Yesterday we looked at Say’s Law of Markets to gain insights into the true nature of money. We realized that — all other things being equal — the only way to consume is to produce, and that in order to consume what others have produced, we must produce something ourselves to offer in exchange. The medium by means of which we carry out exchange we call “money.”
We can (albeit somewhat simplistically) summarize Say’s Law as “Production equals income, therefore supply (production) generates its own demand (income), and demand, its own supply. Notice that, for the sake of the argument, we’re simply bypassing a discussion of charity and inheritance by stipulating the usual copout in economics, “all other things being equal.” We’re dealing with the general rule here, not the exceptions.
Now, about that Say’s Law. . . .
Authorities like Karl Marx (1818-1883) and John Maynard Keynes (1883-1946) rejected Say’s Law, claiming that it didn’t work. (They also had a much more limited understanding of money than Smith and Say.) Louis Kelso, however, pointed out that Marx and Keynes assumed — erroneously — that labor is the sole factor of production, whereas Smith and Say took into account labor, land, and other capital.
Obviously, if something other than labor is productive, thinking only labor is productive will distort the picture. There will be production (and thus income) that seemingly came out of nowhere . . . so it must have been stolen . . . right?
Plus, if you withhold production from consumption (“save”) in order to finance new capital to create jobs and stimulate economic growth, you have another problem that appears insoluble. When you save to finance production, you distort matters by reducing demand, and thus the need to produce and create new jobs. If there’s no reason to produce because people aren’t consuming what is already produced, and thus no reason to invest in even more production, why should anyone invest in more production? (And people wonder why the powers-that-be promote consumerism, i.e., convincing people to consume higher levels of what they neither want nor need . . . it's to generate profits to invest in more new capital to produce more stuff nobody really wants, with the consequence that capital ownership — and thus income — becomes increasingly concentrated in fewer and fewer hands.)
|Marx: Surplus value stolen from workers.|
Thus, Marx claimed the production Smith and Say attributed to land and other capital was really surplus value stolen from workers and consumers. Keynes didn’t really try to explain it, but advocated government creation of money backed by its own debt to increase demand artificially.
Keynesian induced inflation would presumably clear the excess production allegedly essential to generate savings by allowing people to consume what had been saved from consumption, thus having your cake and eating it, too. This was something (“multiplying barren consumptions,” i.e., consuming without producing) that Say specifically warned could not work. Thinking you can force it to work all evidence to the contrary has resulted in the vast increase in national debt throughout the world since the nearly universal adoption of Keynesian theory.
Kelso explained that if we want Say’s Law to work, we must make every child, woman, and man into a capital owner as well as an owner of labor. The question is, where is the purchase money to come from?
That is what we will look at tomorrow.#30#