History of Economic Thought

Jean-Baptiste Say (1767-1832)

Who was Jean Baptiste Say?
A French Libretarian,
Political economist,
Businessman, One of the
Founders of the Classical
School, First Academic
teacher of Economics and
Propagator of Classical
Thought in France.
 Background and Trivia

● Born to a Protestant family in Lyons (Huguenote Merchants) in 1767.

● His schooling and Upbringing were steeped in mercantilist teachings, although he chugged out of them
early on in his career.
● He was engaged in an Insurance Company in Paris at the time when he first came upon Wealth of
Nations by Adam Smith.
● The Smithian principles so touched him that he decided to break into economics with a periodical ‘La
Décade philosophique’, which he dedicated to the French Revolution in addition to printing
explanations of Smith’s Doctrines.
● After a swift fallout with Napoleone Bonaparte at the Tribunate, he had given up political office to
become a successful cotton merchant.
● He spent his final times reading and expounding theories at College de France until his death in 1832
 Introduction to J.B. Say - What Say Says

Jean Baptiste Say, a businessman himself, was rather liberal in his approach to
Economics (and Politics - He was the secretary to the Finance Minister of France in the
midst of the French Revolution in 1793).

JB Say was the first writer who attempted to raise political economy to the rank of the
exact sciences.

Say popularized his own law of demand, known as the Say’s Law. The law can arguably
be summarized in a very simple phrase - Where there is a supply, there will be a
demand.

JB Say believed that products are paid for by products, and money is merely a
causeway in the exchange of products.
 Introduction to J.B. Say - What Say Says

Jean Baptiste believed that the role of an entrepreneur carries pivotal power and strength
in any economy. An entrepreneur, according to Say, is the chef that combines the ingredients,
referring to factors of production (Land, Labor and Capital), to make a dish fit for
consumption (As a fully functional economic system), and one that is widely demanded.
JB Say Contributions
His Major Works and Publications
● Jean-Baptiste Say has been an author of revolutionary scholarly books and popular tracts, a social
philosopher, and a remarkable Renaissance man.

● He is majorly known for his contribution to the Theory of Markets, also referred to as Say’s Law of
Markets, which postulates that supply creates its own demand. His major publication was Traite d’economie
politique also called (A Treatise on Political Economy) in the year 1803.

● In addition to his famous Treatise, his other published works were the two-volume “Cours Complet d
Economie Politique Pratique” (in 1852) and a collection of his correspondence with fellow economist
Thomas Malthus titled “Letters to Mr. Malthus” which discussed and debated his critics' theories of
economic growth.

● Among others of his teachings, Say also expressed the belief that deflation could be a positive occurrence, if
it resulted from productivity gains. He also wrote about money and banking, shared his views of taxation as
burdensome. He was also among the first economists to discuss entrepreneurship and notions of utility,
describing entrepreneurs as helpful in meeting “human wants.”
● A Treatise on Political Economy : One of the most influential works on Political Economy in
the 19th Century talks about the Production, Distribution and Consumption of Wealth. It set the stage for
the development of the study of political economy in France and an early translation into English helped
make it become the most used economics textbook in the United States. The book has also been heralded
by Mises, Hayek, Rothbard, and many modern Austrians, who depend on his insights to assist in the
understanding of markets and prices.
Between 1828 and 1830, Say published his ‘Cours complet d'économie politique pratique’, which was an
expansion of Political Economy to practical applications.

● Letters to Mr. Malthus : The book is a compilation of the Letters exchanged with Robert Thomas
Malthus in which Say replies to Malthus’s negative views about the impact of population on the
well-being of workers, and provides a popularization of his economic views. The series of letters explain
how economic growth occurs without destabilizing economic forces and have been written with great
passion and personality, anticipating so many Austrian insights.
What JB Say theorizes?
Theories & Models
1. Say’s Law of Market

● Supply creates its own Demand.

● Money’s role is only to act as a medium of exchange. It does not hold its own value. Value
is held in commodities- “You say you only want money, I say you want other
commodities”.
● The reason why sales are dull (for a particular commodity) is not because people don’t
have money- It is because people have not had enough profit in their respective businesses
i.e. some other commodities have not found advantageous market.
● The success of one industry yields purchasing power to people and opens up avenues for
other commodities. To say that the demand falls short is incomplete and fraught with
serious misgivings.
Say’s Law of Market-Assumptions

● Prevalence of Free Enterprise system

● There is no such thing as displacing existing players- new players put up their
products and services in exchange for goods and services.
● The extent of the market is not limited- It is as big and diverse as the volume
and assortment of products manufactured and exchanged.
 Say’s Law of Market- Explanations

