Monday, July 15, 2013

Another Note on Say’s Law of Markets


Most authorities and experts have a partial understanding of “Say’s Law of Markets” and its application in the “real bills doctrine” from the perspective of past savings (the present value of past reductions in consumption) instead of future savings (the present value of future increases in production).  This causes a little confusion when we attempt to explain the monetary and fiscal reforms of Capital Homesteading.

Say’s Law can be summarized as follows: As Adam Smith pointed out, the purpose of production is consumption. It is impossible to consume what does not exist. Consumption must therefore be preceded by production. People can only consume that which they produce, or that others have produced.

Everything else being equal, the only way to obtain what others produce is to exchange for it that which you have produced. Thus, we do not purchase what others produce with “money,” but with what we produce. “Money” is simply the medium by means of which we exchange what we produce for what others produce. Money is the “medium of exchange.” (Jean-Baptiste Say, Letters to Mister Malthus on Several Subjects of Political Economy. London: Sherwood, Neely, and Jones, 1821, 2-3.)

Consequently, if some goods remain unsold, it is because other goods are not produced. That is, if people who are producing marketable goods and services find there is insufficient market demand for their products, it is because other people are unable to produce the goods and services the productive people require in exchange for their products. (Ibid.)

The Keynesian solution is to “multiply barren consumptions,” (ibid.) that is, to stimulate demand artificially by creating money backed by government debt. In contrast, Say’s Law dictates not that demand be increased artificially by manipulating the money supply, but by turning non-productive people into productive people.

By becoming productive, people will be able to have the goods and services they can either consume themselves, or trade to others for what those others produce. The only question is how people without savings can become capital owners. The answer is found in the nature of money itself.

This “banking principle” is found in binary economics, and can be stated very simply: money is anything that can be accepted in settlement of a debt: “[E]verything that can be transferred in commerce.” (“Money,” Black’s Law Dictionary. St. Paul, Minnesota: West Publishing Company, 1951.) All money is therefore a contract, just as (in a sense) all contracts are money.

The opposed “currency principle” is less easily stated. For our purposes, however, we can summarize the currency principle as being that money consists exclusively of currency (coins and banknotes) and currency substitutes (demand deposits, some time deposits, and credit cards). To oversimplify somewhat, the currency principle is that “money” is whatever the State says it is.  As Keynes asserted without a shred of proof:

“It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp’s Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized.” (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

Note that some authorities classify Keynes as “banking principle” (Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1989, 60-65.), although this passage from the Treatise on Money clearly reveals Keynes as adhering to the currency principle.

Money being a promise, that is, a contract, nothing is money until and unless it is “accepted,” that is, an agreement is reached as to the content of the promise. All contracts consist of offer, acceptance, and consideration. “Consideration” is the thing of value that induces someone to enter into a contract. (“Consideration,” Black’s Law Dictionary, op. cit.)

Thus, strictly speaking, it is not necessary for anyone to cut consumption and accumulate money savings in order to finance new capital formation and become a capital owner. It is only necessary to have the capacity to enter into a contract.

Creating money by entering into contracts based on the present value of future marketable goods and services is called “pure credit.” This is because the credit does not rely on past savings for anything except traditional collateral — and money and credit are simply two aspects of the same thing: “Money and Credit are essentially of the same nature; Money being only the highest and most general form of Credit.” (Henry Dunning Macleod, The Theory of Credit. Longmans, Green and Co., 1894, 82.)

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