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.”
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| Jean-Baptiste Say |
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.)
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| 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#