Why Are So Many Americans In Prison?

http://bostonreview.net/BR32.4/loury.html

A long piece worth reading. We read (or, at least, were assigned to read John Rawls "A Theory of Justice" in a law school class we attended before withdrawing and graduating. Our own theory has to do with something called Say's Law: All the prison building has created a demand to fill those prisons. A great tragedy and stain on American society.

Say's Law is the principle that supply constitutes demand. Or, in the words of economist Jean Baptiste Say, "...a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." (A TREATISE ON POLITICAL ECONOMY, Chapter 15). Or, "you must sell before you are able to buy".
J.B.Say (1767-1832) is the French economist who coined the word entrepreneur to describe an economic agent independent from the landlord, worker or even capitalist (since the entrepreneur may secure financing from others). Say wrote his TREATISE to counter the Mercantilist doctrine that money is the source of wealth. According to Say, goods buy goods, and money mediates the transaction: "It is not the abundance of money but the abundance of other products in general that facilitates sales." James Mill expanded on Say's argument in his book COMMERCE DEFENDED to counter the belief that underconsumption is the cause of economic recession -- and to counter the belief that increased consumption is the remedy for recession. Say incorporated Mill's ideas in subsequent editions of his TREATISE. Say was emphatic that consumption destroys wealth and that only production creates wealth.
Thomas Malthus was the foremost classical economist who promoted the idea that underconsumption causes recession. Malthus blamed the wealthy for saving rather than spending. David Ricardo, in answering Malthus, invoked J.B.Say to write: "The shoemaker when he exchanges his shoes for bread has an effective demand for bread." Ricardo attributed post-war depression & unemployment to a mismatch of supply & demand, rather than to underconsumption.
Classical economics incorporated the ideas of Say, Mill and Ricardo rather than Malthus in its body of wisdom. These ideas were augmented by John Stewart Mill who emphasized the role of savings rather than consumption in wealth-creation when he said: "...to consume less than is produced, is saving; and that is the process by which capital is increased."
The beliefs of Malthus were revived during the Great Depression of the 1930s by John Maynard Keynes in his book THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY (1936). It may not be much of an exaggeration to state that the GENERAL THEORY is little more than a protracted attack on Say's Law -- a reversion to Malthus in claiming that underconsumption (low "aggregate demand") causes recession & unemployment -- and the claim that government spending (financed by deficits, taxes or inflation) and subsidized consumer spending can compensate for "demand deficiencies". In his preface to the French edition of THE GENERAL THEORY Keynes refers to Say's Law as a "fallacy" and describes his own book as "a final break-away from the doctrines of J.-B. Say".
In the first section of Chapter 3 of his GENERAL THEORY, Keynes states Say's Law to be "supply creates its own demand" and he interprets Say's Law to mean "that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output". Both Keynes' statement and interpretation are erroneous. Say's Law states that a produced good represents demand for other goods, not for itself (as "its own" could imply). Say's Law does not equate supply & demand (Keynes' belief that Say's Law means that everything that is produced is sold), but makes supply a precondition for demand. Supply equals demand at the clearing price on a supply-demand curve (for particular goods and aggregates), but Keynes was wrong to equate supply/demand curves with Say's Law. Supply constitutes demand, but demand does not constitute supply -- one cannot have the means to buy without first having sold.
Keynes' recommendations for government spending were music to the ears of politicians and merchants eager to sell goods by any means. Keynesianism replaced what Keynes dismissed as "classical economics". And Keynes' misrepresentation of Say's Law as "supply creates its own demand" was accepted as if it were a quotation from J.B.Say.
Classical economists did not refer to the principle that "supply constitutes demand" as "Say's Law", but called it "the law of markets". The phrase "Say's Law" was probably coined by Fred Taylor, who wrote a widely used introductory textbook early in the 20th century (PRINCIPLES OF ECONOMICS, 1921). Although J.B.Say deserves credit for being the first word on the law of markets, he was neither the last word nor the most articulate exponent. Say's Law is not an obscure & insignificant economic tenent. I regard it as the most important issue in economics: how a society creates wealth.
This essay is an analysis of the idea that "supply constitutes demand", which I will call "Say's Law". It might seem appropriate to equate the phrase "Supply-side Economics" with Say's Law were it not for the fact that this phrase has been associated with a policy of cutting taxes (without cutting government spending) to stimulate the economy. This essay is less concerned with historical analysis of Say's Law and of "who said what" than with grasping essential principles. For a thorough scholarly analysis of Say's Law, including its exponents & detractors, I highly recommend SAY'S LAW AND THE KEYNESIAN REVOLUTION by Steven Kates -- by far the best book on every aspect of Say's Law.
Knowledge of the laws of supply & demand from an Austrian perspective -- and familiarity with The Austrian School of Economics -- would be very helpful for understanding my analysis. I therefore encourage readers to read my review of MAN, ECONOMY AND STATE to the end of the second chapter before proceeding with this essay.