Abstract

The term “Say's Law” was introduced in the twentieth century by an American economist, Fred Manville Taylor. To this date, no research has thoroughly investigated how the term came to be and what it really meant in Taylor's writings. This paper aims to examine how Taylor defined and used it. Drawing upon Taylor's publications and archival sources, we show that Taylor coined the term in direct reference to Jean-Baptiste Say's writings. Simply put, Say's Law was defined by Taylor as the principle that “total demand must in the long run coincide with the total product or output of goods produced for the market.” Taylor never defined Say's Law as “the impossibility of demand deficiency as a cause of recession.” Like Say, Taylor acknowledged that general demand deficiency could cause economic crises. In such scenarios, public expenditures could have expansionary effects, a position that Say also supported. Taylor rightly credited Say with the earliest and clearest formulation of the law of outlets (loi des débouchés), and in doing so he correctly interpreted the essence of Say's thinking.

Say's Law is arguably one of the most controversial principles in economic theory. It is a little-known fact that the term “Say's Law” was introduced in the twentieth century by an American economist, Fred Manville Taylor. However, the literature offers conflicting accounts of Taylor's role in the history of Say's Law. In particular, two issues have been disputed: the definition of the term “Say's Law” in Taylor's writings and whether the term was invented in reference to Jean-Baptiste Say. Petur Jonsson (1999: 967) argues that “as defined by Taylor, Say's Law was the proposition that ‘if we can assume that producers have directed production in true accord with one another's wants, total demand must in the long run coincide with the total product or output of goods produced for the market.’” He adds, “This was the original definition of Say's Law and, while it postdated classical economics, it did capture one of Say's key insights.” Robert Clower (2004: 89) is even more affirmative and states that “F. M. Taylor called Say's théorie ‘Say's Law’: ‘the principle that products constitute at once the demand for goods and the supply of goods, . . . and so, if we assume production to be directed in accord with individual wants, supply and demand must necessarily be equal.’” On the other hand, Steven Kates (1998, 2019) provides a different account. Kates (2019: 124) claims that “Taylor . . . invented [the term ‘Say's Law'] to describe . . . the impossibility of demand deficiency as a cause of recession.” To make his case, Kates quotes the following passage from the ninth edition of Taylor's Principles of Economics:

Among the fallacious notions in popular thinking that have gained very wide currency are to be found a number which grow out of misconceptions as to the real source of the general or total demand for goods, and as to the methods by which that demand is increased or diminished. Thus, governmental improvements of all kinds, including even those of questionable value, are often supported by business men and others on the ground that such improvements increase the total demand for goods. . . . Persons of thrifty habits who save a large share of their incomes are frequently the objects of criticism on the ground that saving diminishes the total demand for goods. (Taylor 1925: 196)

The problem is that this quotation does not show any reference to the term “Say's Law.” Nowhere in this quotation did Taylor define the term as “the impossibility of demand deficiency as a cause of recession.” Moreover, Kates (2019: 125) posits that “Say's loi des débouchés . . . is not what . . . F. M. Taylor had meant by what he referred to as ‘Say's Law.’” However, Kates (1998: 151) previously claimed the opposite, writing, “Taylor was the first to use the term ‘Say's Law’ to describe what had previously been referred to as ‘the law of markets’ or the ‘théorie des débouchés.’” In light of these conflicting statements and divergences with previous analysts, it is all the more necessary to thoroughly investigate how the term “Say's Law” came to be and what it really meant in the writings of its creator. In particular, the following questions must be answered: When exactly did Taylor use the term “Say's Law” for the first time? What was Taylor's actual definition of the term? Was Taylor right in naming the law after Jean-Baptiste Say?

The purpose of this essay is to retrace the origins of the term “Say's Law” and to analyze its meaning and uses in Taylor's writings. Drawing upon Taylor's publications and archival sources, we show that Taylor introduced and popularized the term “Say's Law” in direct reference to Jean-Baptiste Say's writings. Simply put, Say's Law was the principle that “if we can assume that producers have directed production in true accord with one another's wants, total demand must in the long run coincide with the total product or output of goods produced for the market” (Taylor 1911: 151). Taylor never wrote that Say's Law meant “the impossibility of demand deficiency as a cause of recession.” Like Say, Taylor acknowledged that general demand deficiency could cause economic crises. In such scenarios, Taylor admitted that public expenditures could have expansionary effects, a position that Say also supported. Taylor rightly credited Say with the earliest and clearest formulation of the law of outlets (loi des débouchés), and in doing so he correctly interpreted the essence of Say's thinking. These findings are in line with recent studies on the history of Say's Law (Béraud and Numa 2018a, 2018b; Béraud and Numa 2019; Numa 2020).

The present essay contributes to the historiography of Say's Law. It enhances our understanding of the origins and the transmission of an important economic principle, which is still part of the current theoretical and policy debates. The significance of our study is to demonstrate that the term “Say's Law” is perfectly legitimate and accurately reflects the historical record. As Taylor indicated, in the nineteenth century many authors discussed the idea that production stimulated demand, but he rightly credited Say with its earliest and clearest formulation.

