Tuesday, November 02, 2004

Interesting bits in the General Theory, part 3.

Why do we believe in Say's law? Keynes explains this to us.

"...the conclusion that the costs of output are always covered in the aggregate by the sale-proceeds resulting from demand, has great plausibility, because it is difficult to distinguish it from another, similar-looking proposition which is indubitable, namely that income derived in the aggregate by all the elements in the community concerned in a productive activity necessarily has a value exactly equal to the value of the output."

Yes, we are confusing an identity with an idea about how the actors in the economy make decisions about spending and producing. The key is to realize that these decisions are often made separately. That is, I do not decide how many ipods will be made this year, but I do decide whether I want to buy one. Apple has to guess whether or not I will buy.

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