Additional Comments on Say’s "Law"—and the
Consequences of Failing to Recognize Its Fallaciousness

This is a continuation of my comments on Say’s "Law" that were included in section 6 of my "Letter to Frank S." at Frank, I and another couple friends got together after that letter was written for a discussion on political economy which focused on the two topics of the labor theory of value and Say’s "Law". In that discussion it became clear that Frank and I have somewhat different conceptions of what Say’s "Law" is, and/or how it should be formulated.

What is Say’s "Law"?

As I stated in my letter, the simplest and most common formulation of Say’s "Law" is simply that "supply creates its own demand" (or alternately, "production creates its own demand", or yet again, "production creates its own market"). It is true that Jean-Baptiste Say himself did not originate any of these specific concise formulations—James Mill should get the credit (or blame) for that—but Say did come up with the basic idea, that general overproduction "gluts" are impossible because the very act of production creates wealth in the hands of those who will then invariably use it to buy an equivalent amount of other goods.

What we now call Say’s "Law" has in truth been expressed in many different ways. Ricardo put it this way: "There is no amount of capital which may not be employed in a country, because demand is only limited by production. No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity."1 Marx specifically ridicules that particular passage.2

John Kenneth Galbraith wrote that "Production only fills a void that it itself created."3 I take this to be yet another affirmation—though less clearly so than most—of Say’s "Law". But while one might be able to interpret something as vague as Galbraith’s remark in some other way, before my discussion with Frank I never imagined that "supply creates its own demand" or that "production creates its own market" could be interpreted in any other fashion than as affirming Say’s "Law".

Say’s "Law" is central to bourgeois economics, though it has typically been merely assumed, and scarcely examined seriously during the period after the early days of Say and Ricardo up until Keynes. And even now it is usually glossed over in bourgeois textbooks. One historian of (bourgeois) economic ideas notes that the "presentation of what we now call crisis and depression was excluded by Adam Smith, and proscribed by Ricardo and Say when Sismondi and Malthus re-presented it, and it remained, as it were, on the Index Librorum Prohibitorum until rehabilitated by Keynes in 1936."4 (Of course this refers only to bourgeois economics; Marx and his followers gave a great deal of attention to crisis theory during this prohibited period!)

Say himself put what has come to be called his "Law" this way:

It is worth while to remark, that a product is no sooner created, than it from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should vanish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstances of the creation of one product immediately opens a vent for other products.5

It is important to note that Say is claiming not simply that capitalist production creates a market of some sort—for just a part of the value that it creates, for example—but rather that it creates "a market to the full extent of its own value". Thus when people concisely summarize Say’s "Law" as the claim that "supply creates its own demand" (or alternatively, that "production creates its own market") they always intend this to be understood to mean (along with Say) that the demand is to the full extent of the supply. (The importance of this issue will become clear when we discuss some statements by Lenin and the RCP below.)

Say did not refer to the principle he put forward as a law (though he certainly treated it as an absolute scientific law). And in the decades after 1821 when he published it, it was usually referred to as Say’s proposition or his principle. Marx, too, followed these other commentators and referred to it as "Say’s ‘principle’"—using ridicule quotes around the word ‘principle’!6 Keynes not only reinitiated the attack on Say’s "Law" within bourgeois economics, but—ironically enough—may have been one of the first to refer to it as a "law" (and he didn’t use ridicule quotes!). In his General Theory, Keynes defined "Say’s law" as the view "that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output".7

At any rate, Keynes and the fact of the Great Depression of the 1930s, are the reasons that most establishment economists today occasionally talk about "Say’s Law". Most of them, bizarrely enough, continue to defend it! Among those who partially equivocate, however, one favorite ploy is to try to draw a distinction between the short term and the long term:

Say's Law has various interpretations. The long-run version is that there cannot be overproduction of goods in general for a very long time because those who produce the goods, by their act of producing, produce the purchasing power to buy other goods…. Certainly the long-run version is correct. Given enough time, supply does create its own demand. There can be no long-run glut of goods.

