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Finance: Rick Perry flubs a fundamental lesson of modern economics

Rick Perry.

"Here's an economics lesson: supply and demand. You put the supply out there and the demand will follow," Perry said Thursday.

On Thursday, US Secretary of Energy Rick Perry flubbed one of the most fundamental lessons of modern economics. Supply and demand.

"Here's an economics lesson: supply and demand. You put the supply out there and the demand will follow," he said at a coal plant Thursday, according to Taylor Kuykendell, an energy reporter at S&P Global Market Intelligence.

Contemporary mainstream economists generally agree that the reverse is true. Too much supply, theory and empirical evidence suggest, causes demand to go down.

However, Perry is not the first to propose this unorthodox line of thinking.

And this brings us to Say's Law.

In his 1803 work "Traité d'économie politique," French economist Jean-Baptiste Say argued that "a product is no sooner created, than it, from that instant, afford a market for other products to the full extent of its own value."

He continued, "As each of us can only purchase the productions of others with his own productions — as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase."

Taking it a step further, Say argued that a general glut — by which his contemporaries meant a widespread excess of supply over demand — cannot occur. He argued that if there were goods that were unsold, then that was because other goods weren't being produced.

This was actually a popular idea back in the 19th century. Although, even then others questioned the idea that general gluts can't exist.

But then, in his work "The General Theory of Employment, Interest, and Money, economist John Maynard Keynes slapped down the idea that "supply creates its own demand."

"Say's law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment," he wrote.

Notably, in the early 20th century the Great Depression suffocated the US economy and the unemployment rate skyrocketed to about 25%.

This presented a problem for Say's Law in that there was a huge supply of labor, but no demand for it. Or in English: lots of people were available to do work (supply) but there were no jobs (demand).

Today, many of Keynes' ideas from his seminal work are central to modern macroeconomics. But it's interesting to think that just a few hundred years ago Say's Law — and what Perry said on Thursday — was considered mainstream.

Source: Pulse Nig

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