By the way, Cochrane doesn`t need to assume a constant speed of money to be wrong. It must assume a constant product of the stock and velocity of money. Brad DeLong interprets John Cochrane as implicitly assuming that speed is fixed. I interpret John Cochrane as implicitly assuming a non-monetary economy. Both interpretations make sense. But I think (I hope?) mine is more fruitful. It is not obvious that my “proof” of Say`s Law is false, and that it is just the quirk of money that makes Say`s Law false. The latest issue of the Review of Keynesian Economics is devoted exclusively to a dozen Keynesian economists who insist that Keynesian economics is alive and sound. There are no opposing views, but it seems that followers protest too much. Why this defensive attitude? Because most Keynesian principles are wrong – always have been, always will be.

But today`s defensive adherents can take solace in the fact that Keynesian premises, however false, will always be listened to benevolently to the extent that people distrust capitalism, while Keynesian policies, however bad, will always win the passionate support of policymakers to the extent that they try to: Rationalize interventionism and activism. It is money (as a medium of exchange) and only money that makes Say`s law bad. And Keynesians who reject Say`s law, but also reject the uniqueness of money, are just as wrong as those who accept Say`s law. What`s wrong with the above “proof” of Say`s Law? (Apart from “proving” that no market can have an excess of supply or demand?) But what is Say`s law and why was Keynes so wrong? Say`s law of markets [3] was defined in his great work: “A product is hardly created, it therefore offers on a market other products to the fullest extent of its own value.” But to refute Say`s law, Keynes seriously distorted it. As Kates notes, “Keynes was wrong in his interpretation of Say`s Law and, more importantly, he was wrong about its economic impact.” [2] And Kates sympathizes with Keynesian economics! It bears repeating that in political economy there is no more important principle to be right—and avoid being wrong—than Say`s law. As Bastiat knew, the law resembles a torch that illuminates and facilitates the dissemination of knowledge based on reason and reality. It also helps us avoid harmful dissent in the darkness of “mad teachings.” Perhaps the bad thing about macroeconomics is that fundamental issues like Say`s Law need to be discussed in blogging. Is it being discussed elsewhere these days? If there are n goods, including money, there is n-1 overdemand or stocks for n-1 non-monetary goods, and also n-1 overdemand or supplies for money, giving a total of 2 (n-1) overdemand or inventory. Any “proof” of Say`s law that counts only n demand or oversupply must be false (unless n = 2, but then money would be superfluous anyway if there were only a non-monetary good). The best we can say is that in each of the n-1 markets, the excess supply or demand for the non-monetary good in that market must match the excess supply or demand for money in that market.

(And a true barter economy, where everything can be exchanged for everything else, has (n-1)n/2 markets, not the n markets of my “proof”). It`s just as bad in a barter economy. I exchange my production of 1 banana for yours of 1 apple. I want to borrow to buy an extra apple. I borrow the banana from you and offer to spend it in exchange for an extra apple. You increase your production by an extra apple. This will increase your income to two bananas. You saved a banana and consumed one. It is an additional income that no one has anticipated. GDP (GDF) has increased. “It is money (as a medium of exchange) and only money that makes Say`s law bad.” Say`s Law is contentious when prices are completely flexible so that markets are always clear. Say`s Law is only relevant when prices do not adjust immediately and markets are not clear.

And I don`t think we all agree on whether it`s good or bad for prices to be sticky (which is the only time it counts). Say`s Law is wrong, and the fact that it is wrong is really important for macroeconomics.