The kicker is that Jean-Baptiste Say did not believe in "Say's Law" as a short-run phenomenon. Even in 1803 he acknowledged the possibility of an excess demand for money--although he did dismiss it as a very transitory something that would be easily remedied:
Jean-Baptiste Say (1803), A Treatise on Political Economy Book I, Chapter XV: Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied, and is a strong indication of prosperity—a proof that a great abundance of values has been created, which it is wished to exchange for other values. In such cases, merchants know well enough how to find substitutes for the product serving as the medium of exchange or money...
By 1829, however, Say's analysis of an excess demand for money in a financial panic and its consequences for production and employment is--well, it sounds Keynesian:
Jean-Baptiste Say (1829), Cours Complet d'Economie Politique Pratique: The Bank [of England]... to limit its losses... forced the return of its banknotes and ceased to put new notes into circulation. It was then obliged to cease to discount commercial bills. Provincial banks were in consequence obliged to follow the same course, and commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old.
As the bills that businessmen had discounted came to maturity, they were obliged to meet them, and finding no more advances from the bankers, each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared among merchants and among bankers, who having placed more bills in circulation than their personal wealth could cover, could no longer find guarantees to cover their issues beyond the undertakings of individuals, many of whom had themselves become bankrupt...
It has, after all, been known since at least 1829 that planned expenditure can fall short of planned production if people in aggregate plan to hold more liquid cash money, more savings vehicles, or more safe assets than financial markets have to supply--and that the consequence of planned spending falling short of planned production is depression and unemployment.
If Jean-Baptiste Say himself expressly argued that a financial crisis can produce a shortage o demand and a depression, what more is there to be said?
The War on Demand: Something really strange has happened to the debate over economic policy in the face of the Great Recession and its aftermath — or maybe the real point is that events have revealed the true nature of the debate, stripping away some of the illusions. It’s a bigger story than any one point of dispute — say, over the size of the multiplier, or the effects of quantitative easing — might suggest. Basically, in the face of what I would have said is obviously a massive shortfall of aggregate demand, we’re seeing on all-out attack on the very notion that the demand side matters.
This isn’t entirely new, of course. Real business cycle theory has been a powerful force within academic economics for three decades. But... RBC guys had very little impact on public or policy discussion....
Now, however... it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.
So what’s going on here?
First, Keynes was right: Say’s Law — the notion that income must be spent, and hence that supply creates its own demand — really is at the heart of the issue. Many, many people just can’t see how it’s possible for there to be an overall shortfall of demand. The reason I’ve always loved the baby-sitting coop story is that it’s a human-scale example of how demand shortfalls are possible. But my experience is that if you try telling that story to someone convinced that demand can’t ever be a problem, it just bounces off: the minute you finish, they’re back to saying that income must be spent on something, so a shortage of demand can never happen, and any rise in one person’s spending must lead to an equal fall in someone else’s spending.
Second... many people find the notion of inadequate demand abhorrent... [from] notions of morality.... [A] substantial number of writers on economics find the whole idea that the economy can suffer because people are too thrifty, insufficiently willing to spend, deeply repugnant.... The world shouldn’t be like that — and therefore it isn’t.
Third, monetarists — old-style Friedman-type monetarists who focus on monetary aggregates, or the new style which says that the Fed can and should target nominal GDP — are... part of the axis of monetary evil as far as the demand-deniers are concerned.... [F]rom the point of view of those who can’t see how demand can possibly matter they’re... Keynesians....
It’s kind of shocking if you think about it. Here we have a huge, hard-won intellectual achievement, one that accounts very well for the world we actually see, and yet it’s being thrown away because it doesn’t go along with ideological preconceptions. Once that sort of thing starts, where does it stop? The next thing you know, the theory of evolution will get the same treatment. Oh, wait.
Seriously, though, this is truly sad — and dangerous. Demand-side understanding, in my view, played a big role in helping us avoid a full replay of the Great Depression; if enough people had shared that understanding, we might have avoided even the minor-league Depression we’re going through. But willful ignorance is on the march — and the odds are that we’ll handle the next crisis very badly.