Wednesday, September 14, 2016

Introduction to Keynesian Wreckonomics: Say’s Law


Last week we mentioned Adam Smith and the possibility that the political-economist-you-love-to-hate might have gotten a bum rap for the past couple hundred years or so.
"Consumption is the purpose of production."
Adam Smith’s first principle of economics is that consumption is the sole end and purpose of all production. This leads naturally into Say’s Law of Markets which is that, all other things being equal, there are only two ways to consume: produce for your own consumption directly with your land, labor, or capital, or to trade to others to be able to consume what they produce with their land labor, or capital. Thus, what is produced tends to be what people want or need, without stimulating artificial demand for unnecessary or unwanted production produced only for profit: production equals income, and supply generates its own demand, and demand, its own supply.
The anti-Malthusian law of population is that the rate of population growth varies inversely — and naturally — with the standard of living. Thus, as living standards rise, the reproductive rate decreases, and as living standards fall, the reproductive rate increases in response. Confusing cause and effect, however, many authorities have assumed that rising standards of living are caused by reducing population growth, not that the rate of population growth is reduced by raising the standard of living.
Under the Banking Principle, the amount of money in the system is determined by production — all money comes from production, as it is the medium by means of which I trade what I produce for what you produce. Under the Currency Principle, the amount of money determines production. Thus, under the Banking Principle you need production in order to have money, while under the Currency Principle you need money in order to have production.
Keynes: "The Devil made me do it."
Keynesian economics, therefore, assumes as a given that all financing for new capital investment must come out of existing production: past savings. These by definition belong to the currently wealthy, or to the State if it can create money backed by its own debt, thereby effectively abolishing private property.
In Keynesian economics, it is essential that there be great disparities of wealth, and the more expensive new capital becomes, the greater the disparity must be in order to provide savings for new capital formation and job creation. Further, in order to ensure that there is enough savings to form capital, wage earners must spend all of their income to purchase unnecessary or unwanted, even useless goods and services in order to generate more profits for the rich. This is because the presumed need for unconsumed production to provide savings requires unnecessary production . . . which must be sold to turn it into money savings. The more useless junk people can buy in the Keynesian paradigm, the better the economy runs. Consumer credit is a great boon — for the rich, because it enables people to create money to purchase the excess goods and services, thereby providing the savings Keynes considered essential.
Of course, if new capital formation were financed out of future savings instead of past savings, great wealth disparities, unnecessary production, consumer credit, and a host of other Keynesian fixes would be unnecessary.
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