Say’s Law of Markets assumes everything we wrote in the
previous postings in this series — the “banking principle,” as a given. That is why the classical economists Adam
Smith, Jean-Baptiste Say, Thomas Tooke, and others are called “banking school.”
In contrast, the “currency school” that dominates modern
economics defines “money” in terms of currency, i.e., coin, banknotes, and (usually) demand deposits and some time
deposits.
Say’s Law is based on the commonsense observation that there
can be no consumption unless there has previously been production. This utterly obliterates the most fundamental
assumption of the currency school: that there can be no production until and
unless consumption has been reduced and money savings accumulated to finance
production.
Confusing cause and effect, Joseph Schumpeter erroneously
claimed that Say’s Law, oversimplified as “production equals income, therefore,
supply generates its own demand, and demand its own supply,” is therefore
tantamount to a tautology.
More simply put, modern economics steadfastly maintains that
there can be no production until there has been production; that effect must precede cause, which is impossible. Modern economics thereby attempts to violate
the Second Law of Thermodynamics with respect to the direction of time.
Thus, Say derived his “law” from Adam Smith’s observation
that “Consumption is the sole end and
purpose of all production.” [Emphasis
added.] In contrast, modern schools of
economics insist in effect that production is also an end of production by arguing that there is no other source
of financing for future production.
