Thursday, April 18, 2013

Defining Money, IV: The Purpose of Production

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.


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