David Glasner has another interesting post on the history of economic thought, this time on Say’s Law — which, at least since Keynes, has come to be identified as the doctrine that shortfalls in overall demand aren’t possible, because money has to be spent on something. If people save more, well, their money goes into banks, which lend it out, so it finances business investment, and overall spending doesn’t change.

Keynes structured the early chapters of his General Theory as a debunking of this proposition; Glasner calls it a “misdirected tirade”. But Keynes was right.

OK, I understand that you can argue about whether that’s what Say himself really meant; you can also argue about whether the “classical” economists Keynes takes on, men who believe in this version of Say’s Law, really existed. But you know what? I don’t much care. The fact is that the fallacy Keynes called Say’s Law was and is a powerful force in economic discourse, seriously hampering our ability to respond rationally to economic troubles.

Do you want to assert that nobody important believes in Say’s Law? How about Eugene Fama and John Cochrane? Fama:

The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

Cochrane (link to original is dead):

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both.1 This is just accounting, and does not need a complex argument about “crowding out.”

And here’s Brian Riedl of Heritage:

The grand Keynesian myth is that you can spend money and thereby increase demand. And it’s a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another. If Washington borrows the money from domestic lenders, then investment spending falls, dollar for dollar.

So we don’t need to settle the debate about what, say, Pigou actually believed. The fallacy Keynes did battle with is very real, held by people in positions of great influence, right now.