But Say also had a short-run version, that even in the short run there could be no overproduction of goods relative to demand. It was this version that Malthus attacked in the nineteenth century and that Keynes attacked in the twentieth century. They were right to attack it.8

Basically, that’s a pile of crap. This short-run/long-run nonsense is just a way of trying to stick with neoclassical economic theory even though it is clearly and obviously completely out of touch with reality. Even some liberal bourgeois economists recognize this somewhat:

The trouble with Say's law is that empirically it is insupportable. If it were valid, a universal glut (that is, goods no one could afford to buy) would, as he said, be impossible, and inflation would, as we have seen, be next to impossible. But there certainly have been depressions, and there certainly is inflation. Something is wrong with his analysis, and anyone who has ever, as polemicists used to put it, met a payroll knows what it is. It is a distinct possibility that you can't sell all of what you make. Sometimes you can't sell any of it. Mathematically, production creates its own demand; actually, it does not.9

However, even that is partly baloney (and even its correct aspect is poorly expressed). We are supposed to believe that Say’s "Law" is mathematically sound, but nevertheless factually false! But actually the statement that "Mathematically, production creates its own demand" is also nonsense. It is true that if a commodity is sold then there must be a mathematical equivalence between the exchange value amount sold and the exchange value amount purchased. But this by no means guarantees that every commodity for sale will actually be sold (or that if it is sold, that it will be sold for its full value). Thus the claim that there is a mathematical equivalence between production and demand is a ridiculous notion. The validity of any mathematical formula depends, first of all, upon the actual applicability of that formula to the real world situation being discussed. If the formula is not applicable to the real world, then it should not be phrased in terms of real-world quantities ("production" and "demand"), and becomes nothing more than a meaningless and irrelevant bit of abstract algebra.

Marx exposed all this long ago. He brought out the fallacy of Say’s "principle" by exposing Say’s erroneous implicit assumption that the primary circuit of capital is the exchange of one commodity for another (through the medium of money), or in other words the C-M-C' circuit. But actually the primary circuit of capital, the circuit that allows us to understand and make sense out of capitalist production and its contradictions and crises, is the M-C-M' circuit, or elaborated further, the M-C-C'-M' circuit, whereby the capitalist uses money to purchase commodities needed in production (e.g., raw materials and labor power), which are then turned into new commodities for sale (the C' part in the formula), and finally sold for more money (M') than he started with. When you look at things this way, it is obvious that there is the possibility that the capitalist may not be able to sell the commodities which his factory produces, and if he is not able to sell them, he will then not acquire a new demand value equal to the value of the commodities produced. And in that case actual demand will not equal supply.

The further reason why this imbalance between demand and supply must eventually develop derives from the fundamental contradiction of capitalism, that between social production and private appropriation. The workers are paid for only a portion of the goods they produce, and therefore cannot possibly buy back all that they produce. This means that the remaining commodities—if they are to be sold at all—must be purchased by other capitalists, either for their own consumption, or in order to build more factories. But their own consumption needs, no matter how wasteful and luxurious, are very limited compared to the productive power of society. So more and more surplus value must be ploughed back into building more and more factories—even though there is less and less of a market for the output of those new factories. There are ways of propping up this house of cards for a while, mainly through constantly expanding consumer credit and government debt, but eventually the whole thing collapses in a major economic crisis.

Thus the notion that Say’s "Law" is valid in the "long-term", if not the "short-term", is also totally erroneous. In actual fact, the longer the boom portion of the economic cycle goes on, the shakier things become, until the crisis breaks out and forces the destruction of all the excess capital that has been built up (either physically or through forced devaluation). Only then can a new cycle of capitalist accumulation begin in earnest.

What Words Affirm Say’s "Law"?

