Yesterday we
looked at how, under Say’s Law of Markets — everything else being equal — every
producer is a consumer, and every consumer is a producer. Thus, as Say’s Law is often (if somewhat
inaccurately) summarized, “supply (production) generates its own demand
(consumption), and demand its own supply.”
As Jean-Baptiste
Say explained in his Letters to Mister
Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce (1821) — noting, of course,
that is the date of the translated English version, not the original French . .
. and we didn’t include the rest of the title, which is “To Which Is Added A
Catechism of Political Economy, Or, Familiar Conversations on the Manner in
Which Wealth is Produced, Distributed, and Consumed in Society” . . . .
To a proprietor of
a mine, the silver money is a produce with which he buys what he has occasion
for. To all those through whose hands this silver afterwards passes, it is only
the price of the produce which they themselves have raised by means of their
property in land, their capitals, or their industry. In selling them they in
the first place exchange them for money, and afterwards they exchange the money
for articles of consumption. 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.
 |
| Rev. Thomas Malthus |
Thus, any
rational person necessarily draws the conclusion that, if we want supply to
equal demand (and demand to equal supply), and therefore production to equal
income . . . and income to be sufficient to purchase all production, every
producer must consume, and every consumer must produce.
There is one
problem, though. To Say, Smith, and
other classical economists of what became known as the Banking School, labor,
land, and capital (technology) are all productive. To Keynes, Marx, and others of the
“Ricardian” school of classical economics, only human labor is productive. (If you want to see something very nearly
incoherent, see how the Ricardians explain how land both is and is not
productive, and how it is both a cost free factor of production, and not a
factor at all.)
What’s wrong with
that? If there is production taking
place that can’t be accounted for by labor, and if you’re convinced that labor
is the only thing that is productive, you’re going to come to some very bad
conclusions, and even worse decisions.
And the problem will get worse the more capital productiveness outstrips
that of labor.
For example, if
labor is responsible for all production, and capital instruments are
accumulated or “congealed” labor, then all the owner of capital is due is the
cost of capital, nothing else. Labor is
due everything above the cost of capital.
 |
| Marx: "Didn't recognize me, did you?" |
But, obviously,
owners of capital are making enormous profits.
Where are those profits coming from?
Why, it’s surplus or extra value stolen from either consumers who paid
more than the cost of labor and materials that went into it, or from the
workers who were deprived of production that belongs to them.
Thus, all owners
of capital are thieves if they take anything more than depreciation, or recover
the cost of their own labor that they put into the capital they purchased.
That kind of
thinking is bad enough. It’s when
consumers can’t produce enough with their labor to exchange for what the
machines produce that the real trouble starts.
Even if you admit that capital is productive, this gets you into
trouble, because then all profits attributable to capital go to the owners of
capital, not to the owners of labor.
This means that producers
pile up goods that cannot be sold because consumers don’t have the income —
they’re not producing, therefore they can’t consume. Capital is producing, so that the owners of
capital have far more income (“demand”) than they can spend, and owners of
labor don’t have enough. In aggregate,
of course, there is theoretically exactly enough production for consumption,
and vice versa . . . but the production is in the hands of people who can’t
consume it all, meaning, yes, it’s all there, but it’s in the wrong place.
 |
| Keynes: "Trust me. I know what I'm doing." |
So, what do
governments do? They listen to Keynes,
that’s what, and start “creating” demand by issuing debt to back new money that
can be spread out and used to clear unsold goods.
But the demand
already exists! Doesn’t that cause a
problem?
It sure
does. Because government can never catch
up by creating demand that does not represent production, it has to keep going
into debt deeper and deeper. The money
loses value as more money chases the supply of goods, making it necessary to
issue more debt because prices went up.
In extreme cases, the money can lose all value. In the meantime, of course, government debt
is a way of taxing people without really telling them what’s going on.
And what’s going
on? By issuing debt to back new money,
governments make it possible to consume without producing. That can’t go on indefinitely, though, but
while it does, there is no reason for people to be productive, because what
they produce gets siphoned off through inflation to make it possible for the
unproductive to consume. As Say put it,
the government “multiplies barren consumptions,” that is, it allows consumption
without production. As he explained,
 |
| "Hi. I'm Copernicus. What's your sign?" |
I know that this
proposition has a paradoxical complexion, which creates a prejudice against it.
I know that one has much greater reason to expect to be supported by vulgar
prejudices, when one asserts that the cause of too much produce is because all
the world is employed in raising it. — That instead of continually producing,
one ought to multiply barren consumptions, and expend the old capital instead
of accumulating new. This doctrine has, indeed, probability on its side; it can
be supported by arguments, facts may be interpreted in its favor. But, Sir,
when Copernicus and Galileo taught, for the first time, that the sun, although
we see it rise every morning in the east, magnificently pass over our heads at
noon, and precipitate itself towards the west in the evening, still does not
move from its place, they had also universal prejudice against them, the
opinions of the Ancients, and the evidence of the senses. Ought they on that
account to relinquish those demonstrations which were produced by a sound
judgment? I should do you an injustice to doubt your answer.
Besides, when I
assert that produce opens a vent for produce; that the means of industry,
whatever they may be, left to themselves, always incline themselves to those
articles which are the most necessary to nations, and that these necessary
articles create at the same time fresh populations, and fresh enjoyments for
those populations, all probability is not against me.
So, is there a
solution to the lunacy of government creating demand that already exists to
stimulate growth that would take place naturally if government didn’t
discourage it by removing the incentive to become productive? Yes — and that will be our New Year’s gift to
you.
#30#