The primary sources on Taylor's life and works used in this essay consist of his published writings (articles and textbooks) and the Taylor papers held at the Bentley Historical Library of the University of Michigan. The Taylor papers contain biographical materials, his correspondence, several published and unpublished manuscripts, and lecture notes relating to his interest in economics, philosophy, and political science.

1. Eclectic Economist and Educator

Fred Manville Taylor (1855–1932) was born in Northville, Michigan, to a Methodist family. His ancestors were English, Dutch, and Scottish (Hinsdale and Demmon 1906: 319). He received his bachelor's degree in 1876 and a master's degree in 1879, both from Northwestern University. In 1884, Taylor began his graduate training in economics under Richard Theodore Ely and Henry Carter Adams at Johns Hopkins University. In 1887, he transferred to the University of Michigan, where he obtained his PhD in political philosophy a year later. Taylor's doctoral dissertation, titled “The Right of the State to Be,” was a study of the concept of sovereignty. He put forward a theory of evolutionary and revolutionary activities “perhaps somewhat reminiscent of Rousseau,” according to Zenas Clark Dickinson (1960: 43), one of Taylor's colleagues at the University of Michigan. Taylor's dissertation was eventually published as a book (Taylor 1891).

Taylor's academic career started at Albion College (Michigan) in 1879, where he mainly taught history until 1892. Taylor then became an assistant professor of political economy and finance at the University of Michigan. He was promoted to a junior professorship in 1894 and to a professorship in 1904. He chaired the economics department from 1921 to 1924. In addition to courses in economic principles, money and banking, and industrial history, Taylor taught courses on the history and theory of socialism and agrarian reforms. Taylor submitted his letter of resignation in February 1929, citing declining health. Upon retiring in June 1929 after half a century of teaching service, he was made professor emeritus of economics. He died of pneumonia in South Pasadena, California, in August 1932 at the age of seventy-seven. He was survived by a widow, Mary Sandford (Brown) Taylor, and four children.

Taylor's main opus was Principles of Economics, published in nine editions from 1911 to 1925. The structure and the contents of the book reflected Taylor's embrace of the methodology of mathematics: presentation and formulation of fundamental assumptions, demonstration, clear-cut conclusions, and limitations. Taylor made a point to present “principles” and “corollaries” in a systematic fashion; this is the method used in his formulation and analysis of Say's Law (section 3). Taylor was also a specialist on money and credit.1 He published works on the elasticity of money—meaning that the quantity of money “varies in accord with the varying needs of industry” (Taylor 1896: 134)—and on the relation between money and prices in his other best-known book, Some Chapters on Money (Taylor 1906). In his monetary writings, Taylor relied on theoretical arguments and empirical evidence to criticize the quantity theory of money and defend the gold standard. Like Say, Taylor (1906: 11, 68) acknowledged that money was more than just a medium of exchange and could be demanded for itself. Money could thus serve as a store of value. Discussing hoarding, he wrote, “Even in a country like the United States, the amount of money of which such disposition is made is probably quite large. In times of panic its volume increases enormously and with serious consequences” (Taylor 1906: 68). This quotation suggests that, like Say, Taylor believed hoarding was a symptom rather than a cause of disturbance.2

In 1928, Taylor served as president of the American Economic Association. His famous presidential address, “The Guidance of Production in a Socialist State,” marked an important episode of the socialist calculation debate. Taylor (1929: 8) sought to demonstrate that “if the economic authorities of a socialist state would recognize equality between cost of production . . . and the demand price of the buyer . . . they could, under all ordinary conditions, perform their duties . . . with well-founded confidence that they would never make any other than the right use of the economic resources placed at their disposal.” Taylor essentially maintained that a socialist state could be at least as efficient as a private enterprise economy, an argument previously developed in mathematical form by Enrico Barone ([1908] 1935).3 His address would nonetheless pave the way for Oskar Lange's and Abba Lerner's analyses in the 1930s.

Taylor was well respected and read by some of the most illustrious American and US-based economists of his time. The Taylor papers contain several letters from and to Irving Fisher, Frank Hyneman Knight, Friedrich August von Hayek, and Joseph Alois Schumpeter. Other correspondents include H. C. Adams, Edward Hastings Chamberlin—a former student of Taylor at the University of Michigan—Edwin Robert Anderson Seligman, and Frank William Taussig among others.

According to his daughter Margaret, Fred Taylor was a “very serious and religious” man (Taylor Farrell 1949: 1). An adept of poetry, plants and flowers, trout fishing, hunting, golf, cycling, and sailing, Taylor was a “lover of truth at all cost” (Taylor Farrell 1949: 2). This sentiment was also that of his colleagues, who mentioned “his refreshing intellectual honesty, [and] his uncompromising devotion to truth” (Sharfman et al. 1933: 441). While some may have regarded Taylor's views as “backward looking conservative” (Dickinson 1960: 44n1), he certainly appeared to be eclectic. This explains why he could lecture on socialism and revolutionary movements without necessarily espousing a leftist ideology. The picture that emerges from the various available sources is that of a man driven by intellectual curiosity and intellectual honesty.