In my letter, I quoted Lenin as saying in 1897 that it is a "perfectly correct idea that production creates a market for itself and itself determines consumption"10 I also quoted the RCP as saying in America In Decline (1984) that "The expansion of capital requires the continual perfecting of the division of labor and generates its own demand and markets."11 I think it is undeniable that both of these statements put forward Say’s "Law" as it is understood by almost every writer on, or student of, political economy today.

However, Frank claims that neither Lenin nor the RCP ever put forward Say’s "Law", and further claims that neither of these two quotations is a statement of Say’s "Law". This might seem to imply that Frank must have a very different understanding of Say’s "Law" than I do, and than that of almost everybody else. But in our discussion, Frank seemed to be saying that it is merely a matter of how he thinks that "Law" should be expressed.

The phrase "production creates its own demand", Frank seemed to be saying, is in fact completely true, and is not an expression of Say’s "Law" (even if that is the way most people do interpret it). On the other hand, if you modify that phrase to read "production creates its own demand in its entirety", then it is a statement of Say’s "Law" he agrees, and is fallacious. Thus, for Frank (and he thinks for the RCP and Lenin as well), there is indeed an implicit rider on the shorter phrase, but the implicit rider is something like "to a large degree".

So here’s the situation; there are three positions:

  1. Production creates its own demand. (Or: Supply creates its own demand. Or: Production creates its own market.)
  2. Production creates its own complete demand. (Or: Supply creates its own demand to the full degree. Or: Production creates its own complete market.)
  3. Production creates its own demand, to a large or considerable (but not complete) degree. (Or: Supply creates its own demand, to a large degree. Or: Production creates its own market, to a large degree.)

Both Frank and I can now agree, I assume, that b) is a statement of Say’s "Law". I, and most people (it is safe to say), interpret a) as saying the same thing as b). But Frank (and the RCP and the early Lenin, according to Frank) ordinarily interpret a) to mean c). I, and most people I think, find this strange, because c) has never been in doubt or at issue in our minds. Of course production creates some demand, both because the capitalists buy raw materials and because they pay their workers wages, which the workers will then proceed to spend for food, shelter and so forth. No one has ever disputed that! The issue all along has been whether or not capitalist production creates a demand large enough to cover the full amount of the value that is created. Why should anyone have looked at things any differently than this?

Well, even if the use of language by Frank (and the RCP and Lenin, he says) is slightly peculiar, perhaps the rest of us should at least be happy now to find out how they do talk about these things, so we can correctly understand what they are saying on this topic. Or so we might be tempted to think. But I’m afraid there is a lot more to the matter than any simple confusion of language. In reality, the problem was not simply a difference in the use of certain phrases at all, but rather a real difference in how the two sides understand what is going on in capitalist production, what the deepest source of capitalist economic crises is, and so forth. In fact, to be brutally honest here, I continue to think the "peculiar language" that Frank, the RCP and the early Lenin, use on these matters is a reflection of deep confusion on their part, a confusion that actually does reflect either a complete acceptance of Say’s "Law", or at the very least a serious vacillation over it.

If Lenin understood and meant that production only creates a partial market for itself, then why did he omit that crucial word ‘partial’? If the RCP truly understood that the expansion of capital generates its own demand and markets only in part, then why did they leave off that crucial qualifying phrase? The fact that the early Lenin, and the modern followers of that Lenin on these matters, never even think to make this crucial point clear proves, to my mind, that they are indeed very confused about this basic issue of Say’s "Law".

Sismondi and Lenin’s Erroneous Early Crisis Theory

I argued in my letter to Frank that in 1897 Lenin didn’t fully understand Marx’s views on a number of key matters for the simple reason that many very relevant writings by Marx had not yet been published (even in German). In particular, none of the three volumes of the absolutely essential Theories of Surplus Value were available to Lenin. Not only were most of Marx’s comments about Say and his "principle" thus unavailable to Lenin, but so were a great many of Marx’s comments on the basic reasons for overproduction crises. The early Lenin got a very one-sided understanding of crisis theory as being exclusively due to the anarchy of capitalism, and failed to appreciate the much more fundamental overproduction/underconsumption aspect of things.