Important explanations:

● Commodities; Abundance and Scarcity- Superabundant commodities or glutted commodities- Say

provides two reasons why this happens:
a) Overproduction of the commodity to the extent- Its Supply > Total demand
b) Certain commodities are glutted because certain other commodities have not sold well (i.e. their
production has declined)
● Profits; More and less- The absence of good business can accrue to two factors:
a) Producers find it difficult in employing productive means (factors of Production)
b) The means have been inefficient in providing value to commodity.
Role of Success of Branches of Commerce
2. Utility Theory of Value
● The price, or exchange value, of any commodity, Say asserted, depends
entirely on its use value, or utility:

According to Say:
The value that mankind attaches to objects originates in the use it can make of them .
The inherent fitness or capability of certain things to satisfy the various wants
of mankind, I shall take leave to affix the name utility .... The utility of things is the
ground-work of their value, and their value constitutes wealth ....

● Instead of seeing the process of production as a series of human exertions applied to transform natural
raw materials into usable goods, Say asserted the existence of different "productive agencies" that
combined together to produce goods. What these productive agencies were ultimately producing was
"utility," and each agency was co-equally responsible for the production of the utility.
 3. Theory of Distribution
The ‘Utility’ producing Productive Agencies that Say talks about included "human industry, with the aid of
capital and of natural agents and properties,"

Therefore, according to Say’s Utility Theory of Value there was no qualitative difference, in the creation of
utility, between the exertion of human labor, on the one hand, and the ownership of capital, land, and
property, on the other.

He argued that there is a similarity between working and owning capital. According to him ‘Objects of
wealth were obtained only by human sacrifice.’ And just like workers capital owners are also sacrificing
something. He asserted that frugality was the source of capital ownership, and frugality involved as much
sacrifice as working.
 Theory of Distribution

Smith and Ricardo had different views on the Theory of Distribution, they had argued that commodity prices
reflected the rate of wages and the rate of profits and that these rates were determined by other social and
technical considerations.

Whereas, Say argued that wage and profit rates were determined by the relative contributions to utility
creation made by labor and capital. In Say's words:

The value of products is not founded upon that of productive agency [that is, not the rates of profit and
wages], as some authors have erroneously affirmed; ... since the desire of an object, and consequently its
value, originates in its utility, it is the ability to create the utility ... that gives value to a productive agency;
which value is proportionate to the importance of its co-operation in the business of production.

This, Theory of Distribution, was later fully developed by John Bates Clark.
4. Taxsaytion

● He argues that the fundamental class struggle is between taxpayers and tax consumers. Say believed
that those who benefit from the tax system, the tax consumers, are exploiting the taxpaying class

● According to Say, the best taxes, or, rather those that are least bad, are

1. Such as are most moderate in their ratio.

2. Such as press impartially on all classes.

3. Such as are least injurious to production.

5. How Entrepreneurs came into Economics?

The terms "entrepreneur" and "entrepreneurship" have never been described consistently by economists.
Despite the fact that the notion of an entrepreneur has existed and been recognised for decades, classical and
neoclassical economists oddly excluded entrepreneurs from their formal economic models.Economists did
not seriously try to integrate entrepreneurship into their models until the middle of the twentieth century.

Joseph Schumpeter, Frank Knight, and Israel Kirzner became key players in the incorporation of
entrepreneurs in later iterations of economics.

Entrepreneur is a French term derived from the word entreprendre, which means "undertaker" or
"adventurer." It was most likely coined by economist Jean-Baptiste Say. Say read Adam Smith's book -
“Wealth of Nations” and, while agreeing with him on all counts, considered the omission of enterprising
businesses to be a major flaw.
The Concept of Entrepreneurs
Say was responsible for beginning the concept of entrepreneurs in Economics.
First time- a distinction between the capitalist as the financier and the entrepreneur as the organiser.
“An Entrepreneur is the economic agent who unites all means of production; land of one, the labour of
another, and capital of yet another, and thus produces a product. By selling the product in the market, he
pays rent of land, wages of labour, and interest on capital, and what remains is his profit" according to J.B.
Say.

Simply put, entrepreneurs search for business

profit oriented opportunities and, in the end,
generate new markets and opportunities.
Entrepreneurs discourage monopolies from
emerging by continuously upsetting the market
equilibrium , resulting in a wide variety of goods
that keep consumers buying and suppliers
producing.
 Applications of Entrepreneurial thought
Since he was an entrepreneur, Say focused on them. As a cotton producer, he saw
firsthand how an entrepreneur would be able to understand and manage opportunities.