2. Say's Law of Outlets

The core message of Say and his allies was that production was the source of demand. However, that relationship need not imply that supply was necessarily equal to demand nor that demand deficiency could not cause economic crises.

In the chapter on outlets for goods of the first edition of Traité d’économie politique (bk. 1, chap. 22), Say refuted mercantilist monetary fallacies. He criticized the views of economists such as François Véron de Forbonnais (1754) and James Steuart (1767) who claimed that international trade spurred economic development by opening up new markets, and by increasing the quantity of specie in circulation within a country. Say contended that the abundance of money did not affect trade. He then concluded that it was pointless to favor a trade surplus in order to enhance the stock of gold and silver. Indeed, for Say ([1803] 2006: 244), “It is not the abundance of money but the abundance of other products in general that facilitates sales.”4 He aimed to show that in general the production of goods rather than the supply of money stimulated the demand for goods (Baumol 1977: 154).

In fact, Say's discussion of the law is not limited to the chapter on outlets of the first edition of Traité. Thus, in book 4, chapter 5, Say ([1803] 2006: 688) stated that “contrary to what many people thought, the scope of the total demand for means of production, does not depend upon the scope of consumption. Consumption is not a cause: it is an effect. One must buy in order to consume; yet one can buy only what has been produced. The quantity of products demanded is therefore determined by the quantity of products created? Undoubtedly so . . . The total demand for products is therefore always equal to the sum of products” (original emphasis). On this latter point, Say would later be less categorical.

In the second edition of Traité, Say ([1814] 2006: 250) argued, “A product is no sooner created than it opens, from that instant, an outlet for other products to the full extent of its own value.” In Lettres à M. Malthus, Say ([1820] 2020: 240) added, “As each of us can only purchase the products of others with his own products; as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.” Say was aware that, at times, producers would not be able to sell all their merchandise. Thus, if some products did not sell, it was because “many people bought less because they earned less” (Say [1814] 2006: 253). Demand was constrained by successful sales (Béraud and Numa 2018a, 2018b). Thus, for Say, the failure to produce (or the failure of factor owners to sell their services) must have repercussions on the demand for output, because the demand for product was financed out of earned income. In other words, a general demand shortfall was possible and could cause economic crises.

Say ([1819] 2006: 260) acknowledged that in a stagnating or declining economy, “all the demands are on the decline; the value of the products is not equal to the costs of production.” In other words, “while the demands are on the decline, there are always more goods [that are] supplied than goods [that are] sold” (Say [1814] 2006: 260n). Say ([1826] 2006: 1105) argued that “a buyer manifests himself in an effective manner only when there is money to buy; and he can obtain money only through the products that he created or those that were created for him; it then follows that it is production that stimulates outlets.” In Lettres à M. Malthus, Say refuted Ricardo's claim that “there is always as much industry as capital employed, and that all saved capital is always employed” (Say [1820] 2020: 273n3). In light of the 1813 recession in France, Say contended that many savings were not invested, not all capital was employed, and many workers were jobless. In other words, for Say the economy was not always operating up to its full capacity, thereby admitting that a general glut was possible.

Say explained that the creation of a good did not necessarily create a demand because the good could remain unsold or could be sold at a price that was less than its production cost. Once a product was sold, a potential demand was created so that the individual who sold it could use the proceeds of the sale to demand other products or financial assets. The individual could also keep all or part of the money proceeds. Therefore, demand deficiency could cause crises and money was not only a medium of exchange (Béraud and Numa 2018b). Say thus paid close attention to the secular record and economic events of his time, which involved general gluts and the hoarding of cash. In other words, Say thought of his law as a long-term principle. This transpires in the final paragraph of Cours complet d’économie politique pratique (henceforth Cours) in which Say defended the validity of his law described as a powerful engine of long-term industrial growth: “The theory of outlets, by showing that the interests of men and nations are not in opposition to one another, will undoubtedly propagate seeds of concord and peace, which will germinate with time and which will not be one of the smallest benefits of the more correct opinion that people will form about the economy of societies” (Say [1828–29] 2010: 1273).

Say did claim credit for being the originator of the law (Schoorl 2006: 503). The Say papers contain some notes suggesting that he claimed the authorship of its clearest statement (Potier and Tiran 2009: 164–65). Moreover, it should be noted that James Mill read the first edition of Say's Traité before writing Commerce Defended. In his review of the book, Mill (1805: 419) quoted long passages of the relevant chapter that contained a statement of the law. Similarly, David Ricardo acknowledged Say's priority.5

By creating the term “Say's Law,” Taylor rightly credited Say with the earliest and clearest formulation of the law of outlets, and in doing so he correctly interpreted the essence of Say's thinking.

3. The Origins of the Term “Say's Law”

In the nineteenth century, the term “Say's Law” was not used. Jean-Baptiste Say himself referred to “ma théorie des débouchés” or “ma doctrine des débouchés.” Taylor was the first author who used the term “Say's Law” to describe what was previously referred to as “Say's loi des débouchés,” “Say's doctrine,” or “Say's principle.”