Thus a major theme of Lenin’s 1897 pamphlet, A Characterization of Economic Romanticism, was the severe lambasting of Sismondi (and Sismondi’s supposed Russian Narodnik followers) for promoting in any way, or to any degree, an "underconsumptionist" crisis theory. Lenin shows no respect whatsoever for Sismondi and his theory of crises, and sees little or nothing of a positive nature in Sismondi’s economic writings.

In light of that, it is interesting to read Marx’s own much more balanced assessment of Sismondi in TSV. While Marx doesn’t shrink from criticizing Sismondi on many points, he also admires him for his correct perceptions. After criticizing Ricardo (who Marx of course had a fairly high general opinion of) for denying or failing to see a number of key contradictions in capitalist production, Marx then contrasts Sismondi on these issues to Ricardo:

Sismondi is profoundly conscious of the contradictions in capitalist production; he is aware that, on the one hand, its forms—its production relations—stimulate unrestrained development of the productive forces and of wealth; and that, on the other hand, these relations are conditional, that their contradictions of use-value and exchange-value, commodity and money, purchase and sale, production and consumption, capital and wage-labor, etc., assume ever greater dimensions as productive power develops. He is particularly aware of the fundamental contradiction: on the one hand, unrestricted development of the productive forces and increase of wealth which, at the same time, consists of commodities and must be turned into cash; on the other hand, the system is based on the fact that the mass of producers is restricted to the necessaries. Hence, according to Sismondi, crises are not accidental, as Ricardo maintains, but essential outbreaks—occurring on a large scale and at definite periods—of the immanent contradictions.12

Marx goes on to criticize Sismondi for nevertheless wavering constantly, which of course reflects Sismondi’s essentially petty-bourgeois outlook. (Lenin was right about that!) Then Marx continues:

He [Sismondi] forcefully criticizes the contradictions of bourgeois production but does not understand them, and consequently does not understand the process whereby they can be resolved. However, at the bottom of his argument is indeed the inkling that new forms of the appropriation of wealth must correspond to productive forces and the material and social conditions for the production of wealth which have developed within capitalist society; that the bourgeois forms are only transitory and contradictory forms…13

It is for reasons like this that Sismondi is often regarded as a socialist (though Lenin strongly disagreed). In another place Marx is condemning Ricardo and his followers for a major inconsistency in their thought:

Labor is the sole source of exchange-value and the only active creator of use-value. This is what you say. On the other hand, you say that capital is everything, and the worker is nothing or a mere production cost of capital. You have refuted yourselves. Capital is nothing but defrauding of the worker. Labor is everything.14

And of this same inconsistency in classical political economy, Marx notes in passing: "Sismondi was epoch-making in political economy because he had an inkling of this contradiction."15

So while the 1897 Lenin portrayed Sismondi as a romantic fool in his economics (even compared to Ricardo), Marx saw that Sismondi’s thinking not only appropriately criticized Ricardo on important points, but was actually rather profound and even "epoch-making" at times—even if his ideas were also somewhat inconsistent and very inadequately worked out. At the very least we have to conclude here that Lenin’s view of Sismondi and his underconsumptionist crisis theory was very one-sided and really did fail to see that there were some major aspects of truth in what Sismondi was saying. Lenin was way too extreme in his attacks on Sismondi, and shows by his failure to see anything at all positive in Sismondi that his own understanding of crisis theory was very inadequate and unbalanced at that time.

Lenin’s 1897 Crisis Theory is the Basis for that of the RCP

Thus Lenin put forward in his 1897 attack on Sismondi a crisis theory that focuses way too much on the anarchy of capitalist production and which fails to grant any validity at all to the overproduction/underconsumption aspect of things. (Actually Lenin does acknowledge that there is underconsumption by the masses, but denies that this has anything to do with capitalist crises.)16 And Lenin never explicitly put forward any more correct or more balanced crisis theory in his later writings. (He did, in later years, defer to other Bolsheviks—especially Bukharin—on such matters though.)

