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Tuesday, November 04, 2008

Jean-Baptiste Say's "Law of Markets" was a pillar of classical liberalism

Mint : Mon, Nov 3 2008. What pumps up the economy
An understanding of Jean-Baptiste Say’s Law of Markets is essential in these turbulent times
Sauvik Chakraverti

To theoretical economists, the current turmoil in global financial markets is a battle between Keynesians and Austrians. Yet, I would prefer to go back in time to an older insight. This is Jean-Baptiste Say’s “Law of Markets”, which dates back to the early 19th century, long before either Keynes or any Austrian appeared on the scene. J-B Say was known as the Adam Smith of France. An understanding of his important law is essential in these turbulent times.

In a nutshell, Say’s law holds that the sale of X gives rise to the demand for all non-X...I have taken a small liberty by representing the law as “the sale of X gives rise to the demand for all non-X”. The actual law goes deeper. What it really says is that “the production of X gives rise to the demand for all non-X”...

In the early 19th century, gold was the only money everyone knew, and the International Gold Standard was what all political economists called money. The greatest tragedy that Keynesianism has wreaked upon the world is that it has caused a total loss of understanding of how markets actually work, an understanding at least 200 years old.

Furthermore, the Keynesians exaggerated the role of the state. Classical liberals stood for “limited government”: a constitution that limited the government’s powers; and a parliament that limited its revenue. Thanks to the Keynesians we now have omnipotent government. No government is “limited” if it has unlimited powers to “create money”. Parliaments become meaningless then. Democracy becomes “pork-barrel politics”. Economic totalitarianism, and the consequent inflationism, are the twin evils Keynesians have bequeathed to the modern world. This is the long run Keynes laughed about. Sauvik Chakraverti is an author and award-winning journalist. He blogs at www.sauvik-antidote.blogspot.com . Comments are welcome at theirview@livemint.com The "Law of Markets"... Applied from ANTIDOTE

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