The true beginning of the expression “Say's Law” can be traced to 1907. In his textbook Readings in Economics, for the first time Taylor presented the principle which he would later call “Say's Law.” The title of the chapter wherein the principle appeared is very explicit: “The Principle That Goods Constitute the Demand for Goods, and Some of its Most Important Corollaries.” What is remarkable is that Taylor distinguished between an overarching principle and some “corollaries” or implications. This is consistent with what we and other analysts have argued about the correct interpretation of Say's Law (Cowen 1982; Béraud and Numa 2018b; Numa 2020). To illustrate the principle, Taylor reproduced a long passage from Say. Taylor inserted a second passage from John Stuart Mill's Principles ([1848] 1965: bk. 3, chap. 14) to illustrate “the impossibility of general overproduction.”6 This was far from a canonical rule, however. Mill's passage made it clear that all markets would not necessarily clear. In other words, a general demand shortfall was very much a possibility.7 A third passage was taken from Frédéric Bastiat's writings. The first passage—the longest of the three—is taken from the chapter “Des Débouchés” of Say's Traité.8 Here is how Taylor introduced Say's text: “A principle of much importance in dealing with various popular fallacies is that which affirms that the real demand for goods is determined by the total amount of goods produced and offered for sale. We can increase our demand for goods only by increasing our production of goods. What we shall be able to buy is determined by what we have to sell” (Taylor 1907: 101).

Later in the text, Taylor inserted the following remark to guide the reader: “After further illustrations of this principle that products constitute the demand for products, Say deduces some of its applications” (Taylor 1907: 104; emphasis added). Nowhere does Taylor define the principle as “recessions are never caused by demand deficiency.” The principle that production is the source of demand, the core message of Say's law of outlets, is clearly stated. Taylor explained that the real demand for goods was determined by the total quantity of goods produced and offered for sale. There could be a deficiency of demand, but Taylor's formulation suggested that demand could only be increased by expanding the production of other goods.9 It should be noted that Taylor did not clearly distinguish between supply of goods, quantity of goods produced, and the quantity of goods sold. This is not a coincidence. While Say mentioned produced values (thereby emphasizing that what mattered was the final price at which products were sold), for his part Taylor introduced a footnote to caution the reader to the fact that “throughout this passage Say uses values where we would use goods” (Taylor 1907: 103n).

The principle described by Taylor resurfaced in an article published in the Journal of Political Economy in 1909. In the article, Taylor discussed in detail how he taught elementary economics at the University of Michigan. Taylor (1909: 690–91) explained that in his teaching he aimed “to restore to an important place in economic instruction certain elementary principles . . . on which the early economists laid much stress, but which have latterly fallen into the background.” The first principle that he mentioned was “Say's Law.” For the first time, Taylor used the term in his writings, marking the first recorded use of the term in the economic literature. Taylor was very clear and his formulation was consistent with Say's message: “[I] set forth in definite form and with ample illustration what I call Say's Law; that is, the principle that products constitute at once the demand for goods and the supply of goods, and so, if we assume production to be directed in accord with individual wants, supply and demand must necessarily be equal” (Taylor 1909: 691).10 Again, Taylor's explicit definition did not include “recessions are never caused by demand deficiency.”

In 1911, Taylor published the first edition of his textbook Principles of Economics. The first section of chapter 7 is titled “Say's Law.” Taylor refined the definition of the term. It now meant the principle of “ultimate identity between demand and product”:11 “The demand for goods produced for the market consists of goods produced for the market, i.e., the same goods are at once the demand for goods and the supply of goods; so that, if we can assume that producers have directed production in true accord with one another's wants, total demand must in the long run coincide with the total product or output of goods produced for the market” (Taylor 1911: 151).12

Taylor stressed the importance of the condition included in the second part of the clause—“that producers have directed production in true accord with one another's wants”—which “is necessary; since, if any producer should find that the particular goods he wanted were not offered for sale, he might decide to leave the exchange operation half completed—selling his goods for money or credit but not using that money or credit to buy other goods” (Taylor 1911: 151–52). For Taylor, Say's Law was only true at the equilibrium when producers correctly anticipated the structure of the demand for goods. In other words, it is clear that in case of disequilibrium, demand could be deficient. If some individuals realized that some goods they wanted were not offered for sale, they would reduce their purchases and increase their money holdings. Taylor thus concluded that conventional demand stimulus was ineffective, an argument also conveyed in the end-of-chapter questions for his students. For instance, Taylor (1911: 284) argued that extravagant public or private expenditures did not improve the level of employment. Nonetheless, aware of the fact that temporary hoarding could lower labor demand, he conceded that public expenditures might increase employment during periods of industrial stagnation, which were usually accompanied by temporary hoarding.

