Monday, May 20, 2013

Binary Banking Theory, III: Say’s Law of Markets

One of the most misunderstood “laws” of economics, distorted or confused by capitalists, socialists, liberals, and conservatives, is “Say’s Law of Markets.”  Say’s Law is based on private property and freedom of association, which probably accounts for the lack of understanding today.

The banking theory and understanding of money and credit in binary economics is based on Say’s Law of Markets.  Say’s Law is, in turn, based on Adam Smith’s common sense observation in The Wealth of Nations that, “Consumption is the sole end and purpose of all production.” (Wealth of Nations, “Part III, Ch. 8, “Conclusion of the Mercantile System.”)

According to Jean-Baptiste Say (and plain common sense), it is impossible for consumption to exceed production.  If something is not produced, it cannot be consumed.  Everything else being equal, then, if someone wants to consume, he or she must produce a marketable good or service by means of his or her labor, capital, or both to consume directly, or to trade to someone else for something of equivalent value that he or she wishes to consume that the other has produced.

Say’s theory, then, was that we do not use “money” to purchase what others produce.  Money is only the medium by means of which we exchange what we produce for what others produce.  Money is thus a symbol of wealth, as Kelso pointed out, not wealth itself.  As Say explained in his refutation of the scarcity-based theories of the Reverend Thomas Malthus,

“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.”  (Jean-Baptiste Say, Letters to Mister Malthus on Several Subjects of Political Economy.  London: Sherwood, Neely, and Jones, 1821, 2-3.)


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