by the fact that the same words can have different meanings, depending on the context. Hope it's cleared up now, mate. We await your retraction.

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