Evidently the Reverend Thomas Malthus, author of the noted Essay on Population (1797), agreed with Keynes, at least in rejecting Say's Law. In 1821, then, a series of letters Say wrote to Malthus were translated into English and published. In the very first chapter we find the following response to Malthus' rejection of Say's Law. Read the following extract carefully, for not only does the slightly archaic language confuse the meaning somewhat to our modern understanding, but the concepts appear radically different to minds conditioned by nearly two centuries of Malthusian doctrine, and almost a hundred years of Keynesian dogma. Critical passages are highlighted.
All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.Keynes' solution to a declining or stagnant economy is found in the highlighted passage in the final paragraph: "That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new." That is, people should first purchase existing inventories before producing anything more. Say's analysis, however, was that if goods remain unsold by some people, it is because other people aren't producing.
To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.
From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.
I know that this proposition has a paradoxical complexion, which creates a prejudice against it. I know that one has much greater reason to expect to be supported by vulgar prejudices, when one asserts that the cause of too much produce is because all the world is employed in raising it. — That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new.
Keynesian remedies, therefore, concentrate on redistributing existing purchasing power. This is done either through the tax system, or by inflating the currency and increasing government expenditures and welfare payments. Remedies based on Say's Law, however, concentrate on creating new purchasing power without redistributing existing wealth.
The only problem is that Say did not take potential or actual barriers to engage in production into account. He assumed as a matter of course that anyone who wanted to could produce, whether by means of labor, land, or capital, "capital" meaning productive assets other than natural resources; all natural resources were grouped as "land." (Kelso and Adler — below — group all non-human productive assets into the category of "capital.") Say did not acknowledge, or (possibly) realize that there could be barriers to becoming an owner of capital, any more than he could imagine barriers to employing one's labor.
Clearly, however, there are barriers to becoming an owner of productive assets if you do not already own something that you can pledge as collateral or use to purchase capital outright. Worse, as technology advances and human labor becomes relatively less valuable as a factor of production, a significant barrier appears limiting the ability to employ one's labor as a means of engaging in the production of goods and services. Given a free choice between a relatively less expensive machine or expensive human labor, an employer will choose the machine.
Nevertheless, Say's Law remains valid. The problem is that factors that are not inherent in the economic process interfere with its ability to function. The fact that capital is becoming increasingly productive over time and human labor less productive in comparison is irrelevant to Say's Law, for people do not produce only by their labor, but also "through the means of their capital or their land."
To Say, then, the solution to "overproduction" was obvious: produce more. Those who are not producing must produce, and thereby create the purchasing power to clear inventories of existing goods at market prices.
The problem, then, is that the malfunctioning of Say's Law is not a problem of economics. On the contrary, it is a problem of how capital formation is financed. Keynes assumed that capital could only be financed by cutting consumption, saving, then investing. Keynes' assumption requires that ownership of the means of production be as concentrated as possible. Owners receive far more income than they can possibly spend on consumption. The excess is necessarily reinvested to create jobs for people who own nothing.
If people earn too little money from their labor, unsold production can be cleared by having the State print money, thereby redistributing purchasing power through the "hidden tax" of inflation. If people earn too much money from their labor, the State will tax the excess away. The former technique is Keynesian "monetary policy," while the latter is Keynesian "fiscal policy." Both techniques require a large outstanding and permanent national debt and a currency backed exclusively by that debt in order to facilitate State manipulation and control of the currency and the price level.
Unfortunately, both techniques lead ultimately to national bankruptcy. The national productive capacity becomes concentrated in fewer and fewer hands. Because the need to form new capital is not determined by economic consumer demand (necessarily decreasing as increasing amounts of consumption income are diverted to reinvestment), but by the political need to "create jobs," national productive capacity eventually becomes alienated from what the consumer wants, needs, and can afford. Planned obsolescence, massive advertising, colossal increases in the need and demand for consumer credit, tax cuts, stimulus packages, bailouts, and stock speculation on an immense scale replace the genuinely productive activity on which Say relied to make his "Law" function.
This is why the problem of Say's Law not working is financial not economic. Keynes' incredibly convoluted solutions to economic problems were and remain necessarily wrong because he was trying to fix a problem of corporate finance (a microeconomic job) with macroeconomic tools. It's like trying to drive in a screw with a sledgehammer. The screw will go in, certainly, but the damage will be heavy, and may destroy whatever is being constructed or repaired.
If we assume, however, that capital can be financed without first having to cut consumption, save, and then invest, the functioning of Say's Law can be restored. In 1935, Dr. Harold Moulton, then president of the Brookings Institution, demonstrated that Keynes' most basic assumption — cut consumption, save, invest — is wrong. Dr. Moulton's short monograph, The Formation of Capital, proved that in the United States from 1830 to 1930 by far the bulk of new capital formation was financed not by cutting consumption, saving, and then investing, but by commercial banks creating money out of the inherent productive capacity of future capital. That is, capital formation was not financed by existing savings, but by the creation of new money by the banks through the extension of credit for capital projects that would pay for themselves out of future income — the projects were "self-liquidating."
The only thing Dr. Moulton left out of his analysis was the key factor that Say took for granted: that people who did not produce because they were unable to employ (or simply didn't have) labor, capital, or land, would, in fact, somehow produce. This remained a conundrum for the next 20 years, until Louis Kelso and Mortimer Adler published The Capitalist Manifesto in 1958, and followed it up with The New Capitalists in 1961. The subtitle of the latter book is perhaps the most significant issue when asking the question how people who currently lack access to the means of acquiring and possessing capital are to be empowered to do so: "How to Free Economic Growth from the Slavery of Savings."
Kelso and Adler's position was that Say's Law could be restored 1) by financing all new capital formation through the extension of bank credit and collateralizing the loans by using capital credit insurance (paid for by using the usual "risk premium" charged on all loans as an actual insurance premium), 2) making certain that people who currently own little or nothing in the way of capital are able to purchase self-liquidating investments in new capital financed through such extension of bank credit, and 3) use all income from new capital first to retire the loan by means of which the capital was acquired in the first place, then afterwards for consumption.
Thus, it is possible to solve the seemingly impossible economic problems of today if we free ourselves from the "slavery of savings" (or, more accurately, the slavery of Keynesian economics), and restore the functioning of Say's Law of Markets in a way that enables everyone to participate in the economic process, both as owners of labor, and as owners of capital.