James Mill’s formulation of “Say’s Law” (1808)

The crude formulation of “Say’s Law” is that “supply creates its own demand” which is rather cryptic in meaning. It was first put forward in Jean-Baptiste Say’s Treatise of Political Economy in 1803 and famously rejected by John Maynard Keynes in his General Theory (1936). It has been largely ignored by mainstream economists ever since. The idea that production is logically prior to consumption, that producers come together in “markets” to exchange what they have produced for other things which other people have produced, and that these markets “clear” at voluntarily agreed upon prices, was also taken up by James Mill in 1808 in his “defence of commerce”. Mill was writing while the Napoleonic Wars were in full swing, with international commerce severely disruption by policies such as Napoleon’s “blockade” of Europe which was designed to impoverish Britain by keeping its products out of Europe, and domestic production in England reduced by heavy taxation, growing national debt, and price inflation of necessities. The latter disruptions to the market resulted in critics such as Spencer and Cobbett arguing that “commerce” was merely an unproductive transfer of wealth from one place to another, and that the free market was prone to creating gluts and shortages. Mill’s reply was to show that commerce was productive in its own right, that gluts and shortages were not inherent in the market but were rather the result of “the injudicious tampering of government” in regulating markets and industry, or the result of the “disorders in the intercourse of the world, produced by the wars” which were raging around them. If left to itself, the free market “has so powerful a tendency to produce (a balance in supply and demand), that it will always be very exactly preserved.