The eighth edition of Taylor's Principles (1921) is particularly interesting. The structure of the book changed, and some parts were rewritten. An entire chapter (chap. 15) was now devoted to Say's Law.13 The chapter started by reviewing some common fallacies and misconceptions, such as the role and effects of public expenditures. The argument about their ineffectiveness previously embodied in the end-of-chapter questions was now made explicit in the text. At times, the business community was in favor of public expenditures—even though their utility and effectiveness were questionable—based on the premise that they stimulated the demand for goods. Thus, natural disasters, wildfires, and tornadoes were frequently regarded as evils, but also as beneficial, as the expenditures required for reconstruction and repairs would vitalize economic activity. Taylor's explanation was the following: “The general demand for goods is that they set up chains of purchases which would not otherwise be made, and, in doing so, bring about an increase in the total demand for goods” (Taylor 1921: 197; original emphasis); but Taylor noted that those who defended this argument neglected a second set of effects brought about by a natural disaster. For instance, after a tornado, the money spent by a homeowner to fix the roof or install a new one would have been spent anyhow (that is, in other sectors) if the tornado had not struck. Overall, the total demand for goods would remain the same, only the type of purchases would change. Kates (2019: 124) relies on this passage to claim, mistakenly, that Taylor invented the term “Say's Law” “to describe . . . the impossibility of demand deficiency as a cause of recession.” In reality, Taylor discussed “general demand fallacies”; nowhere in the passage did Taylor actually define Say's Law. The idea that recessions are not caused by demand deficiency does not constitute Say's Law; it is merely an implication of the law, as defined by Taylor.

Before stating the principle formally, Taylor referred to Say in specific terms: “I shall therefore put the proposition we have discussed in the form of a principle. This principle, I have taken the liberty to designate Say's Law; because, though recognized by many earlier writers, it was particularly well brought out in the presentation of Say (1803)” (Taylor 1921: 201; emphasis added). The actual statement of the principle begins on the same page. Thus, just like in the previous editions of his Principles, Taylor offered the same explicit definition of the principle which he called “Say's Law,” still viewed as “the ultimate identity of demand and product”:

In the last analysis, the demand for goods produced for the market consists of goods produced for the market, i.e., the same goods are at once the demand for goods and the supply of goods; so that, if we can assume that producers have directed production in true accord with one another's wants, total demand must in the long run coincide with the total product or output of goods produced for the market. (Taylor 1921: 201–2)

What is striking is Taylor's emphasis on the fact that Say's Law was a “long-run principle” (Taylor 1921: 198, 202). Indeed, Taylor (1921: 198) indicated that “the contribution made by any one person to the total demand for goods is, in the long run, bound to be just equal to his income, no more and no less” (emphasis added). His reasoning suggests that in the long run desired money holdings were equal to actual money holdings. Therefore, it appears that the long run involved a steady-state equilibrium. The fundamental reason, Taylor insisted, was that except for the case of primitive economies, every exchange consisted of two phases: first, exchanging one's own product for money or bank credit (P—M); second, exchanging the money or bank credit thus obtained for another product from someone else (M—P). Taylor pointed out, however, that an interval of time between these two phases, short or long, almost always intervened. Better yet, the second phase could be postponed for a long period or even indefinitely. In such a scenario, the general demand for goods would be reduced while the level of production remained unchanged. Therefore, demand deficiency was possible.14 On the other hand, individuals could have access to money or credit in ways other than by trading it for goods, thus allowing them to perform the second phase before having performed the first; in such a case, Taylor (1921: 202) indicated, “demand may be increased enormously, though production has not been increased at all” (original emphasis). He made it clear that Say's Law was subject to a “limitation,” which led him to qualify his initial argument against public expenditures. Indeed, having many producers suspending their purchases associated with the second phase mentioned above caused a general demand deficiency. In such a scenario, public expenditures did exert expansionary effects by increasing the total demand for goods. He wrote:

If circumstances have brought us to a point where the first of the discrepancies between demand and output noted above has become quite general,—that is, a point where buyers generally are suspending the second half of the exchange-operation. Such a procedure means a general decline in demand, hence of necessity a general slackening of productivity all along the line. A situation like this is characteristic of the depression which follows a business crisis. If, now, under such a condition of things, the public authorities step in and undertake a large program of roadmaking or building construction or harbor improvements, this will really mean a considerable increase in total demand and so an increase in general prosperity. (Taylor 1921: 203; original emphasis)15

Therefore, if, like Taylor, one considers Say's Law a long-run principle, one cannot maintain that recessions are never caused by deficient effective demand. Furthermore, in Taylor's mind, supporting government intervention while believing in Say's Law was not incompatible. In the preface to the eighth edition of Principles, Taylor (1921: iv–v) indicated that “the body of doctrine herein contained is . . . rather markedly orthodox . . . I have been at some pains, however, to stress the point that the acceptance of orthodox economic doctrine is entirely compatible with giving support to whatever degree of interference with the working of the present economic order may prove on the whole conducive to the welfare of society.” This statement is hardly surprising. Consistent with the political philosophy of his PhD thesis, Taylor made a point to discuss the rationale for government intervention in all editions of his Principles. For instance, in the second edition he referred to John Stuart Mill. He wrote:

No one claims that the present system works perfectly, that there are no evils which society ought to try to eliminate by authoritative regulation. That a system wherein regulation was effected automatically, spontaneously, would work well, without any tincture of authoritative regulation, no one would affirm. The most enthusiastic advocates of a let-alone policy have demanded that degree of interference which is necessary to exclude force, fraud, and violations of contract. Further, as was shown by Mill more than sixty years ago, in the actual world authoritative regulation goes much beyond this, and does so with almost universal approval . . . it surely would be very silly to claim that this policy has been carried just as far as it ever ought to be. There surely are left not a few places where spontaneous regulation fails to attain good results; and it surely is possible that at some of these points authoritative regulation would do better. (Taylor 1913: 11–12; original emphasis)

Starting with the fifth edition, Taylor devoted an entire chapter to analyzing “authoritative control in the existing economic order” (chap. 3). Taylor (1918: 29) stated, “There never was, and is not now, an economic order spontaneous purely. The spontaneous action of men in their economic relations has always been more or less influenced, either in the way of help or hindrance, by authoritative forces outside the men themselves. . . . The strongest of all authoritative forces outside the individual . . . is the action of organized government” (original emphasis). Taylor (1918: 34) added, “The present system needs to be supplemented by governmental action not only to increase its efficiency, but also to prevent undesirable consequences which the free working of the system would inevitably produce. One such consequence is the extreme inequalities in respect to the distribution of property income. In spite of the high efficiency of the system as a whole, many people feel that we cannot rest content until we have ameliorated the inequality resulting from it. And at this point, the intervention of government is demanded” (original emphasis). By embracing government intervention as a remedy on the grounds of economic efficiency and social justice, Taylor preserved the spirit of Say's thinking.

In general, Say was critical of government intervention in private affairs. However, from the first edition of Traité, Say ([1803] 2006: 330) recognized that “there are circumstances that can modify this generally true proposition that everyone is the best judge of how to use his industry and capital.” In these situations, self-interest became ineffective and socially undesirable, and public intervention was required (Numa 2019). For instance, Say ([1803] 2006: 329–30; [1814] 2006: 63) argued that the government could grant temporary protection for infant industries facing international competition.

Say also pushed for government intervention in the form of public works as a remedy for unemployment resulting from the introduction of machinery (Baumol 1997). He suggested industrial policy so the government could confine the use of new machines in regions where labor was scarce. Say ([1803] 2006: 136–37) also suggested creating companies with public funds in order to give jobs to unemployed individuals, and thereby to jumpstart the economy. Say ([1814] 2006: 385) was perfectly clear in his support of stimulating the private sector with the underpinning of a public works program, writing that “the government is a bad producer . . . yet it could powerfully stimulate private production with well-designed public establishments, properly executed and well-maintained, and especially with roads, bridges, canals and ports.” In Say's thinking, public infrastructure boosted productivity and spurred economic growth. Say ([1819] 2006: 171; [1826] 2006: 167) added that “this is the reason why roads, canals, bridges . . . [and] everything that facilitates domestic communications, enhance the wealth of a country” (see also Say [1803] 2006: 388). In general, Say criticized public debt because he feared that the funds would be used for wasteful expenditures and unproductive consumption, such as funding wars and military purchases. However, he welcomed public debt for “the construction of bridges, the construction or maintenance of roads and canals, and all public infrastructure indirectly productive” (Say [1803] 2006: 766; see also Say [1828–29] 2010: 1007–8). Say understood that public works were effective because they enhanced productive capacities.

4. Farmers and Swindlers

For Taylor, Say's Law was not just an abstract theoretical principle, it had practical significance. In February 1922, Taylor received a letter from Willis Hatfield Hazard (1866–1950), the head of the Department of Publications at New England Mutual Life Insurance Company based in Boston, Massachusetts. Hazard sought Taylor's “authoritative answer” after the publication of an article authored by Richard Spillane in the Philadelphia Public Ledger, a daily newspaper (Hazard 1922b: 1). Hazard had sent the article in a letter addressed to the general agents representing his firm.16 One of them criticized Spillane's thesis; this prompted Hazard to purchase a copy of Taylor's Principles in October 1921, hoping he could find some arguments to respond to the agent's criticism. Discouraged by the fact that the book contained no index, Hazard reached out to Taylor for assistance. In his reply, Taylor brought up Say's Law to illustrate his reasoning.

According to Spillane, farmers experienced a period a prosperity that allowed them to amass large savings after World War I. They then used their savings to invest in securities. However, some of these securities turned out to be fake stocks. Spillane wrote, “It is the estimate of leading bankers of the Middle West that the horde of swindlers who swept over the agricultural belt in the flush days of 1919–20, selling stocks in oil wells that never produced oil, packinghouse projects that never operated, phonograph concerns that never made phonographs and all kind of flyby-night affairs, robbed the farmers of $2,000,000,000” (Hazard 1922a: 2; original emphasis). Spillane blamed country bankers for participating in the schemes that resulted in the plundering of the farmers. His thesis was that

No people in America can suffer or be plundered without the people of all other parts of America being affected to some degree. . . . If the farmers had not been robbed they would be able to purchase some of the machinery they need urgently, and more men would be working in agricultural machinery plants. . . . To carry the illustration further, the butcher, the grocer and every supplier in every city, town and village, feels it in his purse when anything happens to reduce the buying power of any one branch of the American people. (Hazard 1922a: 2)

According to Hazard (1922b: 1), one general agent criticized Spillane's thesis, arguing, “The stealing of two billion dollars from the farmers does not mean the destruction of that money nor its real loss to the community as a whole. While the farmers did not have the privilege of spending it, the gentlemen who relieved them of it did have; and it makes no difference whether the money is kept in circulation for the benefit and at the pleasure of thieves or farmers.”17 Hazard believed such a reasoning was “a very old economic fallacy” (Hazard 1922b: 1). Fearing that other agents shared that view, Hazard turned to Taylor so he could provide solid counterarguments.

Taylor replied to Hazard early in March 1922. For him, Spillane's article merely showed “that the producers who catered directly or indirectly to the farmers will suffer because the farmers have been swindled out of two billion of dollars.” However, the real question was whether “the swindling of the farmers will have no adverse consequences to producers generally” (Taylor 1922: 1; original emphasis). Interpreted this way, Taylor explained, the reasoning of the agent who criticized Spillane's thesis was flawed. The argument of the agent meant that the transfer of purchasing power from the farmers to the swindlers shifted demand from some industries to other industries; as a result, demand remained unchanged overall. For Taylor (1922: 2), “There can be no reasonable doubt that the reverse is true: the transfer of two billion of purchasing power from the farmers to the swindlers must tend to lower general prosperity.” The reason, Taylor pointed out, lay in the deficient demand of real resources.

Taylor referred to the chapter on Say's Law of the 1921 edition of his Principles (chap. 15). Taylor wrote, “From the somewhat narrow standpoint of those who stress the dependence of business prosperity of a large demand for goods, it needs to be remembered that demand is limited by the volume of product (see my chapter on Say's Law)” (Taylor 1922: 2–3; original emphasis). Taylor added:

The extent to which any group can demand goods of other groups depends on the extent to which they can themselves produce goods. But high productivity in any group is out of the question, if the members of that group are liable to be deprived by force or fraud of the natural rewards of their high productivity. It follows that a fraudulent transfer of two billion of buying power from real producers to swindlers must tend to lower the productivity of the former, and hence to cut down demand in general. Nor can this be countered by saying that the diminution in productivity on the part of the farmers is offset by increased productivity on the part of the swindlers. From the very nature of their avocation the latter are not producing, are not adding to the sum total of products, and so are not adding to the sum total of demand. It is, therefore, to be expected that the transfer of two billion from the farmers to the swindlers will diminish the total output of products, hence will decrease the total demand for products in general, and so will diminish general prosperity. (Taylor 1922: 3)

Taylor mentioned three other reasons to support his view. Because the transfer of purchasing power from farmers to swindlers was unexpected, it disrupted the business world as a whole, thereby destroying wealth and diminishing the purchasing power of the community. This was so because some goods produced in expectation of the farmers' demand, not wanted by the swindlers or those who catered to their wants, would wind up not being offered for sale, or would only be sold at a loss due to obsolescence or deterioration. Another reason mentioned was that “an unexpected loss has greater significance than an unexpected gain of equal magnitude” (Taylor 1922: 4). Indeed, an industry from which two billion dollars of demand has been unexpectedly taken suffered a more significant loss than the gain experienced by the industry to which the two billion dollars of demand had been transferred. The third reason to explain the general demand shortfall was that the farmers would have certainly used their lost purchasing power in a more productive way than the swindlers, by “increasing the productive apparatus of industry, buying machinery, draining farms, enclosing fields, etc.” (Taylor 1922: 4). On the other hand, there was little doubt that the swindlers were “more likely to squander their wealth in various forms of riotous living, and in general for consumption purposes,” a criticism that echoed Say's thinking on the ineffectiveness of unproductive consumption (Taylor 1922: 4). This type of expenses added nothing to the productive capacities and did not contribute to the prosperity of business in general.

The takeaway is that Taylor referred to Say's Law to describe a scenario that eventually led to general demand deficiency.

Conclusion

After a careful and thorough analysis of the textual and archival evidence, the following remarks can be made:

  1. Taylor discussed and coined the term “Say's Law” well before 1921. He used the term in his writings for the first time in 1909; however, we have shown that he discussed the principle in his teaching at least since 1907, possibly before that.

  2. It is perfectly legitimate to begin from the writings of Jean-Baptiste Say and work forward because Taylor himself—the inventor of the term “Say's Law”—traced it back to Say's writings. He coined the term to describe a long-run principle that he specifically and explicitly attributed to Say.

  3. Taylor did not use the term “Say's Law” “to describe the impossibility of demand deficiency as a cause of recession.” That is not what he meant and nowhere did he define “Say's Law” this way. The impossibility of overproduction was described as a “corollary,” but Taylor never mentioned it in the actual definition.

  4. Like Say, Taylor viewed Say's Law as a long-term principle, and like Say, Taylor acknowledged that general demand deficiency could cause economic crises. In such cases, government expenditures could remedy the situation by boosting demand.

We have demonstrated, indisputably, that Taylor created the term “Say's Law” based on Say's formulation of the law. It is remarkable that Taylor displayed a solid understanding of Say's message solely based on the fourth edition of Say's Traité d’économie politique. There is no evidence that he read the first three editions of Traité, nor the fifth or the sixth. Taylor did not cite Say's second magnum opus, Cours, or Lettres à M. Malthus, either. This is significant because it suggests that he was able to correctly interpret Say's message without reviewing all of the primary sources, something that later analysts have unfortunately failed to do.

We are grateful to Farhad Rassekh, two anonymous referees, and the editor of HOPE for their pertinent remarks and suggestions.

Notes

1.

Taylor served as chair of the banking and currency committee of the American Economic Association (Willcox 1899: 43).

2.

On Say’s analysis of hoarding, see Numa 2020.

3.

Apparently, at the time of his address Taylor was not aware of Barone’s article (Dickinson 1960: 48n2).

4.

All translations of Say’s writings are ours, unless otherwise noted.

5.

In the preface to Principles of Political Economy, Ricardo (1951: vi) wrote: “Chap. xv. part i. ‘Des Débouchés,’ contains in particular some very important principles, which I believe were first explained by this distinguished writer.” In chapter 21, Ricardo (1951: 290) referred to “M. Say’s Principle” and added that “M. Say has . . . most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production.”

6.

It is significant that, to illustrate the idea that the impossibility of general overproduction was a “corollary,” Taylor relied on Mill’s text not Say’s.

7.

The relevant passage quoted by Taylor (1907: 108–9) is the following: “Those who have the means, may not have the wants, and those who have the wants may be without the means. A portion, therefore, of the commodities produced may be unable to find a market, from the absence of means in those who have the desire to consume, and the want of desire in those who have the means. This is much the most plausible form of the doctrine, and does not, like that which we first examined, involve a contradiction. There may easily be a greater quantity of any particular commodity than is desired by those who have the ability to purchase, and it is abstractedly conceivable that this might be the case with all commodities” (Mill ([1848] 1965: 572). On Mill’s views about the possibility of general gluts, see Béraud and Numa 2021.

8.

Taylor mentioned the publication date of the first edition of Say’s Traité (1803); however, the passage is taken from the English translation of the fourth edition which appeared in 1821, the only edition (out of six) translated into English.

9.

The title Taylor chose to introduce Bastiat’s text speaks volumes: “The Destruction of Goods Does Not Increase the Demand for Goods,” a clear reference to unproductive consumption.

10.

After “that is,” this passage is correctly quoted by Clower (2004: 89) as Taylor’s definition of Say’s Law. See the introduction above.

11.

Taylor’s phrasing should not be confused with what Becker and Baumol (1952: 357) called “Say’s Identity,” which means that “the quantity of money demanded, considered either as a stock or a flow, is independent of the price structure and is always equal to the quantity of money supplied.”

12.

The second part of the passage is accurately quoted by Jonsson (1999: 967) as Taylor’s definition of Say’s Law. See comment on footnote 10.

13.

Taylor’s discussion of Say’s Law remained exactly the same between the eighth edition and the last edition published in 1925; so did the pagination of chapter 15 in both editions (196–205). Ironically, in Say’s Traité the famous chapter “Des Débouchés” is also chapter 15!

14.

Taylor (1921: 202) wrote: “It follows from the facts just brought out that it is possible for us to postpone for a long period, even indefinitely, the second part of the operation, thus cutting down for the time being the general demand for goods, though we have not cut down the amount of production” (original emphasis).

15.

Taylor (1921: 203n3) added: “It may even be the beginning of a general revival of business.”

16.

In his letter to Taylor dated February 17, 1922, Hazard enclosed a copy of the letter sent to his agents which contained Spillane’s article.

17.

The general agent’s reasoning brings to mind a similar argument made by Bernard Mandeville in The Fable of the Bees. Mandeville ([1729, 1732] 1924, 1:24, 25, 86) argued that human vices (deception, fraud, hypocrisy, theft, and so forth ) were socially beneficial. Mandeville’s stance prompted sharp refutations from Francis Hutcheson and Adam Smith ([1759] 1976: 86, 308, 315). Another argument that comes to mind is Frédéric Bastiat’s “Broken Window” analogy, which pointed out that some people regarded a destructive act, such as breaking a window or commencing a war, as beneficial because it increased sales in some businesses (e.g., the glazier). Unlike Mandeville, however, Bastiat (1850: 7) contended that in fact “society loses the value of the objects destroyed unnecessarily,” which led him to conclude that “to break, to destroy, to waste, is not to encourage national labor . . . destruction is not profit.”

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