Lenin’s 1897 crisis theory has been extremely influential, especially among Marxist-Leninists. This is no doubt partly, though not entirely, because of the tendency in many quarters after Lenin’s death to turn his every word into golden dogma. But another part of the reason for this influence is that Marx himself never completed his discussion of capitalist economic crises. (Engels tried to bring some order into the discussion of crises in volume III of Capital, but it is still only semi-coherent there.) Moreover, in both Capital and in Marx’s other writings on political economy there are passages which have seemed to many readers to lean variously towards several conflicting theories of economic crisis. Because this is so, there have been numerous theories of crises which have developed within the Marxist milieu. Lenin’s 1897 crisis theory passage, together with some earlier comments by Engels in Anti-Dühring, have thus been welcomed by many as cutting through all that confusion and disagreement as to what Marx really meant. It established a Marxist-Leninist orthodoxy on this question.

Many Marxists have been influenced by Lenin’s 1897 passage on crisis theory who have never read it, or at least all of it; that is, they have picked up the gist of it second hand. Most Soviet textbooks on political economy, and also most of those by Communists in the West, have accepted the basic view outlined in that passage, and often quote a few of Lenin’s 1897 sentences directly.

Just one of many examples I could mention is in a pamphlet in the series Political Economy: Marxist Study Courses, published by the Communist Party of Great Britain in 1932-33, and distributed widely in the English-speaking world.17 As late as 1976, the Revolutionary Communist Party, USA, looking around for a political economy textbook it could recommend to its members and to others, reprinted these pamphlets in book form.18 It is therefore not surprising to find that when an article against Paul Sweezy and underconsumptionism appeared in the old RCP theoretical journal, The Communist, the author quoted the sentences by Lenin from this old CPGB textbook rather than directly from Lenin’s Collected Works.19 (I’m not trying to make a big deal out of this; just pointing out how ideas disperse, and what their original source was in this case.)


The point of all this is that there is a whole lot more going on in the early Lenin, and in the RCP’s writings on political economy, than just a peculiar or "misleading" way they might have in talking about production and demand that supposedly "falsely" suggests that they agree with Say’s "Law". The early Lenin and his modern followers on this topic do in fact share a whole skewed outlook on crisis theory. And this crisis theory, at least in its original form, does assume the validity of Say’s "Law". Sometimes they actually come right out and affirm Say’s "Law", as Lenin did several times in his 1897 article, and the RCP did in AID. But when confronted about this (by the Narodniks in the case of Lenin), they deny it and try to weasel out of a valid criticism. That’s not right and proper.

In Lenin’s case, after the Narodnik criticism, he did at least stop explicitly affirming Say’s "Law", though he didn’t recognize and admit that he was wrong in affirming it in the first place. This already implied at least something of an implicit change to the crisis theory that Lenin defended in 1897, but he never got around to replacing that crisis theory passage with a more defensible version. By a couple of decades later, however, Lenin’s implicit crisis theory, the one implied by his pamphlet Imperialism, the Highest Stage of Capitalism (written in 1916), was quite different. It recognized the massive overproduction of goods and capital in the imperialist countries, and their desperate need to export more and more goods and capital to the rest of the world in order to prevent crises from breaking out. In that pamphlet he no longer focuses on the anarchy of capitalist production, but rather on the massive excess of it, as compared to the actual market for those goods. Implicitly, at least, he had come around to something close to the crisis theory he had so vehemently rejected in 1897. And there is nothing remotely resembling Say’s "Law" in his Imperialism pamphlet or his other economic writings in later years.

In the RCP’s case there has been no movement at all. The theory of capitalist economic crises they promoted in the 1970s, and still in America In Decline in 1984, comes precisely from Lenin’s 1897 pamphlet (though, as I suggested, this influence may not have been direct). As of 2000, in their Notes on Political Economy, they have reaffirmed their analysis in AID. There is no sign that they have budged at all on this grossly one-sided (and hence erroneous) theory of capitalist crises. Furthermore, the RCP has over and over proven itself to be unwilling to listen to any substantive criticism directed against any important element of its outlook, either in political economy or elsewhere.

But my friend Frank, who is sympathetic to the crisis theory the RCP upheld in AID, has gotten a little nervous and uncomfortable both from my repeated criticisms of the RCP’s anarchy-based crisis theory and my related criticisms of Lenin and the RCP with regard to Say’s "Law". I think he has been forced into the position of trying to deny that what almost everybody would see as a genuinely clear and direct affirmation of Say’s "Law" in Lenin and AID really is such a thing! But the only path then open to him is to also deny that Say’s "Law" is properly expressed in the way that virtually everybody in the world actually does express it!

The whole point of my hammering away against those who affirm Say’s "Law" is to try to get them to reexamine the crisis theory they are defending which is based on Say’s "Law". But I should have realized that it is much easier to simply argue about what Say’s "Law" is, and how it should be expressed, than to begin to seriously reexamine an elaborate theory that one has become emotionally wedded to.

—Scott H.
    (January 15, 2004)


[1] David Ricardo, Principles of Political Economy and Taxation, ed. by P. Sraffa, Ch. XXI, p. 290.

[2] Marx, Theories of Surplus Value, Part II, (Moscow: 1968), p. 493.

[3] J. K. Galbraith, The Affluent Society (1958), Ch. 11, I.

[4] Guy Routh, The Origin of Economic Ideas, (NY: Vintage, 1977 (1975)), pp. 60-61.

[5] J.-B. Say, A Treatise on Political Economy, 2 vols., (London: 1821), Vol. I, Bk. 1, Ch. XV, p. 167. Quoted in Guy Routh, op. cit., p. 140.

[6] See: Marx, Theories of Surplus Value, vol. III, (Moscow: Progress Publishers, 1971), p. 183.

[7] J. M. Keynes, General Theory of Employment, Interest, and Money, (San Diego: Harcourt Brace, 1991 (1936)), p. 26.

[8] The Fortune Encyclopedia of Economics, ed. by David R. Henderson, (NY: Warner Books, 1993), p. 832.

[9] George P. Brockway, The End of Economic Man, 3rd ed. (NY: W.W. Norton, 1995), p. 205.

[10] Lenin, Lenin Collected Works, vol. 2, p. 148.

[11] America In Decline, Vol. One, by Raymond Lotta, with Frank Shannon, (Chicago: Banner Press, 1984), p. 260; my emphasis.

[12] Marx, Theories of Surplus Value, vol. III, pp. 55-56.]

[13] Marx, ibid., p. 56.

[14] Marx, ibid., p. 260,

[15] Marx, ibid., p. 259.

[16] Lenin, "A Characterization of Economic Romanticism", LCW vol. 2, pp. 166-168.

[17] The particular pamphlet in the series that uses (and partially quotes) the Lenin crisis passage in question is Lesson VIII: The Economic Crisis, and specifically section III.c.

[18] Political Economy: Marxist Study Courses, (Chicago: Banner Press, 1976), 548 pp. The book is now out of print, I believe, and I don't think the RCP recommends it any more. When I went into the RCP book store in Berkeley a few months ago and asked them what text they or the Party now recommends on political economy, they acted as if no one had ever asked them such a thing before, and could give no recommendation at all.

[19] "M.F.Z.", "Against Sweezy's Political Economy: Reformist and Revolutionary Views of Capitalist Crisis, Part 2", The Communist, (Chicago: RCP), vol. 2, no. 1, Fall/Winter 1977, p. 98.

— End —

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