Many people were captivated by Say's "A Treatise on Political Economy, or the
Production, Distribution, and Use of Wealth." Infact, after reading the English version,
Thomas Jefferson attempted to encourage Say to teach in his new nation.

About the fact that Say never set foot on American soil, but yet his entrepreneurial mindset finds a home
there. The United States welcomed the industrial revolution wholeheartedly, mixing Adam Smith's free-market
ideals with Say's entrepreneurial call to arms, and emerged as one of the world's most influential and strongest
economies.

As said in previous slide, the entrepreneurial behaviour of seeking opportunities to gain profit and thus
creating a competition in the market is a risky approach. It is believed that efficient pioneers like Bill Gates
and Henry Ford enjoy riches well above those of ordinary economic agents in exchange for taking these risks.
 Criticism to the Entrepreneurial concept
Say's view of the entrepreneur as a static manager and organiser, rather than a dynamic carrier of risk and
uncertainty, is opposed by astute critics as Schumpeter and Hébert.
However, we do not share this viewpoint because Say's claim on the other hand, tends to be deeply rooted in
the Cantillon-Turgot heritage of the entrepreneur as forecaster and risk-taker.
Who is Cantillon and Turgot?

Richard Cantillon : (1680 to 1734) Anne Robert Jacques Turgot

One of the first treatises on
contemporary economics was written
by an Irish economist and financier.
He believed in “Bearing uncertainty
is the essence of entrepreneurial
activity.”
:1727-1781)
A statesman and an economist Turgot
was a keen advocate of reforms during
his political career and was aligned with
the Physiocratic school of economics.
Turgot understood the importance of
labour division, looked at how prices
were established, and studied the roots
of economic development and growth.
Follower, but not Adherent- Divergence & Departures from Smith

● Say, even though a devoted pupil of Smith was far from being devout. He critiqued, criticised and
even corrected smith’s contentions with his own ideas.
● He differed/improved upon the classical doctrine in three broad ways and numerous small fashions.
● Production, Consumption and origin of Value are three main departures this study presents.
Follower, but not Adherent- Divergence & Departures from Smith

Divergence - Production

● The business of production has been defined in a profounder fashion in Traité d’économie politique. Much
addition was made to Smith’s contention of labour being the real and most essential means of production.
Say acknowledged the importance of Land and Capital and their effective concurrence for success in
imparting value to raw materials.

● Say also understood Commercial Production. He refuted Smith’s dismissing of commercial production on
basis of exchange not holding production value. He contended that commercial production (and thus
commercial industry) are based on value added via transport costs accrued in, turn through virtue of
socio-cultural agents and geography.
 Divergence - Consumption

● Adam Smith believed that Consumption was the sole end and purpose of all production.
The production is the means, to the end, that consumption. Consumption leads to
economic growth, and eventual prosperity.

● JB Say believed that consumption destroys wealth, in contrast to production, which is

the source of economic growth. Production should be the eventual end goal of
economic activity, since it creates its own demand.

● Excessive consumption has the potential to destroy an economy, according to Say, and it
should be avoided at all costs.
 Divergence - Value
● His first criticism of Smith's work was that he overrated the role of labour in the creation of value. In
Say's opinion the labour theory of value was incorrect because value is always the combined product of
nature, labour and capital and not of labour alone.

● According to Say, because he exaggerate the importance of the division of labour, Smith underrated the
influence of machinery in the production of wealth . In Say's opinion, the emphasis Smith placed on
the improved "dexterity of the workman" and the saving of "time commonly lost in passing from
one sort of work to another" overshadowed the advantage gained from the division of labour, namely
that is leading to the application of machinery.

● For Say, the last mentioned was the crucial factor, because he did not believe the division of labour to
be very effective unless attended by the introduction of more tools and machines.

● Say regarded capital as a prime mover and Smith saw it as an indirect factor contributing to the
efficiency of labour.
 CONCLUSION
Criticism, Impact & What Others Say
 Keynesian Criticism
● The exact phrase "supply creates its own demand" was actually coined by John Maynard Keynes,
critiquing Say. Say and Keynes differed in their definition of unemployment.

● According to Keynes, if Say’s Law is correct, widespread involuntary unemployment cannot occur.
Say’s Law explains unemployment as arising from insufficient demand for specialized labour, this
can be interpreted as structural unemployment, whereas Keynes explained unemployment in the
context of insufficient aggregate demand wich can be interpreted as cyclical unemployment.

● According to Keynes, the implication of Say's law is that a free-market economy is always at what
Keynesian economists call full employment. Thus, Say's Law is part of the general world view of
laissez-faire economics—that is, that free markets can solve the economy's problems automatically.
These problems being recessions, stagnation, depression, and involuntary unemployment.
 Keynesian Assumptions
In the Keynesian interpretation, the assumptions of Say's law are:
● a barter model of money ("products are paid for with products");
● flexible prices—that is, all prices can rapidly adjust upwards or downwards; and
● no government intervention.
Because historically there have been many persistent economic crises, one may reject one or more of the
assumptions of Say's law, its reasoning, or its conclusions. Taking the assumptions in turn:
● Circuitists and some post-Keynesians dispute the barter model of money, arguing that money is
fundamentally different from commodities and that credit bubbles can and do cause depressions.
Notably, the debt owed does not change because the economy has changed.
● Keynes argued that prices are not flexible.
● Laissez-faire economists argue that government intervention is the cause of economic crises, and that
left to its devices, the market will adjust efficiently.
 New-Keynesian Interpretation
● Paul Krugman, the Nobel Prize winner, considered the term Say’s
Law as a misnomer, calling it Say’s false law or Say’s fallacy.
Criticizing Say’s Law, he said money that is hoarded is not spent on
products.

● He further dismisses Say's law as, "at best, a useless tautology when
individuals have the option of accumulating money rather than
purchasing real goods and services".

● “Any time you see Paul Krugman take a position regarding

macroeconomics, it’s a pretty sure bet that the truth lies somewhere in
the opposite direction.” ~ Louis Woodhill, Forbes Contributor
1. JB Say and Ricardo

● Ricardo and Say first met in December 1814, when Say visited Ricardo at Gatcombe Park. When
Ricardo took up the Smithian heritage in England, he could draw not only on the Wealth of Nations but
also on the exposition and elaboration of Smithian economics contained in Say’s Treatise.

● While Ricardo praised certain aspects of Say’s analysis, from the beginning he was critical of other
aspects and especially of Say’s theory of value and distribution.
 ● Ricardo criticised and disagreed with say exclusively in the following areas:

1. the distinction between ‘value’ and ‘riches’

2. the theory of value, the problem of the measure of value and and the distinction between net and
gross revenue

3. the theory of income distribution, especially the explanation of rent and of profits.

You have I perceive a little modified the definition of the word value as far as it is dependent on utility, but
with great diffidence, I observe, that I do not think you have mastered the difficulties which attach to the
explanation of that difficult word. Utility is certainly the foundation of value, but the degree of utility can
never be the measure by which to estimate value. A commodity difficult of production will always be more
valuable than one which is easily produced although all men should agree that the latter is more useful than
the former. A commodity must be useful to have value but the difficulty of its production is the true measure
of its value. For this reason Iron though more useful is of less value than gold.
In the same letter Ricardo also criticized Say’s confounding of value and riches:

Riches are valuable only as they can procure us enjoyments. That man is most rich, and has most valuables,
who can procure in exchange for his commodities, not those things which he himself or the world generally
consider as most desirable, because they may possibly be procured at little cost, but those things which are of
difficult production, which is always the foundation of great value.
 2. JB Say, T.R Malthus and Sismondi
Thomas Malthus and J. C. Sismondi tried to provide a theoretical rebuttal of Say’s Law.

Sismondi questioned the self-equilibrating nature of a capitalistic system as suggested by Say’s Law.
He emphasized that while the productive powers of the modern capitalistic system increase,

“Working class, having only the purchasing power of subsistence wages, is unable to purchase all the
products the system is capable of producing. Inadequacy of consumer purchasing power will manifests
itself in overproduction which is the most striking feature of economic crises”.

Malthus expressed a similar idea by arguing that

“When profits rise, there will be a tendency for capitalists to spend a smaller proportion of their gains
and to save more. They are more interested in accumulation than in making large expenditures on
consumer goods. Their savings increase the stock of capital and eventually output, which increases the
problem of maintaining effective demand.”

However, these arguments, though they unveil the mistake that Say might make and also inspired
Keynes’s macroeconomics afterward, did not attract enough attention.
 Remembering Say- The Austrian School of Thought

The Austrian School of Economics has not done much justice to Jean Baptiste say:
1) He is primarily remembered as the giver of say’s law and not much else even though
many of his masterful observations lie in catechism and correction.

2) Joseph Garnier said in ‘Elements de l’ Economic politique’ that say has been
somewhat drowned out by his trivialization of his own work; as being a mere
extension to Smith and singing hymns about him.