Cahiers d'économie politique

Say's law in Marx and Keynes

Duncan K. Foley

Résumé
Les critiques émises par Marx et Keynes à la loi de Say sont examinées de façon critique. Un modèle simple de circuit du
capital est utilisé pour montrer que les deux théoriciens fondent la possibilité d'une demande globale inadéquate sur l'existence
de la monnaie et de retards finis et variables de la dépense concernant les actifs monétaires. A la fois Marx et Keynes vont plus
loin pour discuter le type d'agent qui présente de tels retards variables dans la dépense. Marx démontre que les producteurs
capitalistes réagissent aux contraintes de liquidité et aux contraintes de ventes avec des retards variables dans la dépense.
Keynes démontre que la spéculation est le premier facteur responsable de cette situation.

Abstract
Marx's and Keynes' criticisms of Say's Law are examined critically. A simple model of the circuit of capital is used to show that
both theorists base the possibility of inadequate aggregate demand on the existence of money and of finite and variable
spending lags for monetary assets. Both Marx and Keynes go further to discuss the type of agent that will exhibit such variable
spending lags. Marx argues that capitalist producers will react to liquidity constraints and sales constraints with variable
spending lags. Keynes argues that speculation is the primary factor responsible.

Citer ce document / Cite this document :

Foley Duncan K. Say's law in Marx and Keynes. In: Cahiers d'économie politique, n°10-11, 1985. L'hétérodoxie dans la pensée
économique. Marx - Keynes - Schumpeter. pp. 183-194;

doi : https://doi.org/10.3406/cep.1985.1006

https://www.persee.fr/doc/cep_0154-8344_1985_num_10_1_1006

Fichier pdf généré le 17/05/2018

 SAY'S LAW IN MARX AND KEYNES

par Duncan K. FOLEY

I. SAY'S LAW AND ECONOMIC ORTHODOXY

In the long, unequal, but always renewed debate between

orthodoxy and heterodoxy in economic theory, Say's Law, the argument
that generalized overproduction of commodities in relation to
demand is impossible in a market economy, plays a central role. The
orthodox position, whether it be laissez-faire, Ricardian, margina-
list, monetarist, or « supply-side », seems inevitably drawn to affirm
one or another version of this idea. A willingness to deny or
criticize Say's Law is one of the hallmarks of economic heterodoxy,
and an important token by which the orthodox recognize the
heterodox. For the orthodox theorist the denial of Say's Law. (in
whatever version happens to be dominant at the moment) is a sure sign
of the heterodox theorist's confusion and incompetence. To the
heterodox theorist the acceptance of Say's Law is an instance of
orthodoxy's blindness . to reality, and fetishized attachment to
absurd abstractions.
To begin with, let us consider the rudimentary elements of the
debate over Say's Law. The real economies we deal with involve
the exchange of products through the medium of money1 . A
commodity once produced must be sold for money. Where does the
purchaser get the money to buy the commodity ? With one
exception the answer is, either directly from the sale of another
commodity, or indirectly by borrowing, begging or stealing the money from
someone who has sold a commodity. The exception (which is
confusing, but perhaps not so important as it may appear at first glance)
is in economies where a produced commodity like gold serves as the
measure of value, and a purchaser can get money by producing the
money-commodity itself, without any need to sell it first2 .
The argument for Say's Law begins from the tautological
observation that if all the commodities produced in a given period could

1 . Throughout this paper I will use the term « money » to refer to financial assets
denominated in monetary units, whether or not they are commonly used as means of
purchase, and whether or not they bear explicit interest.
2. The analysis of such systems is dealt with in greater detail in Foley (1983).
Cahiers d 'Economie Politique, n° 10 et no 1 1
184 Duncan K. Foley

be sold for money at given prices, the resulting money revenues

would suffice to buy the commodities at those same prices. Thus
there is in some sense a potential money demand for commodities
created by their very production. All the arguments for Say's Law
have to take one more step, which is to argue that this potential
money demand becomes actual, or that the monetary mechanism
somehow smoothly and regularly solves the problem of financing
these potential demands.
The simplest arguments for this position abstract arbitrarily
from money altogether and reason as if commodities exchanges
directly for each other. Two striking formulations of this position are
Ricardo's assertion that money is a veil (which, by implication,
can be ignored in analyzing real economic relations), and Mill's
astounding remark (quoted by Keynes (1936), p. 18) : « What
constitutes the means of payment for commodities is simply
commodities. »
More sophisticated arguments proceed not by abstracting
completely from money, but by claiming that the behavior of economic
agents or the operation of markets normally assure that the
production of commodities will generate the money demand required to
buy them. Thus Ricardo in another place (quoted by Marx (1969),
p. 493) says : « No man produces, but with a view to consume or
sell, and he never sells, but with an intention to purchase some other
commodity,... » Twentieth century equilibrium theorists (like Pa tin-
kin) introduce money explicitly as another commodity in exchange ;
then an excess supply of other commodities must correspond to an
excess demand for money. The generalized over-production of (non-
money) commodities corresponds to a market disequilibrium, and
is impossible in equilibrium. This line of argument is developed in
the literature on « non-walrasian equilibrium » models, in which
agents must have « money » before they buy ; if initial stocks of
« money » are too small at certain prices, effective demand is
inadequate and the resulting disequilibrium transactions may give the
appearance of generalized over-production of (non-money)
commodities. Still, money price flexibility should be enough to assure
full equilibrium without generalized over-production.
The assertion of Say's Law in one form or another plays a
central role in orthodox policy analysis. It supports a political economy
centered on production, and, in capitalist economies where
production is for profit, on profitability. From this point of view society
always gains, in the sense of securing higher social production, or
at least higher aggregate profits, from reducing the restrictions on
the pursuit of profit. The policy arguments that flow from this
position are the familiar consensus of economic orthodoxy : free trade
Say 's Law in Marx and Keynes 185

externally and internally ; a preference for wage setting in a free

market ; the criticism of attempts to direct investment socially ;
and defense of an unequal distribution of income as a way of
promoting social saving.
Historically the heterodox denial of Say's Law has been the
strongest argument against precisely these positions. Once we admit
the possibility of demand deficiency, and the necessity of
considering the demand effects of policy, the world is turned upside down
and measures most objectionable to an orthodox position appear to
be desirable. The denial of Say's Law turns the orthodox fixation
on production and profitability against its own positions. Tariffs
are justified, not as good in themselves, but as supporting domestic
production and profitability in a slump. The redistribution of
income, which is of no interest whatever to a hardheaded person of
business, is temptingly urged on the ground that the resulting increased
demand will raise production and profits. This argumentative (« ploy »)
is even more damaging because it appeals to the uninformed
prejudice that production is always limited by demand (as indeed it
appears to be in most sectors of industrial economies), not by the
availability of resources. To allow theoretical arguments based
on a denial of Say's Law is to lose control of the ideological turf
orthodox economists exist to defend.
In what follows I will review Marx's and Keynes, reasons for
rejecting Say's Law. There turn out to be two quite different levels
of argument we encounter in this project, which illuminate certain
basic issues in Marx's and Keynes' theories.

II. THE FIRST REFUTATION OF SAY'S LAW

Keynes ( 1 936, p. 20) refers to the « notion that if people do not

spend their money in one way they will spend it in another » . He
implies that a third choice exists, namely, to hold money rather than
spending it in any way.
Marx is a good deal more explicit (1967, 1 13-4) :
« The sale and purchase constitute one identical act,... That identity
further implies that the exchange, if it do take place, constitutes a period
of rest, an interval, long or short, in the life of the commodity... No one can
sell unless some one else purchases. But no one is forthwith bound to
purchase, because he has just sold... If the interval in time between the two
complementary phases of the complete metamorphosis of a commodity
become too great, ... their oneness asserts itself by producing— a crisis.
These modes therefore imply the possibility, and no more than the
possibility, of crises.
186 Duncan K. Foley

Thus in both Marx and Keynes the first refutation of Say's

Law is at the formal level of pointing out that the existence of
money creates the possibility of a crisis of general overproduction
of (non-money) commodities.
There are some subtle difficulties even with this intuitively
plausible point. What exactly does it mean for an agent to hold
money rather than spend it ? If we think of a commodity-money
system, doesn't the holding of the money commodity constitute
a demand for its production ? If we think of a credit -money system
(including one where the debt of the State serves as the most liquid
and easily transferrable claim) doesn't the holding of money mean
lending it to someone else (possibly the State) ?
It may help here to set out a model of flows of value in a
capitalist economy that allows a direct comparison of Marx's and Keynes'
ideas. Such a model is the circuit of capital construction (Foley,
1982), a framework based on Marx's analysis in the second volume
of Capital, in which we can also see the elements of Keynes'
system.
Let C (t) be the flow of value of capital outlays in a capitalist
system at time t ; Q (t) the flow of value of finished products at
cost ; S (t) the flow of sales, including the markup on cost, a
fraction q ; E (t) workers' spending on subsistence ; W (t) wages, a
fraction k of capital outlays ; B (t) the flow of new borrowing by
capitalist firms to finance capital outlays ; P (t) the value of the stock
of productive capital tied up in production ; N (t) inventories of
finished commodities awaiting sale ; F (t) the gross financial assets
of capitalist firms (either the money commodity, or claims on other
agents); D (t) the total financial liabilities of capitalist firms; A(t)
the accumulated wealth of worker households ; and X (t) the
demand for commodities. Suppose that there is a simple time delay
in each phase of the circuit of capital, T in production, TN in
sales, and TF in the use of monetary assets to finance new capital
outlays. Assume for simplicity that there is no State borrowing
or lending, and that capitalist consumption is zero, so that all the
surplus value is reinvested in the circuit of capital. Workers have a
time delay Tc in spending their wages on means of subsistence.
With these assumptions and notation we can write the necessary
relations between flows and stocks of value and time delays in the
circuit of capital :

(1) Q (t) C(t-Tp)

(2) S (t) (1 + q)Q(t-TN)
(3) E (t) W(t-Tc)
(4) W (t) kC(t)
(5) B (t) C(t)-S(t-TF)
Say's Law in Marx and Keynes 187

because that part of capital outlays that cannot be financed from

past sales given the time delay in the capitals' spending of money
must be financed by new borrowing.
P'
(6) (t) = C (t) -Q (0
N' (t) = Q
(7) (t) i(t:
(8) F (t) = S (t) + B (t) C(t)
A' (t)= W
(9) (t) _ £ (t)
D' (t)= B
(10) (t)

where a prime indicates the time derivative of a variable.

(11) X(t) = (l-k)C(t)+ E(t)

(12) S(t) = X(t)

since the demand for commodities consists of capital outlays on

constant capital and workers' purchases of means of subsistence.
The time delays in this system must respect the rules of first-
in first-out accounting for the corresponding stocks. For example,
sales in a given period correspond to production in the period which
is earlier by TM (t) :
t-TN(t)
(S(r')/(1 +q))dT' = / Q(r')dr'
(13) /
tO + T ft \

This relation (and the similar ones for the other stocks) implies
through the mean value theorem that

(14)
(15) = 1 -[(C(t)-B(t))/S(t-T
-[E(t)/W(t-T
+ q)Q(t-T
)] ))]
)]
(16) u

This system accounts for the gross flows of value in the circuit
of capital, including purchases of intermediate inputs. We can recover
from these equations the usual Keynesian variable, Y (t), net national
product, which is also value added. Value added is the wages and
surplus value contained in current production :

(17) Y (t) = (k + q) Q (t) = W (t - Tp) + qQ (t)

This is also equal to final sales of finished commodities plus changes

in inventories of finished commodities at market prices, since net
investment in non-labor productive capital is (1— k) (C (t) — Q (t))
(the addition to stocks of constant capital) and final sales, Z (t),
1 88 Duncan K. Foley

are net investment plus workers' spending :

(18) Z(t) = E(t)+ (l-k)(C(t)-

Final sales plus changes in inventories of finished commodities

at market prices are :

(19) Z(t)
= E(t)
+ +(1 (l-k)(C(t)
+ q)N'(t) -
+q)Q(t)-S(t)
= (k+ q)Q(t) = Y(t)
using (11) and (12).
The usefulness of this model for our present discussion is that
it gives a clear analytical meaning to the ideas of « general
overproduction of commodities » and « holding money rather than spending
it ». A general overproduction of commodities corresponds to a rise
in TN , the time delay between the finishing of commodities and their
sale. A rise in this delay indicates that production is growing more
rapidly than sales. A tendency for firms or workers' households to
hold money rather than spend it corresponds to an increase in Tp
or Tc , the time delays between the receipt of revenue and
expenditures.
Furthermore, changes in these time delays are closely linked
on any actual path of accumulation. From (15) and (16) :

(20) E(t) = (1 -T;)W(t-Tc)

(21) (1-k) C (t) = (1-k) ((1 - Tp) S (t - TF) + B (t))

so that, usine ( 1 9), ( 1 1 ) and (12), we have :

(22) = 1 -

L1 - -tf> t1 -k>s

(1 + q)Q(t-TN)

An increase in the time delays Tc or Tp, holding B (t) constant,

increases TN as well, since the other variables are historically given.
Thus we can see very clearly in this model that an increase in
spending delays by firms or workers' households (holding money rather
than spending it) must gend to raise the time delay between
production and sale (create a general overproduction of commodities).
This construction also illustrates the possibility of such a motion,
despite the fact that the production of commodities potentially
creates enough revenue for them to be sold.
This model also helps us to see some other theoretical points.
Say 's Law in Marx and Keynes 189

Those who deny the possibility of general overproduction on the

grounds that « the means of payment of commodities is simply
commodities » (as Mill wrote, and as is implied by non-monetary
models of exchange equilibrium) are implicity assuming spending
delays to be always zero. With this assumption, a rise in TN due to
changes in spending delays cannot take place. I suggest that we
ought to think of these « non-monetary » models as models of
monetary exchange where the velocity of money is infinite, so that stocks
of monetary assets are vanishingly small, rather than as models of
« barter» exchange.
We can also see why changes in liquidity preference might appear
to be critical in explaining crises of general overproduction. Rises
in Tc and TF seem to reflect a preference on the part of wealth-
holders to hold monetary assets rather than buying means of
production or means of subsistence.
In a pure credit-money economy, a rise in Tc and TF, if it is
not offset in (22) by an increase in borrowing, B (t), cannot actually
increase the value of the monetary assets firms or workers'
households own. This follows immediately from the fact that the new
supply of such assets is just B (t). The rise in Tc or Tp will, by
raising TN , reduce the realized flows of value in the circuit, and thus
necessarily reduce either wage incomes or profit flows financing
productive investment. This is one way of understanding Keynes'
« paradox of thrift ».
If we have a commodity-money economy, the new production
of the money-commodity plays exactly the same role as the
variable B (t) in (5), (8), and (22). Again, a rise in Tc or Tp without an
increased production of the money-commodity will create a crisis
of generalized overproduction of commodities. In principle an
expansion of money-commodity production could offset such changes
in spending delays. (Where the gold rushes of the nineteenth century
reactions to the state of accumulation, rather than exogenous shocks
to the system ?).
These investigations, then, tend to confirm Marx and Keynes
in their argument that once we have a monetary economy the
consequent separation of sale and purchase make crises of general
overproduction possible.

III. THE SECOND REFUTATION OF SAYS LAW

Marx expresses his impatience with theories that do no more

than observe the possibility of crises of general overproduction due
to the separation of sale and purchase (1968, 502, 512).
190 Duncan K. Foley

« Incidentally, those economists are no better, who (like John Stuart

Mill) want to explain the crises by these simple possibilities of crisis
contained in the metamorphosis of commodities— such as the separation between
purchase and sale. These factors, which explain the possibility of crises,
by no means explain their actual occurrence.
This shows how insipid the economists are who, when they are no longer
able to explain away the phenomenon of overproduction and crises, are
content to say that these forms contain the possibility of crises, that it
is therefore accidental whether or not crises occur and consequently their
occurence is itself merely a matter of chance.
The problem he poses is the difficult one of the « content » of
crises. I think Marx means by this that it is necessary to link actual
crises of overproduction to the behavior of the specific economic
agents involved. The study of the formal structural aspects of
commodity production can take us only a limited distance ; to go further
we must propose behavioral regularities for agents that flow from
their specific positions in a historically determined mode of
production. In the specific case of crises of general overproduction the
question is, why should time delays in spending lengthen in certain
conjunctures ?
.

This is quite an important and difficult question. In passing we

might note that it is hard to see why use-value pursuing consumers
(the utility maximizers of neoclassical theory, for example) should
vary their spending lags very much. Money for such consumers is
not a goal in itself ; they hold it only because of the inconvenience
of matching income and expenditure streams exactly. (Remember
that I am using « money » to mean financial assets in general,
whether or not they are commonly used as means of purchase, or pay
interest. Of course, interest differentials and liquidity
characteristics of assets will influence the proportions in which consumers
hold different types of monetary assets.) Thus we would not expect
any very important changes in spending lags in a society dominated
by such consumers. This fact underlies the extreme difficulty
neoclassical economic theory has in producing a model of general
overproduction. Even if we formally allow money to play a role
in the economic system, rational consumers will tend to manage
their monetary assets so as to stabilize demand for output, not
to destabilize it.
For Marx, of course, the answer to this question lies in the
specifically capitalist character of production (1968, 502, 503).
« In a situation where men produce for themselves, there are indeed no
crises, but neither is there capitalist production. Nor have we ever heard
that the ancients, with their slave production ever knew crises, although
Say 's Law in Marx and Keynes 191

individual producers among the ancients too, did go bankrupt.

The capitalist's immediate object in selling, is to turn his commodity,
or rather his commodity capital, back into money capital, and thereby to
realise his profit. Consumption— revenue— is by no means the guiding motive
in this process, although it is for the person who only sells commodities in
order to transform them into means of subsistence. But this is not capitalist
production, in which revenue appears as the result and not as the determining
purpose. Everyone sells first of all in order to sell, that is to say, in order
to transform commodities into money.
Marx's research program then, is to understand the behavior
of capital as capital. This behavior is surely not simply natural, but
arises from the specific social conditions that underly capitalist
production. If we could understand this behavior, part of it would
capitalists'
explain why spending delays rise in certain circumstances,
and create a crisis of general overproduction.
One point that is unmistakable in Marx is his claim that one
cannot understand this phenomenon by considering only economic
agents whose motive in selling is consumption. This point
constitutes a fundamental criticism of attempts to explain crisis in
theoretical frameworks (like neoclassical theories of equilibrium exchange)
where consumption is the only recognized motive for economic
activity. The problem with these attempts is not the formal
difficulty of modelling the complexities of circulation, but a blindness
to the actual behavioral patterns of capital, a mistake in the
abstractions of economic behavior they employ.
Marx is less explicit and complete in formulating a positive
version of his theory. We may find it plausible that rises in spending
delays under certain circumstances are characteristic of capitalist
firms, but we would like to know exactly how this comes about.
In thinking about this problem we run immediately into the
contrary insight (which Marx develops himself in other places) that
capitalists want to minimize the proportion of their capital they
hold in money form, in order maximize the profit they appropriate
from the use of their capital in production. If capitals are busy
trying to minimize their money reserves, why should they suddenly
lengthen out their time delays in spending ?
Marx's discussion of this problem gives us hints rather than
answers. In the passage we have been examining he puts heavy
weight on the pressure to sell commodities in order to pay debts
rather than to begin a new round of production (1968, 503) :
« Ricardo even forgets that a person may sell in order to pay, and that
these forced sales play a very significant role in the crises.
During the crisis, a man may be very pleased, if he has sold his commodi-
192 Duncan K. Foley

ties without immediately thinking of a purchase. On the other hand, if

the value that has been realised is again to be used as capital, it must go
through the process of reproduction, that is, it must be exchanged for
labour and commodities. But the crisis is precisely the phase of
disturbance and interruption of the process of reproduction. And this
disturbance cannot be explained by the fact that it does not occur in those times
when there is no crisis.
Marx seems to imply here that the threat of bankruptcy for
nonpayment of debts may lead to an inversion of normal capitalist
behavior; capitalists lengthen out their spending delays in order
to ward off the threat of bankruptcy. Obviously a lot of questions
remain to be answered before this line of investigation can be
completed.
To sum up, then, Marx argues that it is not enough to recognize
the formal possibility of crisis by introducing finite spending delays
into a model of commodity production and circulation, To explain
actual crises of general overproduction we have to demonstrate that
the lengthening of these spending lags is a reflection of the social
character of the economic agents involved. This behavior is not
characteristic of agents who sell in order to consume, but, Marx argues,
is characteristic of capitals, which buy in order to sell. The
refutation of Say's Law in its broader forms requires a critical
examination of our view of the behavior of agents in the economy.
It is striking that Keynes' General Theory exhibits the same
drive to go beyond the merely formal aspects of the problem to a
discussion of the economic behavior underlying crises.
Keynes argues (particularly in Chapters 12 and 17 of the General
Theory) that crises occur because the expected rate of return on
productive assets falls more rapidly than the liquidity return to money.
As a result a situation emerges where agents have a strong preference
for money over productive capital. In terms of the circuit of capital
model outlined above, this would appear as a rise in spending delays,
creating a rise in the average delay between production and sale,
or generalized overproduction.
Keynes understands that this problem could not arise if agents
who wished to save placed orders for commodities in the future
(as they are imagined to do in neoclassical models of full
intertemporal equilibrium). Thus in a formal sense the existence of monetary
assets that can be held without making any specific commitment to
future purchases creates the possibility of a crisis.
But Keynes feels he has to go further and explain why there
are periods when expected returns to productive capital fall below
the liquidity yield on money. He propose a quite interesting answer,
Say 's Law in Marx and Keynes 193

that speculators seeking short term financial gains dominate asset

markets These speculators pay little attention to the long run
balance between demand for and supply of commodities. Instead,
according to Keynes (1936, 156), they occupy themselves in trying
to guess « what average opinion expects the average opinion to be».
This speculative activity makes the state of average opinion, or
« confidence », quite unstable and the expected return to productive
capital prone to collapse. Keynes also argues that institutional
characteristics in the production of « money» make it hard for the
interest rate to fall far enough in the face of such a collapse to prevent
a rise in spending delays and the consequent crisis of
overproduction.
Speculation, as a principle of economic behavior different from
simple maximization of utility from consumption, plays a role in
Keynes' argument analogous to the role capitalist behavior plays in
Marx's. Speculation is supposed to introduce an element of private
rationality that leads to socially irrational consequences in the
system of circulation. Keynes concludes that the problem of crises
is connected to the liquidity of secondary security markets.
Keynes, conception is weaker and less plausible than Marx's.
Speculation, though it is an unquestionably real phenomenon in
capitalist society, is not as fundamental as production itself. It is
more reasonable to view speculators as maneuvering within limits
set by the real motions of production and the financing of
production. The weakness of Keynes' explanation has been probed
by neoclassical expectation theorists, who argue that speculation
is just a reflection of the drive for utility maximization. This logic
leads back to the conclusion that well-informed speculation cannot
produce socially irrational outcomes.

IV. CONCLUSION

Many economists today would probably like to dispose of

Say's Law, not just in its vulgar form of an abstraction from
money, but in its more subtle form of a tendency for sales to lead
regularly to purchases. This discussion suggests that this critical project
leads deeper than one might at first suppose. It involves first of all
the formal recasting of models of circulation to reflect the existence
of monetary assets and time delays between receipts and
expenditures. But this formal step is not enough by itself, since we still
may have models in which rational utility-pursuing agents use
monetary assets primarily to stabilize their demand for commodities.
The exorcism of Say's Law requires the further step, as Marx
and Keynes both realized, of criticizing and clarifying our theories
194 Duncan K. Foley

of the behavior and motives of economic agents. I find Marx's

suggestions in this regard convincing. We need to clarify our
notions of what capitalist production means in terms of the agents
engaged in it. The principle that capitalist production is motivated by
the pursuit of surplus value or profit is obviously the starting point
for this investigation. This principle must be supplemented, however,
by a much clearer account of the concrete limits, especially financial
limits like bankruptcy, within which capitals pursue their goal.

Barnard College
Columbia University
New York (USA)

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Economy : Essays in Honor of Alexander Erlich, M.I.T. Press.
Keynes, J.M. (1936). The General Theory of Employment, Prices, and Money,
New York, Harcourt Brace.
Marx, Karl (1967). Capital, Volume I, New York, International Publishers.
Marx, Karl (1968). Theories of Surplus Value, Part II, New York, International
Publishers.
Patinkin, Don (1965). Money, Interest, and Prices. New York, Harper and Row.