Liberty Matters

John Stuart Mill and Say’s “Law of Markets”

Steven Kates has been one of the leading and clearest expositors and defenders of the “classical economists” on the nature and interrelationships among savings, investment, employment, and growth.
And his most recent contributions on John Stuart Mill’s “fourth fundamental proposition” on capital is no exception,[18] as so neatly shown in his opening essay to this “Liberty Matters” discussion focusing on “The Best Test of an Economist” being the understanding that a “demand for commodities is not a demand for labor.”
Mill’s contribution is no less important in relation to a proper understanding of Jean-Baptiste Say’s “Law of Markets,” especially as found in his restatement of Say’s proposition, in his essay, “Of the Influence of Consumption on Production.”[19]
The essence of Say’s Law is that if we do not first produce we cannot consume; unless we first supply we cannot demand. In a system of division of labor in which we do not self-sufficiently produce all that we want through our own labor, we must successfully devote our energies to producing what others will take in trade from us in exchange for what we desire to acquire from them.[20]
Price Changes and Market Adjustment
But how much others are willing to take of our supply is dependent on the price at which we offer it to them. The higher we price our commodity, other things held equal, the less of it others will be willing to buy. The less we sell, the smaller the money income we earn; and the smaller the money income we earn, the smaller our financial means to demand and purchase what others offer for sale. Thus, if we want to sell all that we choose to produce we must price it correctly, that is, at a price sufficiently low that all we offer is cleared off the market by demanders. Pricing our goods or labor services too high, given other people’s demands for them, will leave part of the supply of the good unsold and part of the labor services offered unemployed.
On the other hand, lowering the price at which we are willing to sell our commodity or services will, other things held equal, create a greater willingness on the part of others to buy more of our commodity or hire more of our labor services. By selling more, our money income can increase; and by increasing our money income, through correctly pricing our commodity or labor services, we increase our ability to demand what others have for sale.
Sometimes, admittedly, even lowering our price may not generate a large enough increase in the quantity demanded by others for our income to go up. Lowering the price may, in fact, result in our revenue or income going down. But this, too, is a law of the market: what we chose to supply is worth no more than what consumers are willing to pay for it.
This is the market’s way of telling us that the commodity or particular labor skills we are offering are not in very great demand. It is the market’s way of telling us that consumers value others things more highly. It is the market’s way of telling us that the particular niche we have chosen in the division of labor is one in which our productive abilities or labor services are not worth as much as we had hoped. It is the market’s way of telling us that we need to move our productive activities into other directions, where consumer demand is greater and our productive abilities may be valued more highly.
Can it happen that consumers may not spend all they have earned? Can it be the case that some of the money earned will be “hoarded,” so there will be no greater demand for other goods, and hence no alternative line of production in which we might find remunerative employment? Would this be a case in which “aggregate demand” for goods in general would not be sufficient to buy all of the “aggregate supply” of goods and labor services offered?
The Demand for Money and the Fallacy of General Gluts
John Stuart Mill had already suggested the answers in his restatement and refinement of Say’s Law of Markets. In his essay, “Of the Influence of Consumption on Production,” Mill argued that as long as there are ends or wants that have not yet been satisfied, there is more work to be done. As long as producers adjust their supplies to reflect the actual demand for the particular goods that consumers wish to purchase, and as long as they price their supplies at prices consumers are willing to pay, there need be no unemployment of resources or labor. Thus, there can never be an excess supply of all things relative to the total demand for all things.
Mill emphasized that the introduction of money into the exchange process broke part of the immediate link between a decision to sell and a willingness to buy. 
Interchange by means of money is therefore, as has been observed, ultimately nothing but barter. But there is this difference – that in the case of barter, the selling and the buying are simultaneously confounded in one operation; you sell what you have, and buy what you want, by one indivisible act, and you cannot do one without doing the other.Now the effect of the employment of money, and even the utility of it, is that it enables this one act of interchange to be divided into two separate acts or operations; one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another.”[21]
But Mill admits that there may be times when individuals, for various reasons, may choose to “hoard,” or leave unspent in their cash holding, a greater proportion of their money income than is their usual practice. In this case, Mill argued, what is “called a general superabundance” of all goods is in reality “a superabundance of all commodities relative to money.” In other words, if we accept that money, too, is a commodity like all other goods on the market for which there is a supply and demand, then there can appear a situation in which the demand to hold money increases relative to the demand for all the other things that money could buy. This means that all other goods are now in relative oversupply in comparison to that greater demand to hold money.[22]
To bring those other goods offered on the market into balance with the lower demands for them (i.e., given that increased demand to hold money and the decreased demand for other things), the prices of many of those other goods may have to decrease. Prices in general, in other words, must go down, until that point at which all the supplies of goods and labor services people wish to sell find buyers willing to purchase them. Sufficient flexibility and adjustability in prices to the actual demands for things on the market always assure that all those willing to sell and desiring to be employed can find work. This, also, is a law of the market.
When were these episodes of abnormal demands to hold larger than usual money balances likely to occur? Mill saw them in unsustainable periods “caused by speculation or by the currency,”[23] that is, following a time of inflationary monetary mismanagement. The task of sound economic policy, therefore, was to maintain a stable currency and a secure system of property rights.
Left to itself, the market process and necessary entrepreneurial adjustments in the face of uncertain change assured what today is called “full employment” and sustainable growth.
[18.] Steven Kates, “Mill’s Fourth Fundamental Proposition on Capital: A Paradox Explained,” Journal of the History of Economic Thought, Vol. 37, (2015), pp. 39-56.
[19.] John Stuart Mill, “Of the Influence of Consumption on Production,” in Essays on Some Unsettled Questions in Political Economy (Clifton, NJ: Augustus M. Kelley [1844] 1974), pp. 47-74; Mill’s discussion of Say’s Law in his Principles of Political Economy, with Some of Their Applications to Social Philosophy (Fairfield, NJ: Augustus M. Kelley, [1871] 1976), pp. 556-63, while complementary to his earlier essay of 1844 is less clear on the nature and dynamics of money demand relative to the demand for other nonmonetary commodities as whole. Online version: </titles/244#lf0223-04_head_059>.
[20.] The most thorough explanation of the meaning and logic of Say’s Law of Markets, as well as a critique of Keynes’ misunderstanding and misinterpretation, is to be found in Steven Kates, Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way (Northampton, MA: Edward Elgar, 1998).
[21.] Mill, “On the Influence of Consumption on Production,” p. 70.
[22.] Ibid., pp. 71-72.
[23.] Ibid